THE INDUSTRY TODAY by Alan S Gray (As the Industry was in 1998) Scotch Whisky remains one of the UK’s major export earners and contributes around 20% of the UK’s total exports of food, beverages and tobacco. Scotch exports were in excess of £2bn last year. In addition, Excise Duty and VAT contribute some £700m to the UK Exchequer. It is therefore an extremely important contributor to the UK economy and this makes it all the stranger that the government does not do more to help it in the domestic market by reducing duty which is amongst the highest in Europe. Around 12,500 people are directly employed in the whisky industry but it is estimated that the industry effectively employs a further 40,000 to 50,000 in a wide range of businesses ranging from farming (producing malting barley) and transportation to packaging and tourism. Currently there are around 86 operational malt distilleries and 8 grain. Twenty years ago 114 malt distilleries were working and 11 grain. The closure of so many distilleries is obviously a cause for considerable regret as it reduces the number of malts available both to the public and for blending purposes. As a result of closures there are now only two Lowland distilleries in production and one in Campbeltown, Springbank, although it is hoped that Glen Scotia may reopen. On Islay the good news is that although Port Ellen distillery will not re-open, six are operational whilst Bruichladdich which has been mothballed for several years actually produced a little last year. The largest number of distillery closures has, however, been in the Highlands with 20 distilleries no longer in production. Many of those will not reopen but several hopefully will and indeed a recent example of this was the re-opening of Benromach by new owners Gordon and MacPhail.   Classification     1980 1998 % Change Highland 96 76 -21 Lowland 7 2 -71 Islay & Jura 9 7 -22 Campbeltown 2 1 -50   114 86 -25 There have been several bottling hall closures over the past 10 to 15 years which is the main reason why the number of jobs in the industry has fallen from 20,000 to the present level. However, whilst these losses dwarf those at the distilleries in numbers the latter have been hard hit on the job front and of course job losses in such rural communities have a huge impact on the local economies. Exports After a very buoyant 1997, exports of Scotch Whisky had a difficult time in 1998, a result of economic problems in various parts of the world, in particular the Far East and South America. The result was that export volumes declined by 8.1% last year to 254.2m litres of pure alcohol (lpa), a figure which was almost exactly in line with the 1994 total. Industry figures released by the Scotch Whisky Association show that shipments to the Far East (excluding Japan) declined by 58.2% from 30.7m lpa to 12.8m with the weakest markets being Korea and Thailand, both of which fell by two-thirds. As for Central and South America, total shipments declined by 6.5% from 39.6m lpa to 37.1m after having been 13.3% ahead for the first six months of 1998. The USA was also a weak market with a decline of 9.4% in the main category Bottled in Scotland (BIS) Blend but this was largely a reaction to the much better than expected shipments in 1997 when BIS Blend exports improved by 13.8%. In our view, a more realistic pattern emerges from comparing 1998 with 1996 and on this basis BIS Blend volumes showed a gain of over 3%. Europe Performs Well In contrast to these declines, the European Union, which accounts for over 40% of total Scotch Whisky exports, performed well last year, advancing by 3.4% from 110.3m lpa to 114.1m. Spain proved to be especially buoyant. The table below details the movement in export volumes and values over the past five years. This shows that although 1998 volumes were bang in line with those achieved in 1994, values were actually lower at £2.03bn compared with £2.19bn. Year Exports £m Exports mpla 1994 2191 254 1995 2277 262 1996 2278 257 1997 2394 277 1996 2030 254 The decline in export values in 1998 can be mainly attributed to the fact that sales to Asia are predominantly in the form of high value premium products such as Chivas Regal and Johnnie Walker Black Label and clearly the sharp fall in volumes to these markets translates into a disproportionately greater decline in values. However, part of the blame is also due to the industry’s failure to raise selling prices by anything approaching realistic levels with average increases of only 1% to 2% being achieved in 1998 and with actual price reductions being recorded in Asia. Weak prices are not a new factor, however, as they have been a feature of recent years and emanate from two main sources: resistance in the marketplace to price increases in the face of a more benign inflation environment, this affects most consumer products and not just Scotch; second, unduly aggressive competition within the industry itself as companies have sought to maintain volumes and market share. Weak pricing could well be described as the industry’s Achilles Heel in recent times and has adversely affected profit margins. Failure to achieve adequate price rises has also been a feature of the UK market and there was again heavy discounting over the 1998 Christmas and New Year season. The industry badly needs to adopt a somewhat more aggressive approach to pricing in order to maintain Scotch’s image as a prestigious product rather than simply a commodity. Need to appeal to younger customers In an effort to appeal to younger consumers in both the UK and USA, a category which has been largely ignored over many years, companies have resorted to using television advertising. This was first carried out in the UK by Bell’s in Autumn 1995 and marked an end to the unwritten agreement within the spirits industry not to advertise spirits on television. Many other brands have since followed suit and this trend will undoubtedly gather momentum although it will take several years before the impact of TV advertising will be fully felt. TV advertising has also been complemented by several innovative advertising campaigns aimed at making Scotch more appealing to the younger consumer and we believe that major initiatives on this front will be made by Diageo in the not too distant future. A lead by the industry leader would be most welcome and would encourage rival companies to follow suit. Exports will resume growth Prospects for the current year appear brighter than in 1998 with exports likely to improve slightly, benefiting from an upturn in the Asian economies whilst Europe should continue to record modest growth. Latin America, however, looks like remaining soft for most of the year. Looking to the medium term, export shipments can be expected to continue to recover from the particularly difficult time in 1998 and in the longer term Asia and South America look promising whilst India and China will hopefully become important markets in due course. Single malts have grown by 4.4% per annum over the past decade but they still account for under 5% of total world consumption. Prospects for this category must be regarded as particularly encouraging as more and more people discover their undoubted attractions and sales look set for further substantial expansion. Alan S Gray of stockbrokers Sutherlands Limited is the author of the Annual Scotch Whisky Industry Review, now in its 22nd edition. The current edition is priced £395. Available from; Sutherlands Limited, Lismore House, 127 George Street, Edinburgh EH2 4JX. Telephone 0131 527 3000, Fax 0131 527 3001.