The Scottish Parliament and Scottish Parliament Information Centre logos. SPICe Briefing The Scotch Whisky Industry 28 October 2009 09/76 Scherie Nicol Restructuring announcements by large companies within the Scotch Whisky industry over the summer of 2009 have brought the industry under the public and political spotlight. In response, the Economy, Energy and Tourism Committee is considering holding an inquiry into the industry. This briefing is intended to provide the Committee with an insight into the current state of the Scotch Whisky industry. First, it takes a look at the main companies and summarises the economic impact of the industry in Scotland in terms of employment, income and exports. The legal framework within which the Scotch Whisky industry operates is also outlined, with a particular look at the upcoming Scotch Whisky Regulations 2009 and the existing law with regard to the bottling of Scotch Whisky. The briefing goes on to take a broad overview of the current domestic and international spirits market, with a specific look at the position of Scotch Whisky amidst other spirit drinks such as vodka. Trends within the worldwide whisky market, such as the growth of regional brands and premiumisation, are then examined in more detail, before the key challenges currently facing the industry are outlined. Lastly, Annexes 1 and 2 provide a summary of the restructuring plans announced by Diageo and Whyte & Mackay in recent months. CONTENTS EXECUTIVE SUMMARY..............................................................................................................................................3 OVERVIEW OF THE SCOTCH WHISKY INDUSTRY.................................................................................................4 MAIN COMPANIES .......................................................................................................................................................5 Diageo..................................................................................................................................................................5 Pernod Ricard ......................................................................................................................................................6 William Grant and Sons .......................................................................................................................................6 The Edrington Group............................................................................................................................................7 THE SCOTCH WHISKY ASSOCIATION ............................................................................................................................7 ECONOMIC IMPACT OF THE SCOTCH WHISKY INDUSTRY..................................................................................8 EMPLOYMENT AND INCOME..........................................................................................................................................8 EXPORTS ...................................................................................................................................................................8 A CLOSER LOOK AT LINKAGES WITH OTHER INDUSTRIES ..............................................................................................10 White Spirit Production.......................................................................................................................................10 Agriculture ..........................................................................................................................................................10 Tourism ..............................................................................................................................................................10 LEGAL REQUIREMENTS WITHIN THE SCOTCH WHISKY INDUSTRY ................................................................11 DEFINITION OF SCOTCH WHISKY................................................................................................................................11 SCOTCH WHISKY REGULATIONS 2009 .......................................................................................................................11 OTHER LAYERS OF LEGAL PROTECTION......................................................................................................................12 EC Legislation ....................................................................................................................................................12 World Trade Organisation..................................................................................................................................13 WHISKY LEGISLATION – WHO’S DOMAIN IS IT ANYWAY?..............................................................................................13 BOTTLING OF SCOTCH WHISKY .................................................................................................................................14 Scotch blended Whisky......................................................................................................................................14 Scotch malt Whisky............................................................................................................................................14 PROTECTION OF BOTTLING OF OTHER PRODUCTS .......................................................................................................15 Wine ...................................................................................................................................................................15 Cognac...............................................................................................................................................................16 Outwith the EUU ...................................................................................................................................................16 AN OVERVIEW OF THE SPIRITS MARKET ............................................................................................................17 UK...........................................................................................................................................................................17 INTERNATIONAL ........................................................................................................................................................17 WORLDWIDE TRENDS IN THE WHISKY INDUSTRY .............................................................................................19 CONSOLIDATION AND DIVERSIFICATION......................................................................................................................19 GROWTH OF REGIONAL AND DOMESTIC/LOCAL BRANDS ...............................................................................................19 PREMIUMISATION IN BOTH EMERGING AND MATURE MARKETS ......................................................................................19 GROWING IMPORTANCE OF THE ASIA-PACIFIC MARKET ...............................................................................................19 KEY ISSUES FOR THE INDUSTRY..........................................................................................................................20 PERFORMANCE OF SCOTCH WHISKY IN UK MARKET ..................................................................................................20 INCREASED COMPETITION FROM OTHER SPIRITS .........................................................................................................20 LEGAL PROTECTION..................................................................................................................................................20 TRADE BARRIERS......................................................................................................................................................20 SOCIAL RESPONSIBILITY ISSUES .................................................................................................................................20 Minimum Pricing.................................................................................................................................................21 PERCEPTION OF INDUSTRY WITHIN SCOTLAND ............................................................................................................22 Foreign ownership..............................................................................................................................................22 Movement of bottling operations overseas ........................................................................................................22 ANNEXE 1 - SUMMARY OF DIAGEO’S RESTRUCTURING PROPOSALS ...........................................................23 ANNEXE 2 - SUMMARY OF WHYTE & MACKAY’S RESTRUCTURING PROPOSALS........................................24 SOURCES ..................................................................................................................................................................25 2 (SB 09/76) EXECUTIVE SUMMARY The Scotch Whisky industry Scherie Nicol Scotch Whisky has been defined in UK law since 1909 and recognised in EU legislation since 1989. For a whisky to be labelled Scotch Whisky it has to be produced and matured in Scotland for a minimum of three years. In Scotland, around 41,000 jobs directly or indirectly rely on the Scotch Whisky industry. Included in this is employment