Pouring the dram

This one is a little gem situated in a remote Perth area: Strathearn Distillery. One can guess… It is close to the River Earn! In-between the River Almond and River Earn actually. Quite remote indeed, the postcode was actually invalid in my satnav!

I hesitated before featuring it in the Single Malt Tour (rather in the ‘Special Issue’ section were grain distilleries, other distilleries, malting and cooperage are likely to feature) as there is more Gin outputted from the distillery than Whisky and this is partly due to a reason, the distillery is quite new and the first batch of bottles was released only recently… The bottle number one was auctioned for £4,500. So very recent and also very small, the craft feel is definitely there. And producing white spirit is bringing quicker cash flows while in comparison, brown spirit (here Scotch Whisky) is a tough business: spend now and get the cash in 3 years and one day minimum! This is a substantial working capital to finance and Gin does help for that matter.

There is a Single Malt produced so it has its place in the Single Malt Tour, and I am convinced we will hear about the distillery quite a lot in the future as their Scotch is honestly scrumptious, I have never tasted a such good 3 years old single malt. Scalability might be an issue in the future though, the capacity will be very small, and the size of casks makes the warehousing space needs huge should the volume eventually increase.

But let’s start by the beginning, the distillery is very recent and is branded ‘the smallest distillery in Scotland’. I have to be honest, I just discovered it while trolling Google Maps to check were would be the next stage of the Single Malt Tour.

It was created by Tony Reeman-Clark in 2013 and it’s a great story as the only thing that seems to have driven the project is passion. Indeed, he was an IT consultant for years and its love and passion of the Scotch Whisky led him to create his own whisky, his own distillery.

There is no visitor centre, so I thought this would be the first distillery where we’d find closed doors. But hey, let’s be nice and contact the owner. I was welcome and although the owner was away that day I have been welcomed by Liam Pennycook (Head Distiller) and David Hogg (Distillery Operator). Basically I have been in touch with the most of the staff, this is more or less a 3 man operation indeed.

I was lucky. Thumbs up to the team. I did not come to have a cheeky free sample, I never asked for it. However, I was offered to try two different wee drams, if my memory is good a virgin American oak and a virgin European oak, both not much older than 3 years old, this was excellent to compare the difference of taste brought exclusively by the type of wood (as it was totally virgin, no bourbon, no sherry, no wine before). Judging by the colour and the taste, I would have easily guessed at least 8 years old at least on a blind taste. Why that? Small casks! The maturation is quicker on 50L casks indeed (Octave Casks), it is not the best for optimizing the space in the warehouse but with small batches and small operation, you can afford to waste a bit of space in order to maximise the cask surface to volume ratio. A few bigger distilleries are maturing in so called ‘Quarter Casks’ but for different reasons, more marketing to justify their Non Age Statement and it is quite often a finish rather than a full maturation in small cask (the first example that comes into my mind is Laphroaig Quarter Cask, NAS but something like 5 years old plus a few month finish in a small cask). So it was a truly amazing experience to taste a such rarity.

Coming after the visit of Dalwhinnie, it’s quite extraordinary and striking to see the difference in terms of infrastructure between an industrial scale plant and a craft distillery. It is not much bigger than my house! There is an office, a bonded warehouse and the still house. There is also a small bottling facility which was locked already when I arrived (I was late as previously mentioned, I was basically lost).

So visit is pretty quick. No doubt it is craft operations: the malt is pre-milled (there is no mill at Starthearn) and received in bags. A standard batch is probably (pure guestimate) 500kg, so this is 20 bags only to open, but this is already quite labour intensive! In other words, one batch is producing a hogshead more or less (once again, I could be wrong but it my assessment of the mash tun, might be actually twice bigger maximum, but that doesn’t change the argument, this is a small and cute operation). I really loved what I would call a ‘still doll house’!

The first batch of Scotch was bottled on the 11/12/13 and was put to auction, the bottle Number #001 reached a whooping £4,150, that’s the price of a unique and irreplaceable collector indeed! This first auction reached a total of £39,771… For 100 bottles of 50cl! Nice return on investment, not a lot of 3 years old (and a day) single malts can brag to have been sold almost £550 on average per 70cl bottle! The second batch, released in September 2017 consists in 145 bottles, priced £145 each for a 50cl bottle.

My Tullibardine visit was recent enough and I saw some cask belonging to Michel Picard. It sounds like there is good neighbour relationship and Tullibardine is helping Strathearn to procure casks when needed.

A quick word on the Gin. The still house has separate stills for Gin and Whisky. Distilled Gin is produced by redistilling Grain Neutral Spirit (GNS) with botanicals, the main flavour being juniper. This is why Gin distilleries are usually appearing quite small as the process is starting directly in the spirit stills: no silo to store grain, no mashing needed, no fermentation vessel needed, no large volume of low ABV wash to handle… The raw material is alcohol already, delivered in IBC container at a high ABV (above 96%), it can be dropped next to the still, the botanicals are either added in the GNS, or placed in a basket in the still and that’s us! No need maturation but some do, this is the case of some of the Strathearn’s Gin, in order to add a light oak flavour. Strathearn Gin Still is also very small…

On the business point of view, there is something I really appreciate. One of the tough parts of the business is that you need to produce and potentially survive for years without a cash flow. White spirit and selling new make spirit to blenders is an obvious way to make cash quicker but selling cask is another and here the formula is very interesting. Strathearn is selling casks indeed but with repurchasing agreements. In 2017, you were purchasing a 100L cask at £2,017 (nice marketing price) and were guaranteed a buy back in 5 years at £2,525 (in other words a yearly compound interest rate of 4.595%, much better than a ISA account! For the math geeks:

A cask of 100L is around 55L of pure alcohol, this is around 137.5kg of malt at – let’s assume – £500 per tonne, this is £68.75 of malt in the cask. Of course the energy bill will be the other main component, let’s say £60 of gas to fire and distil a ton of malt (it’s not a sure science and the gas market price, the original gravity of the mash, the batch size and the cutting points are obviously important variables), this is £8.25 of energy in the barrel. In comparison, other cost of production will be small (yeast and water) so this is helping a lot their finances in the sense that it is financing their working capital in a very efficient manner. However, it is a pretty high interest rate considering the current interest rates in the market, but it’s an accounting choice, it has an implied price to carry a debt in current liabilities rather than long term liabilities on the balance sheet, with that way of financing, the long term debt ratio is not getting worse I suppose… And cask buyers won’t worry about the credit score or the ratios of the balance sheet I suppose!

I’ll surely snipe a cask in 2018! And on top of that, you’ll receive six bottles of their single malt. So you technically increase your return to 10.975% on a £145 bottle! Well, we aren’t there to talk finance, but on that note, valuing the bottle in retail price is tricky as it assume that one would be able to immediately resell the bottles at this price, far from being easy, but using a conservative £50 would bring the yield to 6.97%, quite nice. However, on 6 bottles, I’d consider them a loss as far as the investment is concerned, as I’d probably drink them indeed! But I’d also look at the T&C because it is a very promising distillery and the return of investment in the spirit might be better than this loan basically collateralized by a cask of Whisky. In other words, keeping the cask and taking delivery of the bottles is probably a much better investment even after paying VAT, Duty, bottling and labelling! That being said, reselling bottles can be proven difficult and I am pretty sure they would not like so much a parallel competitive market, which is perfectly understandable considering how thin the supply is. If your required yield is lower than theirs (which is very likely the case as you do not have to cope with the industrial side of the business and the investments in terms of time, labour and machines), you’d actually cannibalize their own production creating a discounted market.

So great little visit, great wee distillery managed by nice and passionate people. Of course, £145 per bottle of young single malt is quite pricey, but it tells a nice story and there’s a lot of passion in it so this is priceless. Based on the samples, I will definitely buy one at some point! Saving the pennies!

Further reading:

Strathearn Distillery Website: https://www.strathearndistillery.com

Tony Reeman-Clark: Raising the spirit of success with Scotland’s craft distilling scene: http://www.scotsman.com/200voices/innovators/tony-reeman-clark/

Passion for whisky leads IT veteran to open own distillery: http://www.heraldscotland.com/business_hq/14682150.Passion_for_whisky_leads_IT_veteran_to_open_own_distillery/

Strathearn Inaugural Whisky Auction: https://www.whiskyauctioneer.com/strathearn-distillery-inaugural-whisky-auction

Strathearn Distillery’s Second Malt Bottled: https://scotchwhisky.com/magazine/latest-news/15960/strathearn-distillery-s-second-malt-bottled/

Scotch Whisky Start-Ups: https://scotchwhisky.com/magazine/features/7624/scotch-whisky-start-ups/

Gin – Styles of Gin and Legal Definition: https://www.diffordsguide.com/beer-wine-spirits/category/403/gin-and-juniper-spirits

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