The Cautionary Tale of The Pattison Whisky Crash To The Current Market

The Cautionary Tale of The Pattison Whisky Crash To The Current Market
The Cautionary Tale of The Pattison Whisky Crash To The Current Market

The Cautionary Tale of The Pattison Whisky Crash To The Current Market

A subject that often arises in conversations with enthusiasts, colleagues, industry professionals, and bar folks is the end of the world whiskey boom times. Changing tastes tend to be a generational matter, which would point to a 1970s crash, why it happened, and the coming crash with the world shift towards Tequila. The other cause of a collapse would be poor business decisions, and with that in mind.

As cautionary tails go, the story of how the Pattison Brothers rose from modest beginnings to the barons of the Scotch whisky industry, only to lead that industry into a speculative collapse, is instructive not just to liquor-makers since, but to anyone in business and enjoying explosive growth.

Scotch whisky had been on the rise to supplant Irish whiskey since the early-to-mid 19th Century. 

Cheaper and lighter grain whiskies led to the creation of brands like Dewar’s and Johnnie Walker. They were spearheaded by enterprising salesmen and marketers, such as brothers John and Thomas Dewar; these whiskies were sold worldwide.

The Pattison family had started in business as Edinburgh dairy wholesalers, with patriarch Walter Pattison also acting as an insurance agent. He was joined in the firm by sons Robert and Walter, and in 1882 Pattison, Elder & Co was formed, with the brothers at the helm and Alexander Elder as a partner.

Pattison, Ltd. recognized a good thing when they saw it, and as many of the originally blended whiskies were created by grocery firms, they followed them into the trade in 1887. At this same time, the Great Phylloxera Epidemic devastated French viticulture, which would cause wine output to plunge by three-quarters between 1875 and 1889. 

Recognizing that Scotch whisky was a lucrative trade to be involved in, the Pattisons began to blend and market their own whiskies in 1887, with their principal brands including Morning Dew and Royal Gordon. In 1889, the brothers made a profit of around £100,000 when the company was floated on the Stock Exchange.

Masters Of Publicity

They were also early masters of the art of convincing the world they were a success through conspicuous consumption. The soon acquired palatial country retreats (which were used as a stage for publicity), 

Taking Pattison, Ltd. public in 1889 opened the door to financing the rapid expansion of stock and sales. In an era when advertising as we know it today was in its infancy, they spent vast sums on ads and gimmicks. The best known of the latter were the 500 grey parrots they had trained to say things like “Buy Royal Gordon” (a Pattison whisky brand), which were given out to publicans across Britain.

The brothers operated marble-clad offices in Leith’s Constitution Street, Edinburgh townhouses, and country retreats at Clovenfords, near Galashiels, and Peebles in the Scottish Borders.

One of their favored methods of garnering publicity was to arrive at Galashiels or Peebles railway station slightly too late to catch the early morning train into Edinburgh, and – having made sure that the local press was alerted – they would hire a private train at the cost of £5 1s-per-mile to transport them to their critical business meetings in the capital.

They used the medium of advertising with great skill and nerve, tapping into the prevailing public pride in the British Empire and its military might. During 1897, the Pattisons reputedly spent the vast sum of £20,000 on advertising, and three times that the following year.

In 1896 their company was floated as Pattisons Ltd, with a capital of £400,000. To secure supplies of spirit for blending, a half-share in Glenfarclas distillery was acquired. At the same time, the firm also had substantial interests in the Oban & Aultmore-Glenlivet Distilleries Ltd and Ardgowan grain distillery. The Pattisons even diversified into brewing with the acquisition of Edinburgh’s Duddingston brewery.

Nonetheless, July 1898 saw the announcement of record profits and plans to launch a new branded blend and extend Aultmore and Glenfarclas distilleries.

The Collapse

A slight downturn in the whisky industry was enough to send them crashing to the ground – as the business model employed by the Pattisons could only work in an expansionist environment.

On 5 December 1898, Pattisons’ cumulative preference stock plummeted by 55%, and a few days later, the Clydesdale Bank refused to extend the company’s credit, leading to the start of formal liquidation proceedings.

It was this extravagant promotion-by-luxury lifestyle that probably led to their downfall. Using the kind of accounting gimmicks that appear in significant speculative collapses, such as Enron and stock buyback tactics (in this case, the stock was whisky, not paper), Pattison, Ltd. was able to artificially inflate the value of its holdings and support their financing. It was a model that could only work in the short term and only in boom times.

In 1898, as they started to fail, They stiffed several suppliers, defaulted on debts, and were caught blending a lot of cheap grain whisky with a small proportion of aged malt whisky and calling it “Fine Old Glenlivet.” The firm’s collapse was inevitable, as they were operating almost like a Ponzi scheme: paying investors out of their capital reserves, which were pumped up by new investments. The firm was in bankruptcy proceedings by early December.

The pair were tried for embezzlement and fraud and convicted after a mere hour and a half of jury deliberations. Those proceedings revealed some half a million pounds were missing from the company’s coffers (a sum worth £62 million today), while the company’s assets were (finally) adequately assessed at less than half that. Robert was sentenced to 18 months in prison, and William to 9 months.

The fall of Pattison, Ltd. swamped the Scotch whisky industry as a whole. Many suppliers doing business with the Pattisons were left holding the bag on unpaid bills and went out of business. 

To keep all their plates spinning, the brothers adopted the practice of over-valuing property in the company’s possession and buying back the whisky stocks that they had previously sold at higher prices.

 

The result was that, on paper, the value of their stocks was substantially higher than they were in reality. The Pattisons also paid shareholder dividends from the capital to reassure investors that all was well – though there had been rumors of Pattisons’ financial fragility as early as 1894.

Once these proceedings were underway, it became clear that around £500,000 could not be accounted for, with company assets amounting to less than half that figure.

Robert and Walter Pattison were subsequently tried and convicted of fraud and embezzlement. In 1901, Robert was jailed for 18 months, while younger brother Walter served nine months in Perth General Prison.

The Pattison Crash affected the company, its staff, and unsecured creditors. Nine other businesses failed as a result, and many small-scale suppliers also went out of business. Whisky prices fell, with obvious consequences for the entire Scotch whisky industry.

Indeed, distillery construction abruptly halted, which had been so prolific during the previous few decades. The architect Charles Doig was responsible for the design of the Glen Elgin distillery, which opened in May 1900, but closed just five months later.

At the time, Doig predicted that no new distillery would be built in the Scottish Highlands for 50 years. His prophecy proved uncannily accurate, with Tullibardine in Perthshire being the next to be constructed – in 1949.

Walter and Robert Pattison alone did not cause the ‘crash’. Still, they were merely catalysts of the crisis that hit the Scotch whisky industry, and ‘boom’ would have turned to ‘bust’ before too long in any event, as the level of stocks being accrued bore little relation to the level of sales.

The Pattisons were not alone in being determined to believe that the good times would last forever. Still, the specter of over-production was never far from the feast, with many new distilleries vying with existing and often expanded operations.

In The Making of Scotch Whisky, Moss and Hume note:

‘Stocks were built up…to ridiculous levels… The annual increase in stock warehoused in Scotland rose from just under 2,000,000 gallons [9m liters] in 1891-2 to 13,500,000 gallons [61.3m liters] in 1897-98, and 1898-9 net additions to stock amounted to 40% or more of total output.’

Many years after the ‘Pattison Crash,’ DCL’s chairman and managing director WH Ross wrote:

‘…so large was their transactions and so wide their ramifications that they infused into the trade a reckless disregard of the most elementary rules of sound business… Investors and speculators of the worst kind were drawn into the vortex and vied with each other in their race for riches.’

With the demise of Pattisons Ltd, the world of Scotch whisky may have gained greater integrity, but it undoubtedly lost some of its colors along the way.

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