Special Situation [1]: The Story of a Mislabeled 18 Year
Old sherried scotches are expensive...but our target is trading at a huge discount. What's the catch? The age is on the label is wrong, its really 23 years old.
[Holds up ear to magic conch shell] What’s that you say? A 23+ year old, entirely sherry matured scotch with some peers priced in the $400-1,200 range, available for a much more modest ~$135 and at a fraction of the valuation multiple?
That’s the situation at hand for a particular line item of a particular distillery that we’re about to explore. Suffice to say, $135 is not a casual, no big deal purchase for most buyers. I’d wager that most people have not spent that on a bottle unless they were in the club, an environment where discretion and rational thinking are suspended for the exact number of seconds it takes for someone to cajole you into pitching in for a $400 bottle of Absolute Vodka (MSRP $23.99). Optimistically, that’d be the only mistake of the evening.
Don’t get put off by that price. We will offer opportunities at all pricepoints, and whenever something is pricier, irrespective of the “value” on paper, we’ll only publish about it if we have confidence there is tangible tastebud value too. In this case, it meets and exceeds the tangible tastebud value threshold, and we would recommend this to 100% of people.
As an intro, given this is our first recommendation, why did we pick this as Special Situation #1?
It’s probably the best opportunity to create an illustrative example of the type of value arbitrage opportunities that come up.
While this opportunity is still available in the market, the window to act is closing, so it makes sense to publish now.
This opportunity is instructive because it’s actually a very widely known situation among aficionados. I believe the age gap arb on these was first was publicized in 2014! As an aside, originality is not a prerequisite to a successful piece of research if the opportunities themselves are value-add and still actionable. Good info is good info! Plus, we actually quantify it, and no one has done this part yet, we checked. Of course, we’ll offer proprietary ideas too, but we maintain - actionable is actionable. If anything, it shows how long some opportunities can persist in the marketplace.
Story - Some of the inspiration to launch this newsletter came from friends I rec’d this to around the holidays as great gifts. They told me part of the fun in giving the gift was sharing the story of the mislabeling, in addition to the scotch being delicious.
Opportunity¹:
Buy Glendronach Allardice, which is age stated as an 18 yr old scotch, and is priced as low as $135, up to $150. The bottle looks like this, and some merchants include the original blue tube. These can still be found fairly readily in most Big Box and Mom & Pop stores that have a big scotch selection.
Profile:
Glendronach 18 yr was matured entirely in Spanish Olorosso sherry casks, meaning it’s very similar in style to a Macallan, which is probably the most well-known Sherry matured whiskey. We’re using Macallan as a baseline since most people can mentally imagine what Macallan tastes like. Our view - Glendronach is significantly better.
Have we tried this personally? Oh yeah
BadaBing tasting summary:
Nose: very nicely sherried malt, chocolate milk, honey, vanilla, ginger
Palate: Sherry, orange…orange is lightly citrus, honey, chocolate
Analysis:
The value capture here is a type of regulatory arbitrage regarding age statement compliance with the Scotch Whiskey Association [SWA], combined with some elective decisions the distillery made. The SWA is the governing body and trade organization that represents the whiskey industry in Scotland. They oversee what is “allowed”, both in production methodologies and labeling.
While it’s widely understood that an age statement must reflect the age of the whiskey in the bottle, it’s somewhat taken for granted that this requirement is a proscriptive minimum, not a maximum.
That being said, it’s a safe bet the age is usually pretty accurate.
If you think of the capital investment and cost to begin and/or maintain distillation, and then every imaginable cost of goods, labor, storage and marketing, from time zero to maturity date, you can see why bottling asap makes sense.
Old whiskey is basically the perfect business if your goal is a huge exercise in long-term asset-liability mismatches and capital intensity. Given the incredible boom-bust frequency of distillers over the last 100 yrs, this endeavor has historically proven quite challenging for the industry to manage.
Anyway, given this situation, distilleries nowadays are pretty keen to bottle products as close to the literal second it turns of age - if, and this is a big if - the amount of aged stock coming to maturity meets demand. From the early 1980s to ~mid-1990s, demand for scotch and bourbon was so low, distilleries closed with frequency, and the amount of aged stock piled up.
Now take the situation at Glendronach, and let’s rewind all the way back to 1996.
Glendronach closed for new production in 1996, and stayed shuttered until May 14th, 2002.
Though we can’t speculate on the reason but can take a wild guess, this ~6yr closure and little-known fact is the key to our thesis.
Given what we know about age statements being a proscriptive minimum, and given that we know they have an 18yr old whiskey in their core line up, grade-level math will inform us that:
The first drops, on the first day of reopening, won’t turn 18 until:
May 14th 2002 + 18 yrs = May 14th, 2020
This means that any bottle made after 2014 is >18 yrs old.
It could not possibly be labeled as 18 yr per SWA regulations unless it was bottled old stock from 1996, or earlier, the last possible distillation period before closure that is a minimum of 18 years old.
Last year’s release would be 23 yr old Scotch “mislabeled” as 18 yr old - (2019 - 1996)=23
Scotch greater than 20 yrs old is trading at an ultra premium now, and sherried scotch even more so. Unlike an obviously expensive scotch like Macallan 25, 99% of retailers will not know the actual age of Glendronach, and thus they are not pricing it at a premium, creating a value opportunity for buyers.
Based on our analysis of historical bottle date codes, 2020’s first Glendronach 18 release will be batched on 4/4/2020, so even the most recent bottles as of publication will be 23+ yrs old. This gives you a window to act, because batches produced post May 2020 will be 18 yrs again and the arbitrage will disappear.
There is a direct correlation between age and price - more age, more asset-liability mismatch, more incremental operating expenses = higher price. Obviously, there is not a direct relationship between age and taste - that is a more complicated endeavor - but if we can safely say that Glendronach 18 is very tasty, and then see its cheap on a valuation basis, that’s a good premise for a buy.
One nagging question I’m sure you have: Why did the distillery choose to mislabel these? Why not just make the core lineup older? The quick answer is consistency. They get older each year then reset back, and brands want a steady line-up of 12 yr, 15 yr, 18yr, whatever. But, another smarter way of looking at it is that it’s an effective form of marketing expense and the equivalent to investing in the platform. From an accounting point of view, the costs are anchored to 20 yrs ago - so the dollar per dollar mileage you get out of everyone drinking old premium scotch today but out of the cheaper and regular line item bottles (since 20+ is usually reserved for the ultra-expensive premium line) growth hacks a huge amount of goodwill to your brand being high quality, in a comparatively inexpensive way. And once you’re known for quality, it’s easier to upcharge later.
Valuation and Data:
We can value this opportunity two ways - relative to peers, and relative to itself.
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First, relative to peers, taking an 18-25 yr old Sherry dominant whiskey peer group valuation multiple and normalizing across different factors (proof, rarity, production methods), we come up with a fair value of ~$215 for Glendronach “18”. Since it’s trading at the low end of $135 to $150, it’s “underpriced” by ~$75. That’s value straight to your wallet—err, glass.
One normalization factor we use is Proof Adjusted Price [PaP] / Year. It normalizes based on volume (ie how much scotch you get on an equivalent basis) and years (since we’re inherently linking production age to value for this comparison). It’s an apples-to-apples “cost per year” ratio.
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In the PaP/Yr column you can see that Glendronach “18” is among the cheapest ($5.87), along with Glenfarclas 25 ($5.78) and Bunnahabhain 18 ($6.14). Depending on how you calculate it, the average PaP across the group is $7-12 / yr, which is a pretty usable yardstick.
Even though Glenfarclas 25 is the cheapest on a PaP basis (and while I’ve never tried it, I’ve heard its very good), it’s discount to normalized value (far right column, 35% discount) is half that of the Glendronach and Bunnahabhain. Meaning, from a utility point of view, if I’m spending $135-150 anyway, I’ll take the Glendronach. Plus, from a nerd’s perspective, Glendronach is not chill-filtered³, and Glenfarclas is
The Bunnahabhain 18 at $110 is looking like an extreme value too on every metric. So why not recommend that as a value buy? Guess what? Freebie!! Two for one - we do. Just imagine this is a second pitch, but as a pure value buy. On an absolute basis, $110 is cheaper too. Win-Win.
It’s just not the focus of this writeup, because the Glendronach is a special situation. See row 4 in the table. That shows the value once the 18 yr reverts to an actual 18 yr; The PaP goes up to 7.50, and the valuation discount cuts in half. Plus, no fun story to tell about mislabels and etc. If the price is the same, $150, and on day 1 you’re getting a 23 yr old, and on day 2 you’re getting an 18 yr old, that’s a 28% difference in “what you get” purely as a function of age. For those reasons, it makes sense to act first on the Glendronach. The opportunity is fleeting.
Finding:
Tips to find:
Big box stores probably have Glendronach - its also available online, see Online Links. These bottles are fairly readily “findable” in many mom & pop liquor stores
Identifying:
To identify if a bottle you've found is “in the mislabeled range” hold the bottle up to the light and look so the laser code stamped underneath the label on the back of the bottle. Do not be shy about pulling every bottle out of the tube and looking at the dates while in the liquor store. The 18 yr is the readily available opportunity, but if you can find younger vintages (Glendronach 12, or 15) that have this mislabeling (ie, a date code before (2014 and 2015⁴ respectively) you’ve hit the jackpot.
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Treasure hunting opportunity:
Some of the rarest and most coveted in the line-up is the “younger” products, that contain older scotch.
I was able to find four “vintage” version Glendronachs across their lineup just by walking into liquor stores and looking for the classic tube covered in dust (indicating it’s been sitting there for years).
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These bottles are now quite rare and inherently valuable. My cost basis on the vintage group $365, and I would conservatively estimate they’re up ~250%. Not exactly retirement money, but it means I’m going to be drinking some really expensive scotch I bought for…pretty dang cheap…for the years ahead.
Compare Glendronach 15 bottled in 2019 (which is ~$80 in the US) vs. Bottled in 2013, via The Whisky Exchange:
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Big difference, right? It’s funny, you can see the color difference in those pics. My pics too, for that matter. I think conceivably you can see the 2019 18yr trading in the $300 range over the next 3-4 yrs too, but I would not buy this with collector value being the sole aim. They may go up in price, but even in 5-7 years it’s unlikely they appreciate significantly relative to the 12 yr and 15yr which were only in mislabeled production for a couple of years.
Whether the 18, or getting lucky with one of these younger mislabeled rarities, it’s totally possible to find these still.
Get hunting!!
Online Links²:
Ships within California:
Ships to Most States CONUS, enter zip in checkout to see (confirmed yes to NY):
Resources for more options:
Footnotes:
¹Disclaimer: This newsletter is not investment advice, and it’s not intended to circumvent any federal, state, or local laws regarding the age of consumption or those regarding buying and selling spirits online. Some states allow shipping in, some don’t, many are lenient about overseas purchases, some aren’t. Be responsible.
²Buying, Selling, Fomo: First on buying and selling. Shipping adds up. Its a trade-off - you can either spend time going to stores physically, which is how you chance upon the best stuff, or you say “who has time for that” and just eat the shipping fee. Up to you. I can say for this specific case study, if you wanted any chance of scoring those younger 12-15 yrs that are mislabeled you have to go in-store - they don’t exist online except at auction for hundreds of dollars.
While we do extensive due diligence on finding the lowest prices, prioritize online markets we know are reputable and even read the fine print to better assess a store’s unique shipping policies, these links are available as a courtesy - we have no affiliation with any store, period, we’ll disclose if we ever do, and cannot warrant or assure anything about them. Don’t make me manually disclaim every possible facet of buying something online. It’s online - shit happens. Use a credit card, and if something goes wrong email them, or have your processor reverse the charge. Simple. We have bought from stores all over the USA and Europe and the delivery success rate has been 99.999% in our experience.
On Fomo: Please do NOT rush to buy everything we suggest. Honestly. We mean it. It’s a catch-22; we only suggest things we think are great, but there’s an abundance of greatness. Different opportunities will appeal to different tastes, some bottles are better for gifts, for sharing, whatever. Maybe some ideas you “save” and buy when you're in the mood. I promise - 20 of the best ideas can sell out, and there will still be a 21st idea. And a 30th. And a 40th. And so on. You can always email us too Badabingwhiskey @ gmail.com [remove spaces around the @].
³ Chill filtration is a process some distillers use to screen out the largest flavor molecules prior to bottling that add critical flavor, depth, and mouthfeel/texture to the whiskey. The reason they do that is the larger fat-soluble molecules can occasionally cause slight clouding of the scotch, and even though it’s very uncommon, manufacturers (mistakenly) believe that Harrison Bergeron’ing the texture and mouthfeel out of the whiskey is worth it to prevent inventory from temporarily “looking cloudy”. If a scotch is 43% ABV or under, 9.5/10 times it’s chill-filtered. They also usually make a point of explicitly saying “not chill-filtered” on the label, if it’s natural. No disclaimer means more likely than not they filtered it. It’s not a deal-breaker at all, but you could say in a universal ranking that some of the best whiskeys are filtered, but all of the best whiskeys are not.
⁴ Glendronach 15 went out of production in 2015 because they ran low on aged stocks, and the line was relaunched in 2018 when “the new distillate” post-closure came of age, in case you were wondering why the math didn’t line up