TUESDAY 16 MARCH 2004

MR STUART THOMSON, MR ANDREW RANKIN, MR SIMON COUGHLIN, MR DAVID BARR AND MR ANTHONY WILLS

  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 distillers—Mr Wills is not here this morning—who 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 relationship.

  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, which—not every member of the SWA are independents—we 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 ball park.

  Q209 Mr Lyons: Does anyone else have a view?

  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 stamps.

  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 that?

  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 labels?

  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 are you?

  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 this?

  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.