Examination of Witnesses (Questions 500
WEDNESDAY 31 JANUARY 2001
500. I move on to competitive advantage. You
say in your memorandum that the markets for drinks is mature and
"technological development and global industrial restructuring"
will lead to a loss of jobs unless Scotland works to maintain
its competitive advantage. Can anything be done to prevent developments
in technology and industrial restructuring leading to fewer jobs
in the drinks industry in Scotland? What steps do you believe
are necessary to allow Scotland to maintain its competitive advantage
in the drinks industry?
(Mr Fulton) For the trade unions there is always a
conundrum. On the one hand, we always criticise companies for
lack of investment. It is true that at the beginning of the decade
companies like United Distillers lagged behind in technology.
The irony is that the marker in use at that time was the Strathleven
bond because it then had up to date, high-speed bottling lines.
The company had to catch up with technology. However, its implementation
almost highlights that we have surplus jobs. The question for
the trade unions is: how do we handle that issue over a period
of time? We are certainly not in a position to do it over two
or three weeks. We must be able to reach agreements to enable
us to handle these issues and, as far as possible, retrain people
for new high-skilled jobs or redeploy them. It is upon that that
we have tried to concentrate. The conundrum is how to deal with
investment on the one hand and retention of jobs on the other.
501. Do you believe that there is a bigger market
for scotch whisky in the world; in other words, if you improve
productivity it leads to fewer jobs but if productivity is greater
it creates more jobs? Perhaps in that way you can keep the same
number in the industry?
(Mr Fulton) That is very difficult. I am not an expert
on the marketplace, but it relies on a number of factors including
competition between various brands of whisky but also competition
between whisky and other drinks: white spirits, wine and cognac.
Interestingly, in the globalisation process, whereas the whisky
industry in Scotland used to be unique to whisky that is no longer
true. The three majors and others now have a portfolio which covers
almost every type of drink imaginable. Therefore, there is an
argument that they could be competing among themselves, but from
their strategic point of view it makes sense because if there
is a downturn in one brand they are able to concentrate on the
others. Another aspect of the global market is that it is dependent
on local economies. We hear it said that if America sneezes we
catch a cold. There is little doubt that if America goes into
a recession, as is predicted, that will have an effect on the
export of scotch whisky. It had an effect when there was a downturn
in the tiger economies.
502. Perhaps the more problems that people have
the more they drink?
(Mr Fulton) Absolutely! It is a difficult question
to answer. For example, Diageo has worked on the basis that currently
it produces about 39 million cases of whisky; next year it hopes
to achieve about 41 million, which is not a dramatic increase.
Looked at in that way, there will not be increases of, say, 10
or 20 per cent in the whisky industry. If there is a move it will
503. Moving on to union representation in the
drinks industry, you have touched on the fact that in whisky you
have good representation, wages and conditions and industrial
relations, but you also make the point that that is less true
in the service sectors; for example, hospitality and tourism.
What concerns do you have about the difficulty in recruiting members
in those sectors? Can you identify any improvements in legislation
which would make it easier to organise?
(Mr Speirs) I talk about recruiting people but Mr
Fulton actually does it. If we look at the sector that we are
now talking about, the Employment Relations Act and the legal
rights to recognition that it gives has had a substantial impact,
not in terms of lots of cases coming before the Central Arbitration
Committee, with decisions to impose recognition deals, but the
whole atmosphere. Employers are more willing to listen and talk
about voluntary recognition. To some extent, the evidence that
comes to us indicates that there is less insecurity in the workplace
about being seen to be interested in trade union membership. The
fear factor has been slightly reduced. However, that legislation
does not apply to workplaces in which fewer than 20 people are
employed. A significant feature of this sector is that the workplace
has fewer than 20 people.
504. We saw it last week in Islay where none
of the six or seven distilleries employed 20 or more people.
(Mr Speirs) And those are just the distilleries. One
must look also at bed and breakfast, pubs and the rest of it.
Some time ago this committee made an investigation into the situation
in the tourism and hospitality industry in Scotland and identified
a number of good elements but also areas of difficulty in terms
of quality of service provided. Scotland will never compete on
the basis of sunshine; it must be high value tourism of some other
kind, including quality of service. We argueof course,
we would, would we not?that if there is a low paid workforce
to some extent people under-value themselves, but they are also
under-valued by their employer. The incentive to invest in training
to get the best quality productivity out of highly paid workers
is removed. We are of the clear view that until that sector is
better organised, paid, trained and valued generally that element
of the drinks and hospitality industry in Scotland will continue
Sir Robert Smith
505. Although the smaller distilleries employ
fewer than 20 people, is there much unionisation in that sector?
(Mr Fulton) Yes. The majority of the distilleries
are in the hands of large organisations such as Diageo and Allied.
Part of the bargaining arrangements that we have also include
the distilleries. For example, Diageo has about 35 distilleries
all of which are organised for the purposes of union bargaining.
There may be the odd ones in the smaller companies which are not
organised, but they will be represented.
506. Therefore, the point you make relates more
to the service sector?
(Mr Fulton) Yes. To add a supplementary, Mr Speirs
referred to the Employment Relations Act. I do not operate in
that sector and so cannot be specific. However, at the distribution
end, for example the pubs, there is no doubt that the imposition
of the minimum wage and holiday entitlement has had an effect.
That Act has at least increased the minimum standards.
507. Has it led to any job reductions?
(Mr Fulton) It is impossible to say. I am not aware
of that, but it does not mean to say that it has not happened.
There are other more crucial issues which lead to job reductions,
because that sector of the brewing industry which comprises pubs
is currently to-ing and fro-ing between mergers and demergers.
That sector is basically controlled by the brewing industry which
takes the large corporate decisions.
(Mr Speirs) We have not seen any research on this
matter. The lowest paid end where the minimum wage has had the
biggest impact is de facto non-unionised, so we do not
have any feedback of information.
508. Your point about tourism, which one can
argue is just as important to the Scottish economy as whisky,
is that the workforce is not as highly paid or trained as it could
and should be?
(Mr Fulton) Yes.
Sir Robert Smith
509. Scottish Enterprise has argued that the
beneficial image advantages of products such as whisky could be
developed as a springboard to increase Scottish sales in UK and
foreign markets. What is your opinion of the support provided
to the drinks industry by policymakers in Scotland?
(Mr Speirs) I do not want to go too deeply into the
involvement of Scottish Enterprise and the local enterprise companies
which varies. One can talk about improvements on the supply side
in terms of increasing the skill of the workforce and so on. On
the manufacturing side the position is relatively good and there
is a huge impact. If one talks about policymakers helping the
industry, it is the Chancellor of the Exchequer who can make the
510. You say that the industry is fairly self-sufficient
in terms of its own dynamics. Are the image advantages of quality
Scottish products like whisky being fully utilised?
(Mr Speirs) My comment, which is not based on detailed
research or studies but experience of different areas in which
we operate, is that it could work more effectively. In relation
specifically to the whisky industry, we have identified that the
extent to which the industry relies on brand promotion rather
than the generic promotion of whisky is potentially unhelpful.
More generally, the ability of Scotland to market itself internationally
is a recurrent theme. The issue is the role of the Scottish Tourist
Board, which has been very much up for review, and the Scottish
Trade International and the extent to which bodies of that kind
are able to operate internationally alongside the foreign service,
for example the British Council, and all its aspects. The STUC
is currently undertaking a detailed review of the media and cultural
industries in Scotland, including the role of the British Council
internationally. Our perception is that things could work much
better together. At the moment, we are not in a position to put
forward specific proposals as to how that should be done.
511. Clearly, whisky is a high quality product
with a good image. Coming from the north-east of Scotland, the
whole food sector there has created for itself a good image which
is aimed at the premium end of the market. Do you believe that,
while Scotland the brand has happened fairly naturally, there
is a danger that without some kind of protection or policing others
may believe that if they just stick "Scotland" on something
it does not matter; they will get a premium for it, which would
begin to undermine what other products have achieved?
(Mr Fulton) There is always a danger of that. Earlier
Mr Speirs alluded to the bulk export of whisky. A number of years
ago it was suggested that there should be bulk export of whisky
to India, with the opening up of the Indian economy. The Indians
insisted that they received it in bulk and it would be bottled
there. Although that was specific to the Indian market, if one
looks at the geography and the markets of the Far East it does
not take much to realise the impact. One considers the cost of
transporting cases and bottles from Scotland to the Far East when
India is in between. Assurances were given that that would not
happen, because the whole rationale was to put on the label, as
at the moment, "Produced and bottled in Scotland". That
is part of the whole mystique which is of supreme importance.
Clearly, that is something which must be guarded. There is always
the possibility that the product can be tankered in that way.
The downstream has a multiplier effect in terms of the production
of bottles, cartons, labels and everything else which are also
crucial to the economy.
(Mr Speirs) There are at least two aspects to this.
One is the situation in which Scotland gets such a good name that
people stick "Scotland" onto inferior Scottish products,
which then damages the image. To be honest, if that is a problem
then I would love to face it. If the issue is whether one has
thistle marks put on quality products and one reaches the stage
where Scotland is such a good brand that people are desperate
to use it, that is a problem one is happy to face. The other issue
is counterfeiting and devaluing a product that is already of high
quality. There is dilution and use of bulk malts with the blending
of grain spiritsI refer to the Japanese experience and
so onwhich we believe is a difficulty. There is also the
issue of counterfeiting. One matter that we did not touch on in
our paper, but was spoken to on Friday last by representatives
of the Customs and Excise section of the civil service union PCS,
is the concern about the extent to which contraband drink comes
into Scotland. That problem is reaching desperate proportions,
although not to the same extent as in the south of England. In
the first instance, it does not hit genuine producers, in that
it is a genuine product which goes to Belgium and then returns.
However, it hits legitimate retailers of the product in Scotland
who are continually undercut. In addition, the cut-back in the
number of customs officers is very worrying.
512. You have already suggested that "the
domestic tax treatment of spirits. . .has discriminated against
scotch whisky." Do you have any evidence about the impact
of spirits taxes on employment in Scotland? Do you believe that
tax policy pays due regard to the effects of excise duties on
the Scottish economy?
(Mr Speirs) To answer the first part, I cannot give
you the information but I am happy to check our paperwork and
academic advisers on the quantification of jobs. We have no doubt
that there is an impact because of the much higher level of excise
duty on spirits than wine or beer, but particularly wine as a
comparison. That is bound to be damaging. We have also drawn attention
to the fact that it undermines our argument with other governments
about discriminatory taxation. They simply say that the British
Government does it. It is our view that there is a negative impact
on the Scottish economy as elsewhere in terms of the sale of all
spirits, but particularly whisky.
(Mr Fulton) The industry is now becoming very efficient
in manufacturing. This not particularly a Scottish question; it
is the UK market that is affected by it. Any issue that discriminates
against the ability to be able to sell within the Scottish UK
marketplace does not make life easy for us. It is extremely difficult
to quantify what equalisation of taxation levels would mean for
the number of jobs in the industry, but it certainly has an effect.
513. You have criticised the tax regime. If
you could design a fair tax regime what would it look like?
(Mr Speirs) The straightforward position is that taxation
should be based on alcohol content. We can leave aside the particular
level of tax, but we call for equalisation across all forms of
alcoholic drinks. The tax should be based on the percentage of
alcohol which the product contains.
514. Therefore, you do not look for the same
level of tax on beer, wine and spirits but just on the percentage
so that the tax on wine will still be low compared with spirits?
(Mr Speirs) The level of tax would be the same. Essentially,
it would be based on the percentage of alcohol. Putting it crudely,
the tax that is paid should be roughly the same for a 35 ml glass
of whisky as a pint of beer or glass of wine in terms of units
of alcohol. So far we have managed to steer clear of the health
515. Assuming that the Treasury does not want
to see a drop in the tax take, do you accept that that may mean
making beer and wine more expensive and so increasing the tax
(Mr Fulton) The Chancellor always has that prerogative
in his budget. The point we make is that, whatever be the taxation
level, there should be a uniform index for beer, wine and spirits.
It appears that the index should be based on alcohol content.
516. You do not suggest that the tax on spirits
should be reduced or that it be pegged until all the rest comes
up to that level; you leave it to the Chancellor to sort it out?
(Mr Speirs) Our policy position is that the tax should
be equal, but we do not say at precisely what level the tax should
517. If steps were taken to equalise the tax
within the EU do you think that that would be a successful way
to defeat some of the counterfeiting and smuggling that is concerning
the Chancellor at the moment?
(Mr Speirs) Equalisation across the EU, yes. The equalisation
of tax on different forms of alcohol within the UK would not make
a huge difference, but as long as there is a disparity of rates
between the UK and some other parts of the EU there is a problem.
It might be argued that you could keep the tax take up by reducing
the level because you remove counterfeiting and increase the amount
being drunk, but there is also a health issue here.
518. In relation to smuggling, you said that
it was a greater problem in the south of England, but the committee
has received evidence that it is a growing problem in Scotland.
We were told about various vehicles coming across the channel
which were used to fill up tankers that then drove straight to
Glasgow. Are you concerned that if that was an increasing trend
it might cause a loss of jobs and membership? If so, what measures
do you believe can be taken to counter it?
(Mr Fulton) I believe that that will have an effect
on the retail side of the business. Some retailers in the high
street compete against that, which means that they must be very
cute with their pricing policy. There is a limit to how far they
can go. It is difficult to quantify, but the rationale of cheap
material being produced here and then exported abroad and returned
because it is cheaper to buy it in some of the channel ports is
not unique to spirits; it applies also to the tobacco industry.
That is potentially a major problem, although not so much from
the point of view of the distilleries and the manufacturing areas
in which we operate. One may perhaps take the cynical view that
it does not really matter to them at the end of the day because
they produce the stuff anyway and what happens when it goes out
of the door is not of much interest, but I am sure that it is
of interest not only to retailers but the Chancellor.
519. How do you stop or reduce smuggling?
(Mr Speirs) Certainly, we need to reverse the policy
of reducing the number of people in customs and excise who are
charged with dealing with this issue. I would certainly encourage
the PCS, which is involved in Customs and Excise, to make a submission
to the committee. It has not provided detailed evidence to us,
but its experience on the ground is that there is an increasing
problem in Scotland because staff are being switched to the south
of England. The people who operate in this areaI have no
evidence of it one way or the otherhave asserted that a
number of areas of organised crime which were focused on drug
dealing are now moving into contraband liquor and tobacco in a
substantial way. They have very good intelligence networks. When
they discover that there is extra security in the south it is
not difficult for them to direct the lorries to keep going until
they get to Glasgow, Aberdeen or wherever it may be. Therefore,
in the first instance there should be more staff, but there are
wider questions about tax regimes. We do not have a particular
policy position on that at present.
(Mr Fulton) The obvious solution is some agreed harmonisation
of taxation throughout the European Union.