Select Committee on Scottish Affairs Appendices to the Minutes of Evidence


Memorandum from Professor Mike Danson and Geoff Whittam, University of Paisley


  This independent submission updates a 1999 report to the Scotch Whisky Association and the STUC on the industry. With no access to additional resources, the submission only seeks to highlight the priority issues as identified in that report and to focus attention on the potential conflict between the needs of Scottish workers and communities on the one hand, and the Chancellor and those corporations which dominate the sector on the other.

  The Scottish Whisky industry is a significant and strategic manufacturing industry for Scotland and the UK. As one of the longest established genuinely global industries with a market reach spanning 200 countries, it can well claim to be Scotland's flag-bearer.

  Scotch Whisky is a highly successful international industry. Nearly 30 thousand people are employed in Scotland through the industry, with 90 per cent of its product being exported.

  This contribution to the Scottish and UK economies and the balance of trade has been generated by an industry that has established its product and built up an admirable record of successes on the back of its own efforts.

  Competing in so many mature markets, both at home and overseas, the task for the industry is now to grow the market. Without an expanding market, static sales and improving technology will mean fewer jobs: jobless growth. Indeed over recent years there has been significant loss of employment across the industry, with distilleries, bottling plants and office employment all being affected.

  Companies and brand owners have their role to play: but there is a clear role for government also. Government tax policy accounts for by far the largest element in the retail price of a bottle, in a sector where the retail price matters.

  There has been a tradition of tax discrimination against spirits and this is constraining the ability of the industry to meet these challenges. The industry does not require favourable treatment to achieve improved market share, but merely a level playing field—equalisation of tax and excise duties with other alcoholic beverages.

  The rate of tax faced by Scotch Whisky is not only unduly high. It is also almost twice the rate applied to wine. There is a clear need for Government to acknowledge its responsibility for this state of affairs and for the Chancellor and Treasury to recognise the cogency of the argument for equal tax treatment of all alcoholic drinks—where all drinks bear the same rate of tax, levied according to their alcoholic content.

  However, changes in the tax and excise regime will have little effect on the number of jobs and incomes in Scotland. The impacts of any alterations would be felt in profits and revenues to the UK Exchequer in the short to medium term.

  This is a sustainable industry which is now maintaining a skilled technologically sophisticated workforce and attracting further related activities. Therefore, the priority should be to realise the potential for development and growth through a proactive policy to exploit the opportunities in the global market.

  This submission does re-examine the case for tax equalisation, but also attempts to inform and positively influence public debate about what actions are required, by a range of players, to secure and develop employment and wealth creation in the Scotch Whisky industry.

Main Findings

  (a)  The most recent Government statistics (1995) indicate direct employment at about 10,000, or about 3 per cent of the total manufacturing workforce in Scotland.

  (b)  The total number directly employed in the industry has fallen from 22,000 in 1980, a fall of 13,000.

  (c)  The industry supports a further 20,000 jobs through indirect and induced employment, the eighth highest out of 78 manufacturing industries in Scotland. Almost 60,000 jobs are dependent on the Scotch Whisky industry in the UK as a whole.

  (d)  Pay and conditions of work are above average for comparative industries.

  (e)  Industrial relations tend to be very good.

  (f)  The Scotch Whisky industry is a classic industrial cluster.

  (g)  But, whilst there are strong vertical linkages, horizontal linkages are less developed.

  (h)  And promotion of the product tends to be on a brand basis.

  (i)  There is widespread discrimination against Scotch Whisky both in the home and overseas markets.

  (j)  Although duty free was abolished within the EU last year, the effects on Scottish jobs and incomes have been muted and nowhere near the exaggerated claims made by the industry and by many commentators.

Main Recommendations

  (a)  The industry and the economic development agencies, including the Scottish Tourist Board, Scottish Enterprise and Highlands and Islands Enterprise, continually should exploit niche marketing activities. On the back of increased sales of malt whisky in particular, there exist niche marketing opportunities. As this means short production runs for the bottling plants which are labour intensive, it can sustain employment and create value-added benefits for the Scottish economy.

  (b)  Scottish Enterprise and Highlands and Islands Enterprise should seek to work with the industry more closely given that the Scotch Whisky industry is a classic cluster and Scottish Enterprise is currently actively promoting a clustering strategy.

  (c)  To combat the threat of white spirits and designer drinks, the industry should examine ways to undertake joint promotions by companies within the Whisky sector, and with agencies including the tourist boards.

  (d)  The trend to relocate white spirit production and bottling in Scotland should be encouraged both by the companies involved and by the economic development agencies. The relocation of white spirit production to Scotland results in cost reductions for the whole industry. Scotland has a competitive advantage in the production of spirit, but this needs to be exploited actively to the full if all the benefits to the Scottish economy are to be realised. Locate in Scotland should be encouraged to recognise the potential of this for job and enterprise creation in Scotland.

  (e)  There is a need to rebuild Whisky sales in the home economy. Ways need to be found to educate both consumers and retailers about Scotch in all its forms. This should include courses in the catering, tourism and hospitality sectors in Further and Higher education incorporating an appreciation of Scotch Whisky as a part of the syllabus. The industry and trades unions should be encouraging the education sector to become more aware of the wider opportunities offered by the sector.

  (f)  The British Government should recognise that current levels of tax and duty are contributing to job losses in the longer term and to a falling tax take and should commit to reducing tax discrimination at the earliest opportunity. The present position also allows other governments to legitimise discrimination against Scotch Whisky so that moves towards tax equalisation should have significant effects on exports. There must be a level playing field if the benefits of the single European market are to be gained throughout the EU.



  1.  This submission updates the study into "The Scotch Whisky Industry—current performance and future prospects—priorities for improvement" prepared for the Scotch Whisky Association and the STUC, published in Spring 1999.

  2.  With no independent source of income, we were unable to revisit the statistics and other information used in that research. However, we are confident that the main findings in 1999 are still applicable today.

  3.  In that study, and in subsequent articles, we have argued that the priorities for economic development activities within Scotland arising from the Scotch Whisky industry are different from the objectives of both the owners of the sector and the Chancellor in Westminster. Indeed, the policies which would maximise benefits to Scotland under devolution may well contradict those which would be optimal for the corporations who dominate the industry and from the desire of the Treasury to pursue tax revenue maximisation.

  4.  In this context, it does not seem sensible to adopt a strategic review of the sector with only a narrow focus on the traditional concerns of the industry and its champions. In particular, below we argue that the Scottish income and employment impacts of changes in duties and taxes are insubstantial. The experience of the abolition of "duty free" on the sector is testament to the exaggerated claims which have emanated from many commentators in recent years, this contrasts with the potential for growth and development through the promotion of "bottling glen" and the better linking of tourism and culture to the Scotch Whisky industry.

  5.  The Scotch Whisky industry is one of the most significant sectors in the UK and Scottish economies in terms of employment, exports and government revenues. It is of strategic importance with regard to:

    (1)  overseas trade—it is consistently one of the UK's top five export earners, with sales abroad of £2.4 billion, it is second only to the electronics sector in manufacturing exports from Scotland;

    (2)  domestic consumption—about £2 billion of retail sales are generated in the UK, accounting for 40 per cent of UK spirit sales;

    (3)  environmentally friendly production—with a product using entirely natural resources and processes, generating virtually no pollution, and benefiting from constantly improving industry standards and innovative practices;

    (4)  employment—with about 10,000 direct jobs in Scotland, often in small rural and disadvantaged locations; and high backward and forward linkages creating three times as many jobs elsewhere in the Scottish economy, supporting over 30,000 in total and 60,000 in the UK as a whole.

  6.  However, despite this apparent success, there is continuing concern over the future of the industry. This arises for a number of reasons: high rates of taxation in the UK and overseas; a relative decline in the sales of Scotch Whisky at home; a falling real price; and substitution of other forms of alcohol.

  7.  As the industry provides so many jobs and incomes in fragile parts of Scotland, and in particular in areas recognised by the EU and the UK Government as some of the most deprived and underdeveloped in Europe, addressing these threats is of the utmost significance to the economic well-being of many communities in Scotland—in both urban and fragile rural areas. In late 1998 and early 1999, a study was undertaken for the Scottish Trades Union Congress (STUC) and The Scotch Whisky Association (SWA), therefore, into the current state of the industry by reviewing the sector, its firms and workforce, trade and taxation, linkages, ownership and prospects. This submission is based upon that review of the Scotch Whisky industry. It should be stressed that the study was edited independently of these two bodies and does not necessarily represent their views.


  8.  Because of the importance of Scotch Whisky to the economy, and its obvious attractions as a research area, much has been published and is known about the sector already. An unusually strong trade association[1] (The Scotch Whisky Association) and industry have produced a range of literature and background information which have provided a useful supplement to the official statistics and reports on the industry conducted by the Scottish Office, Scottish Enterprise, HIE, EC and others. However, as many of these were directly based on the research and analysis of The Scotch Whisky Association itself, there was a lower level of independent information than first expected.

  9.  In producing the report, many data and reports held by The Scotch Whisky Association were made available; however, as noted, much of the data and other information held by the public sector agencies were either duplication of primary data produced by the industry or were otherwise unavailable. The critical analysis and review of these secondary sources of knowledge was more limited than initially anticipated. This made the views and proposals of the industry even more significant in informing the study.

  10.  The initial analysis has confirmed the structure (output, investment, sales, exports, size of enterprise and employment, linkages, value added, etc) and business environment (taxation regimes, profitability compared with sector averages, exchange rate sensitivity, market analyses, European and WTO regulations, etc) of the Scotch Whisky industry. In contrast to the above, recent reworking of the official statistics on the value added of the companies involved in producing Scotch Whisky has led to some significant revisions in the apparent performance of the sector. As well as providing the background to the examination of the Scotch Whisky industry, this has identified the key problems and challenges facing the sector in the short and longer terms.

  11.  To analyse the strategies and likely scenarios planned for the future by the enterprises and authorities active in the Scotch Whisky industry, it was necessary to undertake further research to extend this recorded and formal assessment of the sector.

  12.  Therefore, the industry was studied by way of a series of interviews with the key players to confirm the issues identified in the secondary research and, in the light of these, to determine probable developments over the next few years as the industry and the authorities react to these changes in their business environment.

  13.  Prime amongst these interviewees were The Scotch Whisky Association, a sample of distillers, distributors, and others in the supply chain; the STUC and the main Scotch Whisky trades unions; Scottish Enterprise, Highlands and Islands Enterprise, Scottish Trade International, Locate in Scotland, Scottish Office and the Scottish Tourist Board. Several of the latter agencies were reluctant to participate fully in the study because of their limited interaction with this major sector. Further comments on this strategic stance are discussed below.

  14.  A series of one hour semi-structured interviews were held with a number of the key players in the sector, each covering a range of issues. Given the geographical range of the enterprises and the communities affected, interviews were conducted across Scotland, in a range of stages of the production process: from distilling to bottling, packaging and distribution.

  15.  As planned, the first evaluation of the issues facing the Scotch Whisky industry confirmed that the interviews should seek views on how the sector will develop over the next few years in the light of anticipated changes in taxes and duties, tariffs, ownership and control, employment and the labour force (including the minimum wage, increased flexibility and mobility, training and skill demands), devolution, investment and patterns of trade. The following were contacted during the course of the interviews:

    Diageo plc;

    Allied-Domecq plc;

    Highland Distillers plc;

    Glenmorangie plc;

    Invergordon Distillers plc;

    MacDonald and Muir;

    Peter Russell;

    Douglas Laing;



    Scotch Malt Whisky Society;

    Scottish Office Education and Industry Department;

    Department of Trade and Industry;

    Scottish Enterprise;

    Highlands and Islands Enterprise;

    Food and Drink Industry group at Scottish Enterprise;

    Scottish Tourist Board;

    Bowmore Distillery;

    Laphroaig Distillery;

    Cardhu Distillery;

    Glenfarclas Distillery, Grants;

    Tomatin Distillery;

    Speyside Cooperage.

  16.  This qualitative stage of the study allowed a better understanding of how the industry is likely to evolve in terms of its location and production processes, whether diversification strategies are likely to be introduced, and how the sector perceives its role in the economy under the Scottish Parliament.

  17.  This primary information has been analysed through a mixture of qualitative and quantitative techniques. The nature of the study has suggested that it is appropriate to use both a narrative approach, recording and exploring the views of the key players, as well as a statistical analysis of the more quantitative results and forecasts.

  18.  In preparing the report, it was clear that the industry has indeed been analysed quite extensively, both by consultants and by economic researchers. However, most of the studies identified have tended to present their findings in isolation from the more traditional tools of the economic analyst. In presenting our commentary, therefore, we stressed the importance of considering the Scotch Whisky industry as an industry first and foremost. Applying the techniques of the textbook to the sector and its component enterprises allows some insights into the potential development paths open to the industry in the coming decades. We are confident, nevertheless, that the report should improve the understanding of decision makers and opinion formers of the role and importance of this key industry in the Scottish and UK economies, and feedback from the report appeared to confirm this belief.




  19.  In any image of Scotland, Scotch Whisky is at the core, whether it be the marketing campaigns of "Scotland the Brand" or the Scottish Tourist Board. The essential spirit is seen as captured by Scotch Whisky: distilled in the Highlands and Islands, matured and bottled in the Lowlands, and consumed throughout the world. Scotch Whisky is the mainstay of many communities throughout Scotland, fragile rural areas in the north and west depend on a few jobs in scattered production sites, significant employment is provided in the bottling plants of the central belt.

  20.  Work is provided at several stages of the production process: distillation, maturation, blending, bottling, packaging, distributing and marketing. Growing from little more than a cottage industry at the end of the last century, Scotch Whisky is now a sector dominated by massive multinational corporations producing in integrated operations which link plants and activities throughout Scotland. At the same time, much smaller companies, some still private, continue to be active in the industry.

  21.  The industry impacts on many communities and suppliers across Scotland through its linkages particularly to agriculture, the utilities, packaging, distribution and tourism, but also to many other sectors.

  22.  After early resistance to Scotch malt whisky, the use of Scotch grain whisky to create more palatable blended drinks has led to the establishment of a major sector. In past years, helped and occasionally hindered by such diverse factors as problems in the vine crop, the period of prohibition in the USA, the rise and fall of the British Empire, the Scotch Whisky industry has evolved into a mature product and sector.

  23.  More than any other consumer product, Scotch Whisky requires the long-term investment of capital over long periods (in order to secure the quality for which it is famous, and to meet the regulatory requirement which underpins it). While it is important to recognise that the industry does not wish to remove the maturation requirement, at the same time it does mean, of course, that capital is committed over long periods of time, imposing peculiar economic costs on the sector. By law and the industry's own regulation, Scotch Whisky must wait after the initial distilling to mature, a key characteristic in the need for both substantial capital to fund maturing stocks and stability in the market to be able to realise past production decisions.

  24.  This very stability, however, has created a "cash cow" for successive Chancellors of the Exchequer, with heavy excise duties levied on spirits, and so on Scotch, in particular, as the dominant drink in the sector. This has given rise to a series of campaigns to bring about a more equitable form of taxation, which would remove discrimination against spirits compared with wines and beers, and their respective derivatives.

  25.  Whisky can be and is made elsewhere: Japan, North America, the Republic of Ireland and Northern Ireland. Whilst Scotch Whisky outsells these and is dominant internationally, it is constantly challenged by these alternative whiskies, as well as by significant trends in fashionable drinks. Younger more affluent consumers in the UK have been encouraged to start with lighter white spirits, ready mixed drinks, and designer beers and lower taxed wine.

  26.  That many of the larger producers in the Scotch Whisky industry are in these markets also, raises further concerns for the sector. Conglomerates involved in several of these rival markets have the potential to meet threats from such competitors by shifting production between spirits.

  27.  The location of the production and bottling facilities of these other spirits becomes crucial in identifying the impacts of these developments across Scotland. A key part of the analysis has been to determine not only where existing jobs and linkages are currently across the country, therefore, but also where the possible losers and gainers are likely to be.

  28.  In brief, although it can be recognised that Scotch Whisky is a huge marketing success, it still has further potential to be realised. In many sectors it has been demonstrated that stable, or growing, employment needs expanding markets but, in the case of Scotch Whisky, there are continuing problems of discrimination and increasing competition from other products. These threats have to be countered and it is shown below that the Government must now strike its blow by acting on tax discrimination.

  29.  This discussion suggests that a full appraisal of the production, output, investment, sales, exports, value added and profitability of the industry must be seated in a review of the size of enterprises and their employment, linkages, the business environment in which they operate and a comprehensive market analysis. To undertake this the following section considers the structure of the industry as the first part of a consideration of the conduct and performance of the sector.


  30.  A useful framework for considering industries and markets is given by the structure-conduct-performance approach. This links the market structure, or competitive environment in the industry, with the corporate behaviour or conduct of the firms, and with the performance of these firms, in particular their efficiency. Each of these three factors influences and is influenced by the other two. By studying the relationships and interrelationships between the market characteristics, the policies and behaviour of the enterprises and the performance of the firms and markets, it is possible to gain valuable insights into the operation and development of the industry.

  31.  Supply and demand conditions determine the structure of the market. Economies of scale and scope, and learning effects or experience are the dominant supply factors and the elasticity of demand (how responsive sales are to price and income changes) the most important demand factor.

  32.  The most common way of defining structure is in terms of the number and size distribution of firms within the industry, so determining the degree of market or seller concentration. A second significant structural feature is the extent of barriers to entry to the market. Other factors can include product differentiation—created especially by advertising and branding, and by vertical integration, conglomerate integration or diversification.

  33.  Market conduct refers to the strategies adopted by the enterprises in the industry and can encompass policies regarding pricing, marketing, advertising, employment, growth and take-overs, and strategies around competition or collusion with rivals. Generally, the fewer the number of firms in an industry the greater the threat of collusion over price and a reliance on non-price competition eg through advertising.

  34.  Market performance can be affected by the structure and conduct of the firms in an industry and can be assessed in a number of ways. Chief amongst these are measures of efficiency, particularly productive, technical and allocative efficiency. An examination of profit rates, the degree of technical progress or the rates of growth of enterprises are all used to gauge performance.

  35.  The following sections describe the structure-conduct-performance dimensions of the Scotch Whisky industry by reporting on each of these elements in turn.



  36.  As will become apparent below, the larger enterprises in the industry are increasingly becoming producers of a range of white spirits, and many of these activities are being located progressively in Scotland. Although much of this movement is a very recent phenomenon, the official statistics are not available in a disaggregated form for Scotch Whisky alone.

  37.  The definition of the Scotch Whisky industry consists of the manufacture of distilled, potable, alcoholic beverages. These activities are covered by class 15.91 of the Standard Industrial Classification of economic activities (SIC(92)). This class includes the production of other white spirits eg vodka and gin, brandy, liqueurs, etc, but the dominance of Scotch Whisky means that the vast majority of the output in class 15.91 is accounted for by the production of Scotch. This definition includes other stages in the industry: blending, bottling, packaging, and warehousing, as well as the initial distillation.

The Size of the Sector and the Key Players

  38.  Having evolved from the cottage industry of the 19th century through an ongoing series of mergers and take-overs, the Scotch Whisky industry displays some notable characteristics. Not least of these are the dominance of a relatively few players, the vitality of the medium range of producers with their own integrated production and marketing operations, and the survival of a competitive range—able to purchase Scotch Whisky direct from the distilleries and blend and bottle their product to their own recipe. A web of intricate interdependencies between different stages of production and different players underpins the healthy state of competition in the industry.

  39.  It cannot be denied that the three major players—Diageo, Allied-Domecq and Seagrams—control about 80 per cent of all Scotch Whisky production, with the second level of companies—including Highland Distillers, Whyte & Mackay, William Grant and Glenmorangie—contributing a further 10 per cent. The pre-eminent position of the former group suggests an industry under a potential threat of oligopoly pricing and output decision making, with production collectively reduced to maximise profits. The conduct and performance of the sector is critical, therefore, in guarding against this, and that is analysed in the following sections.

  40.  The latest figures available from the industry (The Market for Scotch Whisky, SWA, December 1998) show that almost 30 million litres of pure alcohol were moved out of bond into the retail chain in the year ending September 1998. This represents a decline on the previous year of 5.6 per cent, with the rate of decrease accelerating through the year.

  41.  On a different measure of output (proxied by value added), data from the Scottish Office (Index of Production for Scotland, December 1998) suggest that production had grown by 0.7 per cent in the 12 months to the second quarter of 1998, but this represented a fall of 1.3 per cent over the figure of five years previously and by 19 per cent compared with 1998 (Figure 1 and Table 1). Despite its continuing difficulties over the decade, manufacturing as a whole expanded by over 5 per cent, although all of this can be explained by the growth in the electronics sector.

  42.  The most recent comprehensive valuation of the output of the Spirits sector in Scotland (Scotch Whisky accounts for 97 per cent of the aggregate production) showed that in 1995 gross output was worth £2,196 million, representing 6 per cent of manufacturing output compared with an employment share of only 3 per cent (Scottish Production Database figures). The industry is characterised by high productivity, therefore. This is also reflected in the figures for Gross Value Added (the difference between gross output and material inputs) which amounted to £682 million in 1995, or 6 per cent of manufacturing.

  43.  Over the last year revenue receipts for all spirits, with Scotch Whisky accounting for some 40 per cent of the total, were more or less stable, once the effects of early releases from bond to avoid the 1 January 1998 duty rise are discounted.

  44.  The fairly rapid transmission of fluctuations in demand to current production are a characteristic of the Scotch Whisky industry. This is surprising given the long lead time between the initial distilling and the final sale; this suggests that optimistic market forecasts, past overproduction and excess capacity are significant factors in this reaction also.

  45.  The more pronounced declines in the export markets in 1998, therefore, have had a strong effect on the decisions to decrease current output. It is often stressed that the industry suffers from periodic changes, with output, demand, sales and profits all displaying oscillations over the business cycle. The volume of exports declined by 7.5 per cent in the first 10 months of 1998, and by over 14 per cent in value terms.

Table 1

Index of Production for Scotland: Value-added
YearQuarter WhiskyManufacturing
19873105.2 97.9
4112.7 100.7
19881110.7 103.4
2108.5 102.1
3112.5 104.8
4115.7 104.6
19891107.1 104.2
2115.6 107.8
3100.5 107.5
482.5 106.6
19901107.8 110.8
2112.7 110.4
3103.5 106.1
4112.0 106.5
19911100.6 106.1
290.1 100.4
397.1 98.6
491.3 96.5
1992193.5 90.7
294.9 91.7
391.6 90.4
494.7 90.4
19931106.0 90.3
2103.2 91.0
3103.8 92.3
4112.1 92.9
1994196.7 95.8
2102.2 93.9
396.8 95.2
4100.3 97.0
1995198.9 98.6
2102.4 100.5
3101.2 100.0
497.5 100.9
1996198.6 101.3
294.7 102.5
396.9 103.2
491.0 105.3
1997196.5 104.4
2103.0 108.0
3103.7 108.7
4102.5 111.1
1998196.0 110.7
287.9 109.6

Source: Scottish Office Education and Industry Department.

  46.  Outwith the European Union falls have been severe, down 14.5 per cent January to October 1998 overall, with Asia dropping by almost a third (33 per cent), North America by 10 per cent and Central and South America by 1 per cent—the more recent crisis in the latter having damaged sales there.

  47.  Exports to the EU show a healthier picture with volume sales 3 per cent up and the value of exports 4.5 per cent higher than the previous year. The major markets have grown with France recording a 2 per cent increase in sales and Spain a 9 per cent increase.

  48.  The significance of Scotch Whisky as a luxury product (ie an income elastic good) in many markets is confirmed by these developments, much sought in the boom years in the Far East and elsewhere, it suffers critical declines in times of financial crisis. Apart from those selling into niche markets, it can be argued that there is a need to have a strong conglomerate base or a widespread portfolio of markets to be able to survive such fluctuations. For independents, attempts to ride out the downturns through building up cash reserves in the prosperous years can engender the threat of hostile take-overs.

  49.  The three largest enterprises now produce about 80 per cent of gross output (SWA 1998), suggesting a high degree of concentration and so an oligopoly (few producers). With this degree of market power, there would be a concern over pricing strategies and limitations on production to maximise profits. However, the existence of a wholesale market in malt and blended Scotch Whiskies means that in many ways there is a contestable market. That is, although there are very high barriers to entering the distillation stage of production, the industry continues to make the product available to other smaller blenders and bottlers. This competitive fringe reflects some of the historical origins of the industry and the long tradition of independent marketeers purchasing the raw product for blending for final sales to the retail public.

  50.  It is clear, therefore, that the structural features of the industry are unusual, with the long maturation stage in the production process and the scale economies in bottling, marketing and distribution key to both the current behaviour and the future performance of the sector.


Direct Employment

  51.  There are two official sources of employment estimates for the whisky industry: the Scottish Production Database and the Scottish Register of Employment. The former gives an accurate count for the sector and is consistent with the output data series; the latter gives a longer statistical series but does not include enterprises employing less than 11 workers. In particular, Government employment figures tend to discount locations where there are less than a minimum number of employees, around 10, and of course many distilleries employ less than 10. This tends to exacerbate the undercounting in the rural areas where the relative importance of the sector is often significant in many communities.

  52.  The other statistical source available is provided by The Scotch Whisky Association themselves from a census of their members. These databank returns have tended to show a larger workforce than the official estimates.

  53.  Reconciliation of these figures is probably possible on the basis of the different definitions used; some of the employment in the SWA reports will be in areas not directly related to the production of whisky, eg white spirits, while the official sources may exclude some plants of multi-product and sector companies. However, there are still some questions to be asked over the "true" size of the industry, and by extension of the linkage and multiplier effects.

  54.  Returns from SWA members (Statistical Report 1997) give an estimated workforce of over 12,000 people employed in the industry in 1997, a decrease of 7 per cent on the previous year and 20 per cent down on the 1991 total.

  55.  The most recent Scottish Office estimates (Scottish Production Database) identify just under 10,000 directly employed in the industry in 1995, or about 3 per cent of the total manufacturing workforce. This represents a decrease of almost a thousand on the previous year, and a decline of 25 per cent on the 1992 total.

  56.  The other official data source, the Scottish Register of Employment, suggests an aggregate of under 9,000 in 1994, accounting for 3.1 per cent of total manufacturing employment. This also shows a substantial decline in jobs from the peak years, when it accounted for over 4 per cent of manufacturing jobs. In 1980 these figures suggest that almost 22,000 were employed in the industry, pointing to a fall of 13,000 jobs in the subsequent decade and a half.

  57.  Although compiled from different sources, these different data series demonstrate a consistent picture of significant decline over a fairly short period. Nevertheless, as Table 2 shows, the industry is still larger than the 1950 figure of 7,000 whisky industry employees, when it was a much lower proportion of total manufacturing (1.1 per cent).

Table 2

YearWhisky Industry Total ManufacturingWhisky as a percentage of Manufacturing employment (per cent)
19507,000649,700 1.1
19559,650684,200 1.4
196012,450666,300 1.9
196516,200668,600 2.4
197019,950674,600 2.9
197521,800617,900 3.5
198021,950516,300 4.2
198512,800372,900 3.4
199010,550343,800 3.1
19948,900284,400 3.1
Source: SOEID, Scottish Register of Employment

  58.  A clear long term pattern emerges therefore: of growth in absolute and relative terms (expanding to a three times larger share over the 45 years 1950-95), with substantial increases in the 1960s and 70s, but decline by almost 70 per cent since the peaks in the late 1970s. Over the same period the falls in the rest of manufacturing have been more moderate but still over 45 per cent.

  59.  For further discussion on the employment structure of the Scotch Whisky industry, reference can be made to a number of publications specifically on this sector. However, although the 1992 study by PIEDA ("The Economic Significance of Scotch Whisky") was the first to quantify the direct, indirect and induced effects on Scotland, and so represents a pathbreaking report, subsequent studies have either not been made available to us[2] or the updates have not been sufficiently comprehensive to give any meaningful insights into recent changes. Such a data collecting exercise was beyond the scope of this research, and yet the internal restructuring of the industry has been profound in the period since the early 1990s.

  60.  There is a need for further work, therefore, on the continuing restructuring of the sector especially on the contrasts with the linkages and supply chains of these earlier studies.

  61.  Interviews with the key players in the industry, including senior management at Diageo, Allied Distillers, Highland Distillers, Glenmorangie, Invergordon, Peter Russell, Douglas Laing, and others have led to the conclusion, however, that the restructuring of facilities and employment has not led to significant changes in sub-contracting or in the "buying-in" of services. Such activities as distribution and haulage, marketing and advertising are as likely to be supplied internally to the conglomerate or enterprise as before.

  62.  Where there has been change this has been caused by differential rates of growth and decline between activities—for instance because of technological changes in bottling or the introduction of tourist facilities attached to several distilleries, or by the merger and rationalisation of divisions—transport and bottling being notable examples.

  63.  Therefore, the PIEDA decomposition of the employment effects into three distinct elements remains valid. The estimates of direct employment produced by the Scottish Office and the SWA cover those engaged in distillation, maturation and warehousing, blending, bottling and packaging.

Indirect Employment

  64.  The significance of the industry to Scotland is often recognised as greater than other, perhaps larger, sectors because of its strong linkages into the rest of the indigenous economy. The Scotch Whisky industry has a high rate of sourcing from other parts of the Scottish economy, with raw materials, manufactured inputs and services all important elements in the supply chain. Such indirect jobs and purchases are generated in firms which supply goods and services to the industry.

  65.  Although the PIEDA report calculated these indirect employment and input effects in 1992, subsequent changes and the comprehensive compilation of the "Scottish Input-Output Tables and Multiplies for Scotland 1994" (Scottish Office) allow a more accurate picture of the industry's impact on the Scottish economy to be estimated (Table 3)

Table 3

Direct employment (000)Proportion of total manufacturing employment Indirect and induced employment (000) Total direct and indirect employment (000)
9.93%19.1 29.0

Sources: Scottish Production Database and Input-Output Tables and Multipliers for Scotland.

  66.  Again the sectoral definition used was not restricted to the Scotch Whisky industry, but also included all other elements of the "spirits and wines" category. As argued above, although the whisky sector has dominated these statistics up till now, increasingly the confusion of information between the narrow Scotch Whisky industry and these wider definitions will become significant. This lack of official and objective measures of many dimensions of the trade will become progressively more critical as the conglomerates which dominate the industry move the production and bottling of white spirits and related drinks northwards into Scotland.

  67.  The Scottish Input-Output Tables for 1994 demonstrate the real significance of the industry to the economy. With an employment multiplier[3] of 3.10, the industry records the eighth highest out of 78 manufacturing industries, and is well above the average for manufacturing industries. Providing 29,700 jobs in Scotland, this confirms the strategic importance of the sector to the Scottish economy.

  68.  Given the levels of direct employment identified in the SWA and Scottish Office estimates, this suggests that as well as the 9,900 current jobs in the industry itself, a further 19,100 were engaged in supplying sectors within Scotland, and a further 700 induced jobs were supported in the economy.

  69.  It is instructive to note the much higher levels identified in the PIEDA study refer to indirect (44,000) and induced (12,500) effects in the whole of the UK economy. While these demonstrate the significance of supply leakages from the Scottish economy caused by sourcing of contracts in England, the commodity and product groups responsible for these are key to the evolution of the Scotch Whisky industry in the current and near future. Most of the indirect employment generated in the UK is accounted for by cereals, bottling, investment and maintenance. The movement of bottling to Scotland, and the expansion of related activities and tourism facilities should both result in a decrease in supplies coming from outwith Scotland.

  70.  Nevertheless, the newer input-output tables tailored to the Scottish economy do suggest that the industry will be hard pressed to expand jobs in Scotland without significant expansion through diversification. The technological advances being made and pursued in the bottling and production areas, together with the existing over-capacity mean any transfers of such activities will preserve rather than create employment.

  71.  The major beneficiaries of the supplier chains within Scotland are agriculture (estimated indirect and induced employment 3,200 in 1994 or 15 per cent of the total), paper, printing and publishing (1,000 jobs or 4 per cent), glass and glass products (slightly less with 3 per cent). In services, 13 per cent or 2,800 were employed in the retailing, 5 per cent in hotels and restaurants, and 49 per cent in other services.

  72.  Constraints in the supply of suitable arable land available for malting barley production limit the ability of the agriculture sector to expand the proportion of cereals sold from Scotland into the industry. Climatic change, the vagaries of the weather and a reported reluctance of many in farming to grow appropriate strains of barley also restrict the potential for indigenous growth. More optimistically, changes to the CAP derived relative prices and subsidies could well lead to a switch from rapeseed into barley in the years ahead. Otherwise both sides of the malting trade in Scotland report a stable future for the supply of Scottish crops to the industry.

  73.  A caveat to this analysis is raised by the expansion of white spirits production by the conglomerates at their Scottish plants. To date, and we understand as planned for the future, this represents additional production in Scotland, with transfers of activities from England. However, if the white spirits were to begin to displace whisky production, because of changes in consumer tastes, price differentials consequent on the tax discrimination against whisky, etc, then the position could change radically. That is, gin, vodka etc do not require to use Scottish grown cereals, indeed there would be cost penalties from doing so. Any net movement into white spirits would result in the basic raw materials for any diversification being sourced from elsewhere, with consequent impacts on the Scottish agriculture sector.

  74.  As suggested above, across the supplying sectors to the Scotch Whisky industry, the expectation is that the numbers in most sectors would have reduced proportionately in recent years, with technological, environmental and capacity factors leading to strategies to address the industry's cost structure. Elements of retailing, tourist related and other services have possibly been growing as the industry has introduced some diversification strategies, with linkage effects into the wider economy.

Conditions of Employment

  75.  The most recent data available show that two-thirds of employees in the Scotch Whisky industry in Scotland are male, broadly similar to the position in Scottish manufacturing overall, where 69 per cent are male. All but 6 per cent of workers are full-time employees, again equivalent to the Scottish manufacturing average.

  76.  Information from 1994, the latest available, show that operatives account for 60 per cent of the workforce and administrative, technical and clerical workers the remaining 40 per cent. The proportion of operatives was already lower than the manufacturing average five years ago and developments since would have exaggerated this greater tendency to employ a white collar workforce.

  77.  Using the Scottish Production Database again for comparative purposes, the gross wages per employee in the Scotch Whisky industry in Scotland were £17,600 in 1994, or 17 per cent above the manufacturing average of £15,000. The higher proportions of non-operatives partly accounts for this. However, wages were higher in the industry for all classes of employment compared with the same manufacturing average for that type. Operatives received annual average earnings of £14,400 in 1994 compared with administrative, technical and clerical staff who earned on average £24,400.

  78.  As in most sectors of the economy, those employed by overseas-owned companies tended to have higher average earnings at £19,500 compared to £17,200 in UK-owned firms. The recent mergers in the sector will have some impacts on these respective rates, although a series of negotiations over wages and conditions will determine exactly how this is effective.

  79.  A key area in promoting competitiveness across the developed world has been recognised as the improvement of the quality of the talents and competencies of the labour force. The Scotch Whisky industry has been based on the high standards of a dedicated and skilled workforce, but recent changes have generated a need to upgrade these and to seek new abilities and functions to meet the demands of new technologies in distilling and bottling. Additionally, the demands of overseas markets and increasing orientation to cater for the tourist industry and other forms of diversification have led to the need for new proficiencies and skills. To this end, the industry has undertaken the development of training strategies to address these issues. A case in point is the move into beer barrel production by the Speyside Cooperage and the consequent need for enhanced skills and knowledge. The implications of these developments are discussed further in section 5.7 below.


Output and Gross Value Added

  80.  As noted above, there is a concern within the sector that this traditionally cyclical industry is also suffering from excesses of capacity in production and bottling facilities. This is exacerbating the contemporary problems brought on by the crises in the Far East and parts of Latin America, the job losses created by technological developments—especially in bottling, and the evolution in the UK of the young person's market towards designer beers and white spirit based concoctions.

Table 4

Year ending 31 DecemberMalt Grain Total LPA
1990192,823,000235,939,000 428,762,000
1991186,265,957230,534,943 416,800,900
1992166,491,138216,975,189 383,466,327
1993140,942,181210,235,959 351,178,140
1994146,424,242208,489,770 354,914,012
1995158,079,324236,159,123 394,238,447
1996170,135,855258,965,585 429,101,440
1997192,980,001277,886,386 470,866,387
Source: Databank, The Scotch Whisky Association

  81.  Nevertheless, physical output of both malt and grain Scotch Whisky was approaching record levels in 1997, with 471 million litres of pure alcohol (LPA) produced. Malt whisky accounted for 193 million LPA, or 41 per cent, of output by volume and grain 278 million LPA, 59 per cent (Table 4).

  82.  However, in value added terms this represented a decline of almost 20 per cent in 10 years[4].

Table 5

YearVolume LPA (000) Value £mYear Volume LPA (000)Value £m YearVolume LPA (000) Value £m
194922,11318.74 1966107,944120.39 1982251,277871.60
195025,14426.27 1967111,963122.39 1983227,844858.09
195127,57729.59 1968153,508176.55 1984231,287931.38
195229,89633.03 1969136,048167.49 1985225,894993.94
195334,26037.77 1970160,915194.06 1986236,1881,070.13
195435,52839.05 1971182,501226.94 1987240,1741,135.51
195539,86143.67 1972178,411227.91 1988245,9771,288.79
195642,66047.80 1973203,577259.99 1989242,4921,469.46
195746,47052.14 1974227,336326.39 1990238,3051,712.48
195850,13856.03 1975234,274366.62 1991227,7481,833.89
195956,27661.85 1976238,303436.68 1992231,2721,958.88
196060,06765.56 1977243,633512.62 1993256,8722,093.85
196169,61074.43 1978274,073661.22 1994252,2092,191.29
196278,03180.86 1979262,421707.41 1995262,0782,277.05
196382,45084.83 1980249,917746.61 1996256,8062,278.13
196490,87592.29 1981244,239784.75 1997276,9372,394.27

Source: The Scotch Whisky Association, Pre-1995, includes one N Ireland distillery.

  83.  The potential to raise the performance of Scotch Whisky can be seen from these trends, with an improvement in revenues dependent on an ability to improve margins. In 1994, the Scottish input-output figures estimated that domestic gross output from Scotch Whisky was £2 billion, at current producer prices. Approximately 8 per cent of final demand was consumed in Scotland, and 92 per cent exported to the rest of the UK and abroad.

  84.  The incompatibility of various statistical series creates problems in estimating the sales to the rest of the UK separately, but the returns to the SWA itself suggest that exports have been growing without interruption since the late 1940s. The most recent figure estimated £2,394 million of export sales in 1997 from 277 million LPA (Table 5).

  85.  However, the value of exports in current prices is not a good indicator of trade performance, especially for a product which varies so much in quality. The volume of malt sales overseas has been improving over time, especially of bottled-in-Scotland compared with bulk exports. Sales of bottled malt have increased from about three million LPA in 1977 to almost 14 million LPA in 1997; by contrast bulk sales of malt have declined over this period from 25 million LPA to 11 million LPA (Table 6).

  86.  The Scottish Office have estimated that the real value of exports of Scotch Whisky expanded substantially between 1986 and 1996, reaching £2,278 million or 12 per cent of manufacturing exports from Scotland[5]. Projecting this series forward to 1998 suggests a flat performance since then, with decline in the last year or so in both value and volume.

  87.  The relevance of these developments for the Treasury are clear: with stagnating or falling overseas sales and competition from imported spirits or beverages with a higher import quotient, the tax take will have been declining also. The need to look directly at the tax and excise duty regime in the UK has never been more pressing.

Table 6

Volume mlpa Value £m
Blended—bottled 209.992,017.29
—shipped in bulk 41.24139.68
BLENDED TOTAL251.23 2,156.97
Malt—bottled10.79 179.40
—shipped in bulk 9.9146.04
MALT TOTAL20.70 225.44
Grain5.00 11.86
TOTAL EXPORTS276.93 2,394.27

Source: The Scotch Whisky Association.

Profitability and Investment

  88.  As is increasingly noted, the spread of technology to new areas in the production of Scotch Whisky continues apace. But it should be remembered that this ancient process has already witnessed a series of significant closures and consolidations into fewer production sites (in particular distilleries[6]) and a long history of take-overs and mergers that has left the industry dominated by a few giant conglomerates.

  89.  Recent results highlight the differential exposure of different companies to Far East and to the blended whisky markets. In each case of relative or absolute decline in sales and profits, peculiar factors are identified. Some have undoubtedly been exposed by the Far East financial crises and a reliance on the lower end of the market where competition is perhaps greatest from alternative drinks[7]. Others have been attempting to secure a strategic change in their production and market portfolios with some encouragement from financial analysts.

  90.  The latter repositioning is not being confined to the largest three producers—Diageo, Allied Domecq and Seagrams, with Highland Distillers and Glenmorangie ensuring that the industry is contestable, and that a competitive fringe drives the need for innovation and flexibility as much from within as from the threat from other alcoholic drinks. However, the likely sale of Seagrams to one of the duopoly (Diageo) or to a consortium around this corporation will intensify the concentration of power further.

Recent Market Trends

  91.  As has been shown above, there is a steady growth in the share of malt whisky both at home and abroad. Nevertheless, this still only represents a fraction of total final sales, under 10 per cent for the foreseeable future, with much malt production going into blended Scotch Whiskies.

  92.  The slowly declining market for spirits in Britain over the last few years has been exacerbated for Scotch by the transfer of fashion to the rival vodka, tequila and liqueur drinks. While according to some estimates Scotch Whisky's share of the UK market has fallen from 40.7 per cent to 33.7 per cent in value terms in the four years to 1997, vodka has grown to 17.9 per cent, the fast expanding pre-mixed spirits to 2.3 per cent and tequila to just 0.7 per cent.

  93.  In contradistinction to this, the continuing improvements in sales in the rest of the European Union, to over £800 million in 1997, and to France and Spain in particular, are based on an appreciation of both malts and using Scotch Whisky as a basis for mixers. These two forms of consuming Scotch suggest that the promotion of Scotch Whisky overseas can lead to the expansion of sales, and in markets that follow a different business cycle from the UK. Further, because of the lower duties in many countries, not only do these represent more profitable opportunities for the distillers, but also a loss to the UK Exchequer.

  94.  The aspirational qualities of Scotch Whisky as a luxury good in the Far East are also significant and, despite the impending crisis in 1997, this region still consumed over £420 million of Scotch in that year alone. The substantial falls since, of one-third in value, are therefore of major significance to the industry.

  95.  The American markets remain highly important, however, with sales of £750 million in 1997, over £310 million to the USA and £380 million to Central and South America. These latter markets have been growing rapidly in recent years, with some downturn now expected with the fallout from the Far East domino effect.


  96.  Always a cyclical industry, the global spread of the market for Scotch Whisky ensures that peaks and troughs in production can be controlled and anticipated in more sophisticated ways than before. However, the competition from newer drinks and changing fashions at home have been intensifying the deleterious effects of the discrimination against Scotch Whisky both in the UK and overseas. There has been much technological and marketing innovation in recent times, involving significant investment in just-in-time techniques, larger and more efficient bottling plants and distilleries. This has often been and continues to be at the expense of jobs in both the distilleries and the bottling plants located in high unemployment areas and in remote and fragile communities.

  97.  The need to address the vulnerability of the industry to further retrenchment in the UK market is essential if the lessons of the competitiveness of successful sectors and countries is to be applied to Scotland. This is dealt with in the section below, "The Analysis of the Scotch Whisky Industry".


  98.  It has been recognised above that the dominance of the Scotch Whisky industry by three giants is a mixed blessing. On the one hand their size and market power allows them to escape the dangers of short-term market fluctuations by spreading their risk, production and investments across time and locations. However, the potential and practice of consolidating production onto fewer sites can threaten local jobs and facilities, and could reduce the very diversity of the product base which gives Scotch Whisky such a market advantage over other spirits. This is especially vital for the development of the malt whisky market, where diversity of taste and other characteristics are believed to be key to the growth of this high value-added end of the industry.

  99.  While Scotch Whisky does not necessarily have to innovate through new mixes and blends to attract a new consumer base, recently there has been a greater recognition that there is a need to improve the image of Scotch.

  100.  Whether there are conflicts and so dangers for the Scottish economy of being so dependent on such a restricted number of multinational and multi-product enterprises is conditional on a number of factors, some internal to the companies concerned, others affecting the industry as a whole.

  101.  There is no inevitability that the multinational and multi-product enterprises will forsake Scotch for other spirits in the marketplace, despite the much shorter time periods to maturity for white spirits. The lower investment required to start up production of vodka and other mixer drinks products poses a threat to whiskies across the world. However, the taste and image of Scotch, the guarantee of quality, the status and aspirational characteristics of Whisky from Scotland, all allow a premium to be charged on the price and so profitability is high.

  102.  The past consolidations in the sector have not been to save struggling independents but rather to capture greater shares of the market. Other producers have been able to enter the industry, albeit primarily at the blending, bottling and packaging stages, suggesting that niche markets exist for further exploitation.

  103.  Overall there has been a movement of the major Scotch producers into the other spirit trades, but this does not appear to have been at the expense of the core Scotch Whisky industry. While there is an increasing world domination of the spirit industry by these same huge conglomerates, the distilleries and bottling plants have not suffered from a lack of investment.

  104.  Indeed, the ability of the large players to transfer their bottling and packaging facilities north of the border to the more efficient and modern Scottish plants is allowing a slower decline in employment and activity than would have been the case hitherto with such developments.

  105.  This apart, there have been significant job losses across the Scotch Whisky regions as technological changes have impacted throughout the supplier, production and distribution chain. That the bottling operations and grain distilleries will have to compete continuously for business within their respective corporations is clear and suggests that further rounds of cost-cutting may be necessary to sustain plants and employment.

  106.  The position of the wider spirit sector, therefore, is perhaps not the greatest direct threat to Scotch Whisky. The strategy of constructing competing internal profit centres in the three large players makes it imperative that the industry in Scotland is able to perform to its full potential, at least to maintain the position of Scotch if not to capture progressively the production of the white spirits sectors.

  107.  The potential of creating a more effective and coherent "bottling glen" is discussed below. It is necessary at this stage, however, to reaffirm that the high levels of duty and excise on Scotch make its position within these portfolios of the conglomerates less secure. That the imposition of such levels of taxes on Whisky has been to the long term disadvantage of the industry has become increasingly apparent, with recent positive Treasury responses to the campaigns of the SWA and the STUC.

  108.  It should be noted also that Scotch is a large net as well as gross export earner for Scotland and the UK, only limited quantities of inputs are imported for its production. Export earnings for the country are an equivalent trade surplus. By way of contrast, the other spirits, wines and beers sectors show substantial imports and minimal exports.

  109.  The very significant contribution Scotch Whisky makes to the restriction of the food and drink deficit of the UK has been highlighted by the House of Commons Select Committee on Agriculture in their 1992 report The Trade Gap in Food and Drink. Much of this deficit is due to the bulk importation of produce from northern Europe, countries with no competitive or natural advantage over UK suppliers. After several food production problems in the UK, eg the suspension of beef exports with the disclosure of BSE, Scotch Whisky continues to play a vital and progressively significant role in the protection of Britain's trade balance in food and drink.

  110.  Allowing the industry to be threatened by lower sales to price sensitive consumers through a policy of high taxes and duties can damage the revenues of the Exchequer but also undermine the position of the currency.


  111.  The distillation of Scotch has traditionally been seen, marketed and perceived as a product of the Highlands and Islands. Indeed, given the production process associated with Scotch Whisky and the specific locational requirements of the industry, employment is concentrated in certain regions in Scotland (Table 7). Distilling is concentrated in the Highlands and Islands and in the former Grampian region, with about 2,000 jobs in aggregate. This represents a significant proportion of the manufacturing workforces in these two areas, almost 5 and 7 per cent respectively, often in fragile and remote communities.

Table 7

RegionWhisky employment Whisky as a percentage of manufacturing employment (per cent)
Rest of Scotland1,200 1.8

Source: SOEID, Scottish Production Database.

  112.  Records from the SWA databank suggest comparable figures for these two regions, with little short-term fluctuations in aggregate employment (Table 8). Two-thirds of the regional Whisky workforce are employed in the "upstream" functions of the industry—malting, distilling and maturation—in these areas (Table 9). This bias means not only a stable Whisky economy for the Highlands and Grampian but also a threat to the long-term sustainability of the region if there are futher cuts in distilleries brought on by the abolition of duty free, a further significant market shift to white spirits consumption, etc. The uniqueness of the skills and the lack of alternative employment in most of the communities could have a devastating effect on their futures.

Table 8

Region1997 1996Per cent change
Grampian1,4921,481 +1
Highland540546 --1
Lothian1,5001,592 --6
Strathclyde6,1996,641 --7
Tayside439553 --21
Central and Fife1,739 2,036--15
Rest of UK488496 --2
Total12,39713,345 --7

Source: Databank, The Scotch Whisky Association. Only includes those directly employed by SWA members within the Scotch Whisky Industry.

  113.  The impacts of such changes on particular localities would depend critically on the ownership of the Scotch Whisky facilities in the specific area, the global investment, marketing and production strategies of the major players and the ability of the local economies to diversify into new products and services.

Table 9

FunctionHighland and Grampian All Areas
Maturation/warehousing and cooperage12.5 10.0
Blending and bottling3.9 39.6
By products1.91.0
Office units11.315.7
Sales and marketing5.3
Visitor centres6.92.0
Total (per cent)100.0 100.0
Total (number)2,027 13,345

Source: The Scotch Whisky Association.

  114.  Moray and Badenoch would be most vulnerable to such developments, with rural Strathspey with most to lose. This area already has seen an ageing of its population in recent times, high and seasonal unemployment, and an exceptional reliance on manufacturing in regional terms. The future of the Whisky industry is crucial to the potential of indigenous enterprise and prosperity.

  115.  More remote and fragile island communities are similarly reliant on the industry. Islay, Jura and Colonsay, for instance, according to an Allied Distillers report[8] rely on the Scotch Whisky industry for around 25 per cent of their manufacturing employment. It is notable that on Colonsay, although there is no whisky production, the island communities are so reliant collectively on the tourist and freight trade generated by the industry that Calmac's services do call there as a result of the economies of scale and scope arising from the Scotch Whisky sector.

  116.  Although the north is more dependent on Scotch Whisky for jobs, the majority of the workforce is employed in the former Strathclyde region, according to Scottish Office data. This is explained by the concentration of blending and bottling plants in the central belt with easy access to large labour pools. As these activities are traditionally labour intensive, there is a need to be close to a significant and skilled workforce. Obviously the recent developments in the technologies of bottling and the perceived over-capacity in this stage of the industry will have impacted disproportionately on Strathclyde. As an indicator of the potential adverse effects on the sector locally, in 1994 4 per cent of all manufacturing jobs in the region were in Scotch Whisky, a higher share than in Scotland as a whole.

  117.  Lothian has traditionally been a centre for many aspects of the Scotch Whisky industry, with about 1,000-1,500 jobs, depending on the data source. During the last few years significant concentrations of blending, bottling and packaging facilities have been located in West Lothian, especially around Broxburn to make use of access to the motorway system and to the labour market of the area.

  118.  Interestingly, some of the largest differences in the records of the SWA and the Scottish Office concern the position in Fife and Central Regions. The former counted over 2,000 jobs in the mid-1990s whereas official statistics only identified half of that number. As much of the transfer of activity from the south of England is anticipated to be affecting these areas, a fuller enumeration of the employment patterns is necessary.

  119.  Tayside is the only other part of Scotland recording any appreciable presence in the industry, with under 500 employees in recent years.

  120.  An indication of the importance of the industry for the Highlands and Islands is given by estimates made by the Scottish Council Development and Industry.[9] Their figures, based on the annual statistical report of the SWA, suggest that 34.5 per cent of the total malt and grain Scotch Whisky produced or distilled originates in the Highlands and Islands. Applying this to the total Whisky export figure for Scotland means almost £800 million of Scotch distilled in the region is destined for export furth of the UK.

  121.  This makes Whisky by far the principal export earner for the Highlands and Islands, accounting for nearly half of all manufacturing sales abroad from the area. It also shows that exports of Scotch Whisky to the USA and France, the major markets for Scotch, are critical to the health of the local economy.

  122.  Data for other parts of Scotland are not available with regard to the manufacture and export of Whisky. However, similar reasoning would suggest that a number of counties, particularly Renfrewshire, Dunbartonshire, Fife, Ayrshire and West Lothian depend heavily on the production and bottling of spirits, and of Whisky especially, to pay their way in the economy.

  123.  In other words, Scotch Whisky is a significant and export-base industry for communities across Scotland. Changes to the sector, through diversification, growth or decline, will have profound implications for many skilled workers, farmers and other suppliers in a diverse range of islands, villages and conurbations throughout the land and, therefore, are of concern to the nation as a whole.


Competitiveness and the Scotch Whisky Industry

  124.  In placing the findings of our consultations in the context of the above analysis of the Scotch Whisky industry we intend to utilise Porter's[10] model as a way of understanding the continuing competitiveness of the Scotch Whisky industry. Porter argues that the competitive advantage of industries is . . . "created and sustained through a highly localised process. Differences in national economic structures, values, cultures, institutions, and histories contribute profoundly to economic success".[11]

  125.  From this "highly localised process" we have seen the establishment of a top strategic manufacturing industry for the Scottish and UK economies as indicated in the previous sections. Porter's analysis can therefore give us an insight as to how the Scotch Whisky industry has grown to become a major player in domestic and world markets.

  126.  Using Porter's analysis it can be seen that the Scotch Whisky industry has benefited and developed in line with the four components of "Porter's diamond": namely, factor conditions; demand conditions; related and supporting industries; and firm strategy, structure and rivalry. Scotland possesses the natural attributes which makes the production of Scotch spirit a successful and profitable business.

  127.  From the early production of Whisky, a skilled workforce developed to satisfy a strong home demand for Scotch which led to the development of supporting industries such as bottling plants, cooperages, distribution, packaging, etc. Whilst the industry is dominated by a few large companies (as demonstrated in paragraphs 36-50), there is a competitive fringe and strong competition from close substitutes in the market for spirits.

  128.  Industry/government regulation which states that for spirit to be called Scotch it must be distilled in Scotland, has led to the industry being established in specific geographical locations. Malt Whisky is usually classified in one of four main categories's Highland, Lowland, Speyside and Islay, according to the location of the distillery in which it is made.

  129.  These locations now boast supply-side and demand-side linkages so that one can identify regional Whisky clusters. This evolution of an industry into a geographically specific cluster is in line with the positive developments for the Competitive Advantage of Nations envisaged by Porter.

  130.  Furthermore, in the Central Belt of Scotland, where the majority of employment is to be found, this competitive advantage is leading to the expansion of the clusters from purely Whisky to encompass aspects of other spirit production, such as bottling facilities for white spirits.


The Clustering Strategy

  131.  Scottish Enterprise, the development agency for Scotland, has developed a strategy for promoting industry clusters for the key sectors in the Scottish economy. The critical aspects of clustering for Scottish Enterprise include the development of strong partnerships to utilise the anticipated synergies which arise from co-operation between the key players in an industry.

  132.  The envisaged strong partnerships will ideally consist of customers, suppliers, competitors, universities, colleges, research bodies and the utilities.

  133.  The clusters strategy (Scottish Enterprise, 1998) stresses the need to position Scotland at the high value end of the market, with enterprises active in the cluster operating within . . . "a local economic environment geared to innovation, investment and upgrading" (Scottish Enterprise, p4, 1988). It is argued that the . . . "search for synergy must underpin means as well as ends".

  134.  Integration will be extended to the critical issues identified elsewhere by Scottish Enterprise: "the need to capitalise better on Scottish science and technological expertise; to help companies build up their research, design and development capacities; to stimulate entrepreneurship; to encourage companies' international ambitions and to build a high performance infrastructure" (Scottish Enterprise, p4, 1998).

  135.  The clusters will be inclusive of both indigenous and inward investment. The envisaged strategy is therefore holistic, acting upon synergies and linkages.

  136.  In addition to the development of clustering within the Whisky industry that we have already noted, our research revealed a high degree of co-operation and networking within the sector. In particular there is one trade association, The Scotch Whisky Association, representing distillers, brokers, blenders, bottlers, and other companies, accounting for all the key players within the industry.[12]

  137.  Through the Association, the members obtain synergy in terms of the promotion of Scotch Whisky as a quality product throughout the world, a united lobbying organisation, focusing on tax discrimination and trade barriers in the recent past, and a self-policing institution to protect the image and integrity of Scotch Whisky. In a critical conjunction with the trades unions, through the STUC, this lobbying vehicle has been effective recently in bringing the concerns over tax and excise duty to the attention of Government.

  138.  In these respects, the SWA has the hallmarks of a leading trade association, and can be recognised as a model for other sectors in the Scottish economy.

  139.  A good example of co-operation and networking can be found between the distilleries and related Whisky concerns on the island communities of Islay and Juray. In practice this co-operation consists of regular informal "meetings" between all the distillery managers; the operation of a concordat to purchase malted barley from Port Ellen maltings, which helps to maintain employment; and joint advertising campaigns co-ordinated by Islay and Jura Marketing Group, which is supported by Argyll and the Islands Enterprise, Argyll and Bute Council and the Distillery Companies. Additionally, there is a strong commitment to the local community with the distilleries sponsoring many community activities and recently providing a limited amount of animal feed (mashings) either free of charge or at a nominal fee to assist farmers who had been particularly badly hit through the BSE crisis.

  140.  The Whisky distillers are very much a part of the tourist industry on Islay and Jura but again there is a strong commitment to wider obligations, with the distillers not wanting to compete with established businesses over the provision of hotel and catering, for example.

  141.  Further instances of co-operation and the achievement of synergy occur within the Whisky industry through the co-ordinated efforts of The Scotch Whisky Association. Reinforcing those already mentioned, is the research and training provision developed with the Whisky industry's links with Heriot-Watt University. Both under-graduate and post-graduate degrees are awarded in Brewing and Distilling. The Scotch Whisky Institute plays a critical developmental role which could well be expanded.

  142.  Given the development of clustering and the strong networks within the Whisky industry it is, therefore, somewhat surprising that the Scotch Whisky industry is not a part of the clustering strategy of Scottish Enterprise in its own right.

  143.  The Food and Drinks industry is identified as a key sector by Scottish Enterprise and the Whisky industry is seen as a key player within that sector. However, given the importance of Whisky to the Scottish economy as a whole and the concentrated nature of the industry, it would appear that the Whisky industry has all the hallmarks of a classic cluster as identified by Scottish Enterprise and so could be recognised as a separate cluster itself.

  144.  It would appear from the above analysis that there exists an ideal opportunity for Scottish Enterprise and Highlands and Islands Enterprise to promote improved horizontal linkages with the industry. By stressing the direct economic importance of the Whisky industry, the significant multiplier effects it generates and the further potential it promises, there should be a clear justification for recognition of this key sector as a cluster in its own right. The Scotch Whisky industry should be a distinctive part of the clustering strategy being established by the development agencies, at the heart of a spirits sector.

  145.  In a similar vein, the Tourist Boards when first approached have had "nothing to say" about the Scotch Whisky industry. However, although there are many local initiatives such as the promotion of "Whisky Trails", these could be co-ordinated in a much more concerted fashion.

  146.  We would argue that with so much of the local economy depending on the Whisky industry for many communities, QUANGOs and other Government agencies should be encouraging the wider development of horizontal linkages with the sector and, especially, seeking ways to promote Whisky through the "world's largest industry": namely tourism. This could lead not only to the preservation of jobs but also to open new niche marketing opportunities for job creation in threatened communities.

  147.  There would seem to be a clear opportunity to establish more limited edition and special bottlings which offer high value-added, labour intensive work. Exploiting the growing niche markets for the groups with increasing incomes, for corporate gifts etc. has a locational element with the souvenir trade capable of going up-market.

  148.  It should be recognised, however, that historically, there has been little if any involvement of statutory bodies in the internal organisation of the industry and, indeed, this has not been sought. The industry undoubtedly values its apparent independence and by most measures of performance seems to thrive on that whilst attempting to demonstrate where government can play its part on the tax and regulation front. Thus, there may be a reluctance within the industry to promote horizontal linkages, although we would argue that Scottish Enterprise, Highlands and Islands Enterprise and the Scottish Tourist Board, but also other organisations including the SWA, should consider that greater collaboration might not be inappropriate.

149.   Recommendations

  There would be benefits in the recognition of Scotch Whisky (and white spirit production) as a distinctive industrial cluster in Scotland. All the actors in the field, but especially those with a statutory responsibility for economic development including Scottish Enterprise and Highlands and Islands Enterprise, should explore the advantages of closer links within and across the sector and should consider how these could be improved. The logic of the clustering strategy and of the embryonic global companies strategy[13] is that the Scotch Whisky industry should be promoted as the core of a sector which can compete in world markets and stimulate further indigenous economic development.

  Given the industry needs to address a series of opportunities and changes, it is particularly important that the Scotch Whisky sector is inclusive in its discussions and approach to the future. The trades unions especially must be fully involved in the development and implementation of industry strategies with regard to training, employment and investment.

  Improved links between the Scotch Whisky industry and the tourism sector specifically should be encouraged. There is a need for a recognition of the shared responsibility to achieve better links, with both the Scottish Tourist Board and the Scotch Whisky industry having a role to play in identifying ways of promoting Scotch Whisky in a more sustained manner. This will provide niche market opportunities for all those involved in the Scotch Whisky industry providing increased sales and job opportunities.


  150.  For some years the SWA, on behalf of the Scotch Whisky industry, and the Trade Unions with membership in the Scotch Whisky industry, have been mounting a campaign for tax harmonisation for alcoholic beverages. The current system of indirect taxation (excise duties and VAT) discriminates against spirits in comparison with beer and wines. The SWA Report of February 1994, Alcoholic Drinks Competition in the European Union states:

    (i)  for every Member State the excise duty per degree of alcohol is greater for spirits than for wine and beer;

    (ii)  the median excise duty in ECU per hlpa, is 15 for wine, 306 for beer and 1,349 for spirits; and

    (iii)  seven Member States apply a zero excise duty for wine but all apply a positive rate for beer and spirits.

  151.  A particular cause for concern is the double-taxation with VAT being added to the cost of spirit plus excise duty rather than being levied on purely the value of spirit alone.

  152.  In the existing economic literature it is recognised that spirits and other drinks do compete with each other for sales and hence are substitutes for each other. Given that there are many close substitutes for Whisky, taxation is discriminatory and causes distortions leading to reductions in market share and, undoubtedly, job losses within the industry.

  153.  The SWA has repeated on many occasions that the Chancellor will have difficulty in maintaining excise duty revenue from alcoholic drinks as:

    (a)  per capita alcohol consumption is static in the UK, and consumption spending on alcoholic drinks is falling as a proportion of total spending;

    (b)  there is substantial leakage of expenditure (and duty revenue) from cross-border shopping and smuggling;

    (c)  there is increased competition for all spirits, and from "new" products as tastes and preferences change.

  154.  It is hoped that following an earlier duty increase in 1997, by freezing the duty on spirits in the 1998 Budget, which had the effect of narrowing tax discrimination in relation to wine and beer, the Government took a modest step toward securing genuine harmonisation of taxes on alcoholic beverages. It is believed that this arose from the realisation of the difficulties in maintaining the future levels of tax-take from alcoholic beverages generally, and from Scotch Whisky in particular, in the future as home sales stagnate.

155.   Recommendations

  While the long running campaign to address the inequities in the levels of tax and excise levied on Scotch Whisky has been listened of late, there is a continuing need for the Government to accept the logic of the case for reducing tax and excise progressively: to optimise the tax revenues, to combat smuggling, to safeguard jobs, and to abolish the discrimination against this key Scottish and UK industry.

  In particular, there is a need to focus on the injustice of the tax issue. For example, harmonisation has been perceived until very recently as only equating to the abolition of Duty Free, harmonisation should also mean equalisation of taxes for all alcoholic drinks. The Single Market was used to justify the abolition of duty free. The fact that there is no single market, no genuine tax harmonisation—neither of taxes in all member states applied to each category nor (and of especial importance to Scotch Whisky) of taxes applied across categories to all drinks—undermines the logic of the EU argument.

  There is a continuing and growing need to stress the increasing losses of tax revenue and jobs from the UK as travellers undertake their own spatial arbitrage, buying their whisky on the continent and reimporting to the UK.


  156.  As is known, despite lengthy campaigning against the abolition of duty free shopping for travel within the European Union, duty free sales within the EU did come to an end.

  157.  The case for abolition was that duty free shopping causes unacceptable distortions of competition which leaves non-travellers subsidising ferry and airline users.

  158.  The arguments mobilised against abolition were: it would cause heavy job losses; as differential tax discrimination already existed against spirits in individual European markets, the effects of duty were of secondary importance in the obstacles to the completion of the Single Market and therefore duty free was justifiable; abolition would affect premium products particularly and Scotch Whisky especially would lose an invaluable "shop window"; and the economic effects of abolition would be damaging and far reaching—extending beyond producers, affecting fares and investment in the transport sector, damaging jobs, Government revenues and the whole community.

  159.  In our consultations within the Scotch Whisky industry this was the almost unanimous verdict, with dire consequences forecast.

  160.  However, we argued in 1999 that the abolition of duty free within the European Union offered opportunities as well as threats. Consumers who usually purchased Whisky on overseas visits could well transfer that purchase to their destination, taking advantage of lower excise and tax duties in other EU countries. The impact in terms of direct job losses within the Scotch Whisky industry, we suggested, would not be as great as previously claimed.

  161.  Additionally, as consumers in airports and in ferry terminals and ships at exit, entry and in transit were a captive audience and the abolition of duty free did not equate to no sales of previous duty free goods. It needs to be recognised that the "shop window" opportunity still remains.

  162.  The principle argument of the EU for abolition of duty free on goods for EU travellers is a legitimate one, that of distortion. We have noted that this had been utilised by the SWA and Trade Unions in campaigning for harmonisation of indirect taxation in relation to alcoholic beverages. The proposed abolition of duty free therefore strengthened the logic of the harmonisation campaign championed by the SWA and Trade Unions.

163. Recommendations

  The Scotch Whisky industry needed to explore the marketing opportunities that remained after the abolition of duty free travel within the European Union (in retrospect this has been in evidence and, although there was an undoubted negative effect on sales and profits of both airports and spirits companies, there has been minimal impact on the employment or incomes of those involved in the Scotch Whisky industry).

  The industry and government still need to exploit the arguments used for the abolition of duty free, trade distortion and harmonisation to further its campaign for tax harmonisation on all alcoholic beverages.


  164.  Whilst Scotch Whisky is exported to over 200 world markets there are still widespread barriers to free trade in many markets. Discrimination takes a number of forms from advertising to differentiation in terms of taxes and duties through to outright commercial bans. There is an added danger in mature markets that, where there is increased concern over alcohol consumption, measures may be taken to restrict/limit the sale of alcoholic beverages.

  165.  There is no easy solution to these problems short of continually lobbying and ensuring that countries which sign up to free-trade agreements actually enact these treaties. Generic promotion and marketing campaigns would be a useful tool to "educate" potential consumers over the natural qualities of Scotch Whisky.

166. Recommendations

  There is an ongoing need for the UK Government to lobby the EC and WTO negotiators over discrimination against Scotch Whisky, and spirits in general. An end to discrimination against Scotch Whisky and an acceleration of the timetable to reduce taxes and excise duties where these have been identified should be pursued.

  The discrimination against Scotch Whisky under UK tax and excise regimes allows overseas governments to legitimise their own adverse treatment of Scotch. This has deleterious effects on jobs, incomes and tax revenues in Scotland and the UK, and poses threats to the long term sustainability of the industry and many communities.


  167.  Since the re-emergence of television advertising of Scotch Whisky, and particularly in the run up to the 1998-99 festive season, there has been a steady increase in brand advertising within the Scotch Whisky industry. In our discussions with producers in the industry it was argued strongly that brand promotion was the way forward and consumers were interested in brands. There was only limited enthusiasm for generic marketing with producers questioning who would pay and who would benefit.

  168.  Quite clearly small players in the Whisky industry who cannot afford advertising costs are going to be at a disadvantage from brand promotion and would gain from generic marketing.[14] There is no way of knowing whether the benefits accruing out of generic advertising would be proportionate or disproportionate to member firms.

  169.  The available evidence would suggest, however, that there are economies of scale associated with advertising.[15] Economies of scale result from lower prices paid by large volume buyers and from the greater effectiveness of a large number of repeated messages on potential buyers.

  170.  Producers in an industry may establish a general product image collectively and then advertise individually in such a way as to exploit the general image. There is a widespread belief throughout the industry that attention needs to be given to the image of Scotch Whisky in the UK. Scotch is perhaps associated with the "the old man in the corner."

  171.  Given that the industry believes this to be the case and that this image problem permeates the all important domestic market, then it appears there is a case for generic promotion in an effort to alter this perceived image. The difficulty with this is that there is a free rider problem; that is, individual firms can benefit without contributing to the cost. However, where one trade association represents over 95 per cent of the industry there is the possibility of a joint advertising campaign being effectively introduced, with appropriate mechanisms to ensure collective support for such a campaign.

  172.  With the industry campaigning against discrimination against Scotch Whisky in many overseas markets and where the perceived threat in existing markets arises from other alcoholic beverages, a generic campaign promoting Scotch Whisky as opposed to other alcoholic beverages would be able to take advantage of the economies of scale which exist in advertising and help establish Scotch in new markets.

  173.  Recent and established evidence that Scotch Whisky can be an aid to healthy living because of high levels of anti-oxidants, could be used more strenuously in the promotion of a modern image.

174.   Recommendations

    There is a need for the industry to explore the possibility of generic promotion both within the home and overseas markets, its failure to do so illustrates that a market failure exists here and so a rationale for government or development agency intervention.

  There is a case for generic advertising in the home market to change the "old man in the corner" image of Scotch.

  The case for generic promotion in overseas markets: (a) concerns the potential threat of a downturn in demand due to increased concerns over alcohol consumption; (b) provides assistance to the campaign against discrimination; (c) stresses the benefits of sensible consumption; and (d) involves the SWA, with its members promoting a wider education and tasting programme on malt whiskies especially.


  175.  The Scotch Whisky industry is characterised by good industrial relations. Both management and unions spoke of the... "mutual respect"...and "mature attitudes."

  176.  The industry is associated with well paid jobs, a skilled workforce with good conditions of work and training opportunities. The attitude prevalent in the industry is one of co-operation and partnership, typified by agreements such as "Positive Partnership" by United Distillers, now a part of the Diageo group.

  177.  Similar agreements have been struck throughout the industry. The industry is at the forefront of human resources management with agreements over multi-skilling, team working and full union participation.

  178.  With the ever present need to remain efficient and the increasing use of bench-marking, not just within the Scotch Whisky industry but with other first class, global companies there is the ever present threat of further rationalisation and job cuts.

  179.  However, with the potential of niche markets, greater expenditure on advertising both in the home and overseas markets, and the continual campaign to reduce discrimination against Scotch Whisky, there are opportunities not only to save but to create employment in the sector as a whole.

  180.  Many of these changes have generated jointly developed company-trade union training strategies to address threatened job losses and potential diversification. Some of these have been plant or employer-specific initiatives, others have embraced wider constituencies.

  181.  As a dominant employer in many small, rural and fragile communities, the industry has an obligation to pay special regard to the implications of its investment and production decisions.

182.   Recommendations

  The good industrial relations of the industry need to be protected by an inclusive partnership between the companies, the trades unions, suppliers and communities, to promote its case for an end to discrimination, etc.

  The industry needs to maintain and extend the good relationships with local communities by embracing and implementing the European policies of works councils and adopting an open approach to the need and forms of diversification.

  Training to exploit niche markets, diversification and technological change is necessary to improve the prospects for the industry and its workforce. Local enterprise companies, further education colleges and other agencies should be clear of their roles in promoting this critical sector, often in ways radically different from the past.


  183.  There were mixed feelings within the industry as to the impact of devolution. It was felt that the Scottish Parliament would be more sympathetic to the industry as a whole.

  184.  There was consensus in our study that the SWA needed to open discussions for lobbying purposes with the new Parliament as soon as is practicable. The increased interest in Scotland and Scottishness does, however, provide an opportunity to promote Scotch in a similar way Guinness has been promoted in Ireland and abroad. Our observations to date suggest that the industry has limited its lobbying efforts to the traditional campaigns on taxes and excise duties. This conservatism typifies the restricted agenda of the sector leaders amongst the multinational players, they recognise few opportunities beyond the cash cow of the mass market.

  185.  That a number in the sector worried about the threat of additional costs principally from the fear of increases in taxation, although this is not a devolved power in respect to business taxation, demonstrated that many in the industry were in the industry but not of it.

186.   Recommendations

  The industry must recognise the different responsibilities of the Westminster and Holyrood Parliaments so that there is a wider acceptance of the importance of the industry to the Scottish economy and the potential advantages there are to promoting the sustainable and continued development of this sector.

  This lobbying and information exercise should incorporate many of the points made in this report, even where the responsibilities for action appear to lie elsewhere or reserved powers suggest that action may not be appropriate. The reality of politics suggests that an improved understanding of the sector and its challenges can only benefit the Scotch Whisky industry, with a higher profile leading to direct representation of its concerns in London and Brussels by the new Parliament.


  187.  It is useful to offer a benchmark of the state of the Scotch Whisky industry now and to suggest what challenges face it in the future. To help in this, a simple "strengths-weaknesses-opportunities-threats" (SWOT) analysis is presented below. This exercise provides a baseline against which the industry and others can gauge the performance of the sector over the next few years whilst alerting the key players to developments which may offer the potential for growth and diversification as well as to warn against adverse factors.


  188.  A major strength of Scotch Whisky is undoubtedly its association with a good quality product with a world-wide reputation. It is a profitable industry with state-of-the-art production techniques in the competitive manufacturing sector. It is environmentally friendly. Its raw materials are those provided by nature and natural processes, many sourced from Scotland: barley and other cereals, yeast and water coupled with a naturally occurring distillation process. It is a key provider of good quality, highly skilled, well paid jobs in remote areas as well as generating many indirect jobs through multiplier affects. The industry has strong vertical linkages leading to co-operation and, because of the geographical concentration of the industry, it is a cluster in its own right. Despite a downturn in sales in the volume of Whisky sold in the home market there has been a small but significant increase in the sale of malt Whisky. Many overseas markets are relatively stable and Scotch Whisky is seen as a luxury aspirational commodity.


  189.  The major weakness for the industry is the fact that, while it is trying to expand to sales to many immature markets, its home market is mature with declining sums of consumer spending devoted to alcohol generally and spirits in particular. Within the home market there are declining sales of volume whisky blends, which account for over ninety per cent of the volume of Whisky sold. Additionally, within the home market there is an image problem. Whisky is perceived as an "old man's drink". Whilst there are strong vertical linkages, horizontal linkages with agencies such as Scottish Enterprise appear to be weak. The persistence of tax discrimination against Scotch Whisky at home and abroad is a continual weakness for the industry.


  190.  There exists a number of opportunities for the industry. With the increase in the sale of malts there is the ability to exploit market niches; however, as they only represent a small proportion of total sales—approximately five per cent, the bedrock of the business remains blended Scotch Whisky. Increased sales of blends still generate demand for malts, which generates distilling jobs, as well as those further down the chain ie in blending and bottling, distribution, etc. The interdependencies in the sector are critical in forging a successful clustering effect. Increased co-operation between the industry and Scottish Enterprise, Highlands and Islands Enterprise and the Scottish Tourist Board will offer opportunities for increased marketing and the reversal in sales in the home market. Devolution provides the backdrop for a concerted campaign to promote Scotch. A generic advertising campaign will assist the lobbying to lift the discrimination in overseas markets. The efficiency gains achieved in bottling plants makes them attractive to other bottling users thereby reducing costs and promoting efficiency. This applies also to the distilling of white spirits which can gain significant production and bottling economies of scale by their current movement to Scotland. Together these developments can lead to further agglomeration economies of scale, protecting or growing the jobs in the industry in the areas where the greatest reductions have been felt.


  191.  A prolonged downturn in the UK and world economies will make it more difficult to maintain the current level of sales. The increased market share by white spirit and wines in the home market is a continuing threat. The decreased consumption in alcohol in more mature world markets because of the perceived health risks of alcohol consumption could pose a threat.


  192.  The Scotch Whisky industry forms a critical part of the Scottish economy. More than any other sector, it establishes a coherence to many communities and to the national economy overall. Almost uniquely, it provides employment, incomes and the demand for purchases across Scotland linking many sectors and areas. The production process integrates the distilleries of both the Highlands & Islands and the Central Lowlands with bottling plants and offices in the Glasgow and Edinburgh conurbations. Based on quality and image, it relies upon a skilled and technologically oriented workforce, with all the key ingredients—human as well as natural resources—sourced from within Scotland.

  193.  Despite a domination by massive multinational enterprises, therefore, the Scotch Whisky industry should be secure at the heart of the Scottish economy for many years to come. Indeed, the industry representatives contacted as part of the study demonstrated a realistic but optimistic view of the future, which the industry believed to have the real potential to continue to improve the value-added to the Scottish economy over the long term.

  194.  However, there are concerns that the Government, its agencies but also the industry itself have treated the sector with a good deal of complacency in recent years. In many ways it has been viewed as merely a "cash cow" for the Exchequer, promising an increasing tax-take into the future. With no recognition of the damaging effects of high taxation and duties on the Scottish economy till the middle 1990s, successive Chancellors have undermined the position of the broad base of the industry, encouraging closures and mothballing of plants, and not opposing mergers and take-overs.

  195.  Competition from other alcoholic beverages in this new environment of a few dominant producers is threatening the prospects for the industry. Action to re-image Scotch Whisky and to promote its expansion into younger consumer groups will be necessary to maintain market share.

  196.  Support for the establishment of "bottling glen" with associated production, R&D, packaging and service facilities should be encouraged by the economic development agencies within Scotland. The potential and characteristics of successful cultural tourism ventures are only now being recognised across the world. The Scotch Whisky industry has a major role to play in promoting Scotland's image under a new parliament and in securing a sustainable economy in the fragile and remote communities of the Highlands & Islands.

  197.  Addressing the detailed proposals recommended above should allow the industry to face the next millennium with a good deal of confidence and optimism.

Professor Mike Danson and Geoff Whittam
University of Paisley

December 2000

1   Indeed, given our knowledge and analysis of the other such bodies in Scotland, we would describe this as a particularly dynamic and well-informed trade association. Back

2   This includes the Fraser of Allander Institute reports conducted for Allied Distillers (1996) (which was only available in draft summary) and for Scottish Enterprise and the Scottish Office (1996). Back

3   The multiplier measures the ratio of direct plus indirect plus induced jobs to direct employment. Induced jobs are those which are generated by the additional expenditure of household incomes associated with direct and indirect employment. Back

4   These statistics are calculated as sales of spirits plus changes in stocks during the period expressed in constant prices. This captures changes in production activity, bottling, packaging and stock building. Back

5   Based on Scottish Council Development and Industry survey. Back

6   Brian Townsend claims almost 100 have disappeared over the last century, Scotch Missed, NWP, 1997. Back

7   Datamonitor market analysis report on UK wines and spirits, 5 October 1998. Back

8   Based on Scottish Council Development and Industry survey. Back

9   Survey of Highlands and Islands Manufacturing and Exports 1996-97, SCDI, 1998. Back

10   Porter M E (1990) The Competitive Advantage of Nations. Back

11   Porter (1990) p 19. Back

12   The Membership of the SWA covers 95 per cent of production of Scotch Whisky, allowing thus for the few small companies who for one reason or another are not members. It can be noted that it is this coverage of the industry that makes the SWA such a strong trade association (see page 5 and footnote 1 above). Back

13   The latest high-powered strategic research by Scottish Enterprise The Global Companies Enquiry 1998 argues for an innovative and pro-active approach to helping improve Scotland's performance in growing indigenous global companies. Back

14   The interdependencies which characterise this industry like no other, with most malts being essential ingredients for the blended whiskies of the leading players, mean that the analysis of the potential benefits of different forms of advertising would be rather complex. Back

15   David Brewster (Business Economics, The Dryden Press, 1997), for instance, recognises both the use of advertising to hinder possible new entry and the economies of scale in advertising. The evidence and literature suggest that "the pro-competitive, and hence the informational, role for advertising is paramount." Back

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