Examination of Witnesses (Questions 199
TUESDAY 16 MARCH 2004
Q199 Chairman: Good morning, gentlemen.
First of all, could I thank you for giving up your time and coming
to speak to us this morning. Before the Committee asks you their
specific questions, would anyone like to make a statement or are
you happy just to proceed?
Mr Rankin: We will carry on.
Q200 Chairman: I wonder if you could
clarify one matter for us. Of the independent distillersMr
Wills is not here this morningwho have we got from Bruichladdich?
Mr Coughlin: I am.
Q201 Chairman: You are not members of
the Scotch Whiskey Association?
Mr Coughlin: That is right.
Q202 Chairman: Can we assume that you
agree with the Association's position on the possible introduction
of strip stamps?
Mr Coughlin: Yes, we do.
Q203 Chairman: How do you think that
will affect your business?
Mr Coughlin: Obviously there is
an industry-wide concern about the introduction of strip stamps.
I would particularly like to talk about our specific business,
which is obviously wholly based here on Islay now. This is for
a number of reasons: we are small in terms of the industry, we
are independent and we are the only company that has a bottling
hall here on the island. This is a new introduction in the last
12 months, it was opened in May 2003. We are a relatively small
distiller selling to approximately 25 recognised distributors
around the world into 25 countries, selling relatively small quantities,
although we hope those quantities will grow over the years but
we are only three years old. There are three main areas that concern
us. One is that in this industry the market at large is very competitive
and any extra burden, either administratively or logistically,
is of great concern to us. Opening a bottling hall just over a
year ago was a decision made for three reasons. One was that we
felt that we wanted to be in better control of our bottling programmes.
Being the business had just started three years ago there was
no great pattern, we did not know how our business was going to
grow, and relying on third party bottlers in Glasgow or whatever
was going to be difficult for us. We felt that we wanted to take
control of that situation and create our own bottling hall. Also,
financially in the next two or three years it will start to become
more economic to do bottling on Islay as our business grows and
the fixed costs do not increase at the same rate as, hopefully,
our bottling and sales do. The third reason was it would be nice
to have one on Islay and be all in one place. The other side of
that is we have provided 14 full-time jobs here on Islay because
of it, and that is significant to an island like Islay. We see
that growing as we expand. It may not be at quite the rate as
our growth but it is significant. It has kept people on the island,
it has helped the economy of the island, and that is in danger
with the introduction of this new measure. Currently we have to
attach strip stamps for three markets which is already an onerous
task simply because it slows the whole process down and the fact
that we will have to do this for the UK, which is our biggest
market, on the one side it would mean having to employ more people
but it would jeopardise the whole bottling hall concept and at
the original costings it would be difficult and we would have
to pass that on to our sales price. Certainly for us as Bruichladdich,
although we are not competing at the sharp end on the high street,
we are getting into supermarkets but it is difficult because of
the costs involved in being an independent. Our margins are tiny
until our business grows to a point where we are selling our own
distillate. It is difficult for us.
Q204 Ann McKechin: Clearly there is no
difference between the whisky industry as a whole and Customs
and Excise about the fact that there is a need to tackle fraud
evasion, but also there is a great deal of difference between
the two sides as to how best to tackle that. Can I ask all of
you what, in your view, would be the best way to combat fraud?
Mr Thomson: A good working relationship
between the whisky industry and Customs and Excise, working together
more. If you take the situation at the ports down in Kent, does
everything get checked there? I very much doubt it. I think we
could combat fraud much better by having a better, closer working
Q205 Mr Carmichael: What Customs presence
do you have on Islay at the moment? Is there a Customs presence
based on Islay?
Mr Thomson: No, there is not one.
That was taken away.
Mr Coughlin: None at all.
Q206 Mr Carmichael: When was that removed?
Mr Rankin: Five or six years ago.
Can I just reinforce what Stuart was saying. I agree about a better
working relationship with Customs but the industry already has
a very, very good working relationship with Customs. As an industry,
we have been working for the last year and a half directly with
Customs to develop a Memorandum of Understanding and we had just
got to the point of agreement on that memo when the Chancellor
announced in his pre-Budget speech in December that he was going
down the route of strip stamps. As an industry and Customs we
have pretty well wasted about a year and a half of consultation
with each other to have it literally taken away without any attempt
to try and make that work. In backing Customs, I think we have
a very good working relationship with Customs at present. As an
industry, we all want to target fraud because these guys are penalising
the legitimate traders, whichnot every member of the SWA
are independentswe are behind.
Q207 Ann McKechin: You are in favour
of a system of licensing warehouses?
Mr Rankin: I think you are aware
there are 17 points we have put forward as an alternative to the
strip stamp. I do not think we want to deliberate every point
today but we are keen to get something in order but just not strip
stamps because of the impact it will have on our own individual
businesses, as I am sure every one of us will have an opportunity
to tell you.
Q208 Mr Lyons: Last week we had the National
Audit Office's report on the question of spirit fraud. Clearly
there is a vast difference between Customs and the industry in
terms of its estimate. Do you have a view on that yourselves?
Mr Rankin: We are probably a bit
biased because we have to take the SWA view. We have to be honest
ourselves. We do agree that probably neither of the figures is
correct because it is a difficult thing to substantiate but, as
an industry, our feeling in terms of the way our goods go through
the supply chain, we think that it is nearer to the SWA estimate.
None of us here have been involved in the process of bringing
the figures together so it is probably a bit unfair to comment,
but personally I think the Customs' figures are just way off the
Q209 Mr Lyons: Does anyone else have
Mr Thomson: I think if you look
at the increases over a certain period of time in our estimate,
the SWA estimate, and the Customs and Excise estimate, that shows
an increase of around 40%. We would like to think that whisky
consumption has increased by that amount over the last five or
six years but obviously it has not.
Q210 Mr Weir: I presume you all make
single malts. Is there any information on the type of whisky that
this fraud is being perpetrated against? Is it a particular problem
with malts or more the mass market blends?
Mr Rankin: I think you have to
take that on a ratio basis. The blends are 90/95% of whisky consumed,
so the likelihood is that 95% of duty evasion will probably be
on the blended market. Simon can talk about single malts better
than I. Single malts are a high value product and every company
is very, very selective in who they get to distribute those products.
Q211 Mr Weir: When we talked to Customs
and Excise we were interested in the lot numbers that appear on
the bottles. I just wonder if Customs ever come back to any of
you and say "We found this lot number in an illegal warehouse".
Mr Rankin: We had an incident
about eight years ago when there was a container going to Russia
and the goods were impounded by Customs. Subsequently that
went through the court process. As far as I know, that is the
only time in our company.
Q212 Chairman: Has anybody else had any
incidents like that in living memory?
Mr Barr: What we export to Russia,
and Russia now has a strip stamp in process, we export to France
first and they apply the strip stamps. Strip stamps can easily
be fraudulently made. I cannot see how the impact of putting a
strip stamp on a piece of paper over a bottle would stop fraud
in this day and age of technology, of making counterfeit strip
Q213 Chairman: Good morning, Mr Wills.
Welcome to this session with the Scottish Affairs Committee.
Mr Wills: I am sorry I am late.
Q214 Chairman: That is quite all right.
We know that you are not a member of the Scotch Whisky Association,
but can we assume that you agree with the position that they have
taken on strip stamps?
Mr Wills: My position?
Q215 Chairman: Yes.
Mr Wills: Obviously we are a fairly
new company. I do not have the same distribution as the other
members here. Having read through the various papers that have
been presented it does appear, certainly from my perspective,
that the smaller distributor or distiller is going to be hit very
hard because of the additional costs that they will incur. Certainly
that would be my biggest fear.
Q216 Mr Carmichael: We had a very interesting
evidence session last week from various officials from Customs
and Excise. If I can paraphrase what we got at the end of it,
it seems that this is a problem that is created by their inability
to tackle the problem of duty evasion and the solution that they
seem to have found for that problem is to impose a regulatory
burden on the production end of the industry. I see a few nods,
which is encouraging. Are there any comments you could make on
Mr Rankin: Being directly involved
on the production end from Morrison Bowmore Distillers, I will
give you a little bit of information about our company without
dwelling on it too much. We have our main distillery on Islay
at Bowmore. We also have a distillery just outside Glasgow at
Auchentoshan, which is near the Erskine Bridge, and one just outside
Aberdeen. We have a main bottling, blending and vatting facility
in Springburn. We are a company of some 200 people in total. Our
locations are mainly in the rural areas, ie in the islands, and
areas where jobs are pretty hard to come by, ie Springburn. We
have just had to go through the process of laying off 25 people
before Christmas because the company had been sustaining losses
of over £2 million, £3 million. We are 100% owned by
Suntory of Japan and obviously they have bought our company as
a long-term investment but have made it clear to us that they
are not prepared to sustain losses of that nature, hence the reason
we had to almost re-engineer the company. We had no sooner done
that than the strip stamp issue came up. For our size of company
it will have a pretty serious effect. Just the cost of the equipment
alone for the strip stamp is going to be over half a million pounds.
That is assuming we can buy that equipment at today's price. It
does not need a genius to work out that the whole industry is
going to approach the one or two players who make this equipment
and I think it is fair to say that these prices are going to rocket
accordingly. We are not a modern facility in terms of bottling
equipment, some of our equipment is 30 or 40 years old. We have
very low line speeds in comparison to the Allieds and Diageos
of the world, so that is going to impact on a much slower line
speed which will mean much less efficiency which will hit our
operation even harder. We sell probably 40% of our total case
business, which is only 700,000 cases, into the UK, of which a
high percentage of that is in the supermarket own label area.
As you are probably aware, supermarket own label sales are virtually
non-profit making and are only economies of scale to get line
efficiencies up, to lay down whiskies to keep the distilleries
going. We cannot pass on any increase from strip stamps to the
supermarket, they have just so much buying power and that is it.
The net effect of that is our redressing of the losses that we
carried out before Christmas will be reversed and we will be back
in the same scenario. This is only a personal opinion but I do
not know whether our parent company will be prepared to sustain
Morrison Bowmore Distillers. We are worried about the job effects
at Springburn where we employ probably 150 people, a high percentage
of those in the bottling hall itself, and the other outlying distilleries
and the warehouse side. From our perspective, we are very, very
worried about this course of action.
Q217 Chairman: How much of the other
distilleries' product would go to supermarket sales, to own brand
Mr Thomson: As regards Glenmorangie,
it is very much the same situation as Morrison Bowmore. It is
very much economies of scale that keeps the lines going and keeps
people in jobs basically.
Q218 Mr Carmichael: Can I try and place
you in the market. Compared to the Diageos or whatever you are
very small players, but in terms of the single malt market, where
Mr Rankin: You tend to gauge the
single malt markets in terms of your brands. Bowmore itself, because
of the investment that Suntory has put into it, is performing
particularly well. We are probably the number two Islay malt in
the world and the number nine overall malt, so we are in the top
ten malts in the world, but still only 120,000 cases. That is
the economy of scale, that we are one of the world's top ten single
malts but only producing 120,000 cases. That puts malt into perspective.
The distilleries here, excluding Bruichladdich and Kilchoman,
produce for single malts but a high percentage of the production
capacity is reciprocated within the industry for blended products.
That is where the biggest impact will be felt.
Q219 Mr Weir: The other thing that Customs
indicated to us was that most of the problems seem to be after
the product has left the distillery and bottling plant, in the
warehousing and distribution and retailing in particular, but
their solution seems to be more pressure and costs on the industry.
Do you feel that you are being unfairly treated by Customs in
Mr Rankin: As the legitimate traders
we feel that we have been penalised at the expense of the criminals.
I think Customs know a lot of the companies evading duty but whether
they are incapable of targeting them or they do not have the resources
to target them, I do not know. In terms of legitimate traders,
as you can see we are going to be crucified because of that.