Consumers Are Weird: Maker’s Mark Edition

Frequent commenter Jim` sent me this article: Maker’s Mark* changed the formula of their bourbon, and consumers freaked. Management backtracked, and the product is back to what it always was.

Now, right off, let me say that management’s second decision was the right one. It doesn’t matter what the underlying logic is, if the consumer is ticked off about the change, you change back.

Having gotten that out of the way, the whole story strikes me as odd. Maker’s Mark is a bundled product. They own a distillery, but the whiskey that comes out of the barrels is a far higher proof than what is sold to the public (this is standard in the distilling industry). The final product is a mix of what comes out of the barrel, and water.

What Maker’s Mark announced last weekend, and reversed course on this past week, is an increase in the proportion of water.

The thing is, when you do any kind of fermentation, the percentage of alcohol in your final product is variable. It gets worse when you distill, because you may lose some alcohol as vapor too.

In short, Maker’s Mark is in the business of adding more or less water to get the final product to be consistent. Distillates are commonly 65-80% alcohol, Maker’s Mark final product was 45%, so this means taking 20 ounces of distillate, and mixing it with 9-16 ounces of water.

Maker’s Mark big decision was to change the amount of water they added, increasing it to 11-18 ounces, to reduce the new final product to 42% alcohol.

The first thing that’s odd about this is that the first thing most consumers do with their bourbon is dilute it ever further with a variety of water based products: colas, club soda, lemonade, vermouth, Tom Collins-like mixer … or even more water and/or ice.

So, the downstream diluters are upset about the upstream diluters horning in on their territory? Spare me. Now, I understand that some people drink the stuff straight, but that’s probably not a majority for any liquor.

Now, I’ll bet you a buck that Maker’s Mark was going to sell the new product at the old price, and keep the difference. That’s something worth getting angry about.

But it gets even stranger: management blames inadequate supply.

The bourbon category has accelerated tremendously, and as the bourbon category has grown. That has accelerated Maker's Mark growth to a point where the demand for Maker's Mark is significantly greater than our distillery's ability to produce it. …

…

Over the last 100 days there have been many instances where our distributors, retailers, bars—there have been periods where the brand's not available across most every state in the country. …

…

… It's the tasting panel, at Maker's Mark, they tell us when the barrels of Maker's Mark are fully mature and ready to bottle.The seasons vary—intense summers, intense winters will speed up the maturation process a little bit; mild summer, mild winter will slow it down. Under-aging is bad; we think over-aging is actually worse. One of the ways that many other distilleries can extend their supply is through a slight reduction in time spend in the barrel. That's not an option for us, because we know through the many, many years of producing at Maker's Mark, that we don't land on the Maker's Mark taste profile without a minimum of six full summers in the barrel, through the intensity of six summers.

Now, I do get that they’re in bind here. If they ramp up production now, it will be 6 years before they have more inputs, and by then the boom might be over.

But I’m fairly perplexed by the managerial economics here. Clearly they are facing a demand shift. And their supply is vertical in the short run. The textbook response is that price goes up. But, there’s no mention of pricing decisions anywhere.

Instead, they choose to shut down that market (and its supply and demand diagram), and create a brand new one … with a vertical supply line that is a bit further to the right. Presumably the goal of this is to sell the new product at the old price.

The only reasonable reason to do this is because you feel that the (own price) elasticity (of demand) for your product is high. And yet, all the brand development that’s gone into making Maker’s Mark a premium product is intended to make that elasticity lower. So that doesn’t make sense.

And, you know thinking about it as a brand new supply and demand situation makes clear what they should have done: created a new brand name with less alcohol. You know: old Maker’s Mark at 90 proof with red wax on the bottle, and new Maker’s Mark at 84 proof with blue wax on the bottle. Then raise the price of the premium product, market the new product at a discounted price … and clean up with price discrimination. But nooooo …

I’m going to stick my neck out here, and claim that this never would’ve happened if this wasn’t a family company.† Family companies tend to promote based affinity, rather than business sense. Maker’s Mark’s COO is the grandson of the founder. He’s been running the operation for less than 2 years. He made the decision, and his father (the Chairman emeritus) had to undo it. If there wasn’t blood there … the new guy would be fired.

* We had many laughs at a Super Bowl party a few weeks ago at the host’s fumbling over the name. No matter what she tried, “marker’s make” came out of her mouth. Sorry to point this out CK!

† Maker’s Mark is part of Beam Inc., but that is a brand management company, not a producer. My guess is that if the Samuel’s family delivers the cash flow, that Beam will let them pretty much do what they want. But that raises another issue … why were they so hell bent on increasing cash flow? Where’s all the money going?

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Comments

[David Tufte]

There's one good comment on this over at Marginal Revolution from Ryan. If I can riff on that:

I do like Ryan's explanation of Beam's pricing decisions (lots of brands and price points, so a change isn't a bid deal). But I'm more inclined to think this idea didn't come from them. Rather, I think it came from the Samuels COO at Maker's Mark, and that Beam Inc. viewed it as win-win. If it's a good idea, Beam makes more money, if it's a bad idea it allows them to push for fresh blood at Maker's Mark.

[mike shupp]

The thing fascinating me is that once upon a time (before the internet) American bourbons were routinely bottled at 100 proof (i.e., 50% alcohol), and this seems to have slipped down to the 90 proof level without much objection. Scotch whiskey used to be 86 proof as a regular thing, but has fallen to 80 proof and no one seems to have noticed or objected.

I THINK what happened is that there was much anti-alcoholic sentiment in the USA in the 1970's and 1980's (remember the Mothers Against Drunk Driving?) and the drink manufacturers responded by reducing the potency of their products (while leaving prices unchanged, of course). Amusingly, social intoxication (andd public tolerance for the same) has rebounded, but manufacturers are still pursuing profits by watering down their booze.

Let's drink to that!

[David Tufte]

I have noticed the same diminution of alcohol content over the years, and it has seemed rather odd to me. But ... I don't buy enough of the stuff to really notice price changes either.

I wonder if part of it was the lapse in the ability to make a cocktail, that seemed to sweep the nation in the 80's and 90's. People went from being able to mix something palatable (following the basic formula of a lot of mixer, some liquor, and a little something to cut the taste) to ... really ... not being able to make a cocktail at all. Nowadays, it seems like you should be afraid to ask anyone under 55 to make you a cocktail, unless they have experience in some high-priced establishment. So, perhaps liquor makers were able to get away with changing the content because no one knew what to do with the content they had.

[Michael Stack]

I think most of the complaining came from folks who do indeed drink it straight - drinking straight bourbon is much more popular now than it was even a few years ago.

[Dave Tufte]

That's kind of what I wonder. I think they have a basis to complain.

But, there a signal extraction problem here: how should we separate out the signal from non-diluters from the noise made by people who will dilute this spirit anyway?