Scotch whisky industry could be worth up to £1bn more to Scotland

Like all good fairy tales, it’s best to start at the beginning. Not the beginning relating to the oft-quoted line from the Scottish Exchequer Rolls of 1494 “To Brother John Cor, by order of the King, to make aqua vitae VIII bolls of malt” but the beginning of the modern era in the 1970s.

The Scotch whisky industry behemoth was The Distillers Company – a loose amalgam of family companies such as Johnnie Walker, Buchanan’s, Haig and Dewar’s founded in 1877.

It was badly run and, as often happens with families, many of the executives treated the business as a part-time hobby and had already decanted to the leafy climes of the Home Counties. In short, it was a dinosaur that had eschewed automation and was ripe for takeover.

READ MORE: Revealed: Study could see Scottish whisky deliver £1bn for economy

Other companies, notably Strathleven Bond in Dumbarton, were highly mechanised and were successfully experimenting with robotic packing in the mid-1970s.

In 1981 along come Guinness and Ernest Saunders. There is no room here to relate what was eventually to become known as the Guinness share-trading fraud. It is well-recorded in the excellent contemporary account co-written by Hugh Pym (now the BBC’s health editor) entitled The Guinness Affair – Anatomy Of A Scandal published in 1987.

The text should be mandatory reading in every business school in Scotland as an example of takeover malpractice. One interesting facet of the story is that we would probably know nothing about the financial jiggery-pokery in London and other capitals if the US Securities and Exchange Commission in Washington DC had not noticed and highlighted unusual share movements to the UK’s Department of Trade and Industry (DTI). I’ve often mused if any conversations such as “Jeez, the Yanks have spotted what’s up – what should we do now?” ever took place in select London clubs.

Anyway, in 1997 – a decade after the takeover battle had concluded – the DTI report damned the Guinness plotters and Saunders and his associates ended up in jail. Another interesting facet was that Saunders, who had been sentenced to five years’ imprisonment, was released after 10 months in 1991 as he was apparently suffering from Alzheimer’s disease. He appears to have made a full recovery and is understood to be still alive aged 85.

However, the deal was done, injured parties and ruffled feathers among the Edinburgh great and good were paid off and ownership and control of much of the Scotch whisky industry formally departed from Scotland.

Fast forward to 2021, the post-devolution era and the need to raise funds post-financial crash, post-austerity, post-Brexit and post-Covid to fund economic growth, jobs and health and social care.

Around 92% of Scotch is exported abroad. The most recent data from the Scotch Whisky Association (SWA) tells us that, in 2020, 1.14 billion bottles of Scotch were exported from the UK at a total declared value of £3.8bn. As exports, these bottles are not subject to taxes such as excise duty – only the remainder (8% or so) that enters the UK domestic market pays excise duty and VAT.

Simple arithmetic tells us that the average export price per bottle must therefore be around £3.33. This is the price per bottle that appears on the export documentation that accompanies every shipment that leaves the UK. And that average price includes bottles in airport Duty Free outlets that retail at several hundred pounds – and even a few at a thousand pounds plus.

READ MORE: Pope Francis said whisky is 'real holy water' in censored clip

BILL Ramsay, vice-convener of the SNP Trade Union Group was misguided when he said the SWA is fond of quoting the domestic turnover figure (£4bn). The £4bn relates to the 92% which is EXPORTED at £3.33 a bottle – not the 8% which is released for UK home consumption. That 8% is an added bonus to the £4bn.

For the sake of argument, let’s assume the average retail price in a Duty Free shop of a bottle exported is around £30. That raises two interesting questions. Firstly, where does the £30-£3.33 = £26.67 per bottle go? Secondly, are we not seriously underestimating the true value of the Scotch whisky industry? If the average final retail price is £30 and we export 1.14bn bottles annually then we really have an sector which is worth more than £34bn globally – not the measly £3.8bn trumpeted by the Scotch whisky industry. And this does not take into account the 8% or so of Scotch which is purchased for consumption in the domestic UK market.

These are big numbers. Compare the £34bn from Scotch alone with the TOTAL Scottish Government Budget in 2019/20 of £42.6bn.

Even this may be an underestimate. Professor Sir John Kay is not just any old economist. He is a visiting Professor of Economics at the London School of Economics, a Fellow of St John’s College, Oxford, a Fellow of the British Academy and a Fellow of the Royal Society of Edinburgh – the city of his birth.

He is a former member of the First Minister’s Council of Economic Advisers, wrote a weekly column in the Financial Times for 20 years and led the Kay Review of equity markets for former UK business secretary Vince Cable. Not exactly a Trotskyite, then!

He estimates that only around 2% of the global retail sales value of Scotch whisky remains in Scotland – mainly as wages for relatively lowly-paid jobs in production facilities and local purchases of goods and services. As Kay says, understatedly, “the Scottish economy appears to derive modest benefit from its most famous product”. Industry production experts corroborate this estimate, claiming that only 2-3% of the industry’s purchases of dry goods – bottles, labels, cases, cartons, and closures – come from companies operating and ultimately owned in Scotland.

Quite simply, the vast majority of revenues from our liquid gold haemorrhages out of Scotland to non-Scottish enterprises. As the late Sheikh Yamani, Saudi oil minister in the 1970s, said when oil was $4 a barrel, “Everybody is getting rich from our oil except us!”.

BUT our unique and iconic Scotch whisky is only part of the story. Distilleries in Scotland also produce neutral spirit which enters the market as gin or vodka.

At the lower end of the UK market this can be more profitable than a typical blended whisky. Unlike Scotch, which must be matured in oak barrels for a minimum of three years, gin and vodka are produced in large volumes in high-tech distilleries.

To the accountants’ delight, they can be produced on Monday, bottled on Tuesday, shipped on Wednesday, purchased on Thursday and invoiced on Friday! No more messy old barrels, years waiting and evaporating Angels’ Share!

Neither are Covid or Brexit an excuse for poor performance. Industry growth over the long term (40 years) has been pedestrian at about 0.7% annually. Annual global GDP has grown almost five times as fast in the same period. Economic surveys commissioned by the SWA claim that nearly 50,000 jobs are directly or indirectly supported by the industry.

Had the Scotch whisky industry simply matched global economic growth in recent times, there would be twice as many jobs in Scotland.

So there we have it. The “Scottish success story” isn’t owned or controlled from Scotland; almost all of the revenues it generates leave Scotland – much of it to suppliers that are not Scottish owned. Volumes have been flatlining for 40 years. Instead of providing employment for more than 100,000 people it employs less than one-half of that number.

Donald Blair has spent his working life in the food and drink industries in Scotland and abroad. He has variously been: industrial engineer, John Laird & Son; production engineer, CPC (UK); production manager, J&B Scotch, Strathleven Bond; market analyst, Seagram Distillers; international distribution manager, Chivas Brothers (Scotland); corporate consultant, Joseph E Seagram (NYC) USA; general manager, DIAGEO Polska Ltd, Warsaw (Poland); head of Strategic Affairs (International), Diageo plc (London); drinks industry lobbyist, Amsterdam Group, (Brussels); and senior consultant, International Center for Alcohol Policies, (Washington DC)