Scotched Earth BBC Scotland Investigates

I'm on a journey, to find out

about a multi-billion pound industry,

flowing through this quiet glen and out to a thirsty planet.

I don't need to visit a world city - London, New York or Tokyo.

The big money centres want a share of what is slowly maturing here -

a sleepy backwater that helps define Scotland's place in vast,

fast-globalising markets.

This is Speyside, heart of the Scotch whisky industry,

and I am here to find out how important it is to Scotland.

We have made Scotch whisky the international -

the number one international - drink of choice.

It's sensational.

But is that a success all of Scotland can enjoy?

I think the benefits to Scotland of the whisky industry are really

quite disappointing.

Could the Scotch whisky industry give a little more back?

I believe that the success could be spread around a little more.

It's Scotland's water, and whisky is Scotland's national drink,

but should we be getting more out of each bottle?

My day job is to report on the Scottish economy.

Not only on the downturn, but what is looking up.

That's brought me to Edinburgh, in search of a dram.

Hello. Ticket for one for the magical mystery tour.

The whisky business is booming across the world,

and I want to find out why.

I am being taken for a fairground ride past

the ghosts of distillers past.

'I'm soaked through! Fresh water is,

'after all, a vital ingredient in the art of making Scotch whisky.'

As a tourist attraction, it is for fun and a serious reminder for me

of the unique global appeal that sets Scotch apart.

Only here can you distil and mature the world's premium spirit.

It looks a simple enough process,

but people here are being sold a package of image, tradition

and quite a bit of myth.

Just disappears.

You get a glimpse here of Scotch as a magnificent,

world-beating blend of marketing magic.

But who's buying it?

So we were set up almost 25 years ago

on behalf of the Scotch whisky industry,

to give visitors to Edinburgh a sort of showcase of Scotch whisky.

But the big increases we have really seen in terms of visitor

numbers are in the Chinese market.

So, although Russia and India and, certainly,

South America are coming through quite strongly, the actual

number of visitors delivered that has been most significant is China.

So whisky's new success owes a lot to big growth markets.

Here is further proof.

They tell me this is the world's largest private whisky collection,

pulled together not by a Scot, but an enthusiast in Brazil.

He sold it to Diageo. And that distilling giant brought it here.

Competing for rare malts with buyers round the world,

it helps to be minted.

Well, our most expensive bottles that we

have at the moment are £10,000 and we have had a couple of sales

this year where more than one £10,000 bottle of whisky has been purchased.

So that had been our biggest sale ever before this year.

But this year, we have seen a few sales of £30,000-£40,000.

From more than 100 distilleries, a sprawling global reach.

Selling into 200 markets, the most recent export figures showed

every second, 40 bottles shipped overseas.

America still spends the most.

Then it is France, although the French drink the most.

In recent years, the big growth has been further afield -

South Africa, Taiwan, South Korea,

and Brazil, which saw its imports of Scotch up 48% in 2011.

So what has whisky been getting right?

The head of the industry's umbrella body is Gavin Hewitt.

Since 2001/2002, our exports have doubled, 100%.

So we have moved now to £4.23 billion.

That is the value, as it leaves the country.

Adverts like these help generate sales of more than £20 billion.

So who is this classic old world thoroughbred targeting?

We are appealing to the emerging markets.

We are appealing to the affluent, the middle-class people who

are aspirational, people who actually see Scotch whisky as the drink

of choice, because that is actually telling them that they can afford it.

As well as that, it means that they are part of a global network.

Think Scotch in its new markets -

think cool, glamorous,

elegant, powerful.

It needs a bit of help with the lingo from a native son.

Not much sign of tartan or shortbread here,

where image detonates explosive growth.

Works like a depth charge.

Pow.

A product with a global market is not anything that peculiar.

Think of Apple computers, Toyota cars.

But with whisky, brand works differently.

It doesn't feel like someone is selling me soap powder or cola.

What makes this very rare

is that it is a product which has to be made in one country.

But what is also unusual about it is that it breaks the rules of globalisation.

It's not about one giant powerful brand taking over the world -

although Johnnie Walker is a global brand - it's also about the variety

that there is of different whiskies, different ages and different expressions.

The more variety there is, the more profitable it becomes.

Let's look more closely at those profits.

In the past ten years, the value of exports has nearly doubled,

but the volume is up just over a third.

Growing volume is what helps grow jobs in distilling and bottling.

But with the value growing much faster,

that's where profits come from.

In other words, profit from whisky is rising a lot faster

than employment. But at least both are growing.

That wasn't always the case. Let's look back...

# Whisky, whisky, Nancy whisky

# Whisky, whisky, Nancy-oh... #

The industry sprang from the love of a dram - distilled locally.

It was an early export success.

Family firms got rich - Grants, Walker, Buchanan, Whyte and Mackay.

But that doesn't mean they were running the industry that well.

A lot of whisky industry away back in, say, the '60s and even

the '70s, it was the seat of the pants. They kind of thought,

"Things are looking good, we'll produce whisky,

"X amount of whisky - not worry too much about the stock position

"or the financing of it or things like that."

So this was kind of a cottage industry?

That's a fair description.

And of course, if you take the big company in the industry,

Diageo, away back in the '60s and '70s,

it was the Distillers Company Limited and it was really split up.

You had individual companies like Johnnie Walker, you had Sanderson's,

Haig, White Horse, all of these doing their own things, competing

with one another under the umbrella of the Distillers Company Limited.

So with many of the leading brands under its umbrella,

yet in competition, Distillers Company was proudly Scottish,

with a business footprint in London.

But should Scotland be proud of it?

They'd come in Tuesday at lunchtime to start their working week,

do a couple of days

and leave Thursday at lunchtime back to their estates or their big house

in Surrey or their Highland estate, having done a week's work.

It was a very leisurely business in those days,

a very patrician business.

Then came the '80s.

With the Thatcher revolution, inefficient business

became vulnerable to a new type of businessman.

MUSIC: "Big Time" by Peter Gabriel

It's a matter for the shareholders, it's a matter for the Scotch

whisky industry and it's a matter for Scotland.

To understand how whisky went global,

one business deal was pivotal.

Ernest Saunders was the boss of Guinness,

hired to boost the brewer's family fortune.

He sensed the potential of Distillers Company and launched

a takeover bid. He locked horns in a battle for control

with a Scottish entrepreneur.

It was a bitter and dirty fight.

So what kind of operator was he?

He was charming,

absolutely charming.

He was one of these men who would, you know, nothing was enough.

I mean, I used to get a phone call throughout this saga

almost every weekend.

"Alf, I've just come off the tennis court."

Sunday morning, Saturday afternoon.

He had a big house in Buckinghamshire.

"I just thought I'd have a chat with you about such and such."

He was just always available, always charming

and yet there was something about him that wasn't quite true.

Saunders gained the backing of Scottish business grandees

and won control of Distillers.

But it was a deal built on deceit.

They promised in their prospectus that they would set up

their head office in Scotland, and I don't know why the authorities

did not insist on that, because no sooner had the battle been won,

than that was quietly dropped and, you know, it just didn't happen.

Had the head office of what was then Distillers, subsequently Guinness,

been set up in Scotland, that could have been quite transformational

in many ways. Not that the industry's doing badly, but to bring a head

office of that magnitude to Scotland would have been absolutely wonderful.

Saunders would eventually be jailed for insider share dealing

to do with the Distillers Bid.

But his legacy lives on. The company he helped create became Diageo.

Today, it's a colossus not only of whisky, but also vodka, rum, gin,

tequila and rice spirit.

This is the new global headquarters for Diageo,

a company that last year made more than £3 billion in profit,

more than a third of that from whisky.

Now this could, it should, have been a headquarters based in Scotland.

But instead, it's here in the west side of London, within sight

of England's Wembley Stadium.

I keep hearing this familiar tale -

company headquarters shift out of Scotland, to London and beyond.

Loss of corporate power can mean a loss of confidence

as well as spending clout.

How can Scots ensure they get the most benefit

from what is produced here?

And does it matter that Diageo is not headquartered where it distils

so much shareholder value?

I think we have 5,000 employees in the UK,

4,000 of them are in Scotland, which says quite a lot right there.

I think if you had the headquarters

in Scotland it wouldn't add that many jobs. The jobs are here already.

They're very good jobs. They're very important jobs.

They are the heart of our industry and they're the heart of Diageo.

Diageo is only one player, but it's a very big one.

It's heading towards 40% of the market.

The French company Pernod Ricard owns Chivas Brothers,

and comes next, with 20%.

Japanese and Indian interests

are among those accounting for as much again.

Which leaves just the remaining 20%

controlled from Scottish headquarters.

So power lies outwith Scotland.

What difference does that make?

And where does it leave the areas which produce

so much of this valuable commodity?

I've come to Speyside.

Around half of Scotland's distilleries feed off springs

and burns around this glen.

It's an area of outstanding beauty, but it's got economic challenges.

Pay rates here are among the lowest in Scotland. Skilled work is valued.

This is the Cooperage at Craigellachie, where you can see

what quarter of a million casks look like, while awaiting repair.

These men's jobs depend on whisky. And the whisky depends on them.

You've got sherry butts over there brought in from Spain, and

right here, barrels - these have

come all the way, it says, from Kentucky.

Jim Beam Bourbon.

Made from American oak and about 90% of the wood that comes in here

is American, the rest, much of it is Spanish.

One of the strange things about Scotch whisky

is that although you've got barley, you've got water from Scotland,

a great deal of the character that you get in Scotch comes from

this wood, grown many, many miles away from Scotland.

With bourbon, with sherry infused

into the wood, giving Scotch so much of its character and its flavour.

These coopers are paid per barrel.

And they're driven.

No time for chat, no water-cooler gossip in this workplace.

Lots to do, to hit targets, to meet demand.

Far from the modern marketing, these craft skills remain steeped

and matured in tradition.

So much for patience,

I'm leaving here with the sense of an industry working at full pelt.

In a less frenetic corner of Speyside,

one of its malt whisky distilleries.

Malts are used to flavour blends, which dominate the market.

Bottlings of single malt represent less than a tenth of volume sold,

and nearly a fifth of value.

Billy Walker led a buy-out of BenRiach from Pernod Ricard

nine years ago, since then roughly tripling its valuation.

So, here's whisky's question for a country debating its future.

Small, nimble and independent like this?

Or better placed fitting into a big player with a big reach?

The big boys in this industry,

Pernod Ricard used to own this, Diageo.

They're putting a lot into marketing and advertising.

To some extent you've come along in the slipstream?

We've come along in the slipstream,

but we're not in the same footprint, you know.

We're not operating in the mass market.

We consciously and deliberately do not engage

with multiple retail stores.

You can't get BenRiach in a supermarket?

You cannot get it in a supermarket, and my covenant to the people

who have helped us in the private

independent retailers, you will never get it in a supermarket.

Which makes you happy you don't have to deal with that?

It makes me very comfortable, and I'm a very happy boy.

I can see in here, this is no place for a quick buck.

Maturing product for a market decades from now,

it teaches you to be patient.

So, is long-term,

long-distance thinking another factor that sets whisky apart?

It's working for investors here, using a foothold in Angola.

Well, the Chinese of course are investing in all African

countries at the moment, and there's a lot of oil revenue in Angola.

So... And as a consequence there's quite a lot of money

and the duty-free area is probably the most sophisticated area

in the country, where you will be able to get

the kind of choice that they might be looking for,

and of course there's some very, very high value stuff in there.

And they're attracted to that.

So the Chinese workers on their way home come through

looking for pretty high-end product?

Very high end, top end. And normally they're influenced by the boss.

So the boss comes in and says,

"I like the look of a, what, 25-year-old BenRiach"?

Maybe a 30-year-old, and if he chooses, the rest choose.

What's a 30-year-old BenRiach going to cost?

Oh, it could be maybe £400 a bottle.

That's quite good business for you.

-That's sweet.

-Slainte!

-Slainte!

While BenRiach sells its own malts through independent retail,

I've headed upstream on the River Spey to see how a different small

distillery can be a vital, thriving part of a big corporate structure.

Cragganmore is one of Diageo's 12 Speyside malts.

I've been in the industry now for over 35 years.

I have never known growth like we're seeing just now.

I've never seen the level of expansion within the industry

to try and meet that expected demand, that expected growth,

so it's definitely one of the most buoyant,

the most exciting time that I've seen in whisky so far.

To meet anticipated demand,

Cragganmore operates round the clock, round the calendar.

I'm told distilling here takes only eight people.

That's one highly productive workforce, at full stretch,

but nowhere near what the industry needs.

And that's what explains this place,

and a lot of metal bashing by Diageo's coppersmiths.

Roseisle, near Elgin, is distilling on a grand scale,

producing enough spirit for 35 million bottles of whisky each year.

We can mechanise things to make it a lot more automated,

but also make the quality identical every single run of the spirit

stills, and of the mashing process.

How many people is it work here?

We've got ten operators and myself

and we've also got a business administrator in the office, as well.

So it's the yeast that does much of the hard work here, rather than

the scale of workforce I'd expect in such a productive plant.

There are a lot more jobs in bottling than in distilling.

Though the job creation is modest, the scale of investment is not.

This colossal distillery was opened only three years ago,

and yet the owners are already thinking that they're going to

have to build another one at least this size,

and perhaps another one again, in the next five years.

They've committed up to £1 billion in that investment programme,

because they reckon that this whisky boom that's going on in global

markets in South America and Asia and growing into Africa,

is going to continue, not just for the next five years of investing,

but for the decades after that when the whisky being made here today

is going to be put on the market and drunk.

Learning about the growth so far,

it's easy to forget there's a lot more potential.

India is the world's biggest whisky market.

As I learned when I visited recently, Scotch could take off here.

But there's been a long-running

tax dispute with India's distilleries lobby.

And there's an even bigger challenge,

here and across the world -

the threat of poor-quality counterfeit brands,

which threaten sales and reputation.

I have five intellectual property lawyers whose job is to look after

Scotch whisky and to make sure that fakes, as far as possible,

are taken off the market and we have a zero tolerance policy.

We have an intelligence network beyond belief.

And my lawyers are dealing with 70 cases

at any one day around the world.

It's a big problem, but we, I think, are largely on top of it.

I've reported on the other major challenge thrown up by globally

competitive companies driving for shareholder returns -

the threat to jobs.

Summer 2009 in Kilmarnock, there was outrage when Diageo announced

it would close its Johnnie Walker bottling plant, ending nearly

two centuries of the leading brand's link with the Ayrshire burgh.

700 jobs went, with fewer replacement roles in Fife.

Some argued because Scotch has to be Scottish,

then Scots should dictate the terms.

I say this is such a campaign.

This rally demonstrates it.

And we are going to achieve something for the workforces of Scotland.

Diageo disagreed.

Diageo got its way.

The Kilmarnock decision was very painful

and I was involved in those discussions.

It was a very painful, difficult decision, and I think we...

we behaved, I hope when we look back, and I think it already, we look back

and say we did a job of best practice in looking after those people.

We talked to them individually, many of them

stayed on and are now working, you may have seen some of them,

in Fife in our other plants, and many of them

moved onto other successful jobs and I think we did that well.

Challenges and opportunities.

Scotch is not just valuable to Scotland,

but those export earnings are prized by Government here in London, too.

I've learned this is a product that can surf

the wave of globalisation, but it does so on terms often

dictated by powerful companies, where the benefits are widely

dispersed and governments can wield little more than the power to tax.

Whisky fuels the current debate about who controls Scotland's future

and its economy.

Among those who love the aroma of Scotch whisky

are the mandarins here at the Treasury.

You can almost smell it wafting through

the corridors of Whitehall power, and it's no wonder that when the

Chancellor sets out his budget each year at the Commons dispatch box,

tradition dictates that he fortifies himself with a dram of Scotch.

And in an industry worth some £5 billion a year,

it's reckoned less than £2 billion of that comes to

Scotland in purchase of supplies and in wages.

Is it enough? I asked the economist Professor John Kay.

I think the benefits to Scotland

of the whisky industry are really quite disappointing.

The largest producers of Scotch whisky are not based in Scotland.

Er...they don't...

Their profits mostly go to people who are not resident in Scotland.

They don't pay very much tax in Scotland,

and we don't think they pay very much tax in the UK.

That's a picture the industry rejects.

We have already faced and already enjoyed over £1 billion

of investment into Scotland in the last four years.

I will put my head on the block now

and say that we're going to enjoy £2 billion of investment

into the Scotch whisky industry in the next three to four years.

Of course, it's perhaps this very success that makes getting

more out of the industry rather tempting.

Well, I think the question becomes whether there's some way

we could levy a production tax on this

and a tax of a few tens of pence a bottle.

That's not very significant in terms of the overall retail price

that people are paying for whisky, but it could generate revenue,

which in a Scottish context would be quite significant.

So what's being suggested is a tax on every bottle of whisky

produced in Scotland.

It would be the same amount for every litre

leaving the production line.

In each bottle, there's quality, myth and mystique,

but the unique ingredient is Scotland's water,

and Holyrood already has the power to tax that.

We commissioned research on how much that could raise.

That's all assuming the whisky companies absorb

the tax from their profits.

In austere times, is such a revenue-raiser something

our political leaders in London or Edinburgh might want to look at?

I ran the numbers past a former chairman of the Royal Bank

of Scotland, who chaired the First Minister's economic council,

Sir George Mathewson.

Well, it could in theory result in less sales overseas.

I question that, in as much as the prices...

..50p or whatever it is, would not be a major percentage of the sales

price, it's also highly profitable as I understand it,

so it would seem to me there's room there for some movement.

Would you expect much pushback?

If this idea were pushed forward, clearly a lot of it would

come from lower sales or lower profits within the industry.

Um... I would expect pushback, yes, I would.

But I do think the numbers that

-I

-have seen make it worthwhile investigating.

To be absolutely honest, I cannot see why any government would

actually apply a production tax which would make Scotch whisky less

competitive overseas against drinks - spirit drinks or any other

alcoholic drinks, which are cheaper to produce and cheaper to sell.

From here in Leven in Fife,

I watched this most Scottish of products

being packed up and taken around the world.

I've seen how whisky has brought pride, identity,

jobs and global success to Scotland.

But the industry warns against any attempt to levy more taxes.

Well, I hope it wouldn't happen. I think it's poor economic strategy.

I think it's poor industrial strategy.

I think if the argument in an economy is to take a successful business

and then tax it, keep taxing it because it's successful,

I think is the wrong impression.

Those who like the idea believe the industry has nothing to fear.

Well, I would not wish to harm it, is the first thing.

I don't believe it would be substantially harmed

and I believe that the success could be spread around a little more.

I've learned a lot about this industry on my travels.

About a traditional product sold in a modern way around the globe,

and about what that means to us back in Scotland.

I've even taken time to learn

a thing or two about the whisky itself,

and how to appreciate its complexity.

I'm now getting Columbia and Venezuela...

A bit of Singapore, Korea,

distant hints of Vietnam and India, strong, strong

note of profitability, and the salty tempestuous oceanic trade winds.

Because this is, in a sense, the modern economy in a glass.

It's a product which reaches into almost every country in the world.

It's a sort of liquid currency.

And for all the myth that's built into the marketing,

there's nothing mystical about the way that it approaches these

modern, highly competitive markets,

because this is seen as a threat in some parts of the world.

But it's also been established as the desirable,

aspirational drink to be seen with.

So whether or not there's enough payback to its home country,

this is a Scottish success story worth toasting.

Slainte!

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