SWA highlights collaboration with US industry body to deal with common problems

05 Feb 2015

David Frost, CEO Scotch Whisky Association
Speech to Whiskies & Spirits Conference, 24 February 2015

It is a real pleasure to be back in New York City again.  Those of you who have looked at my biography will see that I was a diplomat and Ambassador for twenty years before taking over the Scotch Whisky Association.  In that capacity I spent a few very happy years here working at the UN and this is actually my first time back since then.

One thing all British diplomats have in common is that part of their job, and which I did when I lived here and am doing again now - is to promote that great product and that great industry - Scotch Whisky. 

Why Scotch Whisky matters to Britain
Now obviously Scotch Whisky is a product that is known world wide.   But it is particularly important to us in Scotland and in Britain because it's one of Britain's small number of really visible products.

As a country we are an exporter of services, which by definition are invisible.  We also make what are known as intermediate goods  - parts that go into other products and therefore aren't well-known to others.  Engines for Ford cars for example.  But Scotch Whisky is quite unusual in being a product that not only has to be made in Britain and is 90% from products sourced from Britain, but carries its origin in its very name, can be put on the table at a party, given as a present, and which symbolises aspiration and success across the globe.

That's part of why the relationship between us and the British Government is so strong.  We provide a visible, reputational, iconic product, and they help us knock over trade barriers across the world so we can sell it better.  

The Trade Environment
And recently that has been a big success.  Over the last 10 years the value of Scotch Whisky exports has doubled, in the latest figures to around $7bn.   Within manufacturing, we are actually the second biggest net contributor to Britain's trade performance.  And that determination to get behind exports has meant that this Association, the SWA, has had to develop an expertise in trade issues that is second to none and which is pretty unusual among trade associations. 

And that expertise is really important.   Great products can only be marketed and sold if a country allows it onto its market at a reasonable cost, doesn't discriminate against it, doesn't make it impossible to advertise, and so on.   So it is governments' job to clear international trade of unnecessary tariffs, rules, and discrimination - and it is our job as an Association and industry to be able to tell them how. 

Doing that is not just a benefit to Scotch Whisky alone.  That expertise is, we think, valuable to the whole whiskies and spirits industry, globally not just in Europe, and we share it readily.  We all have an interest in free markets and open trade for our products.  In particular, we collaborate very closely with DISCUS (Distilled Spirits Council of the United States) on a huge range of issues and we have some big collective successes to our name.

For example, a few years back we worked closely with DISCUS in getting the Chinese authorities to remove limits on fusel oils in whiskies - a problem that affected Bourbon as well as some Scotch Whiskies, so a collective issue of principle. 

A more recent example is our very close cooperation on collectively drafting and putting to the US and EU authorities a proposed "Spirits Annex" for the TTIP agreement - a document that would enshrine best practice in this huge new trade agreement.  
Fighting this battle for open markets for our product is a continuous one.  But it won't always be easy.  Indeed it may get more difficult in the immediate future and here I have two particular concerns.

The Global Economy
First, the global economy is slowing.  It's true that here in the US things seem to be going pretty well.  Economic growth seems to be strong and the spirits market is growing strongly too. 

But out there in the rest of the world things look less good.  Scotch Whisky is unusual in that so much of our success depends on global markets.  We export 90% of our production.  So economic problems hit us quickly.  Indeed Scotch Whisky is perhaps a bit like the proverbial canary in the coalmine, one of the early indicators of economic problems in particular countries or indeed in the global economy. 

That is why, from our industry's perspective, I am concerned at the growth of geopolitical risk - most obviously in the consequences of the Russia / Ukraine crisis, but there are plenty of other risk areas around the world too.  I am also concerned by the effects of bad governance in many countries - notably, the persistently poor economic management in the Eurozone which has had dreadful effects in big markets like Spain and Greece, the even worse economic management in places like Argentina and Venezuela.  There are many bright spots too - India, Taiwan - but it is clear we are going to have to work harder to keep exports growing in future years. 

There isn't much our own governments can do about this - bar one thing.  They can treat us well in our home markets. 

  • Don't tax us excessively.  In Britain we have to put up with 80% of the price of an average bottle of Scotch Whisky being taxation.  You're lucky that America doesn't like heavy taxation and you've been able to stop things getting this bad - though 54% still sounds bad enough. 
  • Treat us fairly as a product.  Don't stigmatise us, don't restrict us unreasonably, don't make it harder for us to get our message across. 

And this is my second area of concern - the whole debate around alcohol and health. 

Alcohol and Health
It is of course economic difficulties like the ones I've mentioned which often lead to an increase in protectionism.  We see this now in the spirits industry. The current trend is that many claimed public health measures in fact hit imported spirits to the benefit of powerful domestic spirits producers.

Here, internationally, we rely very much on DISCUS's unrivalled knowledge base and expertise.  Sharing information helps us debate with those who would like to restrict alcohol's availability unreasonably or push up the price in a way that is unfair to the average person who drinks responsibly and always will.  In bodies like the World Health Organisation - much of whose work I should say we support - there are plenty wanting to go down a restrictive neo-prohibitionist route.  We need to push back, not because it's in our interest, but because such policies have always failed historically, generate more problems than they solve, and will do so again. 

But we need to do this in the right way.  I see getting on the right side of this argument as perhaps the biggest long-term issue for this industry.  It is vital in everything we do that we do not make the mistakes other industries have made.  We have to recognise that our product does have harmful consequences if consumed in a particular way, and our marketing and behaviour must reflect that - as it does, and as our various Codes of Conduct require.   It is reasonable that government gets involved in these areas and we have to acknowledge that and work in partnership with governments to help deal with those who drink anti-socially, irresponsibly, or just dangerously.   The major CSR programmes of our big multinational members like Diageo, PR, Beam Suntory, or Bacardi, are doing just that and they are right to do so. 

At the same time we have to make clear that there is no point in governments taking actions that won't work and are counterproductive.   As many of you will know, we have taken the Scottish Government to court over its wish to introduce minimum unit pricing for alcohol.  That case is now in the European Court and we should get a ruling later on this year.  If we lose it, I would expect that we will see MUP and similar health-justified schemes introduced not just in Scotland but, eventually and gradually, in many places around the world.  Many of them will discriminate in practice against Scotch Whisky and US Whiskey alike, so all of us here have a collective interest in the outcome.   

Great prospects
So there are risks.  But let's not get too gloomy.  The fundamentals are strong.  The global demand for Scotch Whisky remains powerful.  Currently, 45% of emerging market consumers have an income of $5,000 per year.  That may not sound much but it's the income level at which you can hope to buy a bottle of Red Label.  By 2020 that figure will have gone up to 60%.  That is a big opportunity for all of us and that is why we are confident the fundamental drivers of growth remain in place.

In other words, we are successful because we make a great product.  Indeed, if we didn't, nothing else I've spoken about would matter.  And global demand for that product has enabled our industry to expand so that it is not just the biggest single whisky industry globally but actually bigger than Britain's iron and steel, computer, or shipbuilding industries, and half the size of our aerospace industry. 

That matters not just because it adds $8bn to British GDP every year and supports 110 distilleries, six opening in the last year alone.  It matters also because with size goes heavy investment from home and from overseas, goes specialisation, goes the ability to make a wider and wider range of Scotch Whisky catering for a huge range of tastes, to the highest quality standards, at high levels of productivity.  Indeed the average productivity of a worker in our industry is half a million dollars a year. 

A great product
For me this is very much what "craft" in whisky making is about.  It is with some trepidation that I tread into this controversial area.   But "craft" can mean many things.  It obviously means "skill" or "ability".  But it also originally meant "strength" or "power" [as the German word still does].  The modern Scotch Whisky industry exemplifies that.  Indeed for me there is no greater demonstration of it than our ability:

  • to make the equivalent of 2.4bn bottles of Scotch Whisky every year;
  • to control accurately the nature of the spirit so that when it emerges from casks in 3, 5, 10, 20 years' time we can be absolutely confident of its style and taste;
  • and to produce a range of styles and products that, whether single malt, grain, blend, meet any consumer need worldwide.

That is an incredible scientific and technological achievement and one of which I and the whole of our industry is incredibly proud.  And that performance is generated by big and small distilleries alike.  By big and small firms.  By established incumbents and new entrants.   All contribute in their own way to this amazing collective achievement.

But what is true for Scotch Whisky is also true for all the whisky industries represented here today.  The excitement and the buzz around whiskies globally is really palpable.  The boom in Bourbon / Tennessee whiskies and in Irish whiskies is a good example of this.  Together we are all part of a great industry and the more we can collaborate on the issues that cause us difficulties, the more successful we will be.  

It is this ability to continue to innovate on the back of a rigorous quality definition, this ability to spot evolving tastes and respond to them, and this determination to stay in the lead in the range of products we produce, that makes me confident of the future, for Scotch Whisky and for all of us. 

Thank you.