Red, White and Gray: Realities of the Bourbon Market

Jim Beam recently released its 13-year Booker’s limited rye with a suggested retail price of $300. For many long-term whiskey enthusiasts, this flashpoint was tantamount to a declaration of war. Who do they think they are? How dare they?

Whiskey’s gray market (or secondary market or parallel market) has been attacked so viciously you would think we were talking about drug cartels. Buffalo Trace even recently put out a statement announcing they were actively attempting to shut down “the illegal secondary market” for their whiskeys. Citing the “well-developed system for the distribution of spirits which involves us, a distiller, selling to a distributor who in turn sells to a retailer” and all the protections and benefits that affords you, the consumer, Buffalo Trace urges you to buy your whiskey from a fully licensed retailer.”

Fine, then, I visited several local retailers to buy a bottle of Buffalo Trace’s EH Taylor Seasoned Wood. Guess what? They didn’t have any. They didn’t have EH Taylor Barrel Proof either. Nor did they have Weller 12-year, Old Weller Antique or Elmer T. Lee, three Buffalo Trace bourbons I used to be able to buy at my local grocery store anytime I wanted to. But hey, at least I know the system protects me.

The cold reality is that the “well-developed system” that we are urged to stay committed to doesn’t work because we live in a free market economy and the demand for whiskey has risen far beyond the levels that are currently being supplied.

The cold reality is that the “well-developed system” that we are urged to stay committed to doesn’t work because we live in a free market economy and the demand for whiskey has risen far beyond the levels that are currently being supplied. It’s a pretty simple concept to understand and yet, for many whiskey “purists”, basic economics and capitalism are no match for anger when they feel deprived of something that used to be readily available to them.

Bourbon and rye whiskey are as American as it gets and yet, so is a free market. Let’s quickly review the laws of supply and demand as it pertains to the whiskey market:

When the price is set at a point where too many consumers want a whiskey and producers aren’t making enough of it, you have excess demand and prices rise. As prices rise, fewer people will be willing to purchase a whiskey (for argument’s sake, let’s call it a limited edition 13-year cask strength rye). There is an opportunity cost of buying that rye that will force people to give up buying something else they want. For example, “I’d rather buy two 10-year Michter’s ryes with that money” or “I can drink a lot of Pikesville rye for $300.” That is the law of demand.

The law of supply illustrates that as prices rise, producers want to make more whiskey to sell at those higher prices and increase their revenue. If prices rise beyond what consumers are willing to pay, whiskey will spend more time on the shelves. When this happens, prices have to fall to a level where people are willing to buy that whiskey again.

The rub here is that good whiskey takes years to age, and the demand for it has exploded too fast for distillers to adjust gradually. The same store clerk ringing up your Blanton’s two years ago and asking you if it was any good will now laugh at you when you ask him for it. You want a bottle, but your store doesn’t have it. Enter the gray market for whiskey.

Unlike a black market, a gray market is the trade of a commodity through legal channels unintended by the manufacturer. Derided as “taters”, “flippers” and far worse, many people have been successfully purchasing whiskey bottles and reselling them for incredible profits. This has made the gray market the scapegoat for everything wrong with the state of whiskey today. The unfortunate reality is that the whiskey gray market isn’t the problem at all. The problem is that a lot more people really like whiskey and producers can’t keep up. The flippers couldn’t flip if the buyers didn’t buy.

One more point that really ought to be considered is what happens to the economics of whiskey when the outlet of a gray market is interfered with. If people think it’s hard to find their favorite bottles now, imagine if the only point of purchase is their liquor store that is subject to limited allocations that “will continue, with no foreseeable end in sight,” according to Buffalo Trace.

And now let’s take a look at many of our liquor stores, the front door for us consumers in this “well-developed system” set up for our benefit.

Some stores are being rewarded today for having carried a full line of whiskeys back when no one was buying them. They now get a larger allocation of rare whiskeys as a thank-you. That’s the kind of relationship loyalty I appreciate as a business person. However, many other stores are punished because they didn’t sell enough cinnamon liquor that was being pushed on them. Sorry, no Pappy or BTAC for you this year.

Then there are the store liquor managers and clerks keeping limited release bottles for themselves and telling customers their store didn’t receive it in the first place. Those waiting lists you so hopefully added your name to rarely get pulled out of the drawer. Distributors hold bottles back in their warehouses so they can do favors for stores that beg for them later. I’ve seen stores in California with glass cases full of rare bottles marked up higher than the most expensive gray market prices. Is their goal to sell whiskey or ensure their trophies don’t leave the store?

On an important side note, I know terrific people in this industry (both in distribution and retail), and they truly do everything they can to do the right thing. I have personally participated in discussions on how to improve the selling of whiskeys, to make it as equitable as possible given the current challenges they face. I support these people whenever I can and you should too.

Back to the bottle that broke the blogger’s back. A 2015 study by Bain & Company illustrated that the global personal luxury goods market has tripled in the past 20 years. There are cars parked in Southern California that are a quarter of a million dollars, and no one says anything about them. Yet, Beam releases Booker’s first (and possibly only) 13-year old limited rye at a $300 retail price and the whiskey world lost its mind about it before it was even released or reviewed. Reviews have been stellar, by the way, even from bloggers who admit they will pay up for a bottle if they find it. Not surprisingly, the gray market price instantly climbed over $700, further fueling angry and personal attacks. Never mind the fact that I can’t buy a 13-year Van Winkle Family Reserve Rye for under $800, and Buffalo Trace releases them every two years. But hey, those are only $80 retail so let’s blast Jim Beam and praise Buffalo Trace.

Your whiskey isn’t increasing in price because the WRONG people are buying and selling it. It’s rising in price because people are buying it.

We love our country and our whiskey. We sometimes, unfortunately, forget that we aren’t all entitled to enjoy the same things. That would be communism, the exact opposite of the capitalism that fueled our country’s rise to greatness. Your whiskey isn’t increasing in price because the wrong people are buying and selling it. It’s rising in price because people are buying it.

If someone is against escalating whiskey prices, then by all means they should refuse to pay them. They are part of the market, and they have a voice. But they are not the market, and right now the market says that a limited edition 13-year cask-strength rye whiskey is worth over $750, regardless of its suggested retail price.

Ian Buxton feels “this ‘investment’ bubble will end badly and people – and whiskey – are going to get hurt.” I don’t necessarily disagree with him, but he wrote those words for Whisky Advocate back in 2011. Markets always correct, boom and bust, and anyone who thinks they can accurately predict the timing of these events is deluding themselves. Whiskey has an intrinsic value when used for its intended purpose, so asking yourself what you’d pay for that bottle if you couldn’t ever sell it may help provide some perspective.

The final point here is that there are so many more options for excellent whiskey than we have ever had. I don’t know if I’ll get the opportunity to buy a Booker’s Rye, and I haven’t decided if I’m willing to pay the $300 to get it. What I do know is that our Whole Foods has the Michter’s limited edition barrel proof rye for $70, and I’m heading out to grab one of those shortly.