Wednesday, March 19, 2014

Let's Be Clear About This Tennessee Whiskey Thing


On one level, this fight about codifying the standards for Tennessee whiskey is just two big companies butting heads together and trying to gain advantage. Diageo's reply is just another salvo. Except in this case Brown-Forman is right.

Brown-Forman has every reason to be protective of the term 'Tennessee whiskey.' It is a valuable term due almost 100 percent to what Brown-Forman has invested in it over the past half-century. Brown-Forman has invested millions of dollars to make 'Tennessee whiskey' mean something, and what it means is a product that meets the same very high standards as bourbon whiskey.

Recently, many small producers have complained about how 'limiting' the bourbon rules are. They want to be able to produce any damn thing and call it 'bourbon whiskey.'

In other words, they want to steal bourbon's good name. Now there are people in Tennessee, whose strings are being pulled in London, who want to steal Tennessee whiskey's good name.

Since the only Tennessee whiskeys for the past 50 years, Jack Daniel's and George Dickel, voluntarily follow the bourbon standards, a whiskey of that style is what consumers expect from a 'Tennessee whiskey.' They don't expect some felon's fake moonshine, or some watery brew aged in used barrels. And since George Dickel only sells one bottle for every 100 Jack sells, what consumers expect 'Tennessee whiskey' to be is something very much like Jack Daniel's Old No. 7. (Although George Dickel is a very fine product too and also meets the bourbon standards.)

Yes, Brown-Forman was behind last year's successful effort to codify in Tennessee law those well-established standards. They did it because a couple of new producers, including one dedicated to the memory of a convicted felon, want to misappropriate the term 'Tennessee whiskey' by attaching it to a wholly different kind of product. They argue that if it's whiskey (presumably according to U.S. law) and made in Tennessee (without defining 'made' too closely), it's Tennessee whiskey.

The Tennessee lawmaker who introduced the new rule admits it was Diageo's idea. Diageo's motive has nothing to do with switching to used barrels at George Dickel, and surely no one seriously believes Diageo cares about "flexibility, innovation, and entrepreneurship in American whiskey." Diageo's purpose is to undermine consumer confidence in the term 'Tennessee whiskey' by gutting the established standards, after which the marketplace will be swamped with liquid garbage that can legally call itself 'Tennessee whiskey.' Diageo hopes this will slow Jack Daniel's growth enough to prevent it from overtaking Johnnie Walker as the world's #1 whiskey.

Diageo has been very artful in its arguments. Its master distiller paints it as an anti-big government issue, a good tack in conservative Tennessee. "We don’t think there should be a law that says this is how we, or anyone else, have to make whiskey."

Except there already is a law, a federal law, that says how you have to make whiskey, and how you have to make bourbon whiskey, and rye whiskey, and corn whiskey, and several others. Tennessee whiskey isn't mentioned in that law, but there are standards for whiskey, and the law says statements of origin have to be true. That's a standard, but it's a very low standard compared to the standard for bourbon whiskey. The existing law Diageo wants to change is exactly the same as the federal bourbon standard Jack and George have followed voluntarily for more than 50 years, plus the charcoal filtering stuff they have also both followed.

That law, the Standards of Identity for Distilled Spirits, is a consumer protection law that has served consumers well. It has its flaws, and its critics, but is usually not considered a threat to liberty.

But back to the heart of this, the #1 ranking. It's not trivial. It's not just about bragging rights. If Jack Daniel's becomes #1, it could change the dynamic in critical growth markets such as China and India. When newly affluent people gain access to luxury imported goods they immediately want to know what's the best. They'll inevitably start by looking at what's #1. It has never been more important to be #1 and if recent trends continue, Jack Daniel's will pass Johnnie Walker the next time rankings are calculated.

Diageo is desperate.

By the way, Jack Daniel's is big, and it's the biggest thing at Brown-Forman, which is a big company, but Diageo is several times bigger, yet in American whiskey terms Diageo is a pipsqueak. It's trying to turn that weakness into an asset by identifying itself with the micros. Cute.

And, oh the misinformation. New whiskey barrels do not cost $600 each, as one legislator told the Associated Press. More like $175, a lot less if you're buying a lot of them. Used barrels cost about $100.

That's not what this is about.

Most people today, including most people in developing markets, know brands. They don't know types. They don't know Jack Daniel's and Johnnie Walker represent two very different styles of whiskey. The hallmark of the American style is the unique flavor profile you can only get with new, charred oak barrels. If the Chinese try Jack Daniel's and like it, that will naturally align them with the American style.

The tide could turn.

In the world today, scotch outsells bourbon five to one, but China and India don't know that. India knows scotch because of the Raj, China doesn't have an inherent favorite. If American whiskey, not scotch, becomes China's choice, that could change everything.

Everything!

So with everything at stake, Diageo will do anything. If it succeeds in Tennessee (probably a long shot), it will hurt its own Tennessee whiskey, George Dickel. It doesn't care. It will gladly kick George Dickel to the curb to protect Johnnie Walker. Not just Tennessee whiskey, but bourbon and rye too, where The Big Galoot is also a pipsqueak. It likes Bulleit better than Dickel, but not at the expense of Walker. Diageo's big dog in North America is Crown Royal, a Canadian whisky aged in used barrels. The way Diageo sees it, anything that hurts bourbon, rye, and Tennessee, the 'new barrel boys,' helps them.

Ultimately, this fight will be between Big Scotch and Big Bourbon. This is just the opening round.

22 comments:

Anonymous said...

Which "small producers" have complained that the rules surrounding "bourbon" are too restricting? I'm a small producer, and disagree. I think the rules make it more difficult to make a differentiated product called "bourbon", but at the exact same time, that's the exact point of having the rules. I can make whatever product I want, and there are no rules to stop me (within reason) - but I just can't call it BOURBON unless I follow those rules. It is not particularly restricting.

D said...

Interesting. However, I think there is something overlooked here: Diageo actually hurts itself well beyond the Dickel brand by supporting barrel reuse.

Scotch, so called 'old barrel boys' in your terms, relies on a steady stream of used barrels to keep pace with demand and grow. Since this is Diageo's bread and butter, and if they really want to grow dramatically in China and elsewhere, they have much more incentive to increase the supply of these used barrels via supporting the TN whiskey law as it stands (which, as you correctly noted, was only established last year...so I'm hesitant to think a comparison to bourbon, which has had the "new barrel" regulation for quite a long time, is completely apples to apples).

This same logic would apply to bourbon and rye as well—the more used barrels the better, especially if they can get some of those barrels from their own production of these spirits. I’d wager even if the law changed to allow used barrel use in TN whiskey Diageo would never take advantage of it since, as you understand, those used barrels have much more value to Diageo in scotch production. So really, anything that “hurts" the ‘new barrel boys’ actually hurts Diageo much more.

I think the statement "Diageo's purpose is to undermine consumer confidence in the term 'Tennessee whiskey' by gutting the established standards, after which the marketplace will be swamped with liquid garbage that can legally call itself 'Tennessee whiskey’” is a bit overblown. This fight is not about reducing the quality of other brands' products, its about barrels. If it was about undermining quality and if changing the law back to not mandating new barrels really was going to result in a flood of “liquid garbage,” why wasn’t there any concern over TN whiskey quality before the law changed last year to require new barrels? Where are all the “garbage” brands that got wiped out after the law changed? What was Diageo doing back then to undermine TN whiskey quality?


I also think you make an assumption that discounts Chinese (or any other developing country) taste and preferences. While it is reasonable to assume brand affinity is stronger than affinity to a specific spirit type in general, it seems a bit much to think someone can’t tell the difference (or doesn’t care about the difference) between two very different types of spirits. Maybe Jack Daniel’s has a brand name advantage in some developing markets, but that hardly means scotch will be unsuccessful and fade into oblivion in those markets.


Finally, I’m not sure where you ascertained your new barrel cost figures, but I can assure you there are no new barrels on the market for anywhere close to $175 right now. The days of sub $200 barrels have come and gone, likely never to be seen again. But, if you know of any place, domestic or abroad, that is selling barrels for that low, please share! If you can find a cooperage that even has barrels to sell and deliver in the next 12 months, I’d expect a cost closer to $350. Not the end of the world, as most of that increased cost will be passed along to scotch producers and others when they buy the used barrels, but it is another point to consider/in factor of Diageo’s best interest being to continue to mandate using only new barrels. Everyone needs more barrels in the marketplace ASAP, not fewer.


This is just my opinion and, as always, I enjoy reading yours as well! So thanks for another interesting article.

Anonymous said...

Jack Daniels and George Dickel are not the only Tennessee whiskey makers. I think you're forgetting one.

Harry said...

You mean Collier & McKeel? As far as I can tell they're the only other distiller that uses the Lincoln County Process.

Or do you mean Prichard's? Phil Prichard was speaking out against the law and the Lincoln County Process (http://www.tennessean.com/article/20140314/BUSINESS01/303140065/Tennessee-whiskey-barrels-provoke-fight-between-liquor-giants).

What Prichard ignores is that there is plenty of room to differentiate a whiskey from Jack Daniel's, mashbill and barrels among them. And I didn't think his pot still excludes his whiskey from the rules.

Also, what small bourbon distillers complain that the rules for bourbon are too restrictive? If you want to be called bourbon, you make what we all -- and the feds -- agree bourbon is.

Do the guys at Corsair try to change the bourbon rules to make their Triple Smoke malt whiskey fit? Does Chip Tate at Balcones lobby to get his corn whiskeys classified as bourbons? No. They make great whiskeys without fear that they defy traditional categories.

There's nothing wrong with rules like these. A Tennessee whiskey designation that describes what Jack Daniel's and George Dickel have been doing voluntarily for a long time (and what Collier & McKeel do now) preserves and codifies a specific style of whiskey. It's a regional difference that I would think Tennessee distiller big and small would be excited and proud to honor.

I think part of the problem is that it's called "Tennessee" whiskey, and not something like, say, Lincoln County whiskey. This makes it tough for a local whiskey distiller with pride in Tennessee to call it out if they don't adhere to the rules. But I say get over it. The word "Tennessee" isn't banned from your bottle. Get creative. It's ironic that a small distiller would want to stand out by fitting in.

--Harry

Chuck Cowdery said...

Considering that last year's law has zero effect on Phil Prichard (he was grandfathered in), he should shut his big yap.

Chuck Cowdery said...

Don't forget. Jack Daniel's is approaching 12 million cases. Jack Daniel's spills in an hour more whiskey than all of the micros in America make in a year. That matters because we're talking about protecting consumer expectations of what 'Tennessee whiskey' means. The new kids should come up with their own terms, not steal Jack's.

scott said...

Maybe Diageo wants or hopes others like the micros will use the used barrels instead of new ones, so that there will be less competition for the new barrels that they want and need. Unlike JD, they don't have their own cooperage..

Chuck Cowdery said...

I keep trying to tell you. This isn't about barrels.

Anonymous said...

So the new people should come up with their "own terms". I was kind of thinking from your not so educated comments that you thought that Jack somehow has a trademark on the word Tennessee. That is absolutely ludicrous. Maybe, they should come up with a new name if they can't handle other people who make whiskey in the state of Tennessee calling their whiskey Tennessee Whiskey. Good grief!! All I hear from Jack is "cry, cry, cry crybabies"

Chuck Cowdery said...

It takes a special kind of person to fight for the right to be lied to.

Justin Victor said...

I went out today and bought a bottle of Jack Daniels. I like a pour of Jack on a nice sunny day. And I'll say it again.....I wish Diageo would sell George Dickel and move out of the US all together.

You're right Chuck. This isn't about barrels. Diageo is spinning this to further some other end they have brewing.

Darek Bell said...

This is Darek Bell, with the Corsair Distillery. We are FOR keeping the more strict definition of Tennessee Whiskey and are against the repeal or watering down of the current bill. Someone has been telling our legislators in TN that this bill is for small microdistillers and craft distillers. It is not. 5 small distillers came out supporting Brown Forman over Diageo. Only 2 were against it and supported Diageo.

Brian B. said...

Chuck ...

Always a fan of hearing your point of view and am an enormous proponent of agreeing to disagree.

One of your last thoughts in the piece totally switched my side of this fight. Protecting Tennessee Whiskey so that India and China can discover, appreciate and, like Burgundy and Bordeaux, buy every last drop making bourbon literally impossible to find at reasonable prices much like fine French wine is now exactly why I'm in favor of Diageo.

Let Johnnie Walker be the gold standard for the rest of the world. Water down the term "Tennessee Whiskey." Those who take the time to seek out great whiskey will be rewarded. Like ... Corsair. Those barrels aren't aging any faster. Like a secret surf spot ... those in the know reap the benefits.

Lazer said...

I'm with you Brian B. Why are we shooting ourselves in the foot here? Let the rest of the world drink Scotch and let the new era of american glut whiskey begin! Overproduced and underpriced.

Mark Fleetwood said...

chuck, this may be hard to know, but who are the major players (if any) in the spirits business in India and and China, and what are the current taste preferences in each country? I keep thinking India has Scotch or some variant of it as its preference in whiskey, and who knows what China's current whiskey preference is. But I appreciate your learned observation that this could be about how bourbon/TN/Scotch producers go after the virgin third world. P&G and other multinationals have divisions devoted to "upstream", projects and markets 5-10 yrs down the road. so too must big spirits companies.
crap, once india and china are cracked, can domestic producers make enough juice to serve western and eastern hemispheres??

Chris Hoban said...

Just to query one thing; Jack Daniels surpassing JW. The figures I've read show JW at about 8 million 9l cases ahead of Jack with a better level of growth: http://www.drinksint.com/files/CombinednewPDF.pdf

Maybe I'm missing something (I often do) but I thought I would double check.

Anonymous said...

I don't think Prichards was grandfathered in. they were granted an exemption. will this remain if the law sticks next week.

Anonymous said...

Jack daniels does not spill more in an hour than all of the other distilleries produce. This sounds like a statement only the blind faithful JD followers would say. I mean you don't REALLY think that do you? I know for a fact they do not spill that much. I've been there, done that, seen it. (NO not as a tourist as I'm sure this person claiming this has) I bet he even thinks he seen their actual bottling line and production areas. Bless his heart. It's not even close to an accurate statement.

Chuck Cowdery said...

Prichard was given an exemption because he was making a non-conforming product before the law was passed, hence he was grandfathered.

In India, they drink a 'whiskey' that is made from sugar cane and flavored to vaguely taste like scotch. In China, they drink a 'whiskey' that is made from sorghum.

As for sales figures, there are several different lists. In most, Jack is within striking distance of Johnnie and growing faster.

Chris Middleton said...

Two points worth qualifying in this TN barrel debate.

China is no El Dorado. 98% of spirit consumption is baujiu. After 15 years of whisky marketing China still only depletes just over 2 million cases (>0.3% of legal spirit consumprion) with three brands controlling over 80% of sales through on-premise bars - Chivas Regal was about 50%, Walker 25% & Jack Daniel's around 6% (off-premise barely exists in mainland China, it all on-premise socialising). Drinking, like eating food is still a communal, cultural ritual. And developing markets grow at a moderate rate especially when there is no category precedence and when premium pricing for imported spirits makes it a luxury purchase amongst affordable cohorts. China's whiskey growth is coming off a very small base.

The other issue is comparable size between Walker & Daniel's. It's how you describe these two levanthians that give you two different answers. Johnnie Walker's total brand portfoilo (Red, Black, Blue etc.) is the largest and about to surpass 20 milion 9L cases per annum this year. Jack Daniel's family of brands equivalent is approaching 12 million. If you compare Jack Daniel's Black Label to Johnnie Walker Red Label (their largest single label), then Jack Daniel's can claim to sell more bottles.

I'm still giving Diageo the benefit of the doubt. As I don't believe George Dickel distillery is advocating the second use of barrels for their whiskey. I would not be surprised if Diageo HQ London has been calling Diageo NY to find out which executives inadvererntly lit this fuse.

Anonymous said...

In any other state in the US the only requirement per TTB rules and regulations to label a whiskey as
__(Name of State)__ Whiskey is that it must be defined as a straight whiskey made in that state. Why does Jack have the right to take that away from the whiskey producers in Tennessee? Why isn't it good enough to call it Jack Daniel's Tennessee Whiskey. Everyone will know that its not an "inferior product"

merd said...

FYI I linked a url to this blog entry from a denverpost.com article and got a thumbs down vote. Keep it classy, Denver. Infermayshun an' reedin's fer dumdums.