Select Committee on Scottish Affairs First Report


2. The spirits industry

Economic Impact

13. During the inquiry the economic importance of spirits, especially whisky, to the Scottish economy was underlined. Scotch whisky is Scotland's second largest manufactured export earning industry.[6] The status of whisky as a Scottish drink is protected by legislation. The drink must be distilled in Scotland before the designation "Scotch whisky" can be used.[7] This legislation confers an important competitive advantage on Scotland. Scotland has also benefited recently from an increased transfer by the major companies from other parts of the UK of production of other spirits. It is estimated that currently "some 75 per cent of UK gin and vodka is produced in Scotland".[8]

14. If the the sale of Seagram's interests to Diageo eventually goes ahead as planned, the two top companies—Diageo plc and Allied Domecq plc—will make around 80 per cent of all the whisky produced in Scotland.[9] Figures indicate that the industry provides direct employment for around 11,000 people in Scotland, and indirect employment of around 40,000 jobs across Scotland.[10] It was said that the spirits industry supports 1 in every 54 jobs in Scotland.[11] The Scotch Whisky Association estimated that around 70 per cent of raw materials and services were purchased locally.[12] It was argued that simply counting jobs does not adequately measure the overall contribution. The industry suggested that it was particularly important in certain "peripheral" parts of Scotland which would otherwise struggle to maintain employment, particularly rural areas, the islands, and older manufacturing areas.[13]

15. Whisky production continues to represent a vital component of Scotland's manufacturing base. We considered to what extent its role and significance has changed. We looked at three developments in particular:

  • The extent to which consolidation and concentration has taken place as the large companies seek economies of scale.

  • Moves by the major companies in the whisky industry increasingly to focus their marketing efforts on "global brands".

  • The movement of headquarters functions from Scotland.

Consolidation of production

16. Global competitive pressures have meant that there has been a considerable degree of consolidation in spirits production in recent years. Direct employment in the industry in Scotland has fallen and is still falling. The long-term nature of this decline in employment was confirmed in the study submitted jointly by the Scotch Whisky Association (SWA)/Scottish Trades Union Council (STUC),[14] which reported a decline in employment from 21,950 to 8,900 jobs between 1980-94. SWA figures confirmed that direct employment among its member companies fell by a further 22.8 per cent between 1994-99.[15]

17. Competitive pressure has also led to a growing concentration of production facilities in a few large plants, with detrimental effects on employment in peripheral areas. SWA figures show that many areas of Scotland have lost jobs in whisky. For example, jobs in the whisky industry fell by 64 per cent in Tayside between 1994-99, and by 25 per cent in Grampian.[16] Representatives from the whisky industry spoke of the prospect of further consolidation. There has been a substantial fall in the number of distilleries in production in recent years. Figures show that the number of malt distilleries in production fell from114 in 1980 to 85 in 1999, a reduction of 25.4 per cent.[17] We are concerned about the extent to which the peripheral areas are likely to suffer as the industry continues to cut costs.


18. One important reason underlying this process of centralisation was that large companies increasingly tend to focus on a relatively small number of "global" brands, that is, brands which they can promote on a worldwide basis, in order to gain economies of scale from mass production. The Scottish industry exists within a very competitive international environment, and whisky is not the top selling spirit. In 1999, for example, the world's best selling whisky[18] sold only 7.7 per cent as many cases as the world's top selling spirit.[19] The big companies see branding as a key avenue by which profits can be increased. The SWA stated that:

    "It is the old story, it is not a bottomless pit ... The judgement of most companies in the industry is to focus on brands that have the scope to have an international standing, in terms of putting investment behind winners. We are trying to back winners".[20]

19. The need to develop a brand image in order to compete effectively, and the cost involved in doing so, was a recurring theme throughout the evidence from across the drinks sector. An increasing concentration of effort on fewer brands may disproportionately affect peripheral areas as the big companies promote some of their smaller brands less aggressively.

20. The belief is that both consolidation and centralisation and aggressive advertising are necessary to preserve competitive advantage, given global competition in spirits. This point was best expressed during evidence from the Gin and Vodka Association (GVA), who argued that the crux of the rationalisation and consolidation process was that companies achieved economies of scale, and that jobs had been preserved through the consolidation process.[21]

21. While we accept that all companies must take any action necessary to remain competitive, we were concerned about what this could ultimately mean for Scotland. During oral evidence the GVA said that there had been a notable increase in bottling whisky abroad. Unlike its distillation, there is no legal requirement for Scotch whisky to be bottled in Scotland. When a view was sought on the possibility of Scotch whisky being distilled outside of Scotland if the existing legal restriction was removed, the answer was that this was not an unimaginable scenario.[22] The GVA pointed out that Scotland's position as a major spirits producer is some way from being threatened, largely due to the recent heavy investment in rationalisation made by the major companies.


22. Ownership of the major whisky producers has, to a large extent, passed into the possession of a small number of multi-national companies. This concentration of ownership continued during the period of the report, with the purchase of Seagram's whisky interests by Diageo. Important decisions involving the development of the whisky industry are now increasingly taken outside of Scotland. The loss of control over what is Scotland's "flagship" manufacturing industry is worrying. SWA figures confirm the size of these losses. We noted above that total employment in whisky fell during the period 1994-99 by 22.8 per cent, a loss of 2,626 jobs.[23] During this same period, employment in sales and marketing functions outside Scotland increased from 92 to 734.[24] We believe that this diminution damages Scotland's business infrastructure, causing as it does a reduction in high-level managerial jobs in Scotland

23. We are aware that much of the loss of employment in the manufacturing side is due to the global competitive pressures that bear on spirits producers. However, we question whether the loss of managerial jobs from Scotland is necessary for survival, and point to the example provided by Scottish and Newcastle plc. Facing the same degree of competitive pressure as the spirits sector, its evidence to the Committee detailed how it had recently evolved from a relatively small UK regional company to the second largest brewing company in Europe.[25] Scottish and Newcastle have managed this process while maintaining its HQ in Edinburgh throughout.

24. Can or should anything be done to alter the trend towards high-level decision taking in the whisky industry happening outside of Scotland? Do we have to accept the possible detriment caused by the loss of control, even if this means that Scotland, or fragile parts of it, lose out? Some of our witnesses thought otherwise. The STUC pointed out, that external ownership affected its ability to contribute to the company decision-making process. STUC also argued that the current stance on mergers in the UK meant that companies involved in that process were not required to take into account the effects on regional economies. We therefore recommend that the Government should give full consideration to the public interest, including the prospect for employment and regional economic development, during the consideration of proposed mergers. Explicit reference to the weight given to such issues should be made when outcomes are announced.

Problems facing smaller companies

25. We welcome the fact that some of the world's largest drinks producers manufacture in Scotland. But we were concerned about some of the problems globalisation causes for small companies. One of the most significant company pressures apparent across all sectors of the drinks industry was the need to advertise in order to build brands and the expense involved in so doing. The main alternative to this strategy appeared to be producing low value "commodity" drinks for the increasingly powerful supermarkets. For the large companies, the sums involved are considerable. Diageo for example informed us that it currently spends around £200 million[26] a year to advertise only one of its main brands. Allied Distillers advertising budget was £277 million during the financial year 1999-2000.[27] Such sums are beyond the means of small companies. A limited advertising budget might affect their long-term prospects, particularly the smaller distilleries that provide employment in the peripheral areas already referred to.

26. Evidence suggested that there was a fairly robust small firm sector in the whisky industry, and that there were some particular opportunities for smaller firms, in particular, those centred on malt whisky, the high quality end of the market. This side of the whisky industry is unlike the volume side business. It is much more of a connoisseur market, and creates high value niche opportunities that can allow small companies to survive by charging high margins. It is this quality malt market which best embodies Scotland's longstanding craft expertise within whisky. Some of the smaller companies who specialise in malt have managed to produce internationally recognised brands. One example of this is Glenfiddich, produced by William Grant, an independently owned family company. As the SWA noted:

    "Some of the small companies have done particularly well in the emerging malt markets. At the end of the day, money alone does not create brands ... If it was only money, it would be only the majors that would be winning".[28]

27. We acknowledge the relationships between the large and small companies engaged in whisky production, which acts to the advantage of both. The SWA explained that blended whisky, which includes the volume brands most heavily promoted by the big companies, would be produced from grain whisky and anything up to 40 malt whiskies. Not even the two big companies own that number of distilleries. This means that large companies require the spirit from rivals as a constituent part of their blends. SWA argued that:

    "The importance of blended Scotch whisky is that virtually no distillery would remain economically viable if it had to rely on sales of bottled single malt. For example, it is our understanding that between 20-60 per cent of the business of one of the very best malt distilleries ... is the supply of fillings for other companies".[29]

28. A number of malt distilleries have closed in recent years. The small company sector is under some pressure. However, small whisky producers probably have more opportunities to develop than similar sized operations in other drinks sectors.

Corporate responsibility

29. In situations where rationalisations and closures are deemed to be inevitable, large companies, on which peripheral areas can come to depend on heavily, have a corporate responsibility to ensure that actions are taken to aid the process of transition towards new employment. We reviewed developments in one such case which followed the closure of Diageo's Strathleven plant in Dumbarton. The evidence we saw suggested that Diageo took its corporate responsibilities seriously and fulfilled these effectively. The company allowed a two-year timescale for the management of the closure. It instigated an extensive training and counselling programme designed to help former employers find new work. This approach appears to have had some measure of success. Diageo was also involved in the setting up of a local development company which was designed to boost the area's long term prospects by attracting new business to replace the activity lost at the Strathleven plant.

30. We believe that Diageo displayed a well-developed sense of corporate responsibility, and employed a sympathetic approach to its former workforce. The approach adopted by Diageo in Dumbarton may have lessons for other communities that have been affected by closure.

6  After electronic office equipment. HC 114-v, Session 2000-01, p.281. Back

7  The relevant legislation is outlined in HC 114-v, Session 2000-01, p.289, Annex IV, para 3. Back

8  HC 114-ii, Session 2000-01, p.114. Back

9  HC 114-v, Session 2000-01, p.209, para 39. Back

10  HC 973-ii, Session 1999-2000, Q.117. Back

11  HC 973-ii, Session 1999-2000, p.40, para 2.2. Back

12  HC 973-ii, Session 1999-2000, p.39, para 1.3. Back

13  HC 973-ii, Session 1999-2000, p.40. Back

14  HC 114-v, Session 2000-01, p.212, para 57, Table 2. Back

15  There may be some small disparities between the different sets of employment figures quoted, because of different methods of collection. Back

16  The figures use data supplied by the Scotch Whisky Association. Back

17  The Scotch Whisky Industry Review (Millennium Edition) by Alan S Gay, Charterhouse Securities Sutherlands, p.136. The report does not state the location of distillery closures.  Back

18  Johnnie Walker Red Label, produced by Diageo. Back

19  Stolichnaya vodka. The information in this and the previous footnote are taken from "Drinks International", April 2000. Back

20  HC 973-ii, Session 1999-2000, Q.126. Back

21  HC 114-ii, Session 2000-01, Q.332. Back

22  HC 114-ii, Session 2000-01, Q.344. Back

23  Figures provided by the Scotch Whisky Association. Back

24  IbidBack

25  HC 114-i, Session 2000-01, pp.75-77. Back

26  Drinks Buyer Europe, January 2000. Back

27  Figure supplied by Allied Distillers. Back

28  HC 973-ii, Session 1999-2000, Q.129. Back

29  HC 973-ii, Session 1999-2000, p.69. Back

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Prepared 28 November 2001