Select Committee on Scottish Affairs Appendices to the Minutes of Evidence


Memorandum from Allied Domecq plc


  1.  Allied Domecq is the second largest spirits company in the world, with annual sales in excess of £2.0bn.

  Company brands include:

    Ballantine's, Teacher's & Laphroaig Scotch Whisky

    Beefeater Gin

    Sauze Tequila

    Kahlua & Tia Maria Liqueurs

    Courvoisier Cognac

    Maker's Mark Bourbon

    Canadian Club Whisky

  2.  The company's UK distilling operation, Allied Distillers, is centred on Dumbarton (Dumbartonshire), and has approximately 1,000 employees. Allied Distillers owns and operates 11 distilleries in the United Kingdom:

    —  Ardmore (Aberdeenshire):

    —  Glencadam (Angus); Glendronach (Aberdeenshire); Glenburgie (Morayshire); Miltonduff (Morayshire); Scapa (Orkney); Glentauchers (Banffshire); Tormore (Morayshire); Laphroaig (Islay); Strathclyde (Glasgow); Beefeater (Kennington, London).

  3.  The company also has distilling facilities in Spain, Mexico, U.S.A. and Canada, as well as wineries in California, Spain and Argentina.


  4.  Last year the company published the latest findings of the Fraser of Allander Institute (FAI) assessment of the importance of Allied Distillers, and the industry as a whole, to the Scottish economy.

  Key findings were:

    —  Allied Distillers operations in Scotland contribute £390 million a year to the Scottish economy;

    —  76 per cent of Allied Distillers expenditure is in Scotland;

    —  Every £1 million spent in Scotland by Allied Distillers generates a further £2 million within the economy;

    —  Every 100 jobs at Allied Distillers in Scotland supports a further 215 Scottish jobs;

    —  The Scotch Whisky industry directly employs over 11,000 people in Scotland, some economically fragile areas—but supports in excess of 30,000 jobs in the wider Scottish economy;

    —  10 per cent of all agriculture jobs in Scotland are dependent upon the industry;

    —  In excess of 90 per cent of industry production is exported (accounting for more than 20 per cent of all UK food & drink exports);

    —  Based upon analysis of Allied Distillers, the FAI estimated that a total of £3.5 billion of Scottish output is generated by the Scottish spirits industry annually.

  5.  The FAI report stated that the greatest benefit to a "host" economy occurs when the maximum amount of raw materials and services are sourced locally and the maximum amount of goods and services are exported. On this economic measure the Scottish spirits industry is ahead of many other locally based industry sectors, including oil and gas, electrical/computer related manufacturing, and banking, insurance and finance.

  6.  Scotch Whisky is a unique Scottish product, which, by law, cannot be made anywhere else in the world. Geographic concentration, combined with the embedded reliance on local sourcing of raw material and supplies, forms a natural and prime example of an industrial cluster, the type of modern industry which the government seeks to foster.


  7.  Over the last twelve months Allied Domecq has undergone radical change, selling its pub and off licence retail chains, leaving the company focused upon two sectors of business—Spirits & Wines and Quick Service Restaurants. This refocusing has served to raise the pace of change and innovation in the Wine & Spirits business.

  8.  Some highlights are:

    —  A £15 million investment in the creation of the first fully integrated bottling, manufacturing and office complex in the Scottish Spirits industry, based at Kilmalid, Dumbarton; this facility is on schedule to be fully operational by early 2001. As well as bottling spirits distilled in Scotland the facility also bottles our London distilled Beefeater Gin and Tia Maria Liqueurs.

    —  Conclusion of joint venture agreements with Jinro Ltd, the leading spirit's producer and distributor in South Korea. Korea is the fifth largest export market for Scotch Whisky, and the third largest world market for premium whisky.

    —  Allied Distillers has long been an participant in Dumbarton community affairs. Both the company and employees actively work across a wide range of projects including: Lomond Enterprise Partners (assisting small business start-ups); Scholarships to local schools; Support for Erskine Hospital; Business Support Group within the West Dumbartonshire Partnership (assisting the community with work experience, managing projects on issues such as domestic violence and action against vandalism); Lomond & Clyde Business Network; the Dumbarton Annual Festival.

    —  We enjoy excellent labour relations. In partnership with our three main unions, GMB, AEEU and the MSF, we have established a progressive working relationship built upon trust and mutual respect. Our unions have been actively involved in the design of the Company "People Strategy" and play a positive role in all change initiatives. They have played a major role in supporting Allied Distillers build commitment with the workforce and drive performance. They have been the inspiration for many positive suggestions which have both improved the working life of our employees whilst meeting the increasing demands of our customers.

    —  In support of the government's Sensible Drinking Message, Allied Domecq, along with some other leading drinks producers, introduced unit labelling—indicating on the product pack the number of units of alcohol contained within.

    —  Publication of Allied Domecq's Environmental Performance Report, which outlines company policy, achievements and goals; most notable is the goal to implement the international management standard ISO 14001 across all major production sites. This standard demands commitments to continues improvement; prevention of pollution; compliance with relevant environmental legislation; monitoring the environmental performance of activities, products and services. By end 2001 all UK production sites will have achieved this certification.

Issues of Concern

UK Excise Duty

  9.  The UK spirits industry faces inbuilt discrimination in the structure of the excise rates for alcoholic drinks.

  Based upon a typical pub serving, three types of drink, all containing the same amount of alcohol, have the following duty levels:

    Spirits: 27.38p

    Wine: 19.3p

    Beer: 16.6p

  10.  It has been acknowledged by government that there is no reason for this discrimination other than history—the fact that current rate structures were established many years ago (when market, economic and social structures were radically different).

  11.  This discrimination hinders sales, threatens Scottish jobs, encourages duty fraud and smuggling, and impacts export competitiveness by sending the wrong tax policy signals to overseas markets.

  12.  We are encouraged by the Chancellor's duty freeze on spirits in the last three Budgets. We hope that the Scottish Affairs Committee will urge the Chancellor to continue the process of progressively, and over time, narrowing and ultimately removing the burden of discrimination from spirits; developing an equitable system under which all alcoholic drinks would be taxed at the same rate according to alcohol content.

Lack of a Single European Market & Discrimination Across the EU

  13.  The UK spirits industry accounts for 50 per cent of the intra-EU spirits trade, and the EU is a vital export market for Scottish producers (accounting for some 40 per cent of all exports, worth in excess of £800 million in 1999).

  14.  Thus far, there has been no positive progress towards a true Single Market for alcoholic drinks. We still have 15 separate Member States each with differing structures and rates of excise duty (a stimulus for smuggling and fraud between neighbouring nations with significant tax differentials).

  15.  Nearly ten years ago, as a first step towards establishing a Single Market, the EU established Minimum Excise Rates for different categories of alcoholic drinks (below which Member States could not go). Thus far, no positive progress beyond this measure has been achieved. However, as a (negative) step to allegedly further progress to a Single Market, inter-EU sales of Duty Free goods were abolished in mid 1999. This removed a valuable sales showcase for the UK spirits industry—but with no counter balancing positive measures.

  16.  The Minimum Rates institutionalised discrimination against Spirits, allowing a zero rate on wine, a relatively low rate for beer, and a high rate for spirits. In all Member States actual tax rates on spirits reflect the discrimination established in the Minimum Rates, and are higher (on the same measure of alcohol) than the rates levied for wine and beer. Seven Member States, mostly wine producers, choose to adopt a zero duty rate for wine, and one other (France) levies only a nominal rate for control purposes.

  17.  For only the second time in nearly ten years, the Commission has embarked upon its long overdue mandated Review of Minimum Excise Rates. We ask the Committee to support our aims, namely that the UK Government will, at the appropriate time in the review process, make strong representations to the Commission and within the Council of Ministers:

    —  against upwards revalorisation of the Minimum Duty Rates for spirits, which could be potentially damaging to our valuable Southern European export markets;

    —  to press for a fairer and more equitable duty system, which reduces the inherent duty discrimination against spirits.

International Trade

  18.  In excess of 90 per cent of Scottish spirits production is exported. Thus, open markets, unhindered by discriminatory tax regimes, tariff and non-tariff barriers, are essential.

  19.  With excellent support from the Department of Trade & Industry, as well as the Ministry of Agriculture and the Foreign Office, over the last three years, the industry has been successful in gaining positive judgements from the WTO against discriminatory tax regimes in Japan, South Korea and Chile. However, a range of obstacles remain; for example, unduly high tariffs in India (the largest "Whisky" market in the world), equitable market access in the EU accession nations, and the removal of tax discrimination against imported spirits in the Philippines. Of particular concern are the on-going tensions around trade complaints between the EU and the USA (eg Beef Hormones, Bananas, GMO's, Foreign Sales Corporations), which have the potential to give rise to retaliatory trade sanctions impacting our sales.

  20.  The industry supports the objective of a Comprehensive Round of world trade talks, and is hopeful that many of the global barriers can be addressed through this process. The industry is working closely with both national government and the Commission to gain its primary objectives from the talks, namely:

    —  tariff reductions;

    —  liberalisation of non-tariff barriers;

    —  liberalisation of restrictions on services (including advertising and distribution);

    —  simplified and improved measures for import and export procedures;

    —  stronger protection of indications of geographic origin;

    —  a more effective WTO dispute settlement mechanism.

The Cumulative Burden of Regulation

  21.  The Scottish spirits industry operates in the global market place, an extremely competitive environment, where both domestic and international brands vie for the consumer's income. In mature markets, where growth rates can be measured in fractions of a percent, cost containment, and where possible, cost reduction are essential components of meeting the ever present goal of improved performance.

  22.  While we recognise the need to be properly regulated and legislated, we ask that we do not suffer from an undue burden of regulation, whereby our export competitiveness is ultimately injured by "a thousand cuts" of cumulatively expensive regulation/legislation.

  23.  Some current examples are:

  Climate Change Levy (CCL)—we support the principles behind the impending CCL, as demonstrated by our own Environmental Report (see Section 3). However, as currently structured the eligibility criteria for production sites to qualify for inclusion in a scheme to receive rebate from the levy, are at best confused (and confusing) and at worst flawed and inconsistent; as a result added cost burden to the industry could be measured in hundreds of thousand pounds (a burden many of our overseas competitors do not have).

  We seek a logical and equitable structure allowing all significant production sites to be eligible for rebate, subject to meeting the agreed energy efficiency targets.

  Export Refunds—Scottish spirits compete across the world against a raft of competitive spirits. Traditionally, these competitor products have had the benefit of being produced with cereals purchased at prices lower than those available to Scottish producers who are required to buy at CAP prices in excess of world prices. To compensate producers, and thereby allow us to be competitive, a system of export refunds was established payable on products exported to non-EU markets.

  Earlier this year the European Commission severely reduced the refund entitlement available to Scottish spirits producers, claiming that we were better able to absorb this cut than other product sectors also receiving refunds. It has been estimated that this measure could cost Scottish spirits producers some £6 million a year.

  We ask that the government presses for early reform of the CAP, and in the short-term, for the establishment of an accessible Inward Processing Relief system (IPR), allowing us access to non-EU cereals, without price penalty, for goods destined to be produced for export to non-EU markets.

  Duty Fraud & Smuggling—In 1997-98 the industry worked with H.M. Customs & Excise in the government's Alcohol & Tobacco Fraud Review (ATFR), to identify problem areas and remedies to address them; this dialogue has continued beyond publication of the Review in 1998-99. Recently there has been the announcement of the Independent Inquiry into Excise Control Regimes, headed by John Rocques, which the Scottish spirits industry has been given the opportunity to make some initial input to. We understand that Mr Rocques will produce a report later this year for the Paymaster General. It is likely to include proposals for improving control measures and revenue collection.

  24.  Duty fraud and smuggling are socially subversive, distort and undermine the structures of our markets, as well as causing revenue loss to HMG. We wish to work with government to minimise the opportunities for such criminal activities. We hope that once the recommendations of the Rocques Review are given to the Minister, government will not choose to establish procedures placing onerous financial/administrative burdens on our industry using us as the banker to protect its revenue. Rather, we hope that through a process of full consultation government will work with us, in partnership, to tackle the problem to our mutual benefit.


  25.  Allied Domecq is proud to be part of the Scottish spirits industry, an industry making a significant and strategic contribution to the economies of both Scotland and the UK as a whole. We have a talented and motivated workforce working to build upon past and current successes. As mentioned earlier, we now look forward to exploiting the full potential of our multi-million pound investment at our Kilmalid facility in Dumbartonshire; we would like to offer an invitation to the Scottish Affairs Committee to visit the site in early 2001, when it will be fully operational.

  26.  To allow the industry to achieve its full potential we must continue to fight tax discrimination both at home and abroad, as well as breaking down trade barriers in export markets. The support of Westminster is essential to our aims, and we shall be grateful for any guidance or assistance the Scottish Affairs Committee may be willing and able to give.

Allied Domecq plc

September 2000

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