Matthew Gorham!

12/7/10

Engine9

Compass Box Whisky Company

Abstract
! The Compass Box Whisky Company should continue its methods of buying

whisky aged by other large whisky producers and using it to create its own unique blends. While in this period of market distress the company should form partnerships with larger companies to ensure stock is available and it should have less regard for its core-product line and more attention focused on producing quality whisky with the stock available. In this report I will explain the options for the Compass Box Whisky Company and why the plan I have chosen is the one that will bring the company the most success. ! First, I will review the background and history of the Compass Box Whisky

Company. Then I will present the major issue facing the company in terms of its future. Next I will analyze the company where it presently stands, where it hopes to be in the future, and its means to reaching its goals. I will then provide several of my own recommendations for what the companys strategy in dealing with the critical issues should be. Finally, I will reiterate the major points of the paper I want to be remembered and understood. ! The Compass Box Whisky Company was founded in 2000 by John Glaser a

Scotch whisky connoisseur whose goal was to push the envelope of what whisky can be and to help open the eyes of people to the joy of whisky. He started the company in 2000 in his kitchen tweaking his Scotch whiskies to perfection and releasing his rst whisky that year by the name of Hedonism. The company grew and produced several different variations of whiskies over the years. However, by 2007 the company divided

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the product line among two groups; limited releases and core products that the availability was assured for. ! There are several factors that create the unique identity of each whisky. First and

most important are the ingredients used that include any combination of grain, barley, corn, and wheat. Other factors include the type of still is used to distill the whisky, what type of wood the cask it is stored in is made from, what kind of liquid was previously in the cask, and what distilleries the nal whisky is combined from. Scotch whiskey has several further restrictions in order to earn the label Scotch. The whisky has to be distilled in Scotland and age there for at least three years as well in order to be worthy of the name Scotch. ! There is a general process used by all distilleries in order to create whisky. First,

the grain is distilled using either column or pot stills. After distillation the whisky is aged in casks(usually oak) for at least three years but most often around ten to twelve years or longer. Some of the whisky is lost due to evaporation during the aging process. When the whisky is properly aged the whisky-makers dilute the whisky to the desired alcohol level. ! The process used by the Compass Box Whisky Company is more unique than

that of most whisky-makers. The company purchases whisky that has already been aged. Glaser samples 30-40 casks of the pre-aged whisky in order to determine which ones the company will purchase. The chosen casks of whisky are then sent to a bottling hall in Scotland. The whiskys are then combined in a large tank according to the recipe developed by Glaser, further ingredients are added (i.e. orange peels, spices), the alcohol level is diluted to about 48% and then the whisky is returned to the casks to age

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for about half a year. Occasionally the wood the casks is made of is changed to further alter the avor of the whisky. After the whisky is aged it is bottled and the used casks are sold to a local cooper. ! The market outlook during the existence of the Compass Box Whiskey Company

has changed signicantly. The company was born during a period where the stock of aged whisky was high and the demand for the aged whisky was low so the price for the aged stock was also low. This low demand was common though and was not expected to last. The industry often experienced a sort of sinusoidal curve in terms of how the supply compared to the demand as it was challenging for the demand and costs for the whisky to be predicted ten to twelve years in advance. So the market indeed uctuated. As the years progressed the demand for the whisky increased and began to surpass the capacity of the industry. Several other factors contributed to the industries inability to meet the demand for the industry to keep up with the demand besides the expected uctuations. First, as Chinas middle class grew and the demand for Scotch whisky in that nation exploded with the growth from less than one million liters a year to almost 6 million liters a year. Next, India repealed a tariff that taxed the cost of foreign liquor greatly (550%). India, already a large market for whisky (600 liters a year) raised its demand even further. As if the increased demand wasnt already enough of a stress on the company the world also experienced barley shortages around the same time. The cost of the raw materials and the aged whisky stock began to increase signicantly. ! By 2007, the Compass Box Whisky Company was well established as a quality

producer of whisky. The company had earned over sixty awards for its quality and innovation including Whisky Magazines Innovator of the Year four times in the seven

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years of the companys existence. The company had four employees and was estimated to be worth 3.5 million or $7 million U.S. dollars. However, the company had to decide how to deal with the current market conditions. ! The major decision facing the Compass Box Whisky Company is what it should

do in the light of the current shortages and cost spikes. The rst option is for the company to keep purchasing aged stocks. This method would call for two compromises. First that Compass Box partner with a larger company to guarantee access to stocks and secondly, to use the stock available and no longer be able to assure the core products. The second scenario is that Compass Box could do the whole distilling and aging process themselves and completely control the stock to their appeal. There are many advantages and drawbacks to each of these methods. ! There are several qualities that make the option of maintaining the current

process of purchasing aged stocks advantageous. The most obvious and foremost is that it is the method in which the company has excelled and established itself in. The Compass Box Whisky Company knows how to use the aged whisky to their advantage and create their own uniques products. The great number of awards and sales growth the company has seen over the years is warranted. The awards also demonstrate that even if the core line of product is no longer available it is likely consumers will continue to go with the company as their source because of quality and trust. Prior to the establishment of the core line of products the company enjoyed success with several different types of products. This shows that its safe to assume that even if the company cant assure the availability of their core whisky the consumers will still choose Compass Box Whisky name and purchase their limited offer products. Though the

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company will have to partnership with a larger whisky company and will be at their mercy in terms of price and product type they still can create competition for their business among several large whisky companies to keep prices of aged stock low. Another advantage is that the company wont have to change its structure in terms of employees, process, or the almost immediate nancial gains it sees. ! Along with the advantages of continuing the process of purchasing stock there

also come pitfalls. The biggest of which is that the Compass Box Whisky Company will be at the mercy of whatever large whisky company they decide to partner with. The large company will control the price and costs of the aged whisky stock they sell. Furthermore, the large company will control what whisky stock is available and how it is created. This would greatly limit the options Compass Box Whisky would have in terms of creating their own unique avors and the partnership would limit them from shopping other large companies for their stock even if the other ones had the stock Compass Box Whisky was looking for. Additionally, if Compass Box cant offer its core products it may risk losing loyal customers if they dont enjoy the new versions of the companys whisky. ! The second option for the Compass Box Whisky Company is to do the whole

process of distilling and aging the whisky themselves. This method presents multiple advantages all associated with independence. First the company would gain complete control of the process, ingredients, aging, casks allowing for Glaser to complete his goal of experimentation to create unique whiskeys. The process could lead to several unique versions of whisky that he never would have had the opportunity to create previously. Along with creative control Compass Box is free from the restriction to using only the aged stock of other whisky-makers so they can continue to create their core-line of

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products and avoid the risk of losing loyal customers. Also, Compass Box will no longer be dependent on the inated prices offered by the large whisky companies for their aged stock. ! While the controlling the entire whisky process demonstrates many advantages

for Compass Box it also presents many problems. One is making the transition from a small company to an established producer of whisky. The expansion is likely going to necessitate that Compass Box increase its payroll of four employees signicantly. Where is the company going to get the money to pay for this expansion? Who in the company currently has experience managing a work force? These are questions that go unanswered. The expansion will also call for the company to purchase more storage facilities to age ten years worth of stock. All the real estate is going to be very costly for the company and may be more expensive than the companys current value. Another issue is transitioning the company from one that is used to seeing almost immediate gains in less than a year to one that has to compute its gains over a ten year period. This means they will be signicantly invested in a product that wont mature for at least a decade at any one time and leaves no room for error in Glasers experimentation because it could mess up a years worth of stock. It also means the company will have to predict consumer demand ten to fteen years in advance, a very difcult task. To complete this method they would need to secure a nancing partner and be able to assure of the process and the prospective gains. Though this method would free the company of the dependence on the mature stock of other whisky companies they will still be at the mercy of the barley shortages when it comes to making their whisky. Finally, there is no guarantee the shortages will remain as they are because prior history

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demonstrates that the market does uctuate and that it is likely to bounce back eventually. ! The major goal of the Compass Box Whisky Company is to create unique whisky

that increases consumers joy of whisky in order to do this the company is in the belief that it will eventually need to make the move to control the whole process of making their whisky. Although the predictions show that both methods are expected to cost the same over a decade it is in my belief now is not the time for the company to make that decision for several reasons. The company should retain its method of purchasing aged stock and creating its own unique nal whisky from it. To do this the company should develop a partnership with a large whisky producer in order to ensure aged stock is available to them and nally the company should alter its recipes so that it can utilize the stock that is available to it each year. ! The Compass Box Whisky Company should continue its process of using aged

stock to create their own whisky. The company has had tremendous success in its years of existence with this method and there have been no signs that this success will drop off. Though they might not be able to continue supplying a core line of whisky they still will do well in the market with their limited release whiskeys as was demonstrated in the early years before they created a core line. Compass Box is very procient at this method of making their whisky and they seem to have developed their own niche in the market with loyal customers that appreciate their ingenuity and creativity. Continuing this method of production would also allow the company to retain its small efcient structure and not have to worry about nancing expansion. The transition to aging their own whisky is a huge change from the small four person company they are now. There

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are many questions that arise from such a transition. How many more employees? How will we manage them? How many more storage and distilling facilities? Cost of all these things? How will they pay for it? Are they experienced enough to do the whole process themselves? All these questions were not addressed by Glaser when he presented his idea and he likely doesnt have many answers. He has proposed going from a small business to an enormous company with no explosion in sales, or their own capital to support it. The means and method to becoming an established whisky sales company arent present in Compass Box right now. And I believe the market will again uctuate in favor of the company so there it is reasonless to transition now. ! In order to ensure that it always has aged stock to use to create their products

Compass Box Whisky Company should create a partnership with a larger whisky company. This would benet the company greatly in that they would no longer have to worry about where they could get aged stock in times of market distress. Though they might be at the mercy of the larger company in terms of the stock of whisky, it will be better to have a supply and not many options then not to have a supply at all. The limited supply options will also force Glaser to be more creative in his recipes to add variety and will meet his goal of pushing the bounds of what whisky is. The Compass Box Whisky Company really wont have to worry about the price they are getting the aged stock at because they can easily shop and create competition among several large companies to guarantee their business which will drive the price down signicantly. Furthermore, Compass Box can use this partnership with a well established large producer of whisky as a learning experience. Glaser and company can see how a large producer is run, what it takes to be competitive in the market, if

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their goals of creativity are attainable with such large production. This will be like a preview for the company to decide if they truly desire to change and if they are capable of making the change or if not what they need to do to be able to make the change and nally how they can make the transition to a large whisky production company. ! In this period of whisky shortages Compass Box should indeed vary their product

line to what aged stock is available. Though they have a well established core product line retaining it in desperate times should not be their main goal, rather producing quality whisky should be. This has always been their goal since the company was rst founded and it should not change due to shortages. The companys initial growth was due to its creativity and varying products not its core line of products so there is no evidence to suggest going back to a more boundless product line will harm their sales. Furthermore, the company was built on innovation and creativity and has been recognized greatly by the whisky world for such achievement. So Glaser is denitely capable of coming up with creative new products with the available stock and he may even develop a new addition to his core-line of products once the market settles. As history shows, the market tends to uctuate and though I suggest that Compass Box abandon its core-line in times of shortages it is important that the company revives the line after the market levels out and that the company continues to create more products to hopefully some day reach their goal of becoming a large whisky producer. ! It is important that the Compass Box Whisky Company continues to grow its

product line and production of whisky while retaining its current methods of production. The Company has seen great gains in its years of existence and has become welldecorated in the whisky world but it is not yet ready to make the transition to becoming

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a large whisky producer. The company is still to small and there is no apparent plan on how the company would make the jump to a large producer. They have developed there own niche as a nisher of whisky and likely have greater mobility than that of a larger company. The market shortages likely will only be temporary and the stress being put on the companys product line will soon be relieved as the market goes through its normal uctuations. The company should continue to expand and grow but at a gradual rate as opposed to the extreme move they are considering now. For now the Compass Box Whisky Company should continue its process of purchasing aged whiskeys and creating unique blends within a year of purchasing. They should develop a partnership with a larger whisky company and use the aged stock available to them with less regard to the core-product line and this will help them learn, develop, create, and most importantly avoid severe damage from market conditions. ! ! ! !