Focus: On the rocks?

Is the closure of the Johnnie Walker plant in Kilmarnock the beginning of the end for Scotch whisky bottling in Scotland, asks Ian Fraser

Until a few years ago Kearny, New Jersey, was known as Little Paisley. In its heyday 21,000 Scottish immigrants lived in the small town outside New York.

Today its population is more cosmopolitan and all that remains of its Caledonian heritage is the Scottish market, a couple of fish and chip shops, and the Scots American athletic club. Founded in 1932, the club continues to attract Scots diehards who like to relax with one of the many Scotch whiskies on sale in the newly renovated St Andrews lounge.

Joseph Doleman, its 52-year-old bartender, was on shift on Friday when much of the talk among the regulars was of the decision by Diageo, the whisky giant and maker of Johnnie Walker, to close its bottling plant in Kilmarnock with the loss of 700 jobs, ending a 189-year association between the brand and the town. It is one of the club’s biggest sellers, and the announcement was met with anger.

“I will never serve Johnnie Walker on my shift again,” said Doleman, whose ancestors moved to America from Glasgow. “I feel for the people of Kilmarnock. It really is a great shame. It will, without a doubt, change the way the guys here see Johnnie Walker. I know at least five people here who won’t drink it any more and they used to drink it every day. If bottling was to be moved out of Scotland completely, I would not consider it a Scotch any more — it would be a disgrace.”

It is now 12 days since Diageo, which also makes Guinness and Tanqueray gin, announced a restructuring plan that, it hopes, will save the company £40m a year, and the political row it has generated shows little sign of abating. As well as closing the Kilmarnock plant, the firm also plans to shut its Port Dundas distillery in Glasgow, with the loss of 140 jobs, with a further 30 jobs going at the Shieldhall packaging plant in the city. About 400 jobs will be created at a consolidated packaging facility in Fife.

Among the politicians who have taken a keen interest in developments are Alex Salmond, the first minister, Jim Murphy, the Scottish secretary, and Des Browne, the former defence secretary, whose constituency includes the Kilmarnock plant.

At stake is more than the fate of almost 900 jobs, troubling though their loss is to the people affected and to the economy. The wider issue is the credibility of the Scotch whisky industry, for if the principle is conceded that Scotch can be bottled and packaged anywhere, without it impacting on its provenance and reputation, it opens up a host of possibilities.

If there is no practical or business reason for Johnnie Walker Red Label to be bottled in Kilmarnock, runs the argument, then it follows there is no reason why Scotch whisky bottling could not be transferred abroad.

In an interview with The Sunday Times, Brian Donaghey, the managing director of Diageo Scotland, insisted the company was committed to keeping jobs here, but he said it did not follow that bottling could not be done in another country.

“Scotch has to be distilled and matured in Scotland, but it doesn’t have to be bottled in Scotland,” he said, adding that 85% of the company’s Scottish-produced goods were exported and that there were “various pressures” to export in bulk, and bottle and package somewhere closer to the ultimate market.

His comments have implications for an industry that is showing signs of strain, with global sales expected to fall by 5% this year. It continues to be a lucrative source of jobs and income, employing 10,000 people and providing £2 billion a year to the UK balance of trade, but no industry is immune to the global downturn. What remains unanswered is whether the move by Diageo is a one-off by a firm intent on rationalising its operation or the first signs of a restructuring of an industry that could ultimately see some of its operations moved abroad?

Not all whisky drinkers have such an emotional attachment to the town where the bottling of their favourite tipple is carried out. Customers at the Hazelburn bar in Tokyo have more than 400 varieties of Scotch to choose from, but the one they are all familiar with is Johnnie Walker Red Label, according to Kazuya Koyama, the manager.

“Scotch is really popular in Japan, even though we produce our own whisky,” said Koyama. “If you ask the average Japanese person what comes to mind when you say ‘Scotland’, they will almost always say ‘whisky’.”

That’s where their interest in the production process of the drink largely ends.“They talk to us about which ones they prefer but I don’t think I’ve had a conversation about where they bottle any of these drinks,” he said with a shrug.

The bulk of the Scotch whisky industry is now controlled overseas. Diageo’s whisky businesses, for example, are run out of the Netherlands,with some of the accounting handled in Bratislava, Slovakia.

Other corporate owners of leading Scotch whisky brands include the Paris-based Pernod Ricard (owner of Ballantine’s, Chivas Regal and Glenlivet), Moët Hennessy (owner of Glenmorangie and Ardbeg) and Japan-based Suntory (owner of Morrison Bowmore). Other big players in Scotch include Bangalore-based United Spirits (owner of Whyte & Mackay), Bermuda-based Bacardi (owner of Dewar’s), Illinois-based Fortune Brands (owner of Teacher’s and Laphroaig) and Italy-based Campari (owner of Glen Grant).

The only two remaining local producers of any size are the Glasgow-based Edrington Group, which owns brands including the Famous Grouse, Highland Park and Macallan, and William Grant & Sons, which owns Glenfiddich, Balvenie, Monkey Shoulder and Grant’s.

Foreign owners clearly have a loyalty to Scotland, although it is largely driven by commercial factors (the country offers implied authenticity and quality). However Browne, the Labour MP for Kilmarnock and Loudoun, fears the industry is gearing up to loosen its ties with Scotland and to transfer aspects of production — particularly packaging and bottling — overseas.

“If the industry is allowed, by this decision, to break the link between Johnnie Walker, the biggest volume seller and best-known Scotch whisky in the world, and its roots in Kilmarnock, I predict we will see, within my lifetime, the breakage of the link between the packaging and the marketing of Scotch whisky wholesale and Scotland itself,” he was reported as saying.

“That would be unthinkable for any other national, iconic product, and there are many of them throughout the world where society has protected the link to their roots.”

Already between 15% and 20% of Scotch whisky production is bottled overseas — Whyte & Mackay, for example, recently commenced bottling for domestic Indian consumption at its plant in Maharashtra, western India — and some observers fear Diageo is blazing the trail for cost-cutting by other whisky producers.

The industry had an exceptional year in 2007 and a reasonable one in 2008. Overall, total exports of Scotch grew from £2.37 billion in 2005 to £3.2 billion in 2008. However, since the credit crisis, Scotch has started to feel the chill winds of the global downturn. The Spanish and Russian markets have been particularly hard hit, as have duty-free sales.

There are also signs of big drops in the high-value Scotches favoured in Asia, and there is evidence other markets, including America, are trading down. According to Pernod Ricard, global consumption in bars and restaurants is estimated to have slumped by 10%-15% in the first quarter of 2009.

Alan Gray, a whisky analyst at Sutherlands Edinburgh, said the industry had had a “new lease of life in the period up to and including 2007. It was inevitable it would suffer, given the depth of the recession”.

There are new markets opening up, and commentators say that if the India lowered its tariff barriers then demand would rise. “I’m still very optimistic about the long-term growth potential in India and China. Their economies are still growing, only slower,” said Gray.

Roland van Bommel, the chief executive of William Grant & Sons, dismisses any hidden agenda by producers of Scotch where bottling is concerned as nonsense. “The notion that Diageo, or anyone else in the industry, is planning to offshore their bottling is absolute nonsense and a red herring. Scotch whisky companies would have absolutely nothing to gain from doing so,” he said.

Leonard Russell, managing director of distiller and bottler Ian Macleod & Co, said: “The bottling of Johnnie Walker abroad is simply not going to happen. The savings on labour costs would be negligible since these things are so highly automated these days.”

Diageo appears to be concerned about the potential damage to its reputation, and flew two of its most senior European managers to Edinburgh last Thursday in an attempt to defuse the row. In an interview with The Sunday Times, Andrew Morgan, president of the firm in Europe, and David Gosnell, global head of supply, dismissed Browne’s claims.

What matters to drinkers of Johnnie Walker they said, is that the spirit that goes into it is distilled in Scotland, not the location of the bottling plant.

“100% of the bottles of Johnnie Walker we sell is bottled in Scotland. That’s true today and that’s where we see it in the future,” said Gosnell.

John Swinney, the Scottish finance minister, has not given up hope of convincing the company to reconsider its decision to axe the Kilmarnock site.

“Diageo has committed to holding a proper consultation, and we must have a genuine consultation and not a sham” said Swinney. “It has committed to supplying the information required to present an alternative business case and to listening to that alternative plan — we will hold it to that.”

Jim Murphy met Paul Walsh, Diageo’s chief executive, last week and the Scottish secretary proposed a number of ways to maintain the Johnnie Walker bottling operations in Kilmarnock — including an alternative site in town if the government and local authority could provide one. He also sought assurances about Diageo’s commitment to Scotland.

“The onus is now very much on Scottish Enterprise being allowed to analyse Diageo’s business case and provide an alternative proposition — that is why I am meeting the chairman of Scottish Enterprise on Monday morning to discuss these proposals, and make sure they are pulling out all the stops to produce a compelling and comprehensive case to put to Diageo,” Murphy said.

Browne added: “I have never underestimated the challenge we have, but the company has promised me that it will listen seriously to any alternative proposal. I will hold them to that promise. We now need to ensure that when Alex Salmond meets Paul Walsh on July 22, we have examined their business case and he has an alternative to present.”

The company is prepared to fight its corner over where Johnnie Walker is bottled and accepts that unpopular decisions often have to be made. “If we ran into some difficulty in the Scottish market for a period then we’ll have to work our way through that,” said Morgan.

Others have wider concerns at the way in which the whisky industry has become the latest plaything of the government and the opposition. “If the politicians are going to start shouting from the rooftops whenever a company tries to make some of its employees redundant, it hardly sends out a very positive message to prospective inward investors in Scotland,” said Leonard Russell.

Additional reporting: Julia Belgutay. This article on Scotch whisky bottling was published in the Sunday Times Scotland on 12 July 2009.