Are Excess Returns on Bourbon Investments Sustainable?
Kate Lynch, December 11, 2023
The bourbon barrel investment space has garnered significant attention in recent years, with stories about 100% - 300% returns over two years driving investors and enthusiasts to try to understand how to get a piece of the action. But any time investors see eye-popping returns like that, you have to wonder if historical performance is just a sign of a bubble or if outsize returns are still available to new investors.
As the market continues to evolve, we continue to examine the factors influencing the current strength of returns and assess the sustainability of these returns over time.
Historical Performance:
To understand the current landscape, first we'll look at the factors that drove excess returns over the last ten years. The demand for premium and rare bourbons has been on the rise, driving up the prices of both bottled bourbon and wholesale barrels of aging bourbon. Since bourbon is typically aged 2- to 4-years before being bottled, the 15-20% annual growth in demand outpaced the amount of aged product available from distilleries that are constantly trying to keep up with current demand while also avoiding over-producing and being stuck with capital tied up in excess product.
Key Factors Driving Historical Returns:
Rising Consumer Interest: The global fascination with craft and premium spirits has led to an increased demand for high-quality bourbons. Many enthusiasts say that bourbon is smoother and more "approachable" than other whiskies. It has a naturally sweet flavor, meaning that it has no carbs and doesn't need to be mixed with sugary products to enhance the flavor. At least for now, bourbon is popular with the younger crowd of drinkers in their 20's and 30's as well as with older generations. I've been amazed at how many people I've reached out to about the bourbon investment opportunity have responded immediately by saying "I love bourbon!"
Limited Supply of Aged Barrels: Bourbon, by law, must be aged in new charred oak barrels (barrels can only be used one time to make bourbon). This regulation inherently limits the amount of bourbon that can be produced, making it difficult for distilleries to expand production to meet demand. The use of new barrels is part of the reason that bourbon only needs to age 2-4 years, unlike Scotch, which is often aged 10-20 years. Some compare aging in used barrels to re-using a tea bag: you need a lot more time to get good flavor from a used barrel than a new one. As a result, a 2-year aged Bourbon may have a better flavor than a 12-year aged Scotch, but the cost of waiting 12 years to produce the Scotch makes it more expensive than the Bourbon that came from a new barrel (although this may change as the price of white oak increases due to a supply-demand imbalance).
Cultural and Collectible Appeal: Bourbon has transcended its status as a mere beverage and become a cultural symbol. Collectors and enthusiasts often seek out unique and storied barrels, contributing to the investment potential in this space.
What Will Drive Future Returns?
Anyone who acquired high quality Kentucky bourbon barrels on the wholesale market over the last ten years has enjoyed a tremendous financial return. But will the party continue for investors buying in today?
Here are the four reasons we think so.
Good Entry Price: Investors who can partner with the holder of a Distillery License to acquire new-make barrels at the wholesale price have a huge cushion for profit from the intrinsic growth in value as barrels transition from new-make to 2-year aged, even if wholesale prices stay flat. The current price of wholesale new-make barrels is around 50% of the current price of 2-year aged barrels. With no change in the price of 2-year aged barrels, investors who can acquire high quality Kentucky bourbon at the wholesale price would see 30-40% annual returns over the first two years of their investment. I've never seen another investment opportunity where NO CHANGE in current prices generates 30%+ returns.
International Growth: Bourbon is developing a reputation among the international crowd as consummately American as blue jeans and baseball. International sales of American Whiskey grew 32% in 2022, but represented just $1.3 billion of the $6.0 billion sales total. By comparison, the global market for Scotch Whiskey is more than $30 billion. The combination of the appeal of American-made products in international markets with what many believe is a superior flavor profile (see the comment above about re-used barrels that make Scotch), suggest that there's still huge growth potential for international sales of American bourbon.
Shortages in Supply of Oak: It takes 80+ years for a white oak tree to mature. The huge spike in the demand for bourbon is creating a supply issue on quality white oak barrels. This will limit the ability of distilleries to over-supply the market and will put upward pressure on the price of existing barrels of bourbon.
Short Duration: One of my favorite aspects of wholesale bourbon barrel investment is the short duration of the investment. The most rapid increase in prices occurs during the two years after the bourbon is distilled. This allows investors to take profits and exit the investment relatively quickly if demand and/or pricing softens in spite of the factors listed above.
Challenges and Risks:
While the wholesale bourbon barrel investment space has seen robust returns, it is not without challenges and risks that could impact the sustainability of such performance:
Market Saturation: As more investors enter the bourbon barrel market, the potential for saturation increases. This influx of capital may drive up prices of barrels artificially, potentially leading to a correction if demand cannot keep pace.
Regulatory Changes: Regulatory shifts in the bourbon industry and tariffs on international sales can slow the appreciation and demand for the product.
Economic Downturn: Like any investment, the bourbon barrel market is not immune to economic downturns. In challenging economic times, discretionary spending on luxury items such as premium bourbon may decline, affecting the market. Buyers of quality wholesale bourbon should still have an exit opportunity by selling to distilleries in the value segment of the market, but at a somewhat lower price than they would receive from selling to premium brands.
We see the "downside" return profile for wholesale bourbon barrel investments as 10-20% range and the upside in the 40-50%+ range. Outsize returns can never be sustainable indefinitely, but given the potential growth in the international market, we're anticipating at least a 5-10 year opportunity on an investment with a 2-year duration. We like those odds.
About the Author
Kate Lynch spent the first 20 years of her career as a Wall Street investment banker. After learning about the compelling risk/reward profile of wholesale bourbon barrel investments from her incredibly talented entrepreneur brother, Rick Lynch, she joined his team at Estate Barrels to help investors capture value from the rapid, predictable appreciation in the price of wholesale bourbon barrels.
