Examination of witnesses (Questions 100
- 115)
WEDNESDAY 8 NOVEMBER 2000
MR C ARMSTRONG
and MR I HALL
100. Could there be a downside to it if the
public could identify the water from multinational companies?
Could there not be a downside if they then decided to drink the
multinational water?
(Mr Hall) Our concern is not whether the company is
a multinational company or is a small company based in a Scottish
glen. Our concern is that the consumer should be able to make
a choice and make that choice on the basis of labelling which
is clearly understandable. We would hope then they would choose
one of our waters, of course we would, but that is down to them
and we are prepared to take our place in the hurly burly of the
marketplace. However, labels should be clear to enable consumers
to make the choice and at the moment they cannot see that. You
will find that on our products it clearly says Product of Scotland.
We are certainly not going to hide that. The important distinction
is: am I buying water which is natural or am I buying a water
which has been treated? If I am buying water which is treated,
of course I could take it out of the tap. That is the essential
difference.
101. I understood from the submission which
had been made by Highland Spring that you were arguing for increased
legislation and you were also saying that would protect you from
multinational companies but that is not the situation.
(Mr Hall) The two are related. By having the current
legislation enforced and in particular persuading the UK to waive
its opt-out from the European regulations which are in force all
over Europe, that would enable us to have clear labelling, clearly
understood and that in itself would provide us with a great deal
of protection; as much as we want. You are more Scottish than
I am. I do not think you go round feeling you need cottonwool
and protection all the time, do you? My experience north of the
border is that if you want a good argument you can get one very
quickly. We are not pleading for special protection either. What
we are simply saying is let us have a level playing field, let
us have it clear so the consumer can make a choice. We reckon
with our small hard-earned penny we can match their mega-dollars
or huge francs. Nestle and Danone are the two giants of the water
world and they are as big as Coca Cola and Pepsi Cola. We have
four of them lined up against us. We shall survive because there
is always room for mice in the jungle even when the elephants
are charging around. We shall get through. Do not worry about
us. What I do worry about and what is something this Committee
should worry about is the fact that the public are often misled
as to the nature of the product they are purchasing. That seems
to me to be an essential thing that legislators should be concerned
about.
102. That is an important distinction and I
think that your company, with you arguing the case over a very
poor position to the Chairman, have made that clear. May I move
on to supermarkets and distribution? The Competition Commission
ruled that large supermarket chains were able to distort competition
in the supply market. Submissions from the bottled water companies
state that the large supermarkets account for 70 per cent of all
bottled water and that "... retail buying power generates
similar pressure for consolidation amongst suppliers". What
has been the effect of these pressures on the industry? Can you
point to any other pressures on suppliers that arise from this
concentration of retail power? Do you think that the Code of Practice
suggested by the Commission's review will help to redress the
balance?
(Mr Hall) There is no doubt that the concentration
of supermarket power has actually had an impact on all businesses
in the food and drink supply chain and bottled water is no exception.
My experience is not as long as that of Mr Barr but I can go back
to the mid-1960s and then we were dealing with about 15 major
grocery chains, many of them long gone both North and South of
the border. Now we are dealing essentially with the Big Three
and maybe three other significant multiple buying groups. The
Co-op now only accounts for something between four and five per
cent of total grocery sales but it is still important, particularly
in certain regions where the movement is strong. This inevitably
means that there is only a handful of people, three or four people
who are determining whether our products are on the shelves. That
is the same whether it is an own label supplier or whether it
is a brand supplier. We do have a little bit of own label business
still in our portfolio. This inevitably means that we have less
than perfect competition. It means that there is a concentration
of buying power but we have round about ten Scottish water producers,
some of them potentially significant. There are more water suppliers
than there are major supermarkets. For a company even of our size
to lose distribution from one of those major multiples would be
commercial suicide. Understandably therefore the real price of
water, both on the shelf and particularly as supplied to the retailer,
has declined. With the increase in other costs, nobody has mentioned
the packaging waste legislation but packaging waste levies and
fees are really quite high. We did not have those three years
ago. I am not saying it is not right to have them. We now have
the Climate Change Levy coming in. That is going to cost my company
between £30,000 and £50,000. That will have to come
straight off the bottom line. I cannot increase my prices. Supermarkets
would not allow me to even if I wanted to because the competitive
climate is so intense. Thirty to fifty thousand pounds for a company
employing 130 people is two or three jobs; it is either two to
three people we are not going to employ for future growth or we
have to ask questions about the number of people we have. If your
costs keep going up you have to make cuts somewhere. It would
be wrong to blame the supermarkets per se but bottling
water is not a licence to print money. A number of people, particularly
in Scotland have invested money in bottling water from either
their estates or their factories only to see them go bust. Many
Scottish water producers are very, very close to the edge of economic
viability.
Mr Clarke
103. UK policy and regulation. The memoranda
from Gleneagles and Highland Spring claim that several aspects
of UK policy, including fuel costs, the Climate Change Levy and
the recent strength of sterling, are detrimental to the industry.
Do you feel that issues such as fuel costs, the Climate Change
Levy and the strength of sterling affect bottled water more than
other industries? If so, why is this? Do any of the above cause
particular difficulties for the industry in Scotland? What are
these?
(Mr Hall) Certainly the one we have mentioned several
times today, the Climate Change Levy, where the requirement for
being able to join a rebate scheme set by the Government as outlined
in the Finance Bill was that you would have to be processing either
animal, dairy or vegetable fat. They believed that would encompass
all food and drink. Of course you cannot be water if you have
any of those ingredients in your product. The answer from one
of the civil servants at the DETR was that it is a hard law but
it is the law and they cannot change it. That is one particular
regulation where it has impacted particularly heavily and specifically
on bottled waters. As the majority of those producing in the UK
come from Scotland it has hit Scotland harder than most. The sums
of money are negligible if you are Coca Cola. I must make it clear
that I am using Coca Cola here as a metaphor for a large international
company, not wishing to single them out specifically. For small
organisations those are significant costs. There are management
costs and time costs. Packaging waste is another perfect example.
There is a third one which has been referred to, if you will allow
me to include it in my answer to you, and that is rating. The
Gleneagles company in their memorandum to the Committee identified
their concerns about rates. A recent tribunal case in Scotland
ruled that royalties paid for the extraction of water—and
many of our companies operate without owning the land from which
the water is extracted and they do so by agreement with the landowner
in return for a lease and/or a royalty based on the volume extracted—are
liable to a business rate because it was, in the view of the tribunal,
a form of rental payment for the use of the land. That is in effect
taxing our raw material. I do not know what the position will
be for the future but that is certainly something which we as
an industry are going to think very carefully about because if
you pay a rate on a commercial building you are only paying the
rate on the value of the commercial building, you are not paying
a rate on the cost of the raw materials you might buy to introduce
into that building. This seems to us to be an important position
and I make that point on behalf of Helen Lamont of Gleneagles
Water. There is one further point to do with taxation and that
is that if we look at the European context, not all countries
charge for VAT on bottled water. It is interesting to note, particularly
here in the south of England, where there are problems with the
integrity of the water utility supply, that people are being asked
to turn to bottled water. We do not pay VAT on our water bills
but we do pay VAT on our bottled water. This could link into the
points made earlier about health. If we wish to encourage people—and
I believe it is totally right to do so—to move away from
inherently unhealthy foods which indirectly cost the taxpayer
and the Government considerable sums of money, then there should
be an incentive perhaps to switch from sugared or artificially
sweetened soft drinks to water. This is not something I am recommending
to the Committee. I am drawing it to your attention that it has
been featured in the press recently with people asking why we
have to pay VAT on bottled water but not on tap water. It may
be that these are issues that the House of Commons would like
to address but it does raise some questions.
104. I do not want VAT on tap water. That is
not on. We would be very foolish to tackle that. Scottish policy.
"Image" advantages appear to be one of the main reasons
behind the growth of the bottled water industry in Scotland. Scottish
Enterprise has openly supported the view that image advantages
of this sort should be developed as a springboard to develop Scottish
sales in foreign markets, the best example of this being in the
whisky industry. Do you feel that Scottish Enterprise gives sufficient
recognition to the image benefits of Scottish bottled water? What
is your general opinion of the support provided to the industry
by Scottish Enterprise? In particular, what is your opinion of
its main policy, that of developing food and drink "clusters"?
(Mr Hall) We certainly do not have a problem with
Scottish Enterprise. They have been extremely helpful to us as
a business and there are examples of that elsewhere in Scotland
as well. We have a much more positive attitude towards the role
of Scottish Enterprise than that given to you by the BSDA. Certainly
we have an open mind towards the cluster situation. If it was
relevant to our business we should be very happy to do it. There
is quite a high level of informal cooperation already between
the Scottish producers, whether that is at a technical level through
the various associations which exist or simply by picking up the
phone and talking to our friends and colleagues up and down the
road. Bottled water is typified as being one of the most cooperative
business sectors I have worked in; I have been in food and drink
marketing since the mid-1960s and it is the most cooperative I
have ever known. There are certainly areas where we need help:
one of those is in engineering. Benchmarking would be extremely
good. An initiative came out from the DTI on benchmarking which
I know was put to the BSDA. That is extremely useful. Scotland
continues to have extremely good traditional practical engineers
but is extremely weak, as the Committee were observing earlier,
on engineering in the electronic age. I know we talk about Silicon
Glen but there is a difference between being computer orientated
and being an engineer used to using computer controlled engineering
systems. Although we might be small we are quite sophisticated
organisations. All our boreholes are operated by telelinks to
computer-based systems in order to ensure that they are properly
managed and looked after 24 hours a day 365 days a year. That
requires particular skills. You heard earlier from Strathmore
that their concern is that they pull in labour from a very small
locale. We are the same: we are between Perthshire and Stirling
and we like to use as many people from our local communities as
we can so we are very interested in training. Scottish Enterprise
have also been very helpful with training but still more could
be done. We have to move towards multi-tasking. This is breaking
down traditional ways in which Scottish business has been organised
which has been very craft based. I know it has already changed
but it has had that background. In some areas the more you go
into a rural community or a more stable industrial community the
more settled people's minds are. We are moving rapidly towards
multi-tasking. We have a workforce which includes male and female
workers, we are training people to be able to do basic engineering
tasks without having to call in engineers so we can manage efficiencies.
It is extremely good to have the support of an organisation. The
idea that there could be some big programme from Scottish Enterprise,
one-size-fits-all, is probably not correct. If they concentrate
on sector benefits that would be good.
Mrs Adams
105. There have been times when general water
supplies have become contaminated and bottled water had to be
supplied. Would the water companies be able to reclaim the VAT
on the bottled water they distributed?
(Mr Hall) I am not 100 per cent certain about this
but my experience with the last major water crisis, which was
the drought in England when water authorities had to bulk purchase,
was that they purchased from us and we charged VAT because we
have to. What I am not certain about is whether or not they passed
that VAT charge onto the consumers to whom they supplied bottled
water in lieu of the public water supply. It is of course true
that we are seeing increased incidents where the public water
supply is having problems. I know the water quality has improved
dramatically from the report by the Chief Inspector of Drinking
Water but recently there was an outbreak of cryptosporidiosis
in Glasgow with 68 cases and one death which was believed to have
come from a contamination of Loch Catrine through the Milngavie
treatment plant. Bottled water producers usually have sufficient
stock and capacity to cope with a breakdown in the public water
supply if necessary and indeed all of our companies were on standby
in case the millennium bug struck. We were part of the national
crisis plan.
(Mr Armstrong) Sometimes there is too much water as
in the case of York and not a shortage of water.
106. I shall move onto the next subject: abstraction.
Bottled water producers are clearly concerned about the proposed
extension of the system of water abstraction licences in Scotland.
I think Highland Spring have said something about this in their
memorandum. Current concerns, however, appear to be because there
is uncertainty over how the system will operate, in terms of the
time period over which licences would be granted and the threat
to existing commercial agreements to extract water. Can the industry
point to any adverse consequences that have arisen from the abstraction
system operating in the UK? Do you not really accept that a UK-wide
system would simply put Scottish producers on a par with their
English and Welsh counterparts?
(Mr Hall) Yes, that is a good point. That is an excellent
point. We are part of the UK and we do not want to have too many
advantages over our competitors south of the border. One thing
which is quite clear is that we are talking about two countries;
they are not just different in terms of their culture and their
legal systems but they are actually different in their geography
as well. Population levels in England and Wales are considerably
higher, they are much more concentrated. Here we are in London
and I do not need to tell you that, it is obvious. Whereas if
I am up in Blackford and I am looking across the A9 towards the
Orchill Hills I have a quite different view. Scotland has abundant
supplies of water. It is absolutely right and proper that there
should be a plan for how those resources are used. We are not
arguing against the groundwater directive or against a framework
of groundwater control for the UK in general and Scotland specifically,
and SEPA will take over more and more of the responsibilities
in that area as Scotland perhaps changes the structure of some
of its water utilities and water supplies. What we are concerned
about here is that the demands for water in Scotland are not the
same as demands for water in England. There is enormous competition,
for example from agriculture in the UK because of the nature of
the intensive farming and also the significant volume of dairy
farming which takes place, all of which uses vast quantities of
water in its processing. This is not the case in many areas north
of the border. Therefore there is no reason why there should be
one abstraction licence system which applies to both territories.
What is important is that the principles of the ground water directive
are met, that water resources are not wasted, that they are used,
if they are contaminated they are reclaimed. We are upstream.
The essential thing about natural mineral water is that it is
almost as high up the mountain as you can go. The water we are
taking comes from our own aquifers which we either lease or own
and we do not even use all the water that flows through our aquifers.
That water goes down and runs into the streams, the valleys, goes
then on into the public water supply which in Scotland is primarily
lots of surface water and good quality groundwater and then it
goes to industrial use. We believe that bottled waters in general
and natural mineral water in particular should be recognised in
the Scottish system as having a particular place and a particular
role. For example, a 15-year renewable licence which is being
proposed for England and Wales would be inappropriate against
the timescale of investment in our plants. We are operating on
investment programmes which will not see benefit for a longer
period than that. The threat is that if an abstraction licence
terminates after 15 years without the right of renewal or let
us say a pre-emptive right of renewal, an automatic renewal right,
then the danger is that we could have invested this money, established
companies and then find the abstraction licence is taken from
us. The other question is: who is going to apply for the abstraction
licence? Should it be the landowner or should it be the company
which is actually exploiting it? If it is the landowner, there
is the possibility that the landowner might then charge us additional
rent to get access to the new licence. It seems to us to be creating
a whole series of unnecessary troubles and difficulties whereas
if we were recognised as a special case which we would have to
prove to the appropriate authorities, SEPA, that we were a special
case and that we were making a positive contribution to the control
of ground water, which I believe we are, then these could be removed.
It is as simple as that.
(Mr Armstrong) I support that. In England a lot of
the instances where abstraction licences are essential is where
there is an imbalance in the demands for water in a particular
area and things have to be kept under control and managed. In
the Scottish areas we are dealing with there is no competition
in effect and to some extent we are helping in the land and water
management, first of all by acting as wardens of the catchment
area, to make sure there is no pollution and the whole area is
kept drained and the water in the groundwater table is pure and
wholesome, because that is what is needed for what we bottle.
Our management of the water in the system also makes land which
might otherwise be waterlogged or whatever accessible. To my knowledge
we have never had any instance in the Scottish industry where
we have had an embarrassment because of the conflict of demands
of the bottlers and the local community who might otherwise take
advantage of the water. The whole thing is in balance and would
continue to be in balance. I understand the need for some authority
to monitor that and to ensure that is the case but I am sure that
can be done without necessarily some form of enforcement which
could put problems and pressures on the business which probably
had not really been thought out in the first place.
107. Given the differences in population size,
distance, transport, do you think that the proposed system would
put Scottish companies at competitive disadvantage?
(Mr Hall) It would depend on the costs involved in
the extraction licences themselves. I think it is just another
unnecessary burden and I do not know what our colleagues in the
BSDA said earlier but regulation itself is not a bad thing, it
is how the regulation is applied and what is needed to do it.
To have to devote mantime and effort in smaller companies into
doing some of these things just means it becomes a sunk cost.
It can be done. We are perfectly happy to participate in any system
that is there which will help the community. If we have to pay,
so be it. Our concern is regulation which appears to come almost
as a form of taxation and I am afraid that is what the most recent
regulations appear to have done. There is nothing wrong with packaging
control, there is nothing wrong with climate control, there is
nothing wrong with extraction and groundwork licences but a better
method of doing it could be found. I am not making any political
point other than that we need to find practical solutions to these
problems which do not seem to pass an enormous burden on to individual
operating companies.
Chairman
108. Earlier you referred to the two multinational
giants in your industry as being Nestle and Danone. Which brands
does each company own?
(Mr Hall) If we take Danone first, they own the two
largest still water brands in the UK, that is Evian and Volvic.
Evian itself is the largest water brand worldwide. Many people
in the UK believe that Evian comes from the Alps, possibly Switzerland,
but it is of course from France.
109. Whereabouts in France?
(Mr Hall) The little town of Evian which is just by
Lake Geneva.
110. Close to Switzerland.
(Mr Hall) Close to Switzerland.
111. And Nestle?
(Mr Hall) Nestle are Swiss owned, multinational of
course, and they own Perrier-Vittel which is their operating company
here in the UK. Their main brands are Perrier and Vittel; they
also own Buxton which is the largest English bottled water producer
and Ashbourne which is one of the larger English spring water
producers. Other Nestle brands which you will see imported include
San Pellagrino, one of the leading Italian waters and they have
many other waters around the world, some of which occasionally
turn up in the UK. They are significant players in the marketplace.
Both companies have helped to grow the bottled water market in
the UK. One thing I should like to make clear is that I said earlier
I thought the Scottish bottled water industry was very cooperative,
the bottled water industry throughout Europe is very cooperative,
and perhaps our most useful trade association is an organisation
called UNESEM, the European natural mineral water association.
That provides for a very real exchange of high grade technical
information, particularly with regard to the key matters of water
quality and hygiene. The Committee no doubt remembers the Perrier
benzine scare of 1991. Whether as a result of that or not, the
bottled water industry has seen that if any one of its members
has a major quality problem it affects us all. Whilst we have
been talking about Scotland, I should not like to see Scotland
outside Europe. I am not trying to copy somebody's political slogan
here but the European context is absolutely vital for Scotland.
112. I was about to ask you about the Perrier
contamination problem. How confident are you that a similar situation
could not happen to the industry in Scotland?
(Mr Hall) The minute I am confident it could not happen
would be the sign that I had outlived my usefulness and should
be put down. We live with constant paranoia. Mr Armstrong is a
technical director, I am a commercial director, we are at different
ends of the same spectrum. We live or die by the quality of our
product. We have to be obsessive about it but we cannot become
over confident. As companies we currently have standards which
are in excess of those required by the UK regulations and indeed
the European regulations. That is why things like training, access
to highly skilled people to move our business forward are very,
very important. Fortunately Scotland has an extremely good medical
establishment and an extremely good science establishment including
microbiology. We work very closely with the Scottish Laboratory
for Parasitic Research, Professor Hugh Smith and his team. We
are ahead of the game in terms of protection against Cryptosporidiosis,
Giardia, the new protozoan parasite infections which have come
to the UK over the last decade or so. We think we are in the forefront
but it is constant paranoia I am afraid.
113. My final question is on competition. You
have referred to the pure image of Scotland. How worried are you
about the entry of Greenland into your market in partnership with
a huge Canadian company? Would Greenland not be an even purer
image in the minds of the consumer?
(Mr Hall) It might be a pure image but image is also
linked to reality. The benefit Scotland has is not just its place
but its people. If Scotland were a club there would be a queue
of people who wanted to join it. If you think about the other
countries of the United Kingdom, Scotland is not the only Celtic
country, there is Ireland and there is Wales. If you look at which
nation could be trusted to look after water from its very beginning
to its position in the end, there is only one of those nations
which actually has the rugged country with the beautiful reputation,
the quality image, but also has the reputation for engineering,
for medicine, for health and for science. When it comes to whom
you would trust to capture a natural product and put it into a
bottle and deliver it, Scotland comes out top.
(Mr Armstrong) Trust is the key word.
114. You have not actually answered the question.
(Mr Hall) These other countries are not a threat.
We have had people towing icebergs into us and saying we can have
iceberg water. The papers are always full of some water imported
from some strange place. The most important thing is that it is
a question of what people really trust and know. They know in
their hearts and minds where Scotland is and they may not be terribly
good on the pronunciation of the names and they may not be clear
on the geography but they know where it comes from. What is more
of a threat to us is not water from Greenland but engineered water
that is made and processed as though it were a soft drink and
it is backed by multimillion pound advertising bills from outside.
At the moment the Scottish bottled water industry is still a David
and there are Goliaths out there as I think I said in my memorandum
to you. If you are going to bet, you back Goliath. We are hoping
for some intervention, not a lot but just an intervention in a
couple of places which will actually help us survive and then
we shall do the rest.
115. I think the Committee has got the message
you are trying to get across this morning. Do either of you have
any final remarks you would like to make to us?
(Mr Armstrong) No, thank you.
(Mr Hall) I should just like to thank you for your
patience and to invite you to visit us in Scotland whether it
is Campsie Spring, Highland Spring or both.
Chairman: We have not yet decided which one
we shall go to; maybe more than one but we shall certainly take
your invitation into consideration. May I in conclusion apologise
for the coldness and uncomfortableness of this room this morning.
Perhaps it is the weather, perhaps the building is not quite finished.
I should like to thank you on behalf of the Committee for your
evidence which has been very useful to us today. Thank you very
much for coming before us. Order, order.
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