Select Committee on Scottish Affairs Minutes of Evidence

Examination of Witnesses (Questions 320 - 339)



Mr Clarke

  320. If you tasted some of the vodkas you would know. Your organisation sent a memo to us and it stated that it was vital that the industry had open access to foreign markets. Mr MacEachran in his original statement said that the memorandum identified several types of trade barriers and fiscal or administrative obstacles to achieving that aim. For example, it discussed discriminating taxation against gin and vodka, particularly in Canada, China, Czech Republic, India, Mexico, New Zealand, Poland, Romania, Russia and Turkey; export refunds and access to works for raw materials; minimum rates of excise duty across Europe and the current review of this; and the deference of due diligence in terms of paying duty. How does EU regulation and duty rates and trade barriers erected by various countries affect foreign sales? Which has had the biggest impact on sales?
  (Mr Atkinson) Perhaps I can deal with export refunds. In that regard our evidence is very much the same as you have heard already from Scotch Whisky where we work together with them, although technically there was a slight difference in the mathematics. The industry, as with Scotch Whisky, used to get a number of millions of pounds of support because of the price differential between EU cereals and overseas cereals. In wishing to bring down the amount of money committed by the Commission as a whole to all industries to a WTO level, they targeted us for reduction. Because of a specific paragraph in the UK Accession Treaty they could not do away with the refund in total, which they were, I think I could say, disappointed about. This clause meant they could not do away with the refunds so instead they altered the mechanism by which they give us the refunds. Coincidentally I have to say though that the EU prices and the world prices of the cereals we use, converged. Therefore we have been left with a situation where the industry, at short notice and in our view in a discriminatory way have had the refunds taken away from us in a method of calculation that we are less than happy with. We got full support from the Minister of Agriculture and other Ministers on this and the only come-back that the Minister did achieve was that the prices and the refunds will be reviewed in a period of time to see how much we have been disadvantaged. I have to say that will be retrospective and therefore we find that a little disappointing, but we were grateful to the Minister for his support. So in summary on export refunds, whereas together with Scotch Whisky we were over £10 million, nearer £20 million in the money our industry got to help us buy UK/EU cereals, that has now disappeared. Prices have converged but prices have a way of changing again and we are keeping a close eye on it. We will continue to seek Ministers support.

  321. Can you tell me when this happened?
  (Mr Atkinson) Yes, there are some aspects of it, called "inward processing relief", that are still under debate. But essentially it started in the fiscal year beginning October last year, October 2000. With respect to barriers to trade, I might just pick on two or three if I may rather than take your time. It is very difficult with barriers to trade to know what trade you would have got if there was not a barrier, so I cannot answer one of your points. To give you the first example, on Poland: Poland of course is a white spirits drinking country and they wish to protect their industry. Therefore they have had a very high import tariff against spirits from the EU. If I remember correctly, it is 75 per cent currently on whisky, 85 per cent on gin and, wait for it, on vodka, if we live within their quota of imports, it is over 100 per cent. Subject to correction I think it is 135 per cent, of that order[7]. If we exceed their quota, it is over 200 per cent. It will not surprise you to know that our exports of UK vodka to Poland are extremely low. The potential market is extremely good. I particularly raise Poland because it is an accession country and the Ministers in this country and, more particularly, those in the Commission who are leading on accession negotiations are aware of these differentials. We are seeking a reduction of those differentials as soon as possible so that they are brought down before accession. I should tell you that Polish vodka coming into this country and into the EU has zero tariff. So we have got 200 on one side and zero on the other, over 200. What we would urge your support on is that in the accession negotiations, no extension is given to Poland or other such let-outs because they must join a level playing field and not be given undue consideration. They have had time enough to get their tariffs down. It is on the record though that certain UK gin and vodka companies are trying to get an interest in the Polish distilleries. So it is possible that my concern will go away if we end up owning a lot of the Polish vodka industry.

Mr Welsh

  322. On discriminatory taxation I can understand that there is a rhyme and reason to it with regard to countries like Poland, Russia and Mexico; but what about India, China and Turkey? What particular reason would they have to discriminate?
  (Mr Atkinson) The reasons vary. In some cases like China they have a white spirit—I am afraid I cannot pronounce its name. They have a white spirit of their own, although we are really going for a different end of the market. In India white spirits are produced. It is a very complex mixture of their own white spirits; so white spirits are made in India. We do have some access to India already for a limited market in the hotel trade. But in general terms their tariff is still extremely high and there is a complex intrastate problem which we have yet to get over. There are active negotiations going on with India and some tariff reductions are expected, although they have just—I would not use the word defaulted; that may be technically wrong—failed to lower their tariff on whisky in the way that we were led to believe they would. They are now, on white spirits, expected to do it by the end of the year. So India is a huge market; it is a developing market in a wider trade sense. Because it is a developing market there is protection of their indigenous trade in their minds as well.

  323. What about New Zealand?
  (Mr Atkinson) New Zealand again are protecting their own industry. There is a gin industry in New Zealand, but I have to be careful because one member company has an interest in that whereas other member companies are trying to export to New Zealand and have, if I remember correctly, either 4.5 or 5.5 per cent tariff they have to pay to go into New Zealand. That is more of a nuisance tariff.


  324. Can I just quickly follow that with a question about the minimum rates of excise duty across Europe and clarify whether or not you are in favour of a minimum rate and what you say it should be?
  (Mr Atkinson) What we are in favour of, first and foremost, Mr Chairman, is a level playing field. Secondly, we want an open and common market. This came up some years ago when the first attempt was made by the Commission to rationalise the market and there was not the will at that time among member states to really grab the thing by the throat. We ended up achieving only the minimum which was to set what the minimum rates might be. That is now under review, but our expectation is that very little progress will be made this time. To give you an example of our major worry, it is that the wine countries essentially have a minimum rate of zero whereas spirits is considerably higher. That varies country to country and I could give you the details. In some cases that has been raised. But what we are after, and we have had excellent support through Customs and Excise to the Treasury, and the UK submission is, first and foremost, in the longer term to achieve the level playing field that I indicated of an equivalent and level tax based on alcohol; that alcohol is alcohol on the same bases that we mentioned for the UK. But we recognise the difficulties and the unlikelihood of major political moves and so we have some specific aims in the short term. For instance, if spirits minimum rate was revalorised, if you have got wine zero but you update the minimum rate on excise according to revalorations, indexation, inflation—call it what you will—that might appear logical. But it is actually widening the differential. We do not see that the wine countries are going to shift fast although there is indication that one might be more broad minded.

Sir Robert Smith

  325. Just to clarify, I presume with countries like India it is not particularly the spirit; I presume India has a general protectionist ideal.
  (Mr Morrison) It is one where we had recent experience of operations in India. It is very much a protectionist strategy. They have all sorts of locally produced spirits, some of which are mixed with imported spirits and it is purely on that protectionist basis. There are of course one or two states which are designated dry states, but that is not the reason for the high level of import taxation which I think is running at 235 per cent, something like that.


  326. We have a long way to go so we need to move on as quickly as we can. We will move on to production in Scotland.
  (Mr Atkinson) Mr Chairman, may I be very rude and just cover one country very quickly that we have mentioned, which is Russia? A couple of years ago we had an excellent and huge export of vodka to Russia. That might surprise you. It was for a number of reasons. Indeed, anecdotally one company exported to the Red Army. But in more recent times we had particular difficulty with Russia, not just economic but due to barriers of trade. The European Commissioner at this time was proposing, and it has gone before the House, that the EU should impose punitive—not my words; Commission words—tariff sanctions against Russian vodka. What we have a problem with, which the DTI has helped us with, is that on the one hand, if the EU puts on a punitive tariff against Russian vodka, there will be retaliatory actions against our exports to Russia, which are important to us. On the other hand, a number of companies of ours import Russian vodka, and a punitive tariff will mean they go out of business. This also affects the UK Government because they will lose excise. So our companies will have to pay tariff on Russian vodka worth many millions and the UK Government will lose £8 million in excise. So we are fighting this and believe there are better ways of getting a political message to Russia about international trade and respect of international agreements than just selecting vodka as a cause celebre. We would seek the Committee's support in that.

  327. I am not sure I understand the calculation. How would the tariff lose the excise?
  (Mr Atkinson) What would happen is that the EU would impose a tariff on the Russian vodka that comes into the EU. In fact though the tariff will have to be paid by the EU companies, not by the Russians, so it would be killing your friend, not killing your enemy if you like. The tariff is so high it would put a total end to the industry.

  328. Why should that reduce the duty?
  (Mr Atkinson) Because that amount of trade would suddenly go to zero because the tariff is so high it would make it uneconomic.

  329. Does that mean that people would stop buying it? Surely they would buy it from another source?
  (Mr Atkinson) Even if you bring the vodka through Cyprus, say, it has a country of origin on it.

  330. No, I mean buy the vodka from another manufacturer.
  (Mr Atkinson) I am sure one or two of our member companies would welcome that remark.

Miss Begg

  331. In your memorandum you actually say that extra investment has now improved rationalisation further of major companies. A major relocation of facilities has recently been completed in Scotland. That means that some 75 per cent of UK gin and vodka now comes off the bottling line in Scotland. As we found with the other drinks manufacturers, coming off the bottling line and being manufactured can often mean two different things. So my question is: how much of the gin and vodka that comes off the bottling line in Scotland is produced there? What prospect is there of increasing either the amount of gin and vodka produced in Scotland or the amount bottled there?
  (Mr Atkinson) I will start and then hand you over to my colleagues, if I may. The major point of consolidation has been a year or two back with Allied, where their bottling moved from Kennington. However, the gin is distilled here in London. The neutral alcohol for that gin is made at Dunbarton distillery. So it gets quite complex. The neutral alcohol is made in Dunbarton. It is distilled into gin in Kennington, called London gin, and it goes back up north for bottling. The other major consolidation has been at Cameron Bridge where UDV have moved their gin distillation up to Cameron Bridge and bottling down the road to Leven. The exact answer to your question is that 48, shall we say 50 per cent of a UK gin is distilled in Scotland; 72 per cent is bottled in Scotland. Vodka, basically 76 per cent is distilled, made and bottled in Scotland.

  332. Will the barrier to the gin be a factor if it has got to be a London gin?
  (Mr Atkinson) Not at all. One company has chosen to still distil in London.
  (Mr Morrison) I think it is the crux of the rationalisation process and the consolidation process that product companies will try and get economies of scale by locating their business in the optimum place to get their cost benefits. What has happened at Cameron Bridge is that we have actually seen consolidation at one major site and therefore they have preserved jobs globally. The nature of the jobs may have changed. Whereas previously they might have been in a particular sector, such as bottling, they have now moved to production. But the jobs have been preserved through the consolidation process. It is really all about cost and operational efficiency and that is where the industry obviously has to contain that cost burden across the country, to retain those economies of scale and the rationale for doing business at those sites.

  333. In the light of the answers you have given us, does that mean in Scotland that the gin and vodka industries actually concentrate on the cheaper end of the market; that it is the cheaper brands you are producing?
  (Mr Morrison) Production and bottling covers both cheaper and expensive brands as the focus is on optimising the levels of production and efficient use of production facilities.

  334. And are you looking at the more expensive brands? Is that the side of the market that is worth developing because obviously there must be a bigger profit in it for you?
  (Mr MacEachran) It is the more expensive part of the market so you get into the old equation of benefit against risk. It is a highly competitive part of the market. So essentially what you have got are brands that exist now and the issue is to maintain their presence in the market against the price competition, against the cheaper on display labelled brands. To bring a new brand into the market and generate sufficient profit is a highly expensive exercise these days.

  335. Though you have been very successful in bringing in the youth end with your Vodka Ice, Bacardi Breezers among other things. They are expensive. Are you looking to expand that area of the market?
  (Mr MacEachran) That is a difficult question to answer in general. It depends really on, (a) the strength of the brand you introduce; (b) whether there is momentum behind it; and, (c), what the lifespan of these brands are. Sometimes these brands can have a short lifespan. Sometimes they last well into the future. There is obviously a market there and a demand. It is unclear at this point as to what level of demand there is, whether it will increase or decrease.

Sir Robert Smith

  336. Do you see further scope for consolidation? Obviously the percentage of that business is quite high. Do you see further scope and jobs coming in? Understanding it, presumably with more transport costs, what do you think has been the main catalyst of the consolidation to be in Scotland rather than in some other part of the country?
  (Mr MacEachran) I think the main catalyst is the infrastructure that exists in Scotland. There is clearly a very large Scotch whisky production base which therefore provides you with economies of scale when it comes to producing other spirits. That essentially is where the rationale for it came from. As to what drives it, I think what drives it essentially is a medium to long-term issue. Clearly the distribution groups that buy from the suppliers of spirits have changed notably over the past 10 years. We have seen the emergence and strengthening of international retailing groups and also other buying groups. That in turn then gives them purchasing power and selectivity. They can choose what products in what portfolios they want to have on the shelf. That in turn leads to price competition. From that you have to look at your internal operations. So the spirits industry in the UK has had to confront that reality and is doing so progressively and at times aggressively to achieve the necessary cost base.
  (Mr Morrison) One of the key considerations has been operational capacity of plants and therefore while at any time there may be eight or nine plants working at half capacity, there comes a time when you might consolidate that into a lesser number.

  337. So the riskier aspect in Scotland is in terms of production, but you are optimistic for the future for Scotland in that consolidation is still climbing up or at least maintaining a level?
  (Mr Morrison) Hopefully going upwards.

Mr Clarke

  338. Just a quick question. You do not mention the fact that the proof of some brands is different from others? I mean, I would not drink foreign vodka if you paid me. It is murderous. It is far too strong. Some of the vodkas are pretty mild and others are not; there are two different kinds, red and blue. You have not mentioned that in the selling of your brands. That must be a sales aspect.
  (Mr Morrison) In the same way you asked the question about the Smirnoff Ice and so forth, we are actually responding to consumer demand and that is actually the answer. If you respond to consumer demand then there is a profit opportunity there and an opportunity to build your business. You are obviously going to follow through on it. If it is not profitable, then you will pull back from it and sooner or later the consumer will change as to exactly what he desires. You then move on to another type of product or variation of that product. That is the answer rather than any plan from the outset to deliver something to the consumer that he does not want.

Mr Welsh

  339. I have two questions. Your memorandum said that the law requires that neutral alcohol (from which gin and vodka is derived) must be produced at a different site from the finished product. Why does the law require that?
  (Mr Atkinson) If I may answer, I suspect you are quoting from my own statement. I have a technical rider which I have yet to research. I am not sure if that law applies to Scotland.

7   Note by witness: Vodka exports to Poland are charged a discriminatory rate of 105% import tax plus 2 Euro per %of alcohol per litre. If the quota of 685,200 lpa for vodka imports is exceeded in the year, the import tariff rises to 268%. EU exports to Poland are currently well within this quota figure, presumably because the tariff is so punitive. Back

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