The world is running out of whiskey… specifically, of old, single malt scotch whiskey, to be exact.
CNN reported yesterday that The World Is Running Low On Old Single Malt Scotch.
The problem is: it takes a while to make more scotch, so distillers have to anticipate years in advance what demand will be like. And it seems as if their predictions fell short.
The problem is actually a good one: whiskey demand has climbed dramatically, driven by a number of factors.
For alcohol sin stock distillers like Diageo (DEO), it means they need to make more old single malt scotch as quickly as possible to keep up with demand.
For consumers it means demand is outpacing supply.
But what does it mean for investors?
There are a few ways this could go.
THINK ABOUT THE NEXT FEW YEARS
1. Distillers could do nothing and allow the existing stock to simply rise in price according to market demand. This should have a positive short-term effect on stock prices, since the possibility of diminishing supply will prompt people to buy.
2. Distillers could try what Maker’s Mark threatened to do a couple years ago and dilute their whiskey. That didn’t go over so well among the whiskey-drinking public but the threat boosted sales.
2. Distillers could offer other luxury products that don’t take as long to make. If they’re successful, this might help to retain marketshare instead of losing drinkers to competitors with a deeper supply.
In the next few years, these changes seem like they may have an upward impact on share prices. However…
Longer term, I think we’ll a swing in the other direction because industries ALWAYS over-compensate. So there will be too much single malt scotch made and the over-supply in about 2 decades will push the price down… and depress stock prices.
HOW TO INVEST
It depends on a few factors like how long the popularity of single malt scotch will last, and how distillers react to the under-supply. But the most important factor is what YOUR timeline is. If you want to invest today, the supply/demand fundamental of your favorite publicly-traded single malt scotch distiller suggests that stock prices could increase because of this. But in the long term, their inevitable over-correction to this supply/demand differential is going to force prices down.