Analyzing the Impact of Scotch Tariffs in the U.S.

The US has imposed tariffs on a number of European goods, effective October 18 as part of an ongoing trade dispute stemming from airline subsidies. This includes single malt Scotch whisky, which now carries a tariff rate of 25%.

According to Euromonitor International, sales of single malt Scotch in the US were just over USD2 billion in 2018, just over a fifth of the global category total. Prior to the announcement of the new tariffs, this was projected to grow by an average of 5% a year to reach USD2.5 billion by 2023. The question that naturally arises is what happens to these optimistic growth projections given these new tariffs.

Using the IFM to simulate tariff impacts

Euromonitor’s Industry Forecasting Model (IFM) allows us to simulate what such a price hike might do to the category based on past consumer reactions to price increases. From the historical record, volume sales of single malt Scotch display a 1-year price elasticity of -0.29 (this means for every 1% increase in price in real terms, we could expect to see sales growth fall off by 0.29% if all other variables remained constant).

This is among the lowest price elasticities of any category of US alcoholic beverages, owing to the fact single malt consumers tend to be wealthier and therefore more likely to absorb the cost of price increases than consumers of other spirits. Certainly, the tariffs are not good news for the category, but they are not as devastating as they would be for a spirit that is more reliant on value-seeking consumers, like rum or vodka.

Were the industry to collectively raise prices by 25%, fully passing costs onto the consumer, we could thus expect volume growth to fall off from current projections by 7.3%. Current Euromonitor projections for single malt Scotch are for the category to grow by 4.9% in volume terms from 2019 to 2020, which means that in this scenario we could expect instead the market to contract in 2020 by roughly two percent.

Of course, some brands will no doubt opt to eat at least some of the cost in order to keep the loyalty of their customers on the assumption these tariffs will pass once the political winds shift. This would cushion the effect of the tariffs at the consumer level and possibly keep consumption growing depending on how much of the category decides to go down this route. IFM modelling suggests that positive growth would still be achieved as long as no more than a 17% price increase reached consumers.

If the tariffs remain in place for only a short period of time, the long-term damage to the category should be minimal. As long as producers are willing to split the cost increase for now, they can preserve most of their consumer base. The longer the tariffs remain in place though, the harder it will be for producers not to pass along price increases, which will encourage consumers to migrate over to other booming segments of premium whisky like craft or Japanese, to the detriment of Scotch.

To learn more, visit “The Global Outlook for Whiskies” report.