Scotch Whisky Industry

HC Deb 03 February 1986 vol 91 cc120-6

Motion made, and Question proposed, That this House do now adjourn.—[Mr. Neubert.]

10.3 pm

Mr. Malcolm Bruce (Gordon)

I am extremely pleased to have the opportunity of this debate, particularly as events in the Scotch whisky industry are so topical. However, the debate is on the industry and not just the immediate developments in it.

The Scotch whisky industry has had a difficult few years. Volume sales have declined from a peak in 1979. The number of distilleries has reduced since then from about 130 to 100, and employment has fallen from over 25,000 to about 16,500. While smaller companies have performed fairly well, especially those selling single malt whiskies, the industry leader, Distillers, has generally not done well, and the facts show it.

The industry is obviously extremely important, to Scotland, but it is also important to the whole of the United Kingdom. It provides manufacturing jobs, many of them in areas where there is little or no alternative, and it still represents a major export industry, with sales approaching £1 billion a year. It is important to maintain and develop its employment and export potential.

The recent developments began in the middle of 1985, when Guinness took over Arthur Bell and Sons plc for £356 million and so acquired the top domestic brand of whisky. The Fosters lager consortium, Elders IXL, has put in a bid for Allied Lyons, which includes William Teachers, whose two distilleries are in my constituency. Teachers is the second largest United Kingdom brand. That bid has rightly been referred to the Monopolies and Mergers Commission, involving as it does the acquisition of a key product by an Australian group, which must be examined carefully in this strategic industry.

It is not surprising that bids and counterbids have been launched for a company such as Distillers, which seems to be under-achieving its potential under its present management. The first bid came from James Gulliver's Argyll Group, which offered £1.89 billion. When the bid arrived, there were calls for it to be referred to the MMC. On competition grounds that did not seem to be justified, but in relation to the strategic national interest the bid warranted at least deep consideration about whether it would secure jobs and promote exports.

Mr. Alexander Pollock (Moray)

In that context, does the hon. Gentleman recall the words of my hon. and learned Friend the Member for Folkestone and Hythe (Mr. Howard), the Under-Secretary of State for Trade and Industry, who said that in addition to competition there might be referrals where the destiny of a vital national capability is at issue?

Mr. Bruce

I am grateful to the hon. Gentleman for mentioning a factor that must be considered in all bids. I am anxious that the bids are treated equally and fairly and that similar considerations are applied in all cases. That is the critical factor.

Nevertheless, the Argyll bid was cleared. Then Guinness made a bid, which was agreed with Distillers —it invited Guinness in and offered to pay its expenses —for £2.19 billion. If that merger were to go ahead, it would create a group that accounted for 35 per cent. of the whisky market. There is a dispute as to how much whisky production that group would represent, but it is between 35 and 50 per cent.—probably nearer to 35 per cent. The group would also own, as Distillers still does, 50 per cent. of United Glass, which accounts for half the sales of bottles to the whisky industry.

Mr. George Robertson (Hamilton)

When the hon. Gentleman produces statistics about the capability of the Distillers-Guinness conglomerate, will he take into account the spare capacity that is available to Distillers and not rely on a suggestion of actual output? Distillers has a considerable amount of capacity which is at present unused but which could come back on stream.

Mr. Bruce

I am grateful to the hon. Gentleman. I intend to deal with the point later.

As Guinness has acquired Arthur Bell, it would, with Distillers, become a bigger group than Distillers alone and would be bigger than a Distillers group owned by Argyll. That presents a dilemma, because it is difficult to believe that a bid to create such an enlarged group should not be referred to the Monopolies and Mergers Commission, although the Government may take a different view. However, if that merger is referred, it would leave Argyll clear and free in the market and would handicap Guinness. Not to refer it would undermine the credibility of the Office of Fair Trading. Could it say, "We will not refer this bid because we did not refer the Argyll bid; but had there not been an Argyll bid, we might have referred it"? We must have a clear statement, whether or not the bid is referred, of the reasons for so doing. The Minister and the Government must take that point on board.

That clearly leaves the Government with limited options. If the Guinness bid is not referred to the commission there must be a clear explanation for that, as it is difficult to see why it should not be referred. If there is a good reason, it should be made available.

If, on the other hand, the bid is referred to the commission, the Ministers responsible have two further choices. They can either review the decision of Argyll on the ground that they need to consider all the implications for the industry and it would be fair to consider both bids at the same time, or they can state, as this would be the effect of their decision, that they are effectively endorsing the Argyll bid, at least by implication, and explain that they are happy for that to happen. How the bids are referred and judged should not be left to luck. Both bids have every right to be treated fairly. All the factors, jobs, exports, management potential, the merits of the bid and the implications of competition should be considered equally for both bids.

The sheer scale of these bids and the wide issues that they raise require a clear statement by the Government of their position. I do not think that we can accept a "hands off" approach, unless it is a genuine "hands off" approach. There should be no under-the-counter meddling over the decision to refer or not to refer. That would have a perceived effect, and that fact must be taken into account.

It is unfortunate for those of us who are caught in the middle of these battles that they frequently degenerate into an argument between the management of the two different companies. There are claims and counter-claims, which does not add to the clarity of information on both sides. The merits of both companies are such that there is no doubt that if either of them were to take over Distillers there would be a re-invigorated whisky industry, using the brands to lead a new attack on the export market. That would be desirable. It is important that the relative accounts of both companies are considered.

Argyll launched its bid with an attractive statement—attractive to me as a Scottish Member—which claims that the company will bring Scotch whisky back home. It would establish a new company in Scotland. Its management team would be based in Scotland and the industry would be run from there. Argyll claim that its management team has a marketing background which can revitalise the industry, and it feels that its actions are a logical development of its own business.

Guinness countered that by claiming that it had greater international marketing expertise which would be much healthier and better for the industry. It also claimed that it would establish headquarters in Scotland. We should be grateful that there now seems to be renewed enthusiasm for operating international businesses within Scotland. All Scottish hon. Members will be glad to see that it seems from that point of view that we cannot lose. We shall get an enlarged whisky management group in Scotland.

I should not at this stage take sides in the issue other than to ensure that a fair deal is secured. I accept that the Scotch whisky industry needs a boost and injection of new creative management. It needs aggressive and creative marketing. I am looking for, and I believe that the Minister should want, a commitment to centering employment and management in Scotland and to securing the quality of Scotch whisky as a product and to ensuring that it is backed with effective, creative marketing to beat off the challenge it has suffered from its competitors, namely white spirits, white wine, brandy and so forth.

Although it may be invidious to mention the two together, I think we can learn something from the way the producers of Armagnac and Cognac have established the imprimatur on their quality product in a way which Scotch whisky could benefit from if it is to establish itself as top of the heap.

One of the difficulties in relation to white spirit in competition with Scotch, which will lead me to make specific recommendations at the end of my speech, is that there is, of course, no ageing process, no skilful blending and no mystique. One can make gin today and sell it effectively next week. There is no difficulty involved in forward planning, no expense in stock holding, and no creative skills are required. Yet, in the long run, that is not in the best interests of Scotland or the United Kingdom. It would certainly not create jobs in rural Scotland and it does not have the export potential that whisky has, as gin can be made relatively easily almost anywhere. Pure, good quality Scotch whisky can only be made in the right circumstances, in the right place—in Scotland.

The Scotch whisky industry is vital to rural communities and towns in Scotland which have blending and bottling plants. Teachers has its only two distilleries in my constituency and employs 50 people in two relatively small communities. Distillers had a distillery in my constituency but closed it many years ago. I am pleased to say that Morrisons of Glasgow took it over and not only generated employment by producing malt whisky but produces tomatoes and house plants from the waste heat. The company has generated some imaginative tourism on the back of those products.

The importance of the industry to rural areas can be explained by the example of a minister whom I met. He told me that he went for a charge in a rural parish and was asked, "Do you take a dram, minister?" Normally, a minister would assume that the correct answer was no. On this occasion he would have been wrong because the parish was entirely dependent for its employment on a malt whisky distillery. Fortunately, the minister gave not merely the right answer but the honest answer. He admitted that he took a dram and finished up with the charge.

After considering the points that I have made about the two bids the Government should make their position clear. That is critical. They should ensure that they take account of the interests of Scotland and the United Kingdom market. They should treat the bids fairly and evenhandedly and explain their position clearly.

There are three further things that the Government should do for the Scotch whisky industry. I should like to address those points to the Minister. The Government should recognise their responsibility to work with the industry to ensure a good quality product. As the Minister will recognise, a definition of Scotch whisky is required by law. The ageing process is required by law. There are one or two further areas where legislation could strengthen and develop the Scotch whisky industry.

The first point is controversial. The Government should legislate to ban the export of bulk malt whisky. I accept that some distilleries would have some difficulties as a result, but I believe that it would protect the quality of our market. We export bulk malt whisky to Japan where it is blended with the local inferior product so as to pass it off as a more acceptable product. The result is that it is harder for Scotch whisky to penetrate the Japanese market. We face the possibility of the Japanese launching a major export assault on third markets using as a base bulk malt Scotch whisky. That is nothing like as advantageous as us selling Scotch whisky to those markets. In the long term such legislation would be in the best interests of the quality of the product and the market.

The Government should insist that the legal definition of Scotch whisky should provide that it should be full strength, at least three years old, distilled, matured, blended and bottled in Scotland and contain a statement of the percentage of malt whisky included.

Mr. George Foulkes (Carrick, Cumnock and Doon Valley)

No.

Mr. Bruce

I understand the hon. Gentleman's anxiety and I appreciate that it is an important constituency point. Such a quality product would enable the whisky industry generally to be extended to everyone's benefit.

Mr. Foulkes

rose—

Mr. Bruce

I must press on, because the Minister needs time to reply.

I know that the Minister will have to consult her colleagues on these points, but these are important issues. The Government should re-introduce stock relief to the Scotch whisky industry. The abolition of stock relief was effectively a tax on the quality of Scotch whisky. Scotch must be matured for three years. The cost of that three-year maturing process is estimated to be £53 million in lost stock relief. That £53 million would be much better deployed within the industry expanding the market. The re-introduction of stock relief would be to the Government's advantage.

I do not believe that the position of the Scotch whisky industry was appreciated when stock relief was abolished. It put Scotch whisky at a disadvantage compared to competitive products when it was facing a major assault from those products.

I urge the Minister to explain to her colleagues that Scotland feels that it should have a thriving and developing Scotch whisky industry, and they should recognise that bids of the scale that we are now witnessing fall, effectively to be the Government's responsibility. They should ensure that all the strategic considerations are taken into account, that the bids are treated fairly and equally and that Scotland obtains the best possible Scotch whisky industry, with local management, control and ownership and growing export sales. That is what we want, I hope that the Minister will be able to give answers which show that the Government are prepared to take on board their responsibilities and ensure that that is what we get.

10.15 pm

The Parliamentary Secretary to the Ministry of Agriculture, Fisheries and Food (Mrs. Peggy Fenner)

One of the delights of my job in the Ministry has been the opportunity to visit some of those fine Scottish distilleries, so I welcome this opportunity for a debate on the Scotch whisky industry. The hon. Member for Gordon (Mr. Bruce) has paid tribute to the industry as well as challenged it, and I wholeheartedly endorse what he has said. The Government fully recognise the importance of this industry as an important source of employment—some 16,500 jobs, many of them in disadvantaged areas—and as one of the United Kingdom's top five net export earners, the value of exports last year having topped the £1 billion mark. At home, the industry is very important, making a similar level of contribution to the revenue. There can, therefore, be no question but that the Government fully recognise the important role of this industry in the country's economy.

I recognise, however, that the hon. Member, in seeking this debate, is concerned at current trends in the industry and especially the effect of several recent major bids. As the House well understands, responsibility for monopolies and mergers policy does not rest with my Department. The Ministry, however, has responsibilities for the Scotch whisky industry and that is why I am pleased to reply to this short debate. As regards competition policy, as my right hon. Friend the then Secretary of State for Trade and Industry made clear in a statement in this House on 5 July 1984, references to the Monopolies and Mergers Commission would be made primarily on competition grounds. "Primarily" does not of course exclude other considerations. For example, the major consideration behind the recent decision to refer the bid for Allied-Lyons plc by Elders IXL Ltd., was the method of financing, which was thought to raise issues deserving of further consideration. On the other hand, the decision not to refer the Guinness bid for Bell's and Argyll's bid for Distillers was guided primarily by considerations of competition.

I know that there has been comment on these decisions. Reference decisions, whichever way they go, often arouse controversy. I do not want to stray too far into the responsibilities of my right hon. Friend the Secretary of State, but I should point out that there were significant differences between the financing of the Elders and the Argyll bids which led my right hon. friend to his different decisions on the need for a reference. The hon. Member has also raised the question of a possible referral of the recent Guinness bid for Distillers. This decision of course rests with my right hon. Friend, the Secretary of State for Trade and Industry. He will take that decision on the basis of advice submitted by the Director General of Fair Trading. It would not be appropriate for me to anticipate that decision or to comment on the matter at this stage.

Mr. lain Mills (Meriden)

Surely Guinness should have the same chance to bid to the shareholders as Argyll?

Mrs. Fenner

I have made the point that this is a matter for my right hon. Friend the Secretary of State. I have no doubt that the Secretary of State will be aware of the question of balance that has been put by my hon. Friend.

As the hon. Member for Gordon will be aware, my hon. and learned Friend the Parliamentary Under-Secretary of State with responsibility for corporate and consumer affairs, the hon. Member for Folkestone and Hythe (Mr. Howard), has announced that a review of the Government's competition policy will begin this year. The precise scope of the review has not yet been finalised but will be announced in due course. In the meantime I am sure that the interesting points made in this debate by the hon. Member will be considered in the review.

The hon. Member has mentioned several problems which are worrying the industry. As he is aware, the distilling sector working group of the National Economic and Development Office, which includes representatives of the industry, Government and the trade unions, has carried out a wideranging review which was published as recently as October 1984. This followed an earlier review in 1978. Matters have been examined carefully in a short time. The report identified all the major issues of current concern to the industry, several of which the hon. Member has mentioned, and made recommendations for action by Government and the industry during the next five years. We are still very much involved in implementing these recommendations and, of course, we are ready to play our part with the industry in tackling any new issues that may arise.

The possibility of the Government restricting bulk exports, particularly of malt whisky, has been suggested because of the benefits that would bring to the UK in employment and in other respects. I should point out that this issue was examined in the 1978 report, which concluded that the industry was insufficiently united voluntarily to regulate its bulk exports, while Government were restrained from such action by their international commitments under the GATT and by Community obligations. The 1984 study reached similar conclusions. Nonetheless, its analysis suggests that such exports have tended to stabilise around the 1978 levels, and figures just released in respect of last year's exports show a substantial fall in this trade. I am sure that that will reassure the hon. Member.

As for the abolition of stock relief in the 1984 corporation tax changes, the Government are well aware that because of its large stocks of maturing whisky, the Scotch whisky industry has been particularly affected by these measures, although in the longer term, as corporation tax rate falls, the industry should pay slightly less tax even without stock relief than it did before the 1984 changes.

In his decisions on taxation at the last Budget, my right hon. Friend the Chancellor of the Exchequer recognised the difficulties faced by the industry. I cannot of course anticipate the decisions that he will take in this year's Budget, but I am aware that the Scotch Whisky Association has made detailed representations.

The Government are working closely with the industry in several areas in which there is agreement that progress can be made. For example, the Government are currently considering proposals for whisky definitions to be prescribed in new regulations under the Food Act 1984. Any proposals will be subject to the usual consultation with all the interests concerned. We are also giving strong support to Community proposals laying down clear definitions of the spirit drinks most commonly traded within the Community. The industry is keen for the enactment of measures which should help the competitive position of Scotch whisky in export markets. We shall aim to press ahead with these proposals during our Presidency of the Community in the second half of this year.

We maintain regular and close contacts with the industry on the trade barriers it faces throughout the world and we pay special consideration to its efforts in the far east. The Government also have the interests of the industry very much in mind in their approach to the EC Commission's proposals on the harmonisation of the structure of duties on alcoholic drinks. Our joint aim is to help establish fairer terms of competition for the industry throughout the Community.

I know that the Scotch whisky industry has been through a difficult period during the past six years. World recession, coupled with changes in drinking fashions, has contributed to a drop in sales in many key markets. I would not, however, like to conclude on such a pessimistic note, which would not, I think, reflect current attitudes in the industry. In the past year or so, the industry has made substantial efforts to bring maturing stocks more into line with sales expectations. There is also some evidence now that the decline in world sales may be taking a turn for the better. In the domestic market, there was a 6 per cent. rise in consumption in the first nine months of 1985 as compared with the same period in 1984, with considerably greater growth in the as yet small malt whisky market. These are encouraging indications which we hope foreshadow a sustained improvement in the industry's performance to the benefit of the whole economy.

Sir Hector Monro (Dumfries)

Will my hon. Friend bring home to my right hon. Friend the Chancellor the strength of feeling in the debate and the number of hon. Members who attended it? We want a revitalised Scotch whisky industry. The only way in which there can be a dramatic improvement in the near future is through budgetary measures. I hope that my hon. Friend will bring that point home to my right hon. Friend the Chancellor.

Mrs. Fenner

My hon. Friend puts his point very clearly.

Question put and agreed to.

Adjourned accordingly at twenty-nine minutes to Eleven o'clock.