Select Committee on Scottish Affairs Minutes of Evidence

Examination of Witnesses (Questions 500 - 519)



  500. I move on to competitive advantage. You say in your memorandum that the markets for drinks is mature and "technological development and global industrial restructuring" will lead to a loss of jobs unless Scotland works to maintain its competitive advantage. Can anything be done to prevent developments in technology and industrial restructuring leading to fewer jobs in the drinks industry in Scotland? What steps do you believe are necessary to allow Scotland to maintain its competitive advantage in the drinks industry?
  (Mr Fulton) For the trade unions there is always a conundrum. On the one hand, we always criticise companies for lack of investment. It is true that at the beginning of the decade companies like United Distillers lagged behind in technology. The irony is that the marker in use at that time was the Strathleven bond because it then had up to date, high-speed bottling lines. The company had to catch up with technology. However, its implementation almost highlights that we have surplus jobs. The question for the trade unions is: how do we handle that issue over a period of time? We are certainly not in a position to do it over two or three weeks. We must be able to reach agreements to enable us to handle these issues and, as far as possible, retrain people for new high-skilled jobs or redeploy them. It is upon that that we have tried to concentrate. The conundrum is how to deal with investment on the one hand and retention of jobs on the other.

  501. Do you believe that there is a bigger market for scotch whisky in the world; in other words, if you improve productivity it leads to fewer jobs but if productivity is greater it creates more jobs? Perhaps in that way you can keep the same number in the industry?
  (Mr Fulton) That is very difficult. I am not an expert on the marketplace, but it relies on a number of factors including competition between various brands of whisky but also competition between whisky and other drinks: white spirits, wine and cognac. Interestingly, in the globalisation process, whereas the whisky industry in Scotland used to be unique to whisky that is no longer true. The three majors and others now have a portfolio which covers almost every type of drink imaginable. Therefore, there is an argument that they could be competing among themselves, but from their strategic point of view it makes sense because if there is a downturn in one brand they are able to concentrate on the others. Another aspect of the global market is that it is dependent on local economies. We hear it said that if America sneezes we catch a cold. There is little doubt that if America goes into a recession, as is predicted, that will have an effect on the export of scotch whisky. It had an effect when there was a downturn in the tiger economies.


  502. Perhaps the more problems that people have the more they drink?
  (Mr Fulton) Absolutely! It is a difficult question to answer. For example, Diageo has worked on the basis that currently it produces about 39 million cases of whisky; next year it hopes to achieve about 41 million, which is not a dramatic increase. Looked at in that way, there will not be increases of, say, 10 or 20 per cent in the whisky industry. If there is a move it will be gradual.

  503. Moving on to union representation in the drinks industry, you have touched on the fact that in whisky you have good representation, wages and conditions and industrial relations, but you also make the point that that is less true in the service sectors; for example, hospitality and tourism. What concerns do you have about the difficulty in recruiting members in those sectors? Can you identify any improvements in legislation which would make it easier to organise?
  (Mr Speirs) I talk about recruiting people but Mr Fulton actually does it. If we look at the sector that we are now talking about, the Employment Relations Act and the legal rights to recognition that it gives has had a substantial impact, not in terms of lots of cases coming before the Central Arbitration Committee, with decisions to impose recognition deals, but the whole atmosphere. Employers are more willing to listen and talk about voluntary recognition. To some extent, the evidence that comes to us indicates that there is less insecurity in the workplace about being seen to be interested in trade union membership. The fear factor has been slightly reduced. However, that legislation does not apply to workplaces in which fewer than 20 people are employed. A significant feature of this sector is that the workplace has fewer than 20 people.

  504. We saw it last week in Islay where none of the six or seven distilleries employed 20 or more people.
  (Mr Speirs) And those are just the distilleries. One must look also at bed and breakfast, pubs and the rest of it. Some time ago this committee made an investigation into the situation in the tourism and hospitality industry in Scotland and identified a number of good elements but also areas of difficulty in terms of quality of service provided. Scotland will never compete on the basis of sunshine; it must be high value tourism of some other kind, including quality of service. We argue—of course, we would, would we not?—that if there is a low paid workforce to some extent people under-value themselves, but they are also under-valued by their employer. The incentive to invest in training to get the best quality productivity out of highly paid workers is removed. We are of the clear view that until that sector is better organised, paid, trained and valued generally that element of the drinks and hospitality industry in Scotland will continue to suffer.

Sir Robert Smith

  505. Although the smaller distilleries employ fewer than 20 people, is there much unionisation in that sector?
  (Mr Fulton) Yes. The majority of the distilleries are in the hands of large organisations such as Diageo and Allied. Part of the bargaining arrangements that we have also include the distilleries. For example, Diageo has about 35 distilleries all of which are organised for the purposes of union bargaining. There may be the odd ones in the smaller companies which are not organised, but they will be represented.

  506. Therefore, the point you make relates more to the service sector?
  (Mr Fulton) Yes. To add a supplementary, Mr Speirs referred to the Employment Relations Act. I do not operate in that sector and so cannot be specific. However, at the distribution end, for example the pubs, there is no doubt that the imposition of the minimum wage and holiday entitlement has had an effect. That Act has at least increased the minimum standards.


  507. Has it led to any job reductions?
  (Mr Fulton) It is impossible to say. I am not aware of that, but it does not mean to say that it has not happened. There are other more crucial issues which lead to job reductions, because that sector of the brewing industry which comprises pubs is currently to-ing and fro-ing between mergers and demergers. That sector is basically controlled by the brewing industry which takes the large corporate decisions.
  (Mr Speirs) We have not seen any research on this matter. The lowest paid end where the minimum wage has had the biggest impact is de facto non-unionised, so we do not have any feedback of information.

  508. Your point about tourism, which one can argue is just as important to the Scottish economy as whisky, is that the workforce is not as highly paid or trained as it could and should be?
  (Mr Fulton) Yes.

Sir Robert Smith

  509. Scottish Enterprise has argued that the beneficial image advantages of products such as whisky could be developed as a springboard to increase Scottish sales in UK and foreign markets. What is your opinion of the support provided to the drinks industry by policymakers in Scotland?
  (Mr Speirs) I do not want to go too deeply into the involvement of Scottish Enterprise and the local enterprise companies which varies. One can talk about improvements on the supply side in terms of increasing the skill of the workforce and so on. On the manufacturing side the position is relatively good and there is a huge impact. If one talks about policymakers helping the industry, it is the Chancellor of the Exchequer who can make the biggest impact.

  510. You say that the industry is fairly self-sufficient in terms of its own dynamics. Are the image advantages of quality Scottish products like whisky being fully utilised?
  (Mr Speirs) My comment, which is not based on detailed research or studies but experience of different areas in which we operate, is that it could work more effectively. In relation specifically to the whisky industry, we have identified that the extent to which the industry relies on brand promotion rather than the generic promotion of whisky is potentially unhelpful. More generally, the ability of Scotland to market itself internationally is a recurrent theme. The issue is the role of the Scottish Tourist Board, which has been very much up for review, and the Scottish Trade International and the extent to which bodies of that kind are able to operate internationally alongside the foreign service, for example the British Council, and all its aspects. The STUC is currently undertaking a detailed review of the media and cultural industries in Scotland, including the role of the British Council internationally. Our perception is that things could work much better together. At the moment, we are not in a position to put forward specific proposals as to how that should be done.

  511. Clearly, whisky is a high quality product with a good image. Coming from the north-east of Scotland, the whole food sector there has created for itself a good image which is aimed at the premium end of the market. Do you believe that, while Scotland the brand has happened fairly naturally, there is a danger that without some kind of protection or policing others may believe that if they just stick "Scotland" on something it does not matter; they will get a premium for it, which would begin to undermine what other products have achieved?
  (Mr Fulton) There is always a danger of that. Earlier Mr Speirs alluded to the bulk export of whisky. A number of years ago it was suggested that there should be bulk export of whisky to India, with the opening up of the Indian economy. The Indians insisted that they received it in bulk and it would be bottled there. Although that was specific to the Indian market, if one looks at the geography and the markets of the Far East it does not take much to realise the impact. One considers the cost of transporting cases and bottles from Scotland to the Far East when India is in between. Assurances were given that that would not happen, because the whole rationale was to put on the label, as at the moment, "Produced and bottled in Scotland". That is part of the whole mystique which is of supreme importance. Clearly, that is something which must be guarded. There is always the possibility that the product can be tankered in that way. The downstream has a multiplier effect in terms of the production of bottles, cartons, labels and everything else which are also crucial to the economy.
  (Mr Speirs) There are at least two aspects to this. One is the situation in which Scotland gets such a good name that people stick "Scotland" onto inferior Scottish products, which then damages the image. To be honest, if that is a problem then I would love to face it. If the issue is whether one has thistle marks put on quality products and one reaches the stage where Scotland is such a good brand that people are desperate to use it, that is a problem one is happy to face. The other issue is counterfeiting and devaluing a product that is already of high quality. There is dilution and use of bulk malts with the blending of grain spirits—I refer to the Japanese experience and so on—which we believe is a difficulty. There is also the issue of counterfeiting. One matter that we did not touch on in our paper, but was spoken to on Friday last by representatives of the Customs and Excise section of the civil service union PCS, is the concern about the extent to which contraband drink comes into Scotland. That problem is reaching desperate proportions, although not to the same extent as in the south of England. In the first instance, it does not hit genuine producers, in that it is a genuine product which goes to Belgium and then returns. However, it hits legitimate retailers of the product in Scotland who are continually undercut. In addition, the cut-back in the number of customs officers is very worrying.

Miss Begg

  512. You have already suggested that "the domestic tax treatment of spirits. . .has discriminated against scotch whisky." Do you have any evidence about the impact of spirits taxes on employment in Scotland? Do you believe that tax policy pays due regard to the effects of excise duties on the Scottish economy?
  (Mr Speirs) To answer the first part, I cannot give you the information but I am happy to check our paperwork and academic advisers on the quantification of jobs. We have no doubt that there is an impact because of the much higher level of excise duty on spirits than wine or beer, but particularly wine as a comparison. That is bound to be damaging. We have also drawn attention to the fact that it undermines our argument with other governments about discriminatory taxation. They simply say that the British Government does it. It is our view that there is a negative impact on the Scottish economy as elsewhere in terms of the sale of all spirits, but particularly whisky.
  (Mr Fulton) The industry is now becoming very efficient in manufacturing. This not particularly a Scottish question; it is the UK market that is affected by it. Any issue that discriminates against the ability to be able to sell within the Scottish UK marketplace does not make life easy for us. It is extremely difficult to quantify what equalisation of taxation levels would mean for the number of jobs in the industry, but it certainly has an effect.

  513. You have criticised the tax regime. If you could design a fair tax regime what would it look like?
  (Mr Speirs) The straightforward position is that taxation should be based on alcohol content. We can leave aside the particular level of tax, but we call for equalisation across all forms of alcoholic drinks. The tax should be based on the percentage of alcohol which the product contains.

  514. Therefore, you do not look for the same level of tax on beer, wine and spirits but just on the percentage so that the tax on wine will still be low compared with spirits?
  (Mr Speirs) The level of tax would be the same. Essentially, it would be based on the percentage of alcohol. Putting it crudely, the tax that is paid should be roughly the same for a 35 ml glass of whisky as a pint of beer or glass of wine in terms of units of alcohol. So far we have managed to steer clear of the health area.

  515. Assuming that the Treasury does not want to see a drop in the tax take, do you accept that that may mean making beer and wine more expensive and so increasing the tax on them?
  (Mr Fulton) The Chancellor always has that prerogative in his budget. The point we make is that, whatever be the taxation level, there should be a uniform index for beer, wine and spirits. It appears that the index should be based on alcohol content.

  516. You do not suggest that the tax on spirits should be reduced or that it be pegged until all the rest comes up to that level; you leave it to the Chancellor to sort it out?
  (Mr Speirs) Our policy position is that the tax should be equal, but we do not say at precisely what level the tax should be set.


  517. If steps were taken to equalise the tax within the EU do you think that that would be a successful way to defeat some of the counterfeiting and smuggling that is concerning the Chancellor at the moment?
  (Mr Speirs) Equalisation across the EU, yes. The equalisation of tax on different forms of alcohol within the UK would not make a huge difference, but as long as there is a disparity of rates between the UK and some other parts of the EU there is a problem. It might be argued that you could keep the tax take up by reducing the level because you remove counterfeiting and increase the amount being drunk, but there is also a health issue here.

  518. In relation to smuggling, you said that it was a greater problem in the south of England, but the committee has received evidence that it is a growing problem in Scotland. We were told about various vehicles coming across the channel which were used to fill up tankers that then drove straight to Glasgow. Are you concerned that if that was an increasing trend it might cause a loss of jobs and membership? If so, what measures do you believe can be taken to counter it?
  (Mr Fulton) I believe that that will have an effect on the retail side of the business. Some retailers in the high street compete against that, which means that they must be very cute with their pricing policy. There is a limit to how far they can go. It is difficult to quantify, but the rationale of cheap material being produced here and then exported abroad and returned because it is cheaper to buy it in some of the channel ports is not unique to spirits; it applies also to the tobacco industry. That is potentially a major problem, although not so much from the point of view of the distilleries and the manufacturing areas in which we operate. One may perhaps take the cynical view that it does not really matter to them at the end of the day because they produce the stuff anyway and what happens when it goes out of the door is not of much interest, but I am sure that it is of interest not only to retailers but the Chancellor.

  519. How do you stop or reduce smuggling?
  (Mr Speirs) Certainly, we need to reverse the policy of reducing the number of people in customs and excise who are charged with dealing with this issue. I would certainly encourage the PCS, which is involved in Customs and Excise, to make a submission to the committee. It has not provided detailed evidence to us, but its experience on the ground is that there is an increasing problem in Scotland because staff are being switched to the south of England. The people who operate in this area—I have no evidence of it one way or the other—have asserted that a number of areas of organised crime which were focused on drug dealing are now moving into contraband liquor and tobacco in a substantial way. They have very good intelligence networks. When they discover that there is extra security in the south it is not difficult for them to direct the lorries to keep going until they get to Glasgow, Aberdeen or wherever it may be. Therefore, in the first instance there should be more staff, but there are wider questions about tax regimes. We do not have a particular policy position on that at present.
  (Mr Fulton) The obvious solution is some agreed harmonisation of taxation throughout the European Union.

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