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How Does Costco Sell 18-Year-Old Single Malt Scotch for $38?

There’s a groundswell of support among whiskey geeks for Costco’s Kirkland Signature whiskies. Just two questions: Where do they come from, and why are they so cheap?

The geekiest factions of the online whiskey community can be particularly nasty, with insiders railing on “taters” (uninformed collectors) and lambasting the limited-edition releases they pursue. That makes it all the more surprising that, over the past year, there’s been a groundswell of support among geeks for the Kirkland Signature collection. These Costco house whiskies have likewise landed solid scores on Whisky Advocate and Wine Enthusiast of late; they even nabbed a top prize at the New York World Wine & Spirits Competition. They’re cheap, too—whether it be a 1.75 liter of Canadian whisky for $20 or an 18 Year Old Sherry Cask Finish Highlands Scotch for $38.

It’s this downright impossible price that has the online geeks playing a guessing game as to not only where, exactly, these whiskies are coming from, but how Costco gets the prices—specifically on age-statement whiskies—so low.

“It’s called undercutting their own undercutting,” the vice president of sales for a major spirits company told me [he didn’t wish to be identified]. What he means is, if Costco’s bottles of Jim Beam and Jack Daniel’s are already at cut-rate prices, the wholesale giant’s comparable house brands are intentionally sold for even cheaper than that. (And, that same VP claims, intentionally designed to look like well-known bottles from major brands.)

Likewise, many whiskey bloggers have noticed that Costco seems to obscure what they actually offer, with no master list available anywhere online. Most of their lower-end bottlings come in the popular 1.75 liter “handle,” like Kirkland Signature Blended Scotch Whisky ($18) and Kirkland Signature Tennessee Straight Bourbon Whiskey “Premium Small Batch” ($30). In the past few years they’ve also offered a rotating, limited selection of premium Scotch, like a blended 24-year-old for $70 and a Speyside 25-year-old for just $89.

Meanwhile, a typical Speyside 25-year-old from, say, Glenfarclas, hits shelves around $200. Laphroaig’s 27-year-old was just released at $750. And Highland Park’s 40-year-old comes out in minimal quantities each year for around $3,500.

Costco may be an impressive company, but they aren’t aging barrels of whisky in some Issaquah, Washington, warehouse next to the giant tubs of Hellmann’s and Jif. Instead, Kirkland Signature whiskies are sourced from other distilleries. There’s nothing necessarily nefarious about this. Though the practice has gotten a bad rap in America ever since The Daily Beast’s Eric Felten informed unwitting consumers that their “craft” whiskey most likely came from a factory called MGP Ingredients in Indiana. Sourcing is a quite widespread practice throughout Ireland and Scotland, however, where so-called independent bottlers buy up excess stock and put it out under their own labels.

It’s believed that Kirkland’s Canadian whisky comes from Crown Royal and the current Tennessee whiskey from George Dickel, and it’s pretty easy to see that their previous bourbon was Jim Beam juice (according to TTB filings). Their Scotch labels, meanwhile, typically credit Alexander Murray & Co, one of those aforementioned independent bottlers. The California-based company has been buying Scotch barrels and releasing products since 2004; they helped start Trader Joe’s private whisky label that same year, and Kirkland’s in 2007. Like most companies bottling alcohol under a generic house label, reps for Costco are mum on their process and sourcing.

“​Thank you for asking, but again, we don’t disclose how we develop Kirkland Signature,” wrote Annette Alvarez-Peters, Costco’s assistant general merchandise manager and the woman responsible for all the company’s alcohol purchases. I received similar answers to all of my follow-up questions.

Alexander Murray & Co. is also not willing to disclose any information on the arrangement, but it’s long been rumored the vast majority of the barrels they buy come from Tullibardine. Tullibardine sells their own 25-year-old Scotch for around $300 a bottle.

It’s also possible that the Kirkland’s Speyside 25-year-old bottling is Mortlach, Longmorn or even Macallan, the latter of whom Kirkland has openly partnered with in the past. The Macallan’s own 25 Year Old Sherry Oak Single Malt Scotch Whisky sells for $1500.

“Costco has a volume deal with [spirits] companies including Edrington and Diageo,” claims Mike Raymond, owner of Reserve 101, a top whiskey bar in Houston, and a judge at the annual Whiskies of the World conference. “They agree to buy a certain amount of product at a certain price, which is far lower than everyone else is paying. For products like Johnnie Walker Blue or Macallan, it’s virtually impossible to beat Costco on price.”

Meanwhile, the VP of sales claims it’s a well-known fact that Costco only makes a 13 percent gross profit on spirits, while 25 to 35 percent is considered the industry standard. That’s surely one reason they sell nearly $4 billion-worth of alcohol per year. Likewise, Alexander Murray & Co. shipped out some 165,000 cases of Scotch in 2015. And maybe that combined purchasing power allows them to get sweetheart deals on barrels, even ones that have been sitting in a Scottish warehouse for a quarter-century.

Then again, even massive distilleries only have so much room in their warehouses. Getting barrels out the door and sold is a top priority. Plus, the aging of whisky isn’t a perfect science. Some barrels aren’t going to taste exactly how, say, Macallan wants them to.

“Macallan has very high standards and very particular barrels they’re looking for,” notes Clay Risen, a New York Times senior editor and author of American Whiskey, Bourbon & Rye. “How do they get all the carrots in a supermarket to look like perfect carrots? Well, they get rid of all the other carrots.”

While Raymond notes, “My guess would be that [Kirkland Signature Scotch] is liquid from Edrington, which owns Macallan. They can’t use it for Macallan or their blends like Famous Grouse or Cutty Sark. This doesn’t mean that it’s of poor quality; it just has to do with flavor profiles.”

But Costco’s strategy is far more controlled than crossing their collective corporate fingers that some of the large distilleries will want to consistently sell off stock at favorable prices. “If Costco can control the importation of the whisky, get someone to distribute it to them at cost (or at very slim single-digit margins due to high volume) and then sell it at very low margins, then they’re golden,” explains a friend who is an independent bottler himself, though at a much smaller level. He tells me he know this happens with other big players, like Total Wine. “I do think that volume and control of two of the three tiers helps them tremendously.”

Finally, one reason rarely considered for why Costco might be able to offer better pricing is proof. Typically, whisky connoisseurs would want that 25-year-old Scotch to have some decent heft after all those years of concentrating in barrel. Alcohol is a conduit for flavor, after all. But all Kirkland Signature Scotches are sold at 80 proof, meaning that these whiskies are watered down to the absolute lowest legal limit and, thus, Costco is able to empty barrels into way more bottles.

So, in a way, a good percentage of that Speyside 25-year-old is just Kirkland Signature Water. Which Costco will readily admit only costs one penny an ounce.

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