History is full of bubbles, booms and busts, corporate collapses and crises, which illuminate the present financial world. At Stewart Investors we believe that an appreciation of financial history can make us more effective investors today.
The Whisky Bubble (1890s)
The price of any asset may be inflated to extreme levels – bonds, property, shares, tulips – whisky.1 In July 1898 the Scottish whisky firm of Pattisons announced record profits and the expansion of its Aultmore and Glenfarclas distilleries. On 24 November the Company was given a clean bill of health by its accountants. Thirteen days later Pattisons went bust, marking the end of the whisky bubble of the late 19th century. The collapse provides a number of lessons for investors.
The distilling of whisky expanded significantly during the 19th century, boosted by new technology which allowed distillers to produce larger amounts of spirit much more cheaply. Demand increased as whisky was repositioned as ‘the gentleman’s drink of choice’, replacing brandy. The expansion of the railway network across the UK improved the distribution of the product.
The 1890s were glory years for Scotch. Demand boomed in the UK and overseas and whisky barons like Buchanan, Dewar and Haig became household names. A distillery building bonanza spread across Scotland, with 39 new distilleries constructed in the decade, reaching a peak with nine being built in 1897 and ten in 1898.2 Distilled volumes rose from 44 million proof gallons (mpg) in 1893 to 63 mpg in 1899, an increase of 43% in six years.3
The Rise of Pattisons
Beginning as an Edinburgh dairy wholesaler, Pattisons diversified into blended whisky to take advantage of surging demand, when brothers Robert and Walter Pattison took over their father’s business. Initially the company purchased whisky from other distilleries and focused on the marketing of its blends, which included Morning Dew and Royal Gordon.
The rise of Pattisons was nothing short of spectacular, culminating in the flotation of the company on the London Stock Market in 1896. The share offer was six times oversubscribed, encouraging other whisky company flotations, and resulting in speculation in whisky company shares, as well as whisky itself. The brothers pocketed the large amount of £150,000 (more than £15m in today’s money)4 from the flotation, but remained in control of the company, holding all the ordinary shares and a quarter of the preference ones.
The 1890s was a decade of easy money with banks providing credit to fund deals in the whisky industry. Pattisons took advantage of this, buying their own distilling assets to secure supply. The company acquired a half share in the Glenfarclas Distillery, substantial interests in the Oban & Aultmore-Glenlivet Distilleries and the Ardgowan grain distillery, and diversified into beer production with the purchase of the Duddingston Brewery in Edinburgh. The low cost of credit made an industry such as whisky, with its large working capital requirements, especially prone to speculative investment.
Pattisons epitomised the marketing-led whisky firms of the boom years. The company reputedly spent £20,000 (£2m today) on advertising in 1897 and the vast sum, for the time, of £60,000 (£6m today) in 1898. Reportedly, 500 African Grey parrots were provided free to pubs and licenced grocers. The birds squawked ‘Pattisons whisky is best!’ and ‘Buy Pattisons whisky!’ at potential customers!5
The brothers courted publicity through their flamboyant lifestyles. Pattisons celebrated its second anniversary with a lavish party at Henley Regatta on an extravagant houseboat constructed for the occasion. The brothers hired private trains to take them back to their estates in the Borders. The Company’s headquarters in Constitution Street in Leith was described as a ‘palace’.
The Fall of Pattisons
But all was not well in the world of Scotch. There were rumours of financial problems at Pattisons as early as 1894, but these were papered over during a period of surging sales. However, in May 1898, there was a hint of things to come when the whisky company J & G Stewart went into liquidation.
On 5 December 1898 Pattisons ceased payment when it ran out of cash; its preference shares falling 55%. A few days later the Clydesdale Bank refused to extend credit to the company, forcing it into bankruptcy. When the Company’s books were scrutinised, the huge sum of £500,000 (£50m today) could not be accounted for. The bankruptcy hit unsecured creditors of the Company, causing further failures across the industry and among suppliers. Whisky prices fell and distillery construction came to a grinding halt.
The Great Whisky Swindle
The brothers were accused of embezzlement and fraud on a grand scale. At their trial, which was a major media event at the time, it emerged that the Pattisons were swindlers of the first rank, pursuing every accounting scam in the book. They had overvalued the Company’s property assets. They inflated the value of their stored whisky and they had paid dividends out of capital rather than income.
It was not only the books that were cooked. The Company was diddling its own drinkers by selling them dodgy whisky! Cheap grain whisky was mixed with small quantities of quality malt and sold as a premier product at high prices.
The brothers were convicted of fraud in 1901; Robert receiving a jail sentence of 18 months in Perth Prison and his younger brother nine months. The entire whisky industry came under intense scrutiny for lax practices and was severely criticised.
End of the Bubble
The glory days of whisky were over (for now). Glen Elgin distillery had opened in May 1900, but closed only five months later. No new distillery was built in Scotland until the Tullibardine distillery, constructed half a century later in 1949, indicating that the dramatic increase in production of the 1890s was based on absurdly optimistic projections of demand growth.
The 1890s Whisky Bubble highlights how investors can be carried away by the prevailing fad – be it resources, property, technology or whisky. Recent historically high consumption growth rates are projected to continue ad infinitum, with capacity expanded accordingly. The aftermath can be a very painful experience, even for the best operators in the industry. Hence, timing is more important than in steadier, less commoditized, growth sectors. We believe that an historical perspective is very important in investment, but care must also be taken not to become prisoners of recent history.
The bankruptcy of Pattisons underlines the risks of investing in fast-growing companies with a limited performance record which float on the stock market during boom conditions, and are dominated by a sales/marketing culture. When entrepreneurs start to display a flashy lifestyle and/or diversify into areas where they have no experience, this must be heeded.
At Stewart Investors we stress the importance of identifying extreme overvaluation in stock markets to preserve client wealth. We remain focused on the potential downside of any investment as much as the upside.
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