Scottish Agenda: Drinks giant Diageo seems to like hot water

By Ian Fraser

Published: The Sunday Times

Date: July 12th, 2009

It does not encourage multinationals to invest in Scotland if they are vilified for making their company more competitive

The bitter row over Diageo’s plan to axe up to 900 jobs by closing its Kilmarnock bottling plant and its Port Dundas grain distillery in Glasgow at first gave me a sense of déjà vu.

The row over jobs, characterised by a crescendo of moral outrage from Scottish politicians, cast me back to the last time the global drinks business got into political hot water in Scotland. That was just over five years ago, after it emerged that Diageo planned to “adulterate” its Cardhu malt whisky by mixing in unnamed malt whiskies, in what was seen as an attempt to outsmart Spanish drinkers.

The company — whose brands include Johnnie Walker, Smirnoff and Gordon’s gin — found itself at the centre of a political and media storm which, in hindsight, it handled badly.

Other Scotch whisky companies declared that they were appalled at Diageo’s “cynically deceptive” move — and feared that the adulteration of Cardhu would cause consumers to lose faith in any claims of authenticity and provenance made by the industry.

Eventually Diageo saw sense and scrapped its plan for Cardhu, having been offered a convenient exit route by the Scotch Whisky Association (of which it is the most powerful member). This revolved around rewriting the rule book on what could and could not be done in the single malts category.

The moral outrage over job cuts has, if anything, been even more hysterical. Once again, it seemed the clumsy drinks multinational had shot itself in the foot.

However, I suspect that Diageo is on much stronger ground this time around — and is therefore less likely to buckle.

Having met two of the company’s more senior executives on Thursday afternoon — its president of Europe, Andrew Morgan, and global head of supply, David Gosnell — I get the impression that the Kilmarnock and Glasgow plant closures are a done deal.

Whatever alternative proposals the Scottish government comes up with, Diageo will almost certainly be moving production to its other bottling plants in Scotland — Leven in Fife and Shieldhall in Glasgow — in about 2011. Grain distilling will be consolidated at Cameronbridge in Fife, and the part-owned North British Distillery in Edinburgh.

It is worth pointing out here that the company has no intention of offshoring packaging or bottling to cheaper locations elsewhere in the world — at least for now.

In their synethetic fury, the politicians seem to have missed the point that Diageo employs 4,500 people in Scotland, and spends £300m a year on making various spirits here, including Scotch.

They have also missed the fact that the closures of superannuated facilities in Kilmarnock and Port Dundas have been counter-balanced by the company’s £100m investment in production facilities elsewhere in Scotland. These include the recently opened Roseisle distillery near Forres, the Cameronbridge grain distillery in Fife and enhancements to its Leven production line.

While I am sympathethic to those who will lose their jobs as a result of Diageo’s restructuring, I think a little perspective is required. If the politicians are proposing to go AWOL whenever any Scottish-based business dares to try and render their Scottish operations more efficient, it doesn’t send out a positive message to prospective inward investors.

Struggling minnows

Is there a crisis in the North Sea? According to lobby group Oil & Gas UK, there is. Drilling in the UK part of the sea has fallen sharply in 2009 and may well fall further next year. This is largely because, given the lower oil price and elusive funding in the credit crunch, the flotilla of smaller oil and gas exploration firms that took over licences in the North Sea in the past decade have been struggling to finance new projects.

The picture is different in the Norwegian continental shelf, where state-owned StatoilHydro has been going ahead with new drilling projects.

Since the minnows are obviously struggling to finance new exploration projects in tougher economic times, don’t we need to persuade the majors to come back? Larger firms, after all, tend to find it easier to raise the necessary spondulicks.

Even though Centrica’s likely £1.3 billion takeover of Venture Production is bad news for Scotland’s plc base, it’s the sort of thing that will be good for the longevity of the North Sea.

Darling’s Band-Aid

Alistair Darling’s white paper on bank reform was a bit like sticking a Band-Aid on a gaping and gangrenous wound.

The tripartite approach to regulation introduced by Darling’s boss Gordon Brown in 1997 has clearly failed. It must be swept away and replaced with something more coherent, maybe a revitalised Bank of England. After all it was the “underlap” between the the FSA, Bank of England and Treasury — that meant banking timebombs like Northern Rock, HBOS and RBS went undetected for so long before they exploded in the nation’s face. So why is Darling so intent on tweaking a deeply flawed approach?

Maybe he just felt sorry for (or even some residual loyalty towards) its hapless progenitor.

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