Donald Blair - The Global Scotch Whisky Industry - Hit or Myth?

Reproduced with the permission of the Author.

A series of statistical appendices are available with this report on request

The Global Scotch Whisky Industry:
Hit or Myth?
A Twenty-five Year Longitudinal Study

Copyright - PoleStar  Scotland Limited

Independent Consultants in Performance, Productivity and Profitability
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Partly in response to the exhortations of Scottish Ministers, the author of this Report returned to Scotland last year.

Having spent over 30 years of his life promoting the interests of the Scotch whisky industry and establishing successful businesses abroad he wanted to bring his internationally-recognised skills and experience back to his native land.

Fifteen months later he is shocked by the gulf between the rhetoric and reality of an iconic Scottish industry. He decided to find out why there are so few jobs in Scotland in his areas of expertise.

This Report is the result of these investigations.


The data from which this Report is compiled was obtained via the internet from publicly available sources. Polestar Scotland Ltd. has taken all reasonable steps to ensure that no rights of individuals or companies have been infringed. If any such rights have inadvertently been infringed we offer our sincere apologies. Any factual errors or omissions will be acknowledged and corrected in any future editions of this Report if notified to the author.


© Polestar Scotland Ltd
September 2008 (revised September 2009)


“The volume of Scotch whisky sold globally has only risen by 1.14% over the last 25 years. Put in an everyday context, the overall performance of the Scotch whisky industry could be compared to a sales representative who had sold 10,000 tins of beans last year. When asked by the Sales Director what his or her sales target should be for the following year, the reply might be “I think I could sell an extra 4 or 5 tins which would give me a target of, let’s be optimistic, say 10,005 tins for next year”. Any competent Sales Director might justly reply “Just leave the keys of your company car at Reception on the way out ……………… .”

Statistically, that’s the sort of annual “growth” the Scotch whisky industry has been turning in, year after year, for the last quarter century. The word “plodding” seems somehow overly dynamic.

Simply put, the volume growth of the “water of life” has been stagnant for the last 25 years.”

Abstract:

It is regularly asserted that the Scotch Whisky Industry is a long-standing model of economic success. However, the very consistency of its products, the long-term data available and the robustness of that data all make a unique economic analysis of this iconic Scottish product possible. That analysis reveals a true rate of growth that, far from outperforming other global economic and demographic indicators, has seriously lagged the industry’s true potential for growth over the last 25 years.

Executive Summary

The Scotch whisky industry is an iconic, stable, profitable, global industry which is consistently one of the top five UK exporters and which accounts for a quarter of all UK food and drink exports

However, long-run growth in the Scotch whisky industry is poor; 25 years ago it was selling around 302.7 million LPA globally. Today it sells around 306.2 million LPA. This is a mere 1.14% organic growth over a quarter of a century

This growth is equivalent to a Compound Annual Growth Rate (CAGR) of only 0.045%

Other global economic performance indicators have CAGRs in the range of 1.5% to 3.1% during the same 25-year period.

Nearly 16,700 extra jobs could have been created in Scotland had the Scotch whisky industry matched an average annual global growth rate of 1.5%.

This under-performance has prevented the £700 million currently spent annually in the supply chain supporting Scotch whisky production from rising to over £1,000 million.

Although not the prime subject of the research, the Report suggests that there has been a major loss in high-level sales, marketing and strategic jobs based in Scotland and that this issue merits further investigation.

THE ECONOMIC PERFORMANCE STUDY

Typical problems in measuring true business performance

Apart from the iconic and fascinating social, political and commercial history of Scotch whisky, there is one further dimension to the product that has hitherto gone unstudied. This dimension is its unique use as a basic index of business success as explained below.

All economists face significant problems in analysing long-term - in this case 25 years - industrial and commercial performance. These difficulties generally arise from five main factors.

How to aggregate data from differing versions of the product range
The changing value of money over time during the period measured
How to account for the effect of technological change in the product range over time
How to ensure that the data used for analysis during the period of the study is consistent and robust
Is the “portfolio of markets” for the product range sufficiently wide and diversified so as to even out cyclical local, national and regional variations?


1 Aggregating data

In order to compare products of different types (e.g. apples and oranges) it is necessary to convert them into some common unit of measure. This could, for example, be tonnes or money. So the cereal output of Scotland in 2006 could be aggregated as being 1.6 million tonnes of barley worth £117 million and 845,000 tonnes of wheat worth over £56 million. 

While this is still fairly meaningful from the agricultural perspective (we could add in further agricultural products such as turnips and strawberries) the tonneage becomes less meaningful (is a tonne of turnips more “worthy” than a tonne of strawberries?) the more products that are added.

We can devise various ways to overcome this difficulty (e.g. the use of weightings) but the most convenient tendency is to start to aggregate the data in financial terms. This tendency becomes an inevitability when we widen the scope of our study (is a kilo of potato chips worth more than a kilo of electronic microchips?). We quickly end up with apparently no option but to use a financial measure as the only meaningful way of approximating economic output (and derived data such as economic growth rates, business efficiencies, KPIs etc.)

2 Output Measurement over Time

The use of a financial measure, however, brings with it new problems – pounds, dollars and Euros are not constant, they change over time. They change not only because of the passive shift in the relationship between the commodity and price (e.g. inflation) but also because of active changes in that relationship (e.g. imposed price increases, futures markets). This writer can well remember buying a packet of potato crisps (inclusive of blue salt bag) for four old pence (less than 2p in 2008 money) as a nipper. Never in the writer’s wildest dreams did he think he would pay 14/- (or 70p) for the same item half a century later. An economist might attempt to compensate for this by using a generalised all-commodity deflator.


3 The Confounding Effect of Technology

A third factor which fudges long-term trends in analysing a product range is the impact of technology. How can we realistically compare the cumbersome black & white-screened wooden cube on which we watched the 1953 Coronation with today’s HD-ready wall-slab of plasma clarity? Certainly, we can convert into the financial measure of cost, but the two products bear as little resemblance to each other as Babbage’s Difference Engine and a modern personal computer.


4 Data Consistency and Robustness

Fourthly, how can we access data which is decades old and, more importantly, in a world whose PR people spin faster than a tumble-dryer, how can we be sure that the data is accurate? Even in recent times official data can be seriously flawed. The writer can recall writing in July 2000 to the Scottish Executive statistician responsible for publishing the data relating to Scottish exports of SIC Code DA 15.9 (i.e. “Drink”) during the period of 1995-1999. The writer questioned how TOTAL exports of “Drink” in four of the five years could be significantly less than the exports of Scotch whisky alone – especially since Scotch whisky data can only relate to Scotland, the only country where it can be produced. For example, in 1999, the Scottish Executive data claimed that Scotland exported “Drink” to the value of £1.483 billion. However, Customs and Excise data for Scotch whisky for the same year reported exports valued at £2.001 billion. The data for 1995 was even more out of line – total “Drink” exports from Scotland, at £1.071 billion, were only a fraction (47%) of the value of Scotch whisky exports alone of £2.277 billion. How could the part be greater than the whole? The writer received a reply which said that the statisticians were “trialling a new series” and that little hiccups were to be expected. Well, an accuracy of 47% on a basic data-set certainly supports the “lies, damned lies and statistics” brigade.


5 A Wide and Diverse Market

Finally, if we are to draw general conclusions about an industry’s long-term performance, as wide a marketplace as possible helps protect against local, national or regional peaks and troughs. A truly global market would be ideal. But few products, indeed, have the twin attributes of being both uniquely identifiable as to their origins AND of being true players on the global stage of around 200 geographical markets.



How difficult it is to try to make economic sense of the modern world of business! The five factors above – combining data for different products, the changing value of money over time, technological change, data integrity and truly widespread customers - seem to leave any long-term conclusions about true business performance little more than, at best, educated guesses.

Why the Scotch whisky industry avoids these five problems

Happily, however, the Scotch industry, perhaps uniquely, can come to our aid in all five areas and provide an almost laboratory-like environment in which to conduct a precise and scientific analysis of true business performance.


1 The Problem of Data Aggregation

The industry has a unique measure of output. It needn’t use crude measures like tonnes or money because it has long collected data in “litres of pure alcohol (LPA)”. Simply put, this is a theoretical, scientific and accurate volume based on an alcoholic content of 100%. Take a typical bottle of Scotch. It contains 70cl of Scotch whisky with an alcoholic strength of 40% of pure alcohol. So this 70 cl bottle of Scotch contains 0.7 x 40% = 0.28 LPA. A case of 12 bottles contains 12 x 0.28 = 3.36 LPA. A 40’ shipping container holds around 1200 cases, so it contains 1200 x 3.36 = 403.2 LPA. It’s the drinks industry’s bigger version of the “This bottle contains 3.2 units of alcohol.” Simple and straightforward. It can be applied to single malts, vatted malts, blends, vodka, gin – whatever.


2 The Problem of Measuring Output over Time

Not only has the drinks industry this unique measure of output, the unit of measurement (LPA) doesn’t vary over time. It doesn’t need to be re-calculated to take into account that wonderful cloak of poor performance – inflation. Not a variable pound, dollar or euro sign (or a statistician or economist wielding a deflator) in sight!


3 The Problem of Accounting for Technological Change

No new-fangled, hi-tech product evolution here, thank you! The Scotch we’re drinking in 2008 is pretty identical to that consumed by our grandfathers. In fact, not only is the product unchanged, the packaging is virtually identical. Of course, the marketing gurus have amused themselves for years by making minute adjustments to label colour and fonts but basically it’s the same product. Photographic and video evidence of some bottles of whisky recovered from the SS Politician which sank in the Sound of Eriskay in 1941 while en route to Jamaica show that these 60-year-old bottles would be instantly recognisable on the shelves of today’s supermarkets and specialist whisky shops.

4 The Problem of Data Robustness

The data on Scotch whisky is of an astonishingly high quality and longevity. Up until the 1980s, almost all Scotch whisky production and storage facilities were required to have on-site Customs Officers and Watchers. No process or operation could take place without their prior agreement. Every door to a bonded area had two independent sets of padlocks – Crown locks and Trader locks. Entry was impossible without the co-ordination of both Company and Crown. At the conclusion of the operational activity (distilling, batch blending, bottling or exporting, for example), before-and-after reconciliations of the quantities involved (those unique LPAs again) had to be carried out and agreed with Customs and Excise. Just as in the banks of old, no teller could go home at night without a cash reconciliation having been completed to the satisfaction of all concerned.

These procedures have been in use for a long time. The Scotch Whisky Association (SWA) – a trade organisation for whose skills this writer has the highest regard - reports annually on data collected from what has now been renamed HM Revenue and Customs. Their figures date back to 1949. There are no statistical indices, no weightings, no re-based data, no estimates, no inflation adjustments, no statistical sampling – just decades of solid base data – LPAs produced, bottled and shipped and which were being double-checked for excise duty purposes on a daily basis by both Trader and Crown.


5 The Problem of a Sufficiently Wide and Diverse Market

Within Scotland, no other indigenous industry can claim such a global penetration with its iconic products being sold in 200 countries worldwide. A wider portfolio of markets than almost any investment fund. In short, the diversity of its many marketplaces confers a high degree of insulation from local, national or regional economic swings.



It would only be intuitive to assume that such a stable, aspirational, iconic product in a global, diversified and expanding marketplace could only be a model of stunning economic success.


ACTUAL GLOBAL PERFORMANCE OF THE SCOTCH WHISKY INDUSTRY OVER THE LAST 25 YEARS


The author decided to look at the published data over the most contemporary 25-year period available. In order to compensate for normal annual fluctuations, it was decided to smooth the data by averaging it over 5-year periods. In other words, the data for the five years 1977-1981 was aggregated and averaged; similarly the data from 2002-2006 was aggregated and averaged. Although data on Scotch whisky is normally displayed separately as “releases (from bond) for UK consumption” and “exports”, both sets of data were combined to give a “whole world” overview. The results are shown in Appendix III.

The writer was stunned and double-checked his figures. Perhaps the decimal place was wrong and the results out by a factor of ten. Recalculate? - still the same answer.

In the five years period from 1977-1981, “releases” (i.e. UK) plus “exports” (everywhere else) totalled 1,513,749,050 LPA, giving an average figure during the period of 302,749,810 LPA per annum. In the five-year period from 2002-2006, “releases” plus “exports” totalled 1,530,925,001 LPA, giving an average figure during the period of 306,185,000 LPA per annum. In simple terms, that’s fractionally over a 1.14% TOTAL growth in volume over a 25 year period.

One of the most popular measures of brand (or industry) performance in the drinks industry is the compound Annual Growth Rate (CAGR). If we calculate the CAGR over the 25-year period presented above, it turns out to be 0.045%. Less than one-twentieth of one percent per year.

As stated above, the volume of Scotch whisky sold globally has only risen by 1.14% over the last 25 years. Put in an everyday context, the overall performance of the Scotch whisky industry could be compared to a sales representative who had sold 10,000 tins of beans last year. When asked by the Sales Director what his or her sales target should be for the following year, the reply might be “I think I could sell an extra 4 or 5 tins which would give me a target of, let’s be optimistic, say 10,005 tins for next year”. Any competent Sales Director might justly reply “Just leave the keys of your company car at Reception on the way out ……………… .”

Statistically, that’s the sort of annual “growth” the Scotch whisky industry has been turning in, year after year, for the last quarter century. The word “plodding” seems somehow overly dynamic.

Simply put, the volume growth of the “water of life” has been stagnant for the last 25 years.


Surely, the author pondered, there would be some correlation between the growth of such a global industry and world development in general. How did the industry growth compare with other macro-economic indicators such as world population growth, world GDP growth and GDP growth per capita over the same 25-year period?

GROWTH RATES OF SOME OTHER GLOBAL & REGIONAL INDICATORS


World Population Growth

In 1979 (the mid-point of our initial five-year survey period) the world population was 4.371 billion; in 2004 (the mid-point of our final five-year survey period) the world population was 6.371 billion. In round terms, that’s a growth of almost 46% in the same 25-year period. Or, in CAGR terms, 1.52% per annum, around 33 times greater that the volume growth rate of Scotch whisky.


World GDP Growth

World GDP growth is a bit more difficult to measure. It’s also a relativistic measure since currency is necessarily involved. However, one renowned study by Professor Angus Maddison published in 2007 includes a time series which covers the 25-year range from 1978 to 2003. Expressed in 1990 dollars (i.e. adjusted for inflationary effects), world GDP in 1978 was estimated at $18,968,976 million and in 2003 at $40,913,386 million. That infers a growth of around 215% over a 25-year period. Or, in CAGR terms, 3.12% per annum, about 70 times greater than the Scotch growth rate.


Regional GDP per capita growth

However, huge populations don’t necessarily buy bottles of Scotch, especially if they are born into poverty in places like India, China and Africa. Individual people with disposable income do. So it is illuminating to look at growth factors such as GDP per capita in the developed economies. Maddison’s data is again a useful source. He also calculated a GDP per capita time series, grouped by country. In the case of what he described as “29 Western Europe” countries, he calculated GDP per capita in 1978 as being $12,621 and 25 years later, in 2003, as $19,912 (both in equivalent 1990 dollars). This translates into a CAGR of 1.84%. In a second group (which he described, interestingly, as “Western Offshoots”) viz. Australia, New Zealand, Canada and the USA, he estimated a GDP per capita in 1978 of $17,803 and in 2003 of $28,039. Re-cast as a CAGR of 1.83% it bears a close correlation to the first group and is around 40 times the annual Scotch whisky industry growth rate.

Taking all the above into account, the Scotch whisky industry, far from being a star business performer, has signally failed to keep up with global and regional true economic growth rates.


POSSIBLE FACTORS INHIBITING THE GROWTH OF SCOTCH


It could be argued, of course, that other factors – market saturation; lack of financial resources; lack of primary production capacity; lack of packaging capacity; lack of business expertise or international trade barriers - have seriously impeded the potential growth of Scotch. For example, it could be operating in a global marketplace already saturated with Scotch.

However, the global market for legal, commercially-produced spirits in 2004 is thought to have been around 7.3 billion LPA. In the same year, Scotch accounts for fractionally under 300 million LPA. A market penetration of around 4% by Scotch could hardly be considered as “saturation”.

As every CEO knows, sometimes you just don’t have the resources to grow as quickly as you would like. Could it be that the industry has been starved of capital – both financial and intellectual? Hardly. The industry’s Annual Reports are full of financial data about excellent levels of “free cash flow” and other financial technicalities.

Of course, the 10-year-old Single Malt being enjoyed in 2008 was produced no later than 1998, so perhaps the industry is investing ahead of current growth in new stocks of maturing whisky? Not really. Industry stocks are stable, having hardly changed in the last 25 years.

Lack of primary production capacity a constraint? Again, not so. Capacity utilisation of distilleries is sitting at an economically comfortable 80-90%.

Perhaps a shortage of packaging capacity? Not really, one of the largest Scotch bottling plants (Strathleven in Dumbarton) was decommissioned in 1998.

What about a shortage of business expertise? Unlikely. Every type of consultancy imaginable (from branding to strategy, from productivity to paint-ball games, from tax to IT) targets the honeypot of drinks industry’ profits relentlessly.

Nasty competitive international trade practices and other barriers to trade? Well, that’s certainly a current bone of contention – particularly with regard to India - but there’s no evidence that it’s any worse than it has ever been and is probably better. Anyway, the industry’s trade association, the highly-professional SWA, has long had an impressive track record in overcoming such difficulties.

As has been said, the accuracy of historical data on Scotch whisky is beyond reproach. Statistics on other spirits drinks must be treated with a degree of caution: often the time series is not very extensive; the spirit in question may have been produced legally in many countries anywhere in the world with all the difficulties that confers on collecting and collating data - unlike Scotch which is produced in one country with a single, professional, government-controlled data-recording organisation.

Vodka, for example, can be produced anywhere. By any one. A reliable long-term time-series is thus fundamentally more difficult to construct but it is believed that in 1997 global vodka sales were around 445 million 9-L cases (or 1400 million LPA); in 2006 this had risen to 513 million 9-L cases (or 1615 million LPA). This equates to a CAGR of 1.59% during this nine-year period. (If we look at Scotch whisky over the same nine-year time span, the CAGR is 0.52% as volumes rose from around 308 million LPA to almost 323 million LPA). A bit of an improvement in the case of Scotch, but still substantially outpaced in growth-rate by a factor of three by vodka.

It’s rather like the Scotch whisky industry has been almost walking backwards on a 25-year long, upward-moving escalator, while the global economy has been sprinting past it at 40 times its speed. Then, a third of the way from the top, the Scotch whisky industry starts to climb a few steps, slowly. One of its main competitors vodka, meanwhile, keeps running past - taking three steps upward for every one that Scotch takes.
THE IMPORTANCE OF SCOTCH WHISKY TO THE SCOTTISH and UK ECONOMIES


The economic benefits of the Scotch Whisky industry are large in financial terms:

Scotch whisky accounts for 13% of Scottish exports (excl. oil & gas) – around £2.8 billion in 2007
Scotch whisky is consistently one of the top five UK export earners and alone accounts for a quarter of all UK food and drink exports
Scotch whisky contributes £800 million in excise duties and VAT from UK consumers
In addition, Scotch whisky companies pay Corporation Tax on profits (the large company rate in the UK is 28%).

These balance-of-trade and tax revenues accrue, of course, directly to the UK Exchequer in London. The immediate benefit to Scottish society is two-fold viz. (1) jobs provided and wages paid in Scotland and (2) the £700 million spend across the supply chain (presumably excluding wages and salaries) which the industry generates. Indeed, these two contributions are widely, and properly, trumpeted by the industry.


Jobs in Scotland – Current Scenario

In 2000, the Scotch Whisky Association commissioned a Report into the economic impact of Scotch whisky (and other spirits’ production) on Scotland and on the UK. The Report divides the jobs created into three categories:

The direct impact consists of employment in the businesses engaged in the production of Scotch and the incomes (mainly wages) which households receive from that production.

The indirect impact is the income and employment created in supplier businesses in order to meet the demands of Scotch Whisky producers for inputs, materials and services.

The induced impact consists of the jobs and incomes generated in producing the goods and services bought with the incomes created through the direct and indirect impacts.

In numerical terms, in relation to Scotch whisky alone, the Report estimated that the jobs impact on Scotland in 2000 was as follows:

Direct impact: 9,573

Indirect impact: 19,772

Induced impact: 11,465

Total jobs impact: 40,810

The SWA Annual Report for 2006 only provides data for direct employment in the production of Scotch whisky which it concludes is 9,055 (plus a further 170 jobs in the rest of the UK). However, the data for indirect impact and induced impact were estimated in 2000 using economic indices such as Scottish Input-Output tables and Income Multipliers. It is unlikely that there has been any material change in these indices in the intervening few years so we can generate a reliable estimate of employment in Scotland in 2006 related to the Scotch whisky industry as below:

Direct impact: 9,055

Indirect impact: 18,700

Induced impact: 10,843

Total jobs impact: 38,597

It is interesting to hypothesise what industry employment levels might have been in Scotland had the Scotch whisky industry had achieved a higher rate of growth over the last 25 years than the awesomely pedestrian 0.045% CAGR calculated above. But what growth rate to use? Why not re-run the data using a CAGR which is somewhere between the various CAGRs calculated earlier?

Summarising the various international CAGRs calculated over 25 years above gives us:

Global population growth: 1.52%

Global GDP growth: 3.12%

GDP per capita (33 developed economies): 1.83%

Global vodka (9-year series) 1.59%

It would hardly seem unreasonable that, in such an international environment, a CAGR of, at least, 1.0% would have been less than challenging. If we do plug in that growth rate, together with other growth rates, into the starting data from the initial five year average 1977 – 1981 (302,749,810 LPA per annum) then total domestic UK releases + exports (i.e. “global sales”) 25 years later would have been as shown below:

CAGR = 0.045% (actual) 306,185,000 LPA per annum (Ave. 2002 - 2006)

CAGR = 1.0% 388,256,043 LPA per annum

CAGR = 1.5% 439,273,430 LPA per annum

CAGR = 2.0% 496,693,153 LPA per annum

Implications for jobs in Scotland – Potential Scenarios

The data starts to become more meaningful when we translate it into numbers of jobs. Since the Scotch whisky industry is a large and efficient employer already enjoying significant benefits of scale, it is reasonable to assume that total employment would be a function of the total volume produced and packaged. If we take the number of jobs in 2006 as related to the output in 2006, then the various CAGRs would have resulted in projected employment levels in Scotland as shown below:

CAGR 0.045% 1.0% 1.5% 2.0%
(actual) (proj.) (proj.) (proj.)

Volume (LPA mln) 306.185 388.256 439.273 496.693

Direct impact: 9,055 11,480 12,989 14,689
Indirect impact: 18,700 23,712 26,828 30,335
Induced impact: 10,843 13,749 15,556 17,590
Total jobs impact: 38,597 48,941 55,373 62,614

Given the stability and sustainability of the Scotch whisky industry (global prohibition isn’t going to come anytime soon), these “lost” jobs are of key importance. Not only are they permanent, they are generally well-paid as befits a profitable industry with the added benefit that some 7,000 of these jobs (2006) were in rural Scotland. Further, they are jobs in a wealth-creating industry, not jobs in a money re-distributing enterprise.

The total of wages and salaries generated in Scotland by the Scotch whisky industry is £800 million. A further £500 million is paid in wages and salaries in other parts of the UK. This figure is rather surprising given that SWA data compiled from Members’ returns indicate that the industry directly employs a total of 9,225 persons in the UK – 9,055 in Scotland and 170 in the rest of the UK.

In summary, using a CAGR for organic global sales of 1.5% as a reasonable measure of what COULD have been achieved given the various international economic CAGRs listed above, we can assert, over the long-run (in this case 25 years), that:

Long-run growth in the Scotch whisky industry is only one-fortieth of various comparable major international growth indicators

This under-performance has cost an estimated 3,935 direct jobs
This under-performance has cost an estimated 8,128 indirect jobs
This under-performance has cost an estimated 4,713 induced jobs

Total jobs lost in Scotland through under-performance is thus 16,776 jobs

In addition, using the same arguments as above, it can be argued that the £700 million currently spend annually in the supply chain supporting Scotch whisky production would have been over £100 million had the CAGR been 1.5% rather than the actual 0.045%.

SCOTCH WHISKY - Tourism or Trade?


In its “Scotch Whisky Manifesto”, launched before the 2007 elections to the Scottish Parliament, the Scotch Whisky Association stated “Scotch Whisky is iconic and an instantly recognisable ambassador for Scotland in the global market - attracting visitors, business, and investment.”
That statement is undoubtedly true but the stated values are in the wrong order and misleading.
The Scotch whisky industry, with its Visitor Centres, is certainly a tourist attraction. The boast that “Whisky-related tourism is growing in importance. Distilleries represent 25% of Scotland’s five star tourist attractions, hosting one million visitors a year” is no doubt true. But the industry is NOT some seasonal local tourist attraction like Loch Ness or Eilan Donan castle. It’s a GLOBAL BUSINESS accounting for, on its own, 25% of TOTAL food and drink exports from the UK.

Why, also, should its economic importance be in “….(attracting) business, and investment.”?
It IS a major business in its own right, a green, sustainable, business which has developed over 500 years and could still be with us in 500 years time. Scotch whisky will not run out like fossil fuels will. It’s a highly profitable and stable industry that uniquely profiles Scotland in the global marketplace – especially the emerging markets.

But it’s an under-performing industry when its economic performance is compared to other global “KPIs” as this report clearly demonstrates. The Scotch whisky industry would only rate an “E-minus” mark on a global performance scorecard when compared with other top performers getting “A-plus”s. It’s a shocking performance when looked at objectively and contrasts sharply with the annual press-release hype of “Global demand for Scotch increases”.

The industry should not be the drinks equivalent of a “screwdriver assembly plant” supporting blue collar jobs in production facilities in Scotland while more highly-skilled, professional jobs like global marketing, global strategy, global finance, global logistics and the like are elsewhere.

It is not the prime intention of this Report to attempt to provide an answer to the question of WHY the true growth of the Scotch whisky has been so poor over the last 25 years but with the possible loss of almost 17,000 jobs as a result some of the following pointers may be worthy of further study.


Industry Consolidation & Brands:

This may have been good for the survivors, but has it been good for the industry as a whole? While we have highly accurate data for the global industry, companies themselves are reluctant to issue figures on individual brands and there is always a temptation to massage that data upwards. For example, the old Distillers Company Limited was a loose association of various “brand companies” who took great pride in promoting their own small number of brands to the global marketplace. Some industry observers suspect that nowadays many of these “tier 2” brands have been sold off to third parties or have not been prioritised as much as the small number of “tier 1” brands. In other words, has the apparent organic growth in sales of one or two main brands been achieved by the cannibalisation of quite significant volumes of several tier 2 brands, thus accounting for the poor global volume growth of 1.14% over the last 25 years?

Industry Consolidation & Skilled and Professional Jobs:

Have we lost the best and most strategic jobs in Scotch whisky from Scotland? Twenty-five years ago the individual brand companies mentioned above all had physical presences in Scotland with the associated senior sales, marketing and strategic management focussed on the global marketplace. Now, almost without exception, these functions are located outside Scotland - in London or Paris, Tokyo or Singapore, Bankok or Bangalore. It’s not difficult to understand why these functions might want to be “close to the market” – Scotland is no enemy of devolution. But there is a frightening side effect. Once upon a time a young graduate could travel to Perth, Kilmarnock or Glasgow with the hope of embarking upon an international career in the Scotch whisky industry and, perchance, impress the CEO. That is no longer possible and the result has worked its way through the system. If we look at the composition of the Boards of Directors, Executive Committees and Regional Boards of the publicly-quoted largest spirits companies in the world it is difficult to find anyone who appears to have been born, been educated or has even lived or worked in Scotland. Time after time the author of this Report has been told by foreign distributors that “It’s the passion of your (Scottish) people that is your biggest asset”. How can you sell Scotch whisky effectively when all you know of the history and culture of Scotland and its most famous product comes from a corporate DVD?

The author has no wish to denigrate the efforts of Scottish Enterprise and others in job creation and the expansion of the SME sector in general. But why are we pouring scarce resources in to high-risk, high-tech, high-vulnerability start-ups that produce a handful of jobs and, even if successful, rarely exist 10 years later? Should we not be capturing the potential long-term jobs (17,000+) that an averagely successful Scotch whisky industry could supply? We HAVE a large, globally successful industry in Scotland that no one else can emulate. Why is its under-performance being hidden by hype and its true potential being undervalued by politicians and economic analysts? What clutch of SMEs could deliver almost 17,000 indigenous, long-term and well-paid jobs? And wealth-creating jobs, rather than money-redistributing jobs, at that.

Even better, what if the Scotch whisky industry could actually ACHIEVE modern-day mantras such as “exceeding expectations” and “out-performing competitors”? Could growth rates of 2%, 3% or 4% not be achieved? Even a 0.5% increase in growth from 1.5% to 2.0% would result in a further 7,200 jobs in the Scottish economy. Further, an £800 million wage bill spread across 38,597 jobs means an average salary per job in Scotland of £20,726 – not to be sneezed at.

So what to do?

Some Questions Worth Asking

As the Scotch whisky industry is strategically important in so many ways to Scotland, would it not be an opportune time for the Scottish Government to promote a much more dirigiste approach to the Scotch whisky industry and the very real future opportunities it could deliver?

Industry leaders are fond of applying stretching KPIs to their subordinates. In the modern business vernacular, the Scottish Government should set some “challenging and stretching growth targets” for the industry as a whole and monitor the relevant KPIs objectively. We’ve all secretly enjoyed the spectacle of the Chair of the Treasury Select Committee publicly grilling senior figures of the Banking fraternity with such questions as “…in the light of the first bank run in 140 years, if that is success, what is failure?”

Given the unique importance of the Scotch whisky industry to Scotland, isn’t it appropriate for the Minister for Enterprise, Energy and Tourism, in conjunction with his colleague the Cabinet Secretary for Rural Affairs and the Environment and the relevant cross-party group of MSPs, to carry out a similar examination of senior industry CEOs and other industry figures on a regular basis to explain the industry’s global performance when compared to other relevant macro-economic indicators?

It’s a sensitive subject but, sadly, it may be necessary for the Scottish Government to consider some form of specialised Minority Monitoring. We do it already on grounds of Ethnic Origin, Gender, Disability and Age. Is it really too much to ask that the Scottish Government monitors how many people of Scottish origin occupy board positions and senior executive positions in public companies to which Scotch whisky makes a significant profit contribution? Without such monitoring it’s impossible to know if an “Affirmative Action” programme is needed. We talk about the “glass ceiling” for women in industry, government and politics. Shouldn’t we be concerned about a “tartan ceiling” also? What’s the point of encouraging our young people in the direction of education and lifelong learning when a job in a Call Centre or as a “Team Leader” in a production facility is the likely zenith of their career?

Where are the Scottish universities that are capitalising on having this industry a few minutes up the road and spread throughout rural Scotland? Certainly, we’ve got the “International Centre for Brewing and Distilling” at Heriot-Watt University and an annual “Worldwide Distilling Conference” alternating between Edinburgh and Glasgow – but both these institutions are primarily focussed on such operational topics as “Fermentation Raw Materials” and “Impact of New Technologies on Flavour”. A haven for essential and committed industry “operationistas”, perhaps, but it’s not where the real action (or the money and the power) is. Our universities should not only be providing education for local ”team-leaders” and technicians, they should be providing high-level courses in strategic skills for future Scotch whisky industry executives in order that the industry can out-perform their competitors in the international business arena.

In the old days, IBM and the South of Scotland Electricity Board (remember them?) sponsored students through University while giving them practical experience during vacations. In doing so, they developed a core of young graduate managers whose theoretical knowledge was integrated with practical job requirements. The drinks industry should display a similar commitment to the Scottish universities under their well-publicised “Corporate Citizenship” philosophies.

Specifically, where are the undergraduate and post-graduate courses in Scottish universities like “Managing for Growth in Emerging FMCG Markets”, “MBA in Spirits Industry Marketing”, “M.Sc. in Government Affairs majoring in Tax and Duty Issues”, “Ph.D. in Alcohol Misuse and Global Society”, “M.A. in Global Food & Drinks Branding”, “Marketing with Asian Languages” and “BA in Design of Luxury Goods Packaging”? Where? Where? Where? We should be using our educational institutions in partnership with the industry to leverage our skills base in these global business functions.

Key industry players have long prevented the Scotch Whisky Association from generic promotion of Scotch whisky arguing that (their own) brand promotion was enough. Well, some brands might be benefitting but the industry as a whole is not. The author of this Report was the first foreigner to be elected to the Executive of KRPS – the Polish vodka equivalent of the Scotch Whisky Association. During their visit to the SWA in Edinburgh, members of KRPS were astonished to learn that an organisation as well-developed as the SWA merely “defended” the Scotch whisky industry. Knowing the tragic history of Poland, the producers of Polish vodka – a growing premium competitor to Scotch whisky – are convinced that “attack is the best form of defence” and fully intend to use all means at their disposal (including possible EU funding) to promote the whole “Vodka made in Poland” category. Perhaps the Scottish Government should facilitate a review of the question of generic funding for the industry? Much can be broadcast globally about the quality and integrity of Scotch whisky, the ethical way we work with our people and the green ecology of our local rural communities to the benefit of more than simply the Scotch whisky industry.

Some in the industry believe that previous Scottish administrations have shown little true support for, and understanding of, the global nature of the industry. Certainly there have been photo opportunities for MSPs visiting distilleries and bottling plants – nice lunch, couple of drams and a complimentary bottle of Scotch – but little more. The industry, on the other hand, has been happy to concentrate its efforts on a few local (i.e. UK) issues such as appeasement of concerns about irresponsible drinking (generally perceived to be a devolved issue) and minimisation of excise duties on spirits (most certainly not a devolved issue in the Chancellor’s eyes). But local issues account for less than 9% of output – over 91% of Scotch is exported. Isn’t it time the Scottish government woke up to the need to see the “big picture” and to accept its natural role of stewardship and – that cogent American concept – oversight?

Finally, one of the most encouraging signs is the emergence of a few new distillers joining the industry. Whereas consolidation has cost jobs, lost volume and done little for innovation – serial brand extensions hardly count as true innovation – perhaps these newcomers WILL drive real innovation and change. They, therefore, should be the recipients of robust and long-term support from the Scottish government.

In short,

Set targets, provide encouragement and support, measure true performance, reward or castigate!

The Bard would surely have had no truck with bureaucratic KPIs but he certainly understood the concept when he wrote:

“Facts are chiels that winna ding, and canna be disputed”.

Let’s see how smart the Scotch whisky industry REALLY is!


Donald M. Blair,

September 2008


Donald Blair holds a B.Sc. in Physics and Operations Research from the University of Paisley. He has worked in the Scottish food and drink sector in the UK and abroad since 1974. He was formerly General Manager of United Distillers in Poland, latterly Head of Strategic Affairs within the Government Affairs Department of Diageo PLC and is a Senior Consultant with the International Center for Alcohol Policies in Washington D.C.
APPENDIX I


A Brief History of the Scotch Whisky industry

First recorded in the Exchequer Rolls of Scotland in 1494, production remained a rather primitive process until the 16th and 17th centuries saw significant advances in distilling methodology. Increasing taxation on malt and the end product by the Scottish Parliament in the 17th century, continued by the British Parliament after the Act of Union in 1707, had the effect of stimulating illicit production away from the eyes of the authorities. Illicit production and the associated “route to market” known as smuggling became commonplace for the next 150 years. By the 1820s it is estimated that 14,000 illicit stills were being confiscated annually and that more than half the whisky being consumed in Scotland was evading taxation.

In 1822 and 1823 Acts were passed designed to encourage licensed distilling and to severely penalise illicit production. The 1823 Excise Act was passed, which sanctioned the distilling of whisky in return for a license fee of £10, and a set payment per gallon of proof spirit. Smuggling died out almost completely over the next ten years. Thus, the next phase of the Scotch whisky industry began – legitimate enterprises sprang up, some of which eventually became family dynasties. These families – the Walkers, the Haigs, the Buchanans, the Dewars, the Bells – are names that are still recognised globally in the 21st century.

The Distillers Company (DCL) was created in 1877 from the merger of six lowland producers to become one of Britain's largest manufacturing companies with diversified interests around the world. It is an extraordinary story of growth, acquisition, and diversification. By the 1920s DCL dominated the whisky industry in Scotland, eventually acquiring the then big three blending firms - James Buchanan, John Dewar, and John Walker. DCL was a fairly loose conglomerate, with the individual “brand companies” John Walker and Sons (Kilmarnock), Dewars (Perth), Buchanans (Stepps) etc. each maintaining independent Scottish-based head offices, operations and sales forces. By the mid-1970s, around 15% of Scotch whisky was being consumed in the UK and remaining 85% was being exported. (Today, exports now make up just over 91% of total output.)

In 1986 DCL was taken over in what was to be dubbed “The Guinness Affair” by the City. The DCL board was generally supportive of the deal whereby they would be taken over by the London-based Guinness plc but were faced with a hostile bid by Jimmy Gulliver’s Argyle Group. By means of an illegal share-support scheme, Gulliver’s audacious counter-bid was defeated and ownership and control of the Scottish drinks group passed to the much smaller London-based Guinness plc. DCL was re-named United Distillers PLC in 1987 after its merger with Arthur Bell and Sons of Perth (which had been purchased by Guinness plc in 1985).

Details of the share-support scheme emerged during investigations into an unrelated matter in New York and details were passed to the DTI in the UK. Subsequently, four businessmen, including Ernest Saunders, Chief Executive of Guinness plc, were charged with false accounting and theft. All were convicted; convictions were upheld on appeal in 1991 but with reduced sentences. In the case of Saunders, his sentence of five years was halved on appeal as the Court of Appeal accepted doctors' advice that he was suffering from the incurable Alzheimer's disease. He was eventually released from Ford Open Prison in June 1991 having served 10 months of his sentence.
He subsequently apparently recovered from Alzheimer’s and went on to advise various companies internationally. Guinness plc had also negotiated a compensation package in 1988 for owners of Distillers shares at the time of the takeover. A DTI report into the affair was eventually released in 1997, a decade after the event.

In May 1997 a merger was announced between Guinness plc (whose spirits portfolio included Johnnie Walker, Bell’s, Dewars and Gordon’s gin) and Grand Metropolitan plc (spirits included Smirnoff Vodka, J&B Rare Scotch and Bailey’s Irish Cream). At the time of the merger Guinness was valued at £9.8 billion and Grand Met similarly. The merged company – later to be re-named Diageo plc – was three times larger, in profits terms, than its two main rivals, Seagram (based in New York) and Allied Domecq (based in Bristol). In 2000 Seagram was broken up and its beverage division (brands such as Chivas Regal and Glenlivet) was acquired by Pernod Ricard.

In 2005 Allied Domecq (brand-owner of “Ballantines”) was also sold to Pernod Ricard by its CEO Philip Bowman (who was later to sell Scottish Power to Spanish group Iberdrola).

However, one almost immediate effect in Scotland of the Guinness / Grand Met merger was the closure in 1998 of Strathleven packaging plant in Dumbarton with the loss of 470 jobs. In order to compensate for the job losses, the Strathleven Regeneration Company was set up in 2001 by John McFall, MP. In 2000, the Laindon white spirits bottling plant in Laindon, Essex, was closed with a loss of 220 jobs and production transferred to Scotland.

Thus, over 44% of output of malt Scotch whisky (see Appendix II) is currently in the hands of two companies – Diageo plc, headquartered in London and Pernod Ricard, headquartered in Paris. (For further details of the current industry ownership structure see Appendix IV
 
 


UPDATE – September 2009

In compiling the report entitled “The Global Scotch Whisky Industry – Hit or Myth” in mid-2008 it was hoped that direct comparison with the long-term performance with other internationally-traded spirits could be made. However, no reliable long-term data could be found to enable this comparison. Instead, proxy macro-economic indicators (global GDP growth, global GDP per capita growth and global population growth) were used to provide comparative growth rates to the growth rate of Scotch whisky during the 25 years under study.

Readers of the report will recall that the compound annual growth rate (CAGR) of the Scotch whisky industry was established as 0.045% over a 25-year period. CAGRs for the proxy indicators were determined as being in the range of 1.5% - 3.1%. In order to calculate the relative performance of the Scotch whisky industry it was decided to adopt a conservative approach and use the lower of these proxy measures, viz. 1.5%, for the purposes of comparison.

That comparison indicated that, had the Scotch whisky industry matched a global CAGR of 1.5%, then nearly 16,700 extra jobs would have been created in Scotland. This was the conclusion stated when the report was first published in September 2008.

However, in August 2009 a new report entitled “Global market review of vodka – forecasts to 2014” was published by industry commentator Just-Drinks and includes data from the internationally-respected and independent Institute of Wine & Spirits Research (IWSR). This report indicates that the global growth (CAGR) of vodka over the most recent 20-year period has been 3.5%.

Now that we can make a direct comparison between Scotch whisky and another global spirit product we can revise our original (September 2008) conclusions as follows:

The long-term growth of Scotch whisky has a CAGR of only 0.045% (unchanged)

The long-term growth of vodka has a CAGR of 3.5% - 77 times greater than that of Scotch whisky.

Nearly 51,600 extra jobs could have been created in Scotland had the Scotch whisky industry sales volume performance matched the CAGR of 3.5% of vodka.


In other words, the Scotch whisky industry would be 2⅓ times larger than it currently is and would provide direct employment for, or support, over 90,000 jobs in Scotland as opposed to the current 38,000.

NFU Scotland
KPIs - Key Performance Indicators – a currently fashionable means of comparing actual results to target results by using a small number of indices or ratios.
Letter to Hugh McAloon, Statistician, Scottish Executive, July 2000
SWA publication “Scotch Whisky Facts 2007”

CAGR is a similar concept to a compound interest calculation. It is a business term for the geometric mean growth rate on an annualised basis.
US Census Bureau
“Historical Statistics for the World Economy: 1-2003AD” Angus Maddison, Emeritus Professor, Faculty of Economics, University of Groningen, The Netherlands. Pub. (2007) GDP table.
“Historical Statistics for the World Economy: 1-2003AD” Angus Maddison, University of Groningen (2007) GDP per capita table.
International Center for Alcohol Policies: Report 17 (March 2006)
SWA Statistical Report 2006.
Presentation given to the World Whiskies Conference, Glasgow 2007
Presentation given to the World Whiskies Conference, Glasgow 2007
Trade estimates
SWA Statistical Report 2006
SWA “Scotch at a Glance, 2007”
SWA “Scottish Parliamentary Elections 2007 -A Scotch Whisky Manifesto”
“The Economic Impact of the Production of Scotch Whisky, Gin and Vodka in Scotland”, DTZ Pieda Consulting (2000).
Above Report, pp 26-28.
SWA Statistical Report 2006
SWA Factsheet “Supporting Jobs and the Economy”
SWA Statistical Report 2006 – “Employment” p.3
SWA “Scottish Parliamentary Elections 2007 - A Scotch Whisky Manifesto”
“But facts are fellows that will not be upset, And cannot be disputed”: Robert Burns “A Dream”, 1786
Scotch Whisky Association web-site
Presentation to the World Whiskies Conference, Glasgow 2007, based on A. Gray Scotch Whisky Industry Review 2007 updated to September 2008
Source: SWA Statistical Report 2006 - derived from HM Customs & Excise Export Statistics and UK Home Clearances
Global market review of vodka – forecasts to 2014. Published by just-drinks.com / IWSR. £795 single-user.