Business

02.11.13

Maker’s Mark Adds Water, Lowers Proof, Shocks Bourbon Lovers

The storied bourbon maker can’t meet demand. So it’s making supplies last by diluting it with water. This is insanity, writes Daniel Gross.

Talk about diluting the brand. Maker’s Mark, the Loretto, Kentucky, bourbon manufacturer, has the sort of problem that every consumer-products company wishes it had: too much demand for too little product. But the company’s solution might surprise the very consumers demanding its product—adding water to its existing supply of bourbon, thereby cutting the alcohol content in each bottle from 45 percent to 42 percent.

Put another way, Maker’s Mark will temporarily transform from 90 proof to 84 proof.

As the company noted in an email sent to clients: “Fact is, demand for our bourbon is exceeding our ability to make it, which means we're running very low on supply. We never imagined that the entire bourbon category would explode as it has over the past few years, nor that demand for Maker's Mark would grow even faster.”

It takes a while to make new bourbon. The company ages its brown firewater “between five years nine months and seven years,” wrote Maker’s Mark Chairman Emeritus Bill Samuels Jr., in a blog post on Monday. Thus the company’s unorthodox response.

Even in this day and age of information technology and sales-management systems, it is difficult to align supply perfectly with demand. Excess inventory is the bane of existence for producers and retailers—it’s embarrassing when things linger and don’t move, it ties up cash and capital, and it necessitates discounting.

By contrast, high demand is awesome. Inventory turns over quickly, and in a world of near-zero inflation, it allows people to retain their pricing power. In a world where everything has become a commodity, it’s nice to be able to create a little bit of scarcity. It’s even better when the market does that for you.

And that’s the situation Maker’s Mark finds itself in. Maker’s Mark presents as a family company, but it is part of Beam Inc., which in turn is owned by conglomerate Fortune Brands. Typically, when large corporations find themselves confronted with higher demand, they ramp up production. But conjuring up a new batch of bourbon isn’t like whipping up a few batches of cupcakes. It’s a time-consuming process, and aging is part of the brand appeal. To have precisely the amount of bourbon needed for today’s market, the folks at Maker’s Mark would have had to accurately gauge 2013 demand in 2007 and 2008, when the world was quite different.

The move to boost supply by diluting the product seems like a strange idea—from both a brand-management and economic perspective. Generally speaking, reducing the potency of a premium product by cutting it with filler, or removing essential ingredients, is a bad move. Gold and silver coins that were shaved down lost some of their value. In the U.S., snack and cereal companies are hastily removing the sugar, sodium, and fats from their products, which may make them less filling but also taste less great. A high-end caviar producer wouldn’t compensate for a poor harvest by mixing in catfish eggs with sturgeon roe anymore than Louis Vuitton would compensate for a spike in demand by churning out polyester handbags. If you fundamentally change the ingredients, and do so in such a way that changes the consumer experience—without changing the price—it can be damaging to the brand. Maker’s Mark insists that reducing the alcohol content won’t alter “the taste profile.”

A high-end caviar producer wouldn’t compensate for a poor harvest by mixing in catfish eggs with sturgeon roe.

The textbook answer to rising demand in the face of limited production capacity would be to raise prices. That might alienate some customers. In his blog post, Bill Samuels Jr. noted that the company doesn’t see this as a good move. “Some people are asking why we didn’t just raise the price if demand is an issue,” he wrote. “We don’t want to price Maker’s Mark out of reach. Dad’s intention when he created this brand was to make good-tasting bourbon accessible and to bring more fans into the fold, not to make it exclusive.”

But when goods are in high demand, a secondary market tends to develop (think of sports and concert tickets) and the price that people pay tends to go up anyway. By virtue of its scarcity, it is going to become somewhat exclusive, at least for the next few years. Why should Maker’s Mark let retailers and bartenders capture all the value that will arise from this temporary scarcity?

The company also will likely respond by investing in the capacity to produce more. But that’s a risky move. If tastes change by 2018, Makers’ Mark will be stuck with a lot of excess capacity and product. Raising prices a little would put more cash in the company’s pocket today and provide it with some insurance against future declines. The company could also take a page from Tesla, the electric-car manufacturer. It has announced that it will only produce a limited amount of vehicles, and has offered to take substantial deposits from prospective buyers who wish to guarantee themselves an electric car. In so doing, Tesla is effectively raising cash and getting its customers to fund production. Maker’s Mark could do the same, by taking deposits.

Maker’s Mark is basically gambling that its core customers won’t be put off by a change in the formula. The (lower) proof will be in the pudding.