APPENDIX 1
Memorandum from Professor Mike Danson
and Geoff Whittam, University of Paisley
EXECUTIVE SUMMARY
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.
THE STUDY
CONTEXT
Introduction
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.
Methodology
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:
Invergordon Distillers plc;
Scotch Malt Whisky Society;
Scottish Office Education and Industry Department;
Department of Trade and Industry;
Highlands and Islands Enterprise;
Food and Drink Industry group at Scottish Enterprise;
Glenfarclas Distillery, Grants;
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.
ANALYSIS OF THE STRUCTURE-CONDUCT-PERFORMANCE
OF THE SCOTCH WHISKY INDUSTRY
BACKGROUND CHARACTERISTICS
OF THE
SCOTCH WHISKY
INDUSTRY
Introduction
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.
Approach
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.
STRUCTURE OF
THE SCOTCH
WHISKY INDUSTRY
Definition
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
| Year | Quarter
| Whisky | Manufacturing
|
| 1987 | 3 | 105.2
| 97.9 |
| 4 | 112.7
| 100.7 |
| 1988 | 1 | 110.7
| 103.4 |
| 2 | 108.5
| 102.1 |
| 3 | 112.5
| 104.8 |
| 4 | 115.7
| 104.6 |
| 1989 | 1 | 107.1
| 104.2 |
| 2 | 115.6
| 107.8 |
| 3 | 100.5
| 107.5 |
| 4 | 82.5
| 106.6 |
| 1990 | 1 | 107.8
| 110.8 |
| 2 | 112.7
| 110.4 |
| 3 | 103.5
| 106.1 |
| 4 | 112.0
| 106.5 |
| 1991 | 1 | 100.6
| 106.1 |
| 2 | 90.1
| 100.4 |
| 3 | 97.1
| 98.6 |
| 4 | 91.3
| 96.5 |
| 1992 | 1 | 93.5
| 90.7 |
| 2 | 94.9
| 91.7 |
| 3 | 91.6
| 90.4 |
| 4 | 94.7
| 90.4 |
| 1993 | 1 | 106.0
| 90.3 |
| 2 | 103.2
| 91.0 |
| 3 | 103.8
| 92.3 |
| 4 | 112.1
| 92.9 |
| 1994 | 1 | 96.7
| 95.8 |
| 2 | 102.2
| 93.9 |
| 3 | 96.8
| 95.2 |
| 4 | 100.3
| 97.0 |
| 1995 | 1 | 98.9
| 98.6 |
| 2 | 102.4
| 100.5 |
| 3 | 101.2
| 100.0 |
| 4 | 97.5
| 100.9 |
| 1996 | 1 | 98.6
| 101.3 |
| 2 | 94.7
| 102.5 |
| 3 | 96.9
| 103.2 |
| 4 | 91.0
| 105.3 |
| 1997 | 1 | 96.5
| 104.4 |
| 2 | 103.0
| 108.0 |
| 3 | 103.7
| 108.7 |
| 4 | 102.5
| 111.1 |
| 1998 | 1 | 96.0
| 110.7 |
| 2 | 87.9
| 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.
CONDUCT OF
THE SCOTCH
WHISKY INDUSTRY
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
EMPLOYMENT IN WHISKY AND MANUFACTURING 1950-95
| Year | Whisky Industry
| Total Manufacturing | Whisky as a percentage of Manufacturing employment (per cent)
|
| 1950 | 7,000 | 649,700
| 1.1 |
| 1955 | 9,650 | 684,200
| 1.4 |
| 1960 | 12,450 | 666,300
| 1.9 |
| 1965 | 16,200 | 668,600
| 2.4 |
| 1970 | 19,950 | 674,600
| 2.9 |
| 1975 | 21,800 | 617,900
| 3.5 |
| 1980 | 21,950 | 516,300
| 4.2 |
| 1985 | 12,800 | 372,900
| 3.4 |
| 1990 | 10,550 | 343,800
| 3.1 |
| 1994 | 8,900 | 284,400
| 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
EMPLOYMENT 1995
| Direct employment (000) | Proportion of total manufacturing employment
| Indirect and induced employment (000) |
Total direct and indirect employment (000) |
| 9.9 | 3% | 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.
PERFORMANCE OF
THE SCOTCH
WHISKY INDUSTRY
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
SCOTCH WHISKY PRODUCTION 1990-97
| Year ending 31 December | Malt
| Grain | Total LPA
|
| 1990 | 192,823,000 | 235,939,000
| 428,762,000 |
| 1991 | 186,265,957 | 230,534,943
| 416,800,900 |
| 1992 | 166,491,138 | 216,975,189
| 383,466,327 |
| 1993 | 140,942,181 | 210,235,959
| 351,178,140 |
| 1994 | 146,424,242 | 208,489,770
| 354,914,012 |
| 1995 | 158,079,324 | 236,159,123
| 394,238,447 |
| 1996 | 170,135,855 | 258,965,585
| 429,101,440 |
| 1997 | 192,980,001 | 277,886,386
| 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
EXPORTS OF SCOTCH WHISKY 1947-97
| Year | Volume LPA (000)
| Value £m | Year
| Volume LPA (000) | Value £m
| Year | Volume LPA (000)
| Value £m |
| 1949 | 22,113 | 18.74
| 1966 | 107,944 | 120.39
| 1982 | 251,277 | 871.60
|
| 1950 | 25,144 | 26.27
| 1967 | 111,963 | 122.39
| 1983 | 227,844 | 858.09
|
| 1951 | 27,577 | 29.59
| 1968 | 153,508 | 176.55
| 1984 | 231,287 | 931.38
|
| 1952 | 29,896 | 33.03
| 1969 | 136,048 | 167.49
| 1985 | 225,894 | 993.94
|
| 1953 | 34,260 | 37.77
| 1970 | 160,915 | 194.06
| 1986 | 236,188 | 1,070.13
|
| 1954 | 35,528 | 39.05
| 1971 | 182,501 | 226.94
| 1987 | 240,174 | 1,135.51
|
| 1955 | 39,861 | 43.67
| 1972 | 178,411 | 227.91
| 1988 | 245,977 | 1,288.79
|
| 1956 | 42,660 | 47.80
| 1973 | 203,577 | 259.99
| 1989 | 242,492 | 1,469.46
|
| 1957 | 46,470 | 52.14
| 1974 | 227,336 | 326.39
| 1990 | 238,305 | 1,712.48
|
| 1958 | 50,138 | 56.03
| 1975 | 234,274 | 366.62
| 1991 | 227,748 | 1,833.89
|
| 1959 | 56,276 | 61.85
| 1976 | 238,303 | 436.68
| 1992 | 231,272 | 1,958.88
|
| 1960 | 60,067 | 65.56
| 1977 | 243,633 | 512.62
| 1993 | 256,872 | 2,093.85
|
| 1961 | 69,610 | 74.43
| 1978 | 274,073 | 661.22
| 1994 | 252,209 | 2,191.29
|
| 1962 | 78,031 | 80.86
| 1979 | 262,421 | 707.41
| 1995 | 262,078 | 2,277.05
|
| 1963 | 82,450 | 84.83
| 1980 | 249,917 | 746.61
| 1996 | 256,806 | 2,278.13
|
| 1964 | 90,875 | 92.29
| 1981 | 244,239 | 784.75
| 1997 | 276,937 | 2,394.27
|
| 1965 | 102,936 | 107.58
| | | |
| | |
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
EXPORTS OF SCOTCH WHISKY 1997
| | Volume mlpa
| Value £m |
| Blended | —bottled |
209.99 | 2,017.29 |
| —shipped in bulk |
41.24 | 139.68 |
| BLENDED TOTAL | 251.23
| 2,156.97 |
| Malt | —bottled | 10.79
| 179.40 |
| —shipped in bulk |
9.91 | 46.04 |
| MALT TOTAL | 20.70
| 225.44 |
| Grain | | 5.00
| 11.86 |
| TOTAL EXPORTS | 276.93
| 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.
SUMMARY ON
THE STRUCTURE-CONDUCT-PERFORMANCE
OF THE
SCOTCH WHISKY
INDUSTRY
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".
ANALYSIS OF
THE STRUCTURE-CONDUCT-PERFORMANCE
OF THE
SPIRITS 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.
WIDER LINKAGE
AND MULTIPLIER
EFFECTS OF
THE INDUSTRY:
INCLUDING LOCAL
EFFECTS
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
WHISKY EMPLOYMENT IN SCOTLAND BY REGION, 1994
| Region | Whisky employment
| Whisky as a percentage of manufacturing employment (per cent)
|
| Grampian | 1,600 | 4.9
|
| Highland | 500 | 6.8
|
| Lothian | 1,100 | 2.3
|
| Strathclyde | 6,000 | 3.9
|
| Tayside | 300 | 1.4
|
| Rest of Scotland | 1,200 |
1.8 |
| Scotland | 10,700 | 3.2
|
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
NUMBERS EMPLOYED BY SWA MEMBERS BY REGION, SEPTEMBER 1996
and 1997
| Region | 1997
| 1996 | Per cent change
|
| Grampian | 1,492 | 1,481
| +1 |
| Highland | 540 | 546
| --1 |
| Lothian | 1,500 | 1,592
| --6 |
| Strathclyde | 6,199 | 6,641
| --7 |
| Tayside | 439 | 553
| --21 |
| Central and Fife | 1,739 |
2,036 | --15 |
| Rest of UK | 488 | 496
| --2 |
| Total | 12,397 | 13,345
| --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
STRUCTURE OF WHISKY EMPLOYMENT BY FUNCTION AND AREA 1996
| Function | Highland and Grampian
| All Areas |
| Maltings | 5.5 | 1.6
|
| Distilleries | 48.3 | 13.7
|
| Maturation/warehousing and cooperage | 12.5
| 10.0 |
| Blending and bottling | 3.9
| 39.6 |
| Distribution | 2.0 | 2.2
|
| By products | 1.9 | 1.0
|
| Office units | 11.3 | 15.7
|
| Sales and marketing | —
| 5.3 |
| Visitor centres | 6.9 | 2.0
|
| Other | 7.6 | 8.9
|
| 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.
THE ANALYSIS
OF THE
SCOTCH WHISKY
INDUSTRY
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.
ISSUES AND
RECOMMENDATIONS
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.
TAX AND
EXCISE DUTIES
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.
DUTY FREE
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.
DISCRIMINATION IN
OVERSEAS MARKETS
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.
PROMOTION
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.
INDUSTRIAL RELATIONS
AND TRAINING
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.
DEVOLUTION
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.
SWOT
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.
Strengths
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.
Weaknesses
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.
Opportunities
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.
Threats
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.
CONCLUSIONS
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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