Whisky in the jar and billions to the trade balance

Posted on 2 Aug 2013

Exports of Scotch whisky hit £4.3 billion in 2012, a record and more than a quarter of all UK food and drink exports last year. Will Stirling takes the high road to learn more about the water of life.

“Dearest of distillation! Last and best – How art thou lost!”. So Robert Burns parodied Milton when railing against the government for taxing whisky in his 1786 poem The Author’s Earnest Cry and Prayer.

Scotland’s bard would be amused to see this week that changes to the European Union’s Free Trade Agreement removed trade barriers in several countries in Latin America. This will pave the way for more Scotch whisky exports to countries such as Colombia and Panama, keen to follow what their North American neighbours have done for years.

£4.3bn export industry: there are 109 distilleries fit to make true Scotch whisky, as defined by the Scotch Whisky Regulations 2009
£4.3bn export industry: there are 109 distilleries fit to make true Scotch whisky, as defined by the Scotch Whisky Regulations 2009

This £4.3 billon export industry is enjoying perhaps its healthiest period in years. The rising popularity of whisky abroad has allowed big distilleries to grow, new distilleries have sprouted up and old, redundant ones have been rejuvenated by cash from other Scotch distilleries, subsidised in some cases by Scottish government agencies.

While press reports of record whisky sales and strong exports of single malts ran throughout the recession, casual followers might be surprised to know these exports are not all about China and ASEAN markets. “People tend to associate our growth with China, but in fact the US is the number one market and France second, and this has been so for several years,” says the Scotch Whisky Association’s Rosemary Gallagher. “Yes, China is important but more Scotch whisky is consumed in France in a month than cognac is in a whole year.”

The big players like Chivas Brothers (Chivas Regal, The Glenlivet), Diageo (Johnnie Walker) and Williams Grant (Glenfiddich), have all notched up good growth. In June Diageo reported that Johnnie Walker Black Label had become a hallowed “20 million cases” brand, from less than 10 million cases 10-years ago. Exports of Scotch whisky earned £135 every second in 2012.

Have the smaller producers been out-muscled by the big boys in the race to tap new markets, where Diageo has a global marketing spend of some £500 million? No, says Scottish Enterprise’s Serena Sullivan. “Smaller distilleries benefit from the success of firms like Diageo and Pernod Ricard, when they move into a new market.

“It’s easier to sell niche, less familiar malt whiskies to buyers who have been introduced to the product by the large firms who open the door for them,” continues Ms Sullivan adding that Scottish Enterprise has identified Brazil as a hot market for new whisky brands.

But while smaller firms are cannily riding on the coat tails of bigger names to assist market entry, new distilleries also demonstrate tenacious and ambition and clever market strategy.

Younger flavours

Glen Keith distillery
The Glen Keith distillery is being revamped by owners Chivas Brothers as part of a £40m a year capex programme on its Scotch whisky manufacture

Kingsbarns Distillery is one such product of the amber rush. Its new production site is being built near St Andrews golf course. Recognising that the nearest whisky maker to the home of golf was over an hour’s drive away, the investors wanted to build the first distillery open to the public in ‘the Kingdom of Fife’.

Their ability to identify a gap in a crowded market has brought money from fellow whisky producer Wemyss Malt, and has prompted a capex grant for over £670,000 from the Scottish Government.

Construction began on another new distillery near Kilchoan in June. The Ardnamurchan Distillery is a business venture of Adelphi Distillery and will be mainland UK’s most westerly whisky production site.

Harris Distillery is a brand new distillery on the Isle of Harris. Not in production yet, it received capex injection of £1.9 million by government keen to support an industry on the remote island. All were established to ride the current wave of demand.

Facelifts and new cash

Other, older distilleries have received facelifts.

Scottish Cabinet minister Richard Lochhead re-opened the Chivas Brothers-owned Glen Keith distillery in June, after lying dormant since 1999. In 2012 the Pernod-Ricard owned company announced that it would re-open the plant to help the company meet rising global demand for its premium brand whiskies, including blends like Chivas Regal and Ballantine’s. Chivas Brothers has committed £40m annual capital expenditure on its Scotch whisky operations.

Global drink helps local supply chains

When a distillery expands local firms benefit, bringing valuable local cash injection to often remote areas.

Chivas Regal’s investment at Glen Keith has already brought real benefits to the Speyside business community with several local contractors involved in the upgrade.

Building work was undertaken by A.D. Walker of Banff, structural steel work by W.R. Simmers of Keith, and the distillery’s new wooden washbacks were built and installed by Joseph Brown Vats of Dufftown. Stills were refurbished by Forsyth Group of Rothes, while malt and grist handling was carried out by Clark & Sutherland in Keith.

Two companies from just outside Keith – L.H. Stainless and Advanced Electrics – carried out stainless steel piping and tanks installation and electrical works respectively, while C&A Innes of Keith upgraded the distillery’s water supply. Other local contractors at Glen Keith included G&A Construction of Dufftown, McKerron & Milne roofwork and McCormack’s scaffolding of Rothes, D Paterson steelwork of Elgin, and I Fraser & Sons electrical of Rothes. The new mash tun was constructed by Briggs of Burton.

In April, Britain’s biggest Scotch whisky producer by volume, Diageo, said it had chosen Teaninich in the Highlands as the location to build a new malt whisky distillery.

The drinks giant also announced a big new phase of expansion to its Scotch whisky production in the Speyside area, both investments part of the £1bn five-year investment plan which was launched in 2012.

The new distillery will create up to 20 new jobs at Diageo, will be next to the existing Teaninich distillery but will have its own name and identity. Costing about £50 million and will have the capacity to produce around 13 million litres of spirit a year from 16 copper stills. An on-site bio-energy plant will also be constructed to convert co-products into green energy to power the distillery.

At the same time Diageo also plans to invest £12million in expanding the existing Teaninich distillery to almost double its capacity.

Whisky lifts the local economy

As the whisky industry grows, it pulls along other suppliers with it. Bottling companies, cask makers, still and tank fabricators, logistics companies and local engineering firms are all benefiting from the boom (see box).

A true Scotch whisky must be matured in oak casks. Most of the oak is now reclaimed or comes from the US
True Scotch whisky must be matured in oak casks. Strong demand for whisky means good business for cask makers and several distillers have reinvested in their own cask workshops

Ardagh Glass, Scotland’s biggest indigenous bottle-making company, received a £1.95 million government grant towards new furnaces to increase its capacity. Owens of Illinois, the second biggest bottle maker, is also doing well. A spokesman for Forsyths, Scotland’s big distillation equipment company, said sales of fermenters, pot stills and column stills were all up, without providing figures. Originally operating just for whisky-makers in Speyside, Forsyths equipment is now found on every continent making beer, whiskies (from barley, wheat, grain, corn and rye), bourbon, rum, vodka, brandy, gin, tequila and GNS, its website acclaims.

Knock on effects to the logistics firms that ship Scotch whisky are manifest, with 140 million bottles shipped globally in 2012 – laid end to end this would stretch 30,000km.

Here’s tae ye: Scotch whisky industry at a glance

• Exports generated £4.3 billion for the UK balance of trade, a record high.
• Exports earned £135 every second.
• 40 bottles were shipped overseas each second.
• 140 million cases were exported worldwide.
• Laid end to end they would stretch more than 30,000kms – or about six times the distance between Edinburgh and New York.
• Around 10,000 are directly employed in the Scotch whisky industry – many in economically deprived areas.
• Over 35,000 jobs across the UK are supported by the industry.
• About £1 billion contributed to the Exchequer in taxes.
• Some 20 million casks lie maturing in warehouses in Scotland.
• To be Scotch whisky, the spirit must mature in oak casks in Scotland for at
least 3 years.
• 108 distilleries are licensed to produce Scotch whisky.

Source: Scotch Whisky Association

Plenty of support for Scotland’s gem

All this reason to cheer has not gone unnoticed. The Scottish Government and its agencies have assisted whisky producers and suppliers to the industry, where they can demonstrate the investment will generate a return.

Help for companies is available from three principle agencies: Scottish Development International for exports (where the SDI performs a similar role to UK Trade & Investment in England & Wales), the Scottish Manufacturing Advisory Service (SMAS) for operations and business improvement, and Scottish Enterprise for skills and advice on grant applications.

“Scottish Government offered £5m the 12-months to June on capex for whisky-industry projects” says Serena Sullivan, account manager at Scottish Enterprise. “Scottish Enterprise has awarded £10 million in investment grants to whisky companies and their suppliers from 2009 to 2013 to encourage companies to expand and invest in their sites.”

Organisations like the Scotch Whisky Association and SMAS provide ample support to the Scotch industry, with capex, operations, exports and marketing
Organisations like the Scotch Whisky Association and SMAS provide ample support to the Scotch industry, in operations, capex, exports and marketing

One beneficiary is the InBev-owned firm Inver House Distillers, which Sullivan manages for ScotEnt. Its business plan demonstrated that rapid growth was possible by leveraging its “premium product strategy” with special whiskies including Pulteney and Speyburn. The investment worked, helping Inver House to increase turnover from £53 million in 2010 to £80m in 2012. “These Speyside malts have exported well to Eastern Europe, Russia and South America,” she says, boosted by favourable reviews of Pulteney in Jim Murray’s Whisky Bible, the industry’s trusted almanac.

Old methods but R&D boost too

Scottish Enterprise can facilitate grants to help pay towards research projects, where the proposal can demonstrate the R&D will generate real ROI. For example, a distiller might partner with a university to develop a new brewing or distilling technique which can reach a prototype stage, ScotEnt can help with costs of overheads such as materials.

“There has to be a technical challenge in the project, there has to be risk involved and a relevant cost saving from the investment, such as a technology that can reduce waste consumption,” says Sullivan.

“We want to partner with companies and work with them on new processes and business development, like plant refurbishment or energy consumption reduction. We encourage them to do more on R&D,” she says, emphasising that there are still technology improvements to make in a core process that dates from the 5th century.

As well as whisky, Scotland has a nascent but growing gin industry and some of its breweries are the toast of Britain’s real ale industry. Breweries like BrewDog, Caledonian Bottlers, who make Wkd, and Valhalla, the UK’s most northerly brewery on Unst, Shetland, join Thistly Cross Cider as successful, in some cases award-winning, beers and ciders from north of the border.

Collectively they affirm the importance of the drinks industry to the Scottish economy; in fact, Scotch whisky contributes more than one quarter of the value of the entire British food and drink industry.

Whisky sour

While in a purple patch, the whisky industry has challenges. Foreign counterfeit imitations are a constant threat and have undermined the total value of the Scotch industry. A recent innovation is tamper-proof caps and labels, and organisations like the SWA and SMAS are working to make these standard.

Another risk is locally made whiskies. The spirit has been made in the US (bourbon) and Japan for centuries, but new local products are popping up in foreign target markets. Thankfully, the cache of a single malt travels well and industry experts see the rise of new, faux whiskies as a challenge to overcome more than a threat to a premium product.

Will Stirling