January 19, 2020
We’re in the middle of a gold rush. A liquid gold rush. From three distilleries on the island of Ireland, to over thirty, and all in the lifetime of my second-hand Renault Laguna. In any gold rush some stand to make a fortune, but most will end up grubbing in the mud, or rushing to the pawn brokers laden down with fool’s gold.
Of late my social media timeline has got clogged with more and more companies equating whiskey with a financial return. Buying into Irish whiskey is a sure thing we are told. Your investment will be safe as houses we are told. The reality however could be very different.
I met John Teeling for the first time back in 1990 and clearly remember him saying: ‘the quickest way to make a small fortune is the whiskey business is to start with a large fortune.’
So if you are seriously thinking of buying Irish whiskey casks, not for fun, not to drink – but as an investment vehicle, you should keep his words in mind. So here’s a short list to inform your decision making.
- Any financial service provider or collective investment scheme in this country needs to register with the Central Bank of Ireland. You can search the register here. If the cask promoter is offering either of these two services then they need to be on the register. So check. If they are not, ask yourself why, as it is a basic legal requirement.
- One cask investment vehicle offers a ‘55% discount’ on cask purchase, so prices of €2,400 and €2,900 are advertised in their brochure. However businesses cannot claim that goods are being sold at a discount unless those goods were actually on sale at the higher price for a “reasonable period,” which is generally understood to be 28 days in the three months before the price reduction. Without evidence of that higher original price, not only is the discount bogus, but it’s an illegal claim.
- The value of anything is a matter of what the market will bear. Here the scarcity principal comes in to play. Right now there is a shortage of older Irish whiskey, but the market is shifting. There are currently around thirteen Irish distilleries with mature Irish whiskey, (though many of those have not yet come to market) and another seventeen or so with new make maturing. A second fund announces: ‘Cask Returns from 12.5%’. A third fund says its model ‘ensures future profits for the cask owners’. The key word here is ‘ensures’, so apart from the fact that it’s impossible to do that, let’s unpick the pricing on these casks. Supermarket own brand whiskey is always a good industry barometer; it disappeared entirely for a number of years, but now both ALDI and LIDL have Irish Whiskey on sale at €18.99 a bottle. Of that €14.66 is duty and VAT on that duty. That leaves €4.33 to cover the cost of the whiskey itself, bottle, label, closure, seal, outer box, labour, overheads and delivery, plus a profit for the producer and supermarket. Do the maths: making money on younger whiskey is a bulk game, and while older whiskey is scare now, that won’t always be the case. Remember we only have had a couple of producers feeding the ‘second hand’ whiskey market, so currently stocks of old whiskey are scarce and prices are high. In a decade from now we will have had 30, 40 or even 50 distilleries all pumping out Irish whiskey. As time passes the reservoir of affordable available liquid will get older and older, so if the sums don’t stack up now, chances are they never will.
- So you pay for your cask, you even get a lovely certificate of ownership and the whiskey is put to rest in a bonded warehouse somewhere. Are you personally registered with a sub-lease for the bonded warehouse that holds your cask, and has this been approved by your local Revenue officer? This is important as Revenue are due approx €6,800 of duty and VAT on that cask and they will want to know exactly who is liable. Let’s say the fund you bought the cask through, or the distillery, goes bust owing money. In that scenario their assets will be sold and you could find that little certificate of ownership isn’t worth its weight in toilet paper. After all, if you are not legally registered with Revenue as the owner of the cask, then you are not the registered owner. Simples. Put it this way, if this was not a necessary requirement, why would every Irish distillery who sends their whiskey out to be matured have to do it?
- The most important part of any investment is the out. So how do you exit a cask investment? The drinks industry is highly regulated as duty is owed on every drop made. Selling a cask of spirits is not like selling a second-hand Renault Laguna. If you want to get rid of your cask of mature Irish whiskey, you just can’t put an advert on Done Deal. Some schemes will guarantee to purchase your cask back after a set period of time. If that is the case, get any such guarantee in writing and take it your lawyer. Why? Because to sell your cask (to anyone) you will need a wholesalers licence, as you are dealing in wholesale quantities of alcohol. To do that you will need to engage with Revenue and possibly take out a bond. OK, forget the cask. You want to sell your whiskey by the bottle, that way you maximise your profit. Firstly you will need to get your labels approved, then find an facility authorised to bottle Irish Whiskey (as laid out in the Irish Whiskey Technical File). You should probably be VAT registered, as 23% of your sale price is VAT and you will need a retailer’s licence, in other words, a pub licence. Last time I checked a pub licence was around €80,000 and required a trip to the district court with associated fees. Selling alcohol outside the licencing system is certain to bring you into conflict with Revenue and the Gardaí, and that is bloody stupid.
- So you’re smart. To get around this you will get someone with the appropriate licences to sell or auction your cask for you. To be fair, thus far the authorities here have been very lax on this whole issue. The problem though is scale. So far in Ireland cask purchases have largely been driven by the hobby market, but once things shift up a gear, things come to the attention of Revenue. One of these cask schemes sold €10,000,000 worth of whiskey in 2019, with plans to grow revenue by 140% this year. That’s a lot of potential duty, VAT and maybe even capital gains tax to be tracked, so before any purchase it’s best to engage the services of an Independent Financial Adviser as I am not one.
Now if you want to invest in a cask for the sheer thrill of ownership, go for it! And think about going straight to a distillery, remember any middle man will have built in their own margin. There are plenty of new distilleries out there with casks purchase scheme, so shop around (for the sake of clarity Blackwater Distillery does not provide this service).
If after reading all of this you still equate whiskey with wealth, then two words come to mind: caveat emptor.