Examination of Witnesses (Questions 320
WEDNESDAY 17 JANUARY 2001
320. If you tasted some of the vodkas you would
know. Your organisation sent a memo to us and it stated that it
was vital that the industry had open access to foreign markets.
Mr MacEachran in his original statement said that the memorandum
identified several types of trade barriers and fiscal or administrative
obstacles to achieving that aim. For example, it discussed discriminating
taxation against gin and vodka, particularly in Canada, China,
Czech Republic, India, Mexico, New Zealand, Poland, Romania, Russia
and Turkey; export refunds and access to works for raw materials;
minimum rates of excise duty across Europe and the current review
of this; and the deference of due diligence in terms of paying
duty. How does EU regulation and duty rates and trade barriers
erected by various countries affect foreign sales? Which has had
the biggest impact on sales?
(Mr Atkinson) Perhaps I can deal with export refunds.
In that regard our evidence is very much the same as you have
heard already from Scotch Whisky where we work together with them,
although technically there was a slight difference in the mathematics.
The industry, as with Scotch Whisky, used to get a number of millions
of pounds of support because of the price differential between
EU cereals and overseas cereals. In wishing to bring down the
amount of money committed by the Commission as a whole to all
industries to a WTO level, they targeted us for reduction. Because
of a specific paragraph in the UK Accession Treaty they could
not do away with the refund in total, which they were, I think
I could say, disappointed about. This clause meant they could
not do away with the refunds so instead they altered the mechanism
by which they give us the refunds. Coincidentally I have to say
though that the EU prices and the world prices of the cereals
we use, converged. Therefore we have been left with a situation
where the industry, at short notice and in our view in a discriminatory
way have had the refunds taken away from us in a method of calculation
that we are less than happy with. We got full support from the
Minister of Agriculture and other Ministers on this and the only
come-back that the Minister did achieve was that the prices and
the refunds will be reviewed in a period of time to see how much
we have been disadvantaged. I have to say that will be retrospective
and therefore we find that a little disappointing, but we were
grateful to the Minister for his support. So in summary on export
refunds, whereas together with Scotch Whisky we were over £10
million, nearer £20 million in the money our industry got
to help us buy UK/EU cereals, that has now disappeared. Prices
have converged but prices have a way of changing again and we
are keeping a close eye on it. We will continue to seek Ministers
321. Can you tell me when this happened?
(Mr Atkinson) Yes, there are some aspects of it, called
"inward processing relief", that are still under debate.
But essentially it started in the fiscal year beginning October
last year, October 2000. With respect to barriers to trade, I
might just pick on two or three if I may rather than take your
time. It is very difficult with barriers to trade to know what
trade you would have got if there was not a barrier, so I cannot
answer one of your points. To give you the first example, on Poland:
Poland of course is a white spirits drinking country and they
wish to protect their industry. Therefore they have had a very
high import tariff against spirits from the EU. If I remember
correctly, it is 75 per cent currently on whisky, 85 per cent
on gin and, wait for it, on vodka, if we live within their quota
of imports, it is over 100 per cent. Subject to correction I think
it is 135 per cent, of that order.
If we exceed their quota, it is over 200 per cent. It will not
surprise you to know that our exports of UK vodka to Poland are
extremely low. The potential market is extremely good. I particularly
raise Poland because it is an accession country and the Ministers
in this country and, more particularly, those in the Commission
who are leading on accession negotiations are aware of these differentials.
We are seeking a reduction of those differentials as soon as possible
so that they are brought down before accession. I should tell
you that Polish vodka coming into this country and into the EU
has zero tariff. So we have got 200 on one side and zero on the
other, over 200. What we would urge your support on is that in
the accession negotiations, no extension is given to Poland or
other such let-outs because they must join a level playing field
and not be given undue consideration. They have had time enough
to get their tariffs down. It is on the record though that certain
UK gin and vodka companies are trying to get an interest in the
Polish distilleries. So it is possible that my concern will go
away if we end up owning a lot of the Polish vodka industry.
322. On discriminatory taxation I can understand
that there is a rhyme and reason to it with regard to countries
like Poland, Russia and Mexico; but what about India, China and
Turkey? What particular reason would they have to discriminate?
(Mr Atkinson) The reasons vary. In some cases like
China they have a white spiritI am afraid I cannot pronounce
its name. They have a white spirit of their own, although we are
really going for a different end of the market. In India white
spirits are produced. It is a very complex mixture of their own
white spirits; so white spirits are made in India. We do have
some access to India already for a limited market in the hotel
trade. But in general terms their tariff is still extremely high
and there is a complex intrastate problem which we have yet to
get over. There are active negotiations going on with India and
some tariff reductions are expected, although they have justI
would not use the word defaulted; that may be technically wrongfailed
to lower their tariff on whisky in the way that we were led to
believe they would. They are now, on white spirits, expected to
do it by the end of the year. So India is a huge market; it is
a developing market in a wider trade sense. Because it is a developing
market there is protection of their indigenous trade in their
minds as well.
323. What about New Zealand?
(Mr Atkinson) New Zealand again are protecting their
own industry. There is a gin industry in New Zealand, but I have
to be careful because one member company has an interest in that
whereas other member companies are trying to export to New Zealand
and have, if I remember correctly, either 4.5 or 5.5 per cent
tariff they have to pay to go into New Zealand. That is more of
a nuisance tariff.
324. Can I just quickly follow that with a question
about the minimum rates of excise duty across Europe and clarify
whether or not you are in favour of a minimum rate and what you
say it should be?
(Mr Atkinson) What we are in favour of, first and
foremost, Mr Chairman, is a level playing field. Secondly, we
want an open and common market. This came up some years ago when
the first attempt was made by the Commission to rationalise the
market and there was not the will at that time among member states
to really grab the thing by the throat. We ended up achieving
only the minimum which was to set what the minimum rates might
be. That is now under review, but our expectation is that very
little progress will be made this time. To give you an example
of our major worry, it is that the wine countries essentially
have a minimum rate of zero whereas spirits is considerably higher.
That varies country to country and I could give you the details.
In some cases that has been raised. But what we are after, and
we have had excellent support through Customs and Excise to the
Treasury, and the UK submission is, first and foremost, in the
longer term to achieve the level playing field that I indicated
of an equivalent and level tax based on alcohol; that alcohol
is alcohol on the same bases that we mentioned for the UK. But
we recognise the difficulties and the unlikelihood of major political
moves and so we have some specific aims in the short term. For
instance, if spirits minimum rate was revalorised, if you have
got wine zero but you update the minimum rate on excise according
to revalorations, indexation, inflationcall it what you
willthat might appear logical. But it is actually widening
the differential. We do not see that the wine countries are going
to shift fast although there is indication that one might be more
Sir Robert Smith
325. Just to clarify, I presume with countries
like India it is not particularly the spirit; I presume India
has a general protectionist ideal.
(Mr Morrison) It is one where we had recent experience
of operations in India. It is very much a protectionist strategy.
They have all sorts of locally produced spirits, some of which
are mixed with imported spirits and it is purely on that protectionist
basis. There are of course one or two states which are designated
dry states, but that is not the reason for the high level of import
taxation which I think is running at 235 per cent, something like
326. We have a long way to go so we need to
move on as quickly as we can. We will move on to production in
(Mr Atkinson) Mr Chairman, may I be very rude and
just cover one country very quickly that we have mentioned, which
is Russia? A couple of years ago we had an excellent and huge
export of vodka to Russia. That might surprise you. It was for
a number of reasons. Indeed, anecdotally one company exported
to the Red Army. But in more recent times we had particular difficulty
with Russia, not just economic but due to barriers of trade. The
European Commissioner at this time was proposing, and it has gone
before the House, that the EU should impose punitivenot
my words; Commission wordstariff sanctions against Russian
vodka. What we have a problem with, which the DTI has helped us
with, is that on the one hand, if the EU puts on a punitive tariff
against Russian vodka, there will be retaliatory actions against
our exports to Russia, which are important to us. On the other
hand, a number of companies of ours import Russian vodka, and
a punitive tariff will mean they go out of business. This also
affects the UK Government because they will lose excise. So our
companies will have to pay tariff on Russian vodka worth many
millions and the UK Government will lose £8 million in excise.
So we are fighting this and believe there are better ways of getting
a political message to Russia about international trade and respect
of international agreements than just selecting vodka as a cause
celebre. We would seek the Committee's support in that.
327. I am not sure I understand the calculation.
How would the tariff lose the excise?
(Mr Atkinson) What would happen is that the EU would
impose a tariff on the Russian vodka that comes into the EU. In
fact though the tariff will have to be paid by the EU companies,
not by the Russians, so it would be killing your friend, not killing
your enemy if you like. The tariff is so high it would put a total
end to the industry.
328. Why should that reduce the duty?
(Mr Atkinson) Because that amount of trade would suddenly
go to zero because the tariff is so high it would make it uneconomic.
329. Does that mean that people would stop buying
it? Surely they would buy it from another source?
(Mr Atkinson) Even if you bring the vodka through
Cyprus, say, it has a country of origin on it.
330. No, I mean buy the vodka from another manufacturer.
(Mr Atkinson) I am sure one or two of our member companies
would welcome that remark.
331. In your memorandum you actually say that
extra investment has now improved rationalisation further of major
companies. A major relocation of facilities has recently been
completed in Scotland. That means that some 75 per cent of UK
gin and vodka now comes off the bottling line in Scotland. As
we found with the other drinks manufacturers, coming off the bottling
line and being manufactured can often mean two different things.
So my question is: how much of the gin and vodka that comes off
the bottling line in Scotland is produced there? What prospect
is there of increasing either the amount of gin and vodka produced
in Scotland or the amount bottled there?
(Mr Atkinson) I will start and then hand you over
to my colleagues, if I may. The major point of consolidation has
been a year or two back with Allied, where their bottling moved
from Kennington. However, the gin is distilled here in London.
The neutral alcohol for that gin is made at Dunbarton distillery.
So it gets quite complex. The neutral alcohol is made in Dunbarton.
It is distilled into gin in Kennington, called London gin, and
it goes back up north for bottling. The other major consolidation
has been at Cameron Bridge where UDV have moved their gin distillation
up to Cameron Bridge and bottling down the road to Leven. The
exact answer to your question is that 48, shall we say 50 per
cent of a UK gin is distilled in Scotland; 72 per cent is bottled
in Scotland. Vodka, basically 76 per cent is distilled, made and
bottled in Scotland.
332. Will the barrier to the gin be a factor
if it has got to be a London gin?
(Mr Atkinson) Not at all. One company has chosen to
still distil in London.
(Mr Morrison) I think it is the crux of the rationalisation
process and the consolidation process that product companies will
try and get economies of scale by locating their business in the
optimum place to get their cost benefits. What has happened at
Cameron Bridge is that we have actually seen consolidation at
one major site and therefore they have preserved jobs globally.
The nature of the jobs may have changed. Whereas previously they
might have been in a particular sector, such as bottling, they
have now moved to production. But the jobs have been preserved
through the consolidation process. It is really all about cost
and operational efficiency and that is where the industry obviously
has to contain that cost burden across the country, to retain
those economies of scale and the rationale for doing business
at those sites.
333. In the light of the answers you have given
us, does that mean in Scotland that the gin and vodka industries
actually concentrate on the cheaper end of the market; that it
is the cheaper brands you are producing?
(Mr Morrison) Production and bottling covers both
cheaper and expensive brands as the focus is on optimising the
levels of production and efficient use of production facilities.
334. And are you looking at the more expensive
brands? Is that the side of the market that is worth developing
because obviously there must be a bigger profit in it for you?
(Mr MacEachran) It is the more expensive part of the
market so you get into the old equation of benefit against risk.
It is a highly competitive part of the market. So essentially
what you have got are brands that exist now and the issue is to
maintain their presence in the market against the price competition,
against the cheaper on display labelled brands. To bring a new
brand into the market and generate sufficient profit is a highly
expensive exercise these days.
335. Though you have been very successful in
bringing in the youth end with your Vodka Ice, Bacardi Breezers
among other things. They are expensive. Are you looking to expand
that area of the market?
(Mr MacEachran) That is a difficult question to answer
in general. It depends really on, (a) the strength of the brand
you introduce; (b) whether there is momentum behind it; and, (c),
what the lifespan of these brands are. Sometimes these brands
can have a short lifespan. Sometimes they last well into the future.
There is obviously a market there and a demand. It is unclear
at this point as to what level of demand there is, whether it
will increase or decrease.
Sir Robert Smith
336. Do you see further scope for consolidation?
Obviously the percentage of that business is quite high. Do you
see further scope and jobs coming in? Understanding it, presumably
with more transport costs, what do you think has been the main
catalyst of the consolidation to be in Scotland rather than in
some other part of the country?
(Mr MacEachran) I think the main catalyst is the infrastructure
that exists in Scotland. There is clearly a very large Scotch
whisky production base which therefore provides you with economies
of scale when it comes to producing other spirits. That essentially
is where the rationale for it came from. As to what drives it,
I think what drives it essentially is a medium to long-term issue.
Clearly the distribution groups that buy from the suppliers of
spirits have changed notably over the past 10 years. We have seen
the emergence and strengthening of international retailing groups
and also other buying groups. That in turn then gives them purchasing
power and selectivity. They can choose what products in what portfolios
they want to have on the shelf. That in turn leads to price competition.
From that you have to look at your internal operations. So the
spirits industry in the UK has had to confront that reality and
is doing so progressively and at times aggressively to achieve
the necessary cost base.
(Mr Morrison) One of the key considerations has been
operational capacity of plants and therefore while at any time
there may be eight or nine plants working at half capacity, there
comes a time when you might consolidate that into a lesser number.
337. So the riskier aspect in Scotland is in
terms of production, but you are optimistic for the future for
Scotland in that consolidation is still climbing up or at least
maintaining a level?
(Mr Morrison) Hopefully going upwards.
338. Just a quick question. You do not mention
the fact that the proof of some brands is different from others?
I mean, I would not drink foreign vodka if you paid me. It is
murderous. It is far too strong. Some of the vodkas are pretty
mild and others are not; there are two different kinds, red and
blue. You have not mentioned that in the selling of your brands.
That must be a sales aspect.
(Mr Morrison) In the same way you asked the question
about the Smirnoff Ice and so forth, we are actually responding
to consumer demand and that is actually the answer. If you respond
to consumer demand then there is a profit opportunity there and
an opportunity to build your business. You are obviously going
to follow through on it. If it is not profitable, then you will
pull back from it and sooner or later the consumer will change
as to exactly what he desires. You then move on to another type
of product or variation of that product. That is the answer rather
than any plan from the outset to deliver something to the consumer
that he does not want.
339. I have two questions. Your memorandum said
that the law requires that neutral alcohol (from which gin and
vodka is derived) must be produced at a different site from the
finished product. Why does the law require that?
(Mr Atkinson) If I may answer, I suspect you are quoting
from my own statement. I have a technical rider which I have yet
to research. I am not sure if that law applies to Scotland.
7 Note by witness: Vodka exports to Poland are charged
a discriminatory rate of 105% import tax plus 2 Euro per %of alcohol
per litre. If the quota of 685,200 lpa for vodka imports is exceeded
in the year, the import tariff rises to 268%. EU exports to Poland
are currently well within this quota figure, presumably because
the tariff is so punitive. Back