Welcome to the 2nd edition of The Business of Bourbon!
This week I decided to dive into the psychology and business strategy surrounding the illustrious Pappy Van Winkle line-up from Buffalo Trace. I frequent Facebook bourbon groups and watch numerous YouTube video’s and I think there is a common misconception surrounding the business strategy of distilleries like Buffalo Trace.
This week I wanted to put some of my views out there as to what drives the Buffalo Trace strategy surrounding Pappy Van Winkle and the Buffalo Trace Antique Collection. Let me know what you think!
And if you are interested in talking bourbon, please do not hesitate to reach out:
Email: upstreamaginsights@gmail.com
The Pappy Van Winkle line-up of 15, 20 and 23 year old bourbon is the most sought after bourbon on the planet.
The aged spirit has huge demand from bourbon enthusiasts and bar/restaurant owners around the world. The manufacture suggested retail price (MSRP) for the 23 year old is $299.99, but on the secondary market it can command $6000+ (USD) depending on which year it is.
Bourbon enthusiasts line-up outside of liquor stores prior to “drops” that rival the newest release of the latest Apple product. Some stores conduct lotteries, sometimes numbering in the hundreds of participants (thousands if online), for the chance at buying even just one bottle! I have even seen 1oz pours of Pappy 23 for as high as $250 (CAD) in a restaurant in Calgary, AB.
In some regards, it’s easy to see why the brand has skyrocketed in popularity and demand.
Number one is the fact that it’s a great tasting bourbon, specifically “wheated” (wheat replacing rye in the mash bill) which is coveted by many in and of itself. On top, celebrity endorsements from chefs and TV personalities have further enhanced Pappy’s mystique. Not to mention “Pappy Gate” or the images like this one below where the 2022 NCAA College Football Champions, Georgia Bulldogs, were pictured taking swigs of it directly from the bottle:
Source: Reddit
Buffalo Trace Distillery (distiller of Pappy Van Winkle, and owned by Sazerac Co) has been deliberate with their strategy to lean into this – not scaling up production to meet an ever exploding consumer demand. Instead, the company has focused on playing into consumer psychology and leveraging scarcity.
What is Scarcity and How Does it Impact People?
Scarcity is defined as:
the state of being scarce or in short supply; shortage.
What’s most interesting here though is our innate response as humans to scarcity.
People place higher value on things that are scarce or won’t/might not be available in the future.
This is an evolutionary development from when conditions and food were uncertain so the stockpiling of resources was crucial for surviving.
When resources we available, we hoarded valuable items to get us through lean times.
Even though this trait was developed through thousands of generations, it has not been eliminated from influencing how we operate in our day to day lives where crucial resources are often abundant. In fact, it comes into effect when we see a “deal” or a artificially constrained luxury asset that we want (instead of need).
When we encounter items that are scarce, we still feel a heightened sense of urgency that makes us want to purchase. In fact, when we purchase the reward center in our brain releases a quick shot of hormones, such as dopamine, which provides an instant rush of pleasure.
I often see bourbon enthusiasts say “No bourbon is worth $250” or “Don’t support the secondary market”, but that reward centre is the reason why it is justified by people and why it can be viewed “as worth it” to make these irrational purchases. That reward centre is the same area that in part is the root of extramarital affairs, the purchase of a Hermes bag and many other decisions that are not considered “rationale”.
The feeling we get feeds into the reason that owning that bottle of Pappy Van Winkle far exceeds its excessive high price. The mere possession of it may be more satisfying than the joy of consuming it. This even further increases the scarcity because the demand is driven up, which means an increase in price, which means people can collect, or sell the Pappy which further drives scarcity. This even occurs with the more traditional mid-tier products, specifically those from Buffalo Trace, such as Stagg Jr. or Weller 12 Year for example. The demand exceeds supply, which means they already are scarce, but then people begin to hoard 3, 4 or 8 bottles as “back ups” because they never know when they might see them again. It creates a scarcity cycle.
In the bourbon world we love aged whiskey. Many often saying 10+ years is optimal. But check out how scarce aged bourbon actually is in Kentucky:
Source
I often see in Facebook groups or on other social platforms individuals saying “stop the secondary market” or “it’s unfair that people buy numerous when I can’t even get one”. The inability for distilleries to rapidly increase production to meet demand combined with human nature is what will keep secondary markets thriving and every one from distributors, to retailers, to “flippers” continuing to do what they do. Human psychology tells us that.
Does This Happen in Other Industries?
At it’s simplest, the power of scarcity resides in a limitation of:
time
access
quantity
These factors lead to a human response that increases perceived value, drives people to action and increases perceived brand value. Retailers in general have been using it for decades, with terms like “limited time only”, “limit 2 per customer”, “25% off, today only”, “Black Friday” and “Boxing Day Sale”.
Still within the liquor industry, Craft Beer is a prime example. The craft beer industry will produce a line of seasonal beers. These are “limited supply” productions that are available for short periods of time, then unavailable for an entire year. I have personally purchased excessive amounts of Calgary, AB distillery, Eighty Eight’s “Fruity Pebbles” because I wanted to have a steady supply all winter long.
“Drops” in the fashion world have been used to grow massive brands like Supreme, Air Jordan and Yeezy. These groups have a playbook centered around producing a lot of different products, but limited numbers of each product to drive scarcity.
The drop itself displays the power of exclusivity and then drop tactics act as their own marketing, moving effectively through forms of digital media — everything from Instagram posts to text messages.
While the Yeezy and Adidas relationship has ended for valid reasons, it’s difficult to ignore the success that drove the multi-billion dollar brand was thanks in part to a scarcity strategy.
We could also get into Beanie Babies in the 90’s or more recent success stories like Kylie Cosmetics, but the reality is that scarcity drives more demand and often higher prices.
Why Doesn’t Buffalo Trace Increase Their Pappy Van Winkle Prices if Demand Has Increased?
In the world of luxury with brands like Louis Vuitton or Gucci, artificial scarcity is created on purpose with the sole purpose to charge more per unit and increase margins. They create an aspirational aspect to their products. Buffalo Trace does this in a round about way as well.
Traditional luxury brands create scarcity in a methodical and strategic way. We have just went through Buffalo Trace creating scarcity in similar ways (not increasing supply and working to evangelize the product in press releases or product placement for example) so why haven’t they increased their prices to capture some of that value vs. letting secondary re-sellers capture it?
The answer to me is in the 1970’s and 1980’s in the world of bourbon.
Demand for brown liquor declined in these decades, with clear spirits growing. Only just recently has bourbon consumption got back up close to where it was in the 60’s/70’s! Here is a chart illustrating inventory and production by year, plus the 9L case volume from 1970’s to 2021:
Source
If companies like Buffalo Trace begin increasing the price of their bottles too much, they risk turning off consumers and driving them to other brands, or worse, other spirits. The foundation of Buffalo Trace is in selling mid-tier brands, not Pappy Van Winkle. They can sell high volumes of the mid-tier brands and spread out their fixed costs across more bottle units. If they begin selling less bottles, not only do their total sales decrease, but the margins on their P&L will too.
You might be thinking, what does this have to do with Pappy?
Well, the reality is that a lot of what Pappy does for a distillery like Buffalo Trace is create an aura of prestige and excellence. They want Pappy to be viewed positively and in a highly coveted fashion, and not as though they are price gauging customers because it is single handedly one of the best (and cheapest!) marketing strategies for Buffalo Trace.
Another human psychology dynamic outside our response to scarcity is our tendency to apply the “halo effect”. The Halo Effect is defined as:
halo effect is the tendency for positive impressions of a person, company, brand, or product in one area to positively influence one's opinion or feelings in other areas.
Better stated as, we apply our perception of the Pappy Van Winkle line-up to their other bourbon brands subconsciously increasing the perception and aura of these often completely different products.
Consider the general brand ladder within the Buffalo Trace distilleries other brands:
It’s full of of “little buddies”.
Buffalo Trace Antique Collection (BTAC) is second only to the Pappy Van Winkle Line in terms of how coveted it is by bourbon enthusiasts.
The BTAC line-up consists of:
Eagle Rare 17
George T. Stagg
Sazerac 18 Rye
William Larue Weller
Thomas H. Handy
Eagle Rare 17 has the more accessible Eagle Rare 10, George T Stagg has “Stagg Jr.” (now just Stagg), Sazerac 18 has Sazerac Rye and William Larue Weller has an entire line-up of Weller 12, Full Proof, Antique 107, CYPB, Single Barrel and Special Reserve.
The morale of the story is that these highly coveted bottles can act as marketing for their foundational base of bourbon consumers, bringing consumers to their brands. The BTAC collection isn’t intended to be consumed by everyone, but to continue to interest, engage and bring demand to their core product line up. These high end products almost act as a reverse brand ladder; in cars the goal is to have an entry level to get you in the door and hopefully get you buying a higher value model. In bourbon, the higher end product is partially intended to get you in the door and interested in their products and get you drinking a mid-tier product to satiate your palate.
The key is that Buffalo Trace likely has more than strong enough margins at current prices without increasing them too much. Increasing them too hastily in the short term risks long term demand erosion and the long term investments Buffalo Trace have made in growing the output of their distillery because it risks people being turned off of their brand or bourbon as a whole.
As another aspect, Sazerac themselves are not simply a bourbon company, they are a massive house of branded spirits. Having a huge demand for a few crown jewels can be beneficial for them to leverage at the distribution of their business as well.
For example, if they say to a distributor, I want you to sell 3000 cases more of Di Amore Amaretto, they can hold a case of Pappy Van Winkle 23 over their heads as a part of the carrot.
One final aside, there is still a huge emphasis in the bourbon world to “premiumize”. Check out these stats MGP public reports:
While this goal to premiumize makes sense for most players, when you are a privately held organization, the largest bourbon distiller already and have hundreds of others spirit brands, you have ample opportunities to grow your revenues and margins and taking the short term view of simply increasing prices is one of the last levers I suspect they will pull on in any meaningful way with their Pappy line.
Math Breakdown:
The MSRP on Pappy Van Winkle 23 is $299.99/bottle. If we assume there are 10,000 bottles (likely on the high side here) released annually that means that they generate about $3 million in revenue off of Pappy Van Winkle 23. Even if they double the price, that means only $3 million more in revenue ($6 million total).
For context, Buffalo Trace has a production capacity of about 10,000,000 litres of product per year. That means they produce somewhere around 13.3 million 750ml bottles of bourbon annually. According to IWSR data, the average bottle of bourbon sells for $44.12 in the US. This means we can estimate that Buffalo Trace generates about $587 million in revenue annually. That means Pappy Van Winkle 23 contributes 0.1% of their revenue. Even if we assume the distillery produces around 80,000 bottles of the entire Pappy line-up annually and calculate the average cost of a Pappy line-up bottle at $140, the total revenue would be about $12 million, or about 2% of their revenue. A drop in the bucket.
Final Thoughts
Buffalo Trace has been disciplined in ignoring the insatiable demands for more of their Pappy Van Winkle product. They do this for the good of the entire business and their entire line-up of bourbons.
When people talk about organizations that have leveraged scarcity the best, they generally would highlight LVMH or Hermes. What is notable to me though is how a company like Sazerac is seemingly leveraging scarcity not necessarily for increased margins, but to increase the entirety of the demand for their products and to increase the size of the bourbon market as a whole.
Astute understanding of human psychology is an incredible competitive advantage. The leadership at Buffalo Trace has done a wonderful job of turning what could be a “one brand wonder” into a powerhouse of a bourbon distillery.
If you have any questions, comments or thought, please reach out! I do not come from the Spirits or Bourbon Industry, so a lot of this is my own extrapolation of what drives the bourbon world. If you work in the industry, I’d love to hear your more informed thoughts!
Absolutely love what you are doing here, I have exactly the same interest field as you, so very much looking forward to your upcoming articles.
It will be interesting to see how long the "bourbon is only good if made in Kentucky" stigma will last... MGP would sure be a different company at that point...
And items like boss hog certainly generate the same amount of buzz... But it doesn't seem to give their cheaper offerings much of a bump in sales...
I wonder how much the bourbon industry spends on advertising in the US... We certainly don't see much if any up here in Canada...
Great Article Mr Thomas.