Scotch Whisky & Scotland s Economy. A 100 Year Old Blend

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1 Scotch Whisky & Scotland s Economy A 100 Year Old Blend December 2012

2 EXECUTIVE SUMMARY... 2 A CENTURY OF SCOTCH WHISKY... 2 GOLDEN AGE OF SCOTCH WHISKY... 2 EIGHTIES AND ONWARDS... 2 ONE CENTURY LATER... 3 FUTURE PROSPECTS... 3 CONCLUSIONS INTRODUCTION INDUSTRY TRENDS... 6 INDUSTRY TRENDS INDUSTRY TRENDS INDUSTRY TRENDS ECONOMIC IMPACT TRENDS EMPLOYMENT IMPACTS RECENT IMPACT TRENDS PRODUCTIVITY TRENDS PRODUCTIVITY COMPARISONS FUTURE PROSPECTS SCOTCH WHISKY AND SCOTLAND S ECONOMY FUTURE TRENDS CONCLUSIONS REFERENCES PUBLICATIONS WEB LINKS APPENDIX

3 Executive Summary A century of Scotch Whisky The Scotch Whisky Association (SWA) celebrates its centenary year this year, having formed in In that year the Scotch Whisky industry employed just under 5,000 people across Scotland and generated around 3 million in Gross Value Added (GVA). The industry was in decline, the number of active distilleries in Scotland had fallen by nearly a third from the start of the century to just 120 by The Scotch Whisky industry was devastated by the two world wars and for around two years during World War II Scotch Whisky production was even suspended. After World War II the Chancellor of the Exchequer identified one or two special items such as whisky with export potential which could help to close the dollar gap following the 1949 devaluation of sterling. Substantial gains were made between 1952 and 1962 with a Scottish Office report praising the startling performance of Scotch Whisky exports and that the industry had achieved a spectacular expansion in output and exports. Scotch Whisky Industry Year Employment GVA ( m) , , , , , , , , , ,000 1, ,600 2,918 Golden age of Scotch Whisky The 1960s and 1970s represented a golden age for the Scotch Whisky industry. By 1972 the industry accounted for just over 20,000 jobs across Scotland, generated value added of 84 million (GVA) and exports of 228 million. At its peak, Scotch Whisky supported nearly 100,000 jobs directly within the industry and through its supply chains across Scotland. But the end of the seventies also marked the start of an extended downturn in the Scotch Whisky industry. This paved the way for significant structural change in the industry. Eighties and onwards The eighties saw a dramatic reversal of fortunes for the Scotch Whisky industry compared to the spectacular performance in the sixties and seventies. Some of the difficulties were compounded by overproduction in the late seventies and there were clear signs that the industry had overinvested bringing old distilleries back into use. 2

4 The disparate nature of the industry made it difficult to develop international brands in increasingly competitive markets. Following the downturn the Scotch Whisky industry has undergone a process of consolidation still on-going today. Arguably it is inward investment and development of international networks that has once again restored Scotch Whisky to the spectacular performance seen in the seventies. One century later Today, the total economic impact of Scotch Whisky on Scotland s economy is nearly 4.2 billion supporting around 36,000 jobs in the industry and supply chain. Productivity has accelerated to previously unseen levels, this year (2012) the GVA per worker was conservatively estimated to be 275,000. The average Scotch Whisky worker adds nearly five times the value added by workers in Scotland s life sciences sector. Workers in the Scotch Whisky industry are 57% more productive than workers in London s financial and business services industry. Economic Impact of Scotch Whisky 2012 Direct Indirect & Induced Total Impact Employment 10,600 25,400 36,000 GVA ( m) 2,918 1,276 4,193 Future prospects The economic impact of Scotch Whisky as a share of the Scottish economy is still below the watermark during the sixties. If the Scotch Whisky industry were to account for a similar share today, this would add value approaching a further 1 billion. A return to these heights is not unreasonable given significant new investment in Scotch Whisky production capacity. Scotch Whisky exports are now Scotland s largest international export ahead of refined petroleum ( 3.0 billion) and business services ( 2.5 billion). Scotch Whisky has underpinned Scotland s international export markets overtaking refined petroleum in 2009 and accounting for 55% of growth since Scotch Whisky exports are being sold to countries that are currently growing more quickly than countries buying other Scottish international exports. Scotch Whisky enjoys an enviable position with regards to growth markets and is likely to play an increasingly important role in the story of Scotland s export markets. 3

5 Conclusions The golden age of Scotch Whisky during the sixties and seventies saw a significant rise in export volumes. The more recent rise of the Scotch Whisky industry has been helped by rising export values. Even throughout the current global downturn the average value of each bottle exported has risen by 42% over the last five years. The average value of bottles of Scotch Whisky sold overseas has risen each and every year since It is difficult to identify other drinks industries in Europe, or elsewhere, that have developed products as high value as Scotch Whisky. Significant capital investment and the reopening of previously mothballed distilleries suggests Scotch Whisky will play an even greater role in Scotland s economy in the future, especially as its growth markets are focused on the high growth economies of the world. 4

6 1 Introduction 1.1 During 2012 the Scotch Whisky Association (SWA) celebrates its centenary year, having formed in consulting was commissioned by the Scotch Whisky Association (SWA) to undertake a study of the contribution that Scotch Whisky has made to Scotland s economy. 1.2 Previous studies have focused on the economic impact of Scotch Whisky production during individual years (DTZ Pieda Consulting, January 2003 and Verso Economics, May 2010). This study assesses the impact over the last century providing a timeline to allow a broader view of development of the industry. 1.3 The history of Scotch Whisky is strongly linked to Scotland s culture and communities (4-consulting, July 2011) and development of the industry has been well documented. A detailed review is given in The Scotch Whisky Industry Record (Craig, 1994). 1.4 Cabinet papers over the last century were also reviewed during the preparation of this report. So whilst regular data is not available it was possible to look at one off surveys and assessments to build up a picture of how the industry has changed and developed. Additional data was drawn from the Scottish Government, Office for National Statistics (ONS) and HM Revenue and Customs. A further description of the data sources is included in the appendix to this report. 5

7 2 Industry Trends Industry trends One century ago the Scotch Whisky industry employed just under 5,000 people across Scotland and generated around 3 million in Gross Value Added (GVA). The industry was in decline with employment having fallen from 6,200 at the start of the twentieth century. The number of active distilleries in Scotland fell by nearly a third from 159 in 1900 to just 120 by 1912 (Craig, 1994). 2.2 The main cause of the industry s difficulties was a near collapse in domestic demand. Domestic demand was influenced by significant rises in excise duty alongside campaigns against the consumption of alcohol. The volume of spirits produced in the UK for domestic consumption fell by more than half (56%) from 100 million litres of alcohol in 1900 to 44 million by 1912 (Craig, 1994). Table 2.1: Scotch Whisky Trends Year Employment Gross Value Added ( million) , , , , , , , , , ,000 1, ,600 2,918 SOURCE: 4-consulting (data sources appended) 2.3 Attempts by the Scotch Whisky industry to develop overseas markets were stifled by the outbreak of the First World War, rising taxes on imports of alcohol around the world and prohibition in the United States from Weir (1989) describes the UK s drinks industry as moribund with hardly detectable signs of life in the 1920s, and an observable, but still feeble pulse in the 1930s. 6

8 2.4 By 1932 employment had risen to nearly 8,000 jobs and GVA had expanded to 7 million, helped by gradually improving export markets. The onset of World War II saw both employment (4,400) and GVA ( 400,000) fall to their lowest levels seen in the last century. For around two years during World War II, Scotch Whisky production was even suspended (The National Archives,1946). Industry trends The importance of Scotch Whisky in helping rebuild the UK s economy after the war was noted in a draft white paper presented to parliament by the Minister of Food (The National Archives, 1946). The UK government sought to allocate grain, mainly barley, to the Scotch Whisky industry in order to play a valuable part in the recovery of export markets. However, grain was in short supply and the government could only provide a limited allocation with the Minister warning that would result in a consequent reduction in the capacity to earn foreign currency. 2.6 Between 1942 and 1952 the number of Scotch Whisky industry jobs more than doubled from 4,400 to 9,900 with a near thirty fold increase in value added (GVA) from 0.4 million to 11 million. By 1952 exports of Scotch Whisky had reached 33 million 1 up from 11 million at the end of World War II. 2.7 An economic survey presented to parliament by the Chancellor of the Exchequer (The National Archive, 1950) identified one or two special items such as whisky as established exports to North America. The survey suggested these special items could help to close the dollar gap following the 1949 devaluation of sterling. 2.8 Further substantial gains were made between 1952 and 1962 with employment expanding to 14,000 jobs, GVA increasing to 38 million and exports rising to 81 million. A Scottish Office report on Scotland s economy (The National Archives, 1965) praised the startling performance of Scotch Whisky exports during the 1950s stating that The Scotch Whisky industry has achieved a spectacular expansion in output and exports. 2.9 Jones (2002) suggests the 1960 s and 1970 s represented a golden age for the Scotch Whisky industry. By 1972 the industry accounted for just over 20,000 jobs across Scotland, generated value added of 84 million (GVA) and exports of 228 million. But the end of the seventies also marked the start of an extended downturn in the Scotch Whisky industry, paving the way for significant structural change in the industry. 1 Gross Value Added (GVA) is a net measure (including exports) from which the costs of production (including imports) are deducted, hence export values have frequently exceeded GVA. 7

9 Industry trends In 1982 Scotch Whisky GVA had risen to 140 million with industry exports growing to 872 million. Between 1952 and 1982 Scotch Whisky exports grew around twice as quickly as value added (GVA) as the industry moved firmly towards overseas markets The eighties saw a dramatic reversal of fortunes for the Scotch Whisky industry compared to the spectacular performance in the sixties and seventies. By 1982 employment had already fallen to 19,800 jobs and would decline more sharply in the mid to late eighties but GVA continued to rise Some of the difficulties were compounded by overproduction in the late seventies, stocks had continued to rise until by 1980 they were equivalent to more than ten years production (Jones, 2002). By the eighties there were clear signs that the industry had overinvested bringing old distilleries back into use Jones (2002) outlines a scenario where many smaller distillers supplied limited quantities of their single malts. Larger blenders, including The Distillers Company Limited (DCL), sold their products through marketing subsidiaries. The blending and marketing operations of DCL comprised around 40 marketing subsidiary companies. The disparate nature of the industry made it difficult to develop international brands in increasingly competitive markets Following the downturn during the eighties, until the present day, the Scotch Whisky industry has undergone a process of consolidation. The majority of distilleries are now under the ownership of larger enterprises with extensive overseas operations. Arguably it is this inward investment and development of international networks that has once again restored Scotch Whisky to the spectacular performance seen in the seventies Table 2.2 provides a more recent assessment of annual industry GVA and employment. The direct value of the Scotch Whisky industry is now approaching 3 billion. Employment is also showing signs of rising, on the back of significant capital investment and the reopening of previously mothballed distilleries Diageo s new bottling plant in Leven opened earlier this year (2012) with the plant supporting around one thousand on-site jobs. Diageo also announced a 1 billion investment package this year to increase Scotch Whisky production capacity including the expansion of around half of its malt Scotch Whisky distilleries and the building of a new distillery Chivas Brothers is also undertaking a significant investment programme including reopening the mothballed Glen Keith distillery in Banffshire next year. The investment will also see an expansion in existing distilleries and the opening of a new bottling hall in Paisley. 8

10 2.18 A number of new developments are also underway including the Adelphi Distillery at Glenbeg in Ardnamurchan. The Ardnamurchan distillery was granted planning consent earlier this year and includes warehousing and a visitor centre. The number of investment projects becoming operational this year may explain the slight rise in employment during Table 2.2: Scotch Whisky Trends Year Employment Gross Value Added ( millions) , , ,000 1, , , , , , ,300 2, ,700 2, ,300 2, ,100 2, ,600 2,918 SOURCE: 4-consulting (data sources appended) 9

11 3 Economic impact trends Employment impacts Tables 3.1 and 3.2 outline the economic impact of the Scotch Whisky industry over the last century. Indirect impacts show the employment and value (GVA) generated through the links between businesses in the Scotch Whisky supply chain. For example, distilleries purchase cereals and logistics services providing income to farms and hauliers. 3.2 Induced effects arise through the spending of workers employed either directly in the Scotch Whisky industry or in the supply chain. For example, workers in a bottling plant will support jobs on the high streets of towns around the plant through local spending. Taken together the direct, indirect and induced effects show the overall impacts outlined in Tables 3.1 and 3.2. Table 3.1: Scotch Whisky Employment Year Direct Indirect & Induced Total ,900 38,500 43, ,900 38,500 43, ,900 57,000 64, ,400 27,500 31, ,900 56,600 66, ,200 55,900 70, ,200 78,000 98, ,800 75,100 94, ,100 40,500 53, ,000 20,500 32, ,600 25,400 36,000 SOURCE: 4-consulting 3.3 The employment impact of the Scotch Whisky industry peaked during the golden age in the late seventies with around 100,000 jobs. Production was at its peak generating jobs directly within the industry, but induced and indirect effects were also important. The agricultural sector has always been a key supplier to the Scotch Whisky industry. Substantial productivity gains over the last century have significantly reduced the number of supply chain agricultural jobs. 10

12 3.4 Over the last thirty years Scotland s economy has become increasingly open and woven into the global economy. In the seventies the Scottish economy was less open, most people bought their shopping on the local high street and holidays abroad were a rare luxury. In a more closed economy indirect and induced effects tend to be much larger as spending is recycled among local businesses. 3.5 The latest Scottish Government multipliers show that in 2007 every 100 jobs in the Scottish spirits and wine industry sustained 260 jobs across Scotland (Table A.1 appended). Nearly a decade earlier 100 jobs in the Scottish spirits and wine industry sustained 279 jobs across Scotland and nearly two decades earlier the equivalent figure was 474 jobs. A set of data for the UK economy in 1841 (Horrell et al, 1994) showed 100 jobs directly in the UK s food, drink and tobacco industry sustained a total of 950 jobs across the UK. 3.6 Table 3.2 shows the latest estimate of economic impact for the Scotch Whisky industry stood at nearly 4.2 billion for The changes shown in Table 3.2 should be treated with some caution as GVA is shown in current prices with no account made for inflation. Table 3.2: Scotch Whisky Gross Value Added ( millions) Year Direct Indirect & Induced Total , , , ,918 1,276 4,193 SOURCE: 4-consulting 3.7 More recent evidence (Verso Economics, 2010) shows that most Scotch Whisky multipliers are slightly higher than those published for the wider Scottish spirits and wines industry. The difference may be partly attributed to more of the Scotch Whisky industry s supply chain being based in Scotland compared to other drinks. 3.8 The difference may also be partly explained by a gradual movement of activities north of the border in recent years, as the spirits industry consolidates to the benefit of Scotland. Diageo's new bottling plant in Leven includes six bottling lines and is also used for Diageo's vodka and gin brands. 11

13 3.9 Producing inflation adjusted estimates of the value added by Scotch Whisky should ideally take account of the changing prices of whisky sold and the changing prices of inputs to production (cereals, labour, distribution). This is likely to be a complex and data hungry task, instead Table A.2 (appended) uses simple economy-wide GDP deflators published by HM Treasury to adjust the total impact figures shown in Table After adjusting for inflation the overall impact of Scotch Whisky more than doubled between 2002 and 2012 with value added in 2012 nearly two and half times that of This nearly matched the highest post World War II growth seen between 1952 and 1962 where the value added in 1962 was just over two and half times that of The inflation adjusted figures also show three decades where the Scotch Whisky industry contracted significantly including , and Recent impact trends 3.11 Tables 3.3 and 3.4 provide a more recent assessment of the annual employment and GVA impacts of the Scotch Whisky industry. The Scotch Whisky industry now sustains around 36,000 jobs across Scotland with the overall employment impact now at its highest level for over a decade. Our estimates suggest that the overall employment impact was last higher fifteen years ago in 1997 at around 37,000 jobs. Table 3.3: Scotch Whisky Impact on Scottish Employment Year Direct Employment Indirect & Induced Employment Total Employment ,700 18,700 29, ,000 19,000 30, ,000 20,500 32, ,700 19,700 31, ,800 18,000 28, ,600 17,400 28, ,000 19,500 31, ,800 18,900 30, ,300 24,600 34, ,700 25,300 36, ,300 24,600 34, ,100 24,100 34, ,600 25,400 36,000 SOURCE: 4-consulting 3.12 The economic impact of Scotch Whisky rose to just under 4.2 billion in 2012 buoyed by export markets. The economic impact comprised 2.9 billion of GVA directly within the Scotch Whisky industry and nearly 1.3 billion in indirect (supply chain) and induced (employee spending) effects. 12

14 Table 3.4: Scotch Whisky Impact on Scottish Gross Value Added ( millions) Year Direct Indirect & Induced Total ,697 1,179 3, ,807 1,227 4, ,684 1,173 3, ,805 1,226 4, ,918 1,276 4,193 SOURCE: 4-consulting Productivity trends 3.13 Table 3.5 below shows GVA per worker from 1912 to 2012 based on the direct figures from Tables 3.1 and 3.2. The figures are shown in constant 2012 prices based on HM Treasury s GDP deflators. There was relatively little improvement in productivity until the 1990s. The Scotch Whisky industry faced considerable challenges early in the twentieth century and suffered during the 1940s and early in the 1950s due to World War II The rise of the Scotch Whisky industry during the late 1950s through to the 1970s appears to have been based on expanding volume rather than value. Since the beginning of the 21 st century industry productivity has increased sharply and this is reflected in the rising average value per bottle, particularly in export markets. Table 3.5: GVA (2012 prices) per Worker Year Direct , , , , , , , , , , ,000 SOURCE: 4-consulting 13

15 3.15 Table 3.5 shows productivity has accelerated to previously unseen levels, this year GVA per worker was estimated to be 275,000. The latest Scottish Government estimate for 2010 (see web links) suggests productivity per worker in the spirits industry may be as high as 289,000 GVA per worker. The estimate of 275,000 GVA per worker is therefore in line with official estimates. Productivity comparisons 3.16 The Scottish Government has identified growth sectors as part of the latest Government Economic Strategy (see web links). The strategy emphasises the need to target support towards growth sectors as the sectors have the potential to drive sustainable growth in the long-term The growth sectors include financial & business services, life sciences, energy, sustainable tourism, creative industries and food & drink (including Scotch Whisky). Table 3.6 shows GVA per employee for Scotland s growth sectors in 2010, published by the Scottish Government, benchmarked against the Scotch Whisky industry. Table 3.6: Productivity Comparisons Sectors GVA per Employee Energy 380,000 Scotch Whisky 275,000 Financial & Business Services 179,000 Food & Drink (inc. Whisky) 80,000 Life Sciences 57,000 Creative Industries 45,000 Sustainable Tourism 18,000 SOURCE: Scottish Government (Annual Business Survey) and 4-consulting 3.18 Energy is Scotland s only growth sector with higher productivity than the Scotch Whisky industry, and this is driven by oil and gas. The average Scotch Whisky worker adds nearly five times the value added by the average worker in Scotland s life sciences sector. The Scottish Government figures (based on the Annual Business Survey) for financial and business services exclude some banking activities (see web links) which has the effect of increasing the productivity figure. Despite this, the Scotch Whisky industry exhibits productivity figures that are still 54% higher than the productivity measure shown for Scotland s financial and business services. 14

16 3.19 The latest Business Register and Employment Survey (BRES) data for 2010 shows 325,000 employees in financial and business services in London. The latest ONS figures for GVA (unsmoothed) covering financial and business services in London (also for 2010) is 56,626 million. This suggests GVA per employee of around 174,000. Workers in the Scotch Whisky industry are therefore 57% more productive than workers in London s financial and business services industry Value added (GVA) per employee job calculations can be made based on Eurostat s databases (see web links). The Eurostat data show that the Netherlands has the most productive food and drink sector in Europe adding around 82,000 (GVA) per employee job during 2009 ( 1= 0.80). This figure is only marginally ahead of Scotland s food and drink sector (Table 3.6), it is therefore reasonable to suggest that Scotland is one of Europe s leading economies in food and drink production Detailed data for the drinks industries across Europe is limited. The latest data from the National Institute of Statistics and Economic Studies (INSEE) in France suggests the drinks industry generated around 72,000 per employee during It is difficult to identify other drinks industries in Europe, or elsewhere, that have developed products as high value as Scotch Whisky ( 275,000). 15

17 4 Future Prospects Scotch Whisky and Scotland s economy 4.1 Recent trends may suggest the Scotch Whisky industry has moved into another golden age. But Table 4.1 shows the economic impact of Scotch Whisky as a share of the Scottish economy is still below the watermark of 4.4% during the sixties and 4.2% during the seventies. Estimates of the overall value of Scotland s economy are appended. 4.2 If the Scotch Whisky industry were to account for around 4.2% to 4.4% of Scotland s economy, this would add value approaching a further 1 billion and potentially support new jobs. This scenario is not unreasonable and may become a reality given recent announcements of significant new investment in Scotch Whisky production capacity. Table 4.1: Impact % Scottish GVA Year Scotch Whisky Impact % of Scottish Economy % % % % % % % % % % % SOURCE: 4-consulting 4.3 International exports of manufactured goods from Scotland are shown in Table 4.2 based on the latest Global Connections survey (Scottish Government, 2012). The latest data is only available up to 2010 and the earliest data is available from Scotch Whisky accounted for nearly one quarter (24.3%) of Scotland s manufactured international exports, nearly doubling its share (12.8%) since Scotch Whisky exports overtook international exports of refined petroleum (and other chemicals) in The 2010 global connections survey identified Scotch Whisky as Scotland s largest international export ahead of refined petroleum ( 3.0 billion) and business services ( 2.5 billion). 16

18 Table 4.2: International Scottish Exports Year Scotch Whisky Refined Petroleum Manufactured Exports Whisky Share of Man. Exports ,860 2,325 14, % ,035 2,435 12, % ,125 2,675 11, % ,805 3,470 13, % ,330 3,010 13, % SOURCE: Global Connections Survey 2010 (Scottish Government) 4.5 Total international exports (including manufacturing and services) rose from 19.3 billion in 2002 to 22.0 billion by 2010, a rise of 14%. Over the same period international exports of Scotch Whisky rose by 79% or just under 1.5 billion. Scotland s international exports have struggled over the last decade as electronics manufacturing has declined. 4.6 The surge in Scotch Whisky has underpinned Scotland s international export markets accounting for 55% of growth between 2002 and More recent data available from the Scotch Whisky Association (SWA) suggests international exports rose again in The Scotch Whisky industry is likely to continue to play an important role in Scotland s international trade. Future trends 4.7 Table 4.3 shows the top 10 international export markets for Scotch Whisky (Scotch Whisky Association, October 2012) and for the wider Scottish economy (Scottish Government, January 2012). The figures for Scotch Whisky and wider Scottish exports cover the calendar years 2011 and 2010 respectively. 4.8 The top exports markets for Scotch Whisky in 2011 were similar to those for 2010 with the USA and France the largest markets in both years. However, the value of exports to Singapore increased by 44% between 2010 and 2011 overtaking exports to Spain. Exports to Taiwan rose by 44% overtaking exports to Germany. Brazil and Venezuela moved into the top 10 Scotch Whisky export markets with growth of 48% and 33% respectively. 17

19 Table 4.3: Top 10 International Export Markets ( millions) Scotch Whisky Scottish Economy Country Value Country Value USA 655 USA 3,530 France 535 Netherlands 2,365 Singapore 318 France 1,530 Spain 259 Germany 1,265 South Africa 166 Belgium 985 Taiwan 155 Norway 815 Germany 150 Spain 710 South Korea 143 Italy 570 Brazil 99 Ireland 550 Venezuela 83 Switzerland 520 SOURCE: Scotch Whisky Association & Global Connections Survey (Scottish Government) 4.9 Real economic growth figures for last year (2011) for each of the countries in Table 4.3 were taken from the World Bank s databank (see web links). The growth figures were weighted by the value of international exports for both Scotch Whisky and the wider Scottish economy. The weighted real economic growth for Scotch Whisky markets in 2011 was around 2.5% compared to around 1.5% for Scottish international export markets. This suggests that Scotch Whisky exports are being sold to countries that are growing more quickly than countries buying other Scottish international exports A similar calculation was applied using economic growth forecasts published by the International Monetary Fund (IMF) for 2017 (see web links). The weighted real economic growth for Scotch Whisky markets for the next five years was around 2.6% compared to just under 1.7% for Scottish international export markets. This suggests that Scotch Whisky exports are being sold to countries that are likely to grow more quickly in the future The Global Connections Survey also measures goods and services sold by Scotland s economy to the rest of the UK. If the value of sales to the rest of the UK are treated as exports then nearly one fifth (19.7%) of the value of all Scotch Whisky exports are sold to the rest of the UK. The latest data from the SWA (based on HMRC data) suggest around 7% of Scotch Whisky sales by volume are to the rest of the UK Over two thirds of the value of all Scottish exports (67.2%) are sold to the rest of the UK. If exports to the rest of the UK are included in the above growth calculations then the gap becomes more prominent with economic growth in Scotch Whisky markets around double that of all Scottish exports. 18

20 4.13 Although Scotch Whisky operates in increasingly competitive international markets, it enjoys an enviable position with regards to growth markets and is likely to play an increasingly important role in the story of Scotland s export markets. 19

21 5 Conclusions 5.1 The Scotch Whisky industry has undergone significant changes over the last century but still faces many of the same challenges. There have been well documented struggles with sweeping changes in legislation, taxes and rapid developments in overseas markets. 5.2 Distillery owners have to invest in capacity based on the likely market demand several years ahead. On a number of occasions this led to overcapacity and protracted downturns in the industry as demand failed to materialise. 5.3 The golden age of Scotch Whisky during the sixties and seventies saw a significant rise in export volumes. The more recent rise of the Scotch Whisky industry has seen a more marked rise in export values. Even throughout the current global downturn the average value of each bottle exported has risen by 42% over the last five years (Scotch Whisky Association, October 2011). 5.4 The rising value of exports has underpinned substantial productivity gains over the last twenty years. Scotch Whisky is now the second most productive sector in Scotland behind only energy, fuelled by oil & gas. Workers in the Scotch Whisky industry are more productive than workers in London s financial and business services industry. 5.5 It is difficult to resist the conclusion that since the eighties, investment by enterprises with extensive overseas operations has helped better develop international networks and export markets. These developments have coincided with increasing overseas demand for higher value products. 5.6 Scotch Whisky is well aligned to growth markets and has accounted for over half the growth of all Scotland s international exports since Significant capital investment and the reopening of previously mothballed distilleries suggests Scotch Whisky will play an even greater role in Scotland s economy in the future, especially as its export growth is focused on the high growth economies of the world. 20

22 References Publications Crafts N. F. R. (March 2004a) Regional GDP in Britain, : Some Estimates, Working, Department of Economic History, London School of Economics Crafts N. F. R. (March 2004b) Market Potential in British Regions , Working Paper No. 04/04, Department of Economic History, London School of Economics Craig H. C. (1994) The Scotch Whisky Industry Record DTZ Pieda Consulting (January 2003) The Economic Impact of the Production of Scotch Whisky, Gin and Vodka in Scotland Jones S. R. H. (September 2002) Brand Building and Structural Change in the Scotch Whisky Industry, Dundee Discussion Papers in Economics Horrell S., Humphries J., Weale (August 1994) An Input-Output Table for 1841, The Economic History Review, New Series, Vol. 47, No. 3, pp The National Archives CB/129/8, Minister of Food (March 1946) Draft White Paper On The World Food Shortage The National Archives CAB/129/38, Chancellor of the Exchequer (March 1950) Economic Survey for 1950 The National Archives CAB/129/123, Secretary of State for Scotland (December 1965) The Scottish Economy : Draft White Paper Scotch Whisky Association (October 2012) Statistical Report 2011 Scottish Government (January 2012) Scotland s Global Connections 2010 Verso Economics (May 2010), The Economic Impact of Scotch Whisky Production in Scotland Weir R., (1989) Rationalization and Diversification in the Scotch Whisky Industry, : Another Look at 'Old' and 'New' Industries, Economic History Review Series, 42, Web links Eurostat Statistics Database International Monetary Fund, Data & Statistics 21

23 Scottish Government: Government Economic Strategy Scottish Government: Gross Value Added definition Scottish Government: Input-Output tables Scottish Government: Profile of Scottish Spirits Sector Scottish Government: Profile of Scottish Spirits Sector (updated) Office for National Statistics: What is Gross Value Added? World Bank Databank 22

24 Appendix Employment and GVA multipliers were used drawing on the previous economic impact report (Verso Economics, 2010) and sources shown in Table A.1. The most appropriate multiplier for each year from 1912 to 2012 was used with the multiplier from 1841 used in 1912 and multipliers from the previous economic impact report used from 2008 onwards. Scotch Whisky industry data for employment and GVA was based on a wide range of sources with the data for 2008 taken from the previous economic impact report (Verso Economics, 2010). Estimates of employment data from 1971 onwards were available from the Business Register & Employment Survey (BRES), Annual Business Inquiry (ABI), Annual Employment Survey (AES) and Census of Employment (COE). Earlier estimates for both output and employment were available from Weir (1989) from 1912 to the 1940s. Estimates for the 1950s and 1960s were based on measures of the Scotch Whisky industry drawn from the 1950 Scottish economic survey (March 1950) and the draft white paper The Scottish Economy (December 1965). Additional estimates for Scotch Whisky industry output were drawn from the Annual Business Survey (ABS) published by the Scottish Government and data on prices and output volumes taken from Craig (1994) and the Scotch Whisky Association. Table A.1: Selected Employment Multipliers (Type II) Year Country & Sector Multiplier 1841 UK Food, Drink & Tobacco Scotland Spirits & Wine Scotland Spirits & Wine Scotland Spirits & Wine 2.60 SOURCE: 4-consulting 23

25 Table A.2: Table 3.2 in 2012 prices ( m) Year Total GVA Impact , , , , ,193 SOURCE: 4-consulting Table A.3: Scottish Economy ( bn) Year GVA SOURCE: ( consulting estimate) Measures of Scotland s economy were taken directly from Crafts (b) (March 2004) for 1912 to Estimates for 1941 and 1951 were based on data from Crafts (b) (March 2004) and the estimate for 1961 was based on Scottish Government data for GDP at constant prices (adjusted for inflation). Estimates for 1972 and 1982 were based on Crafts (a) (March 2004) and 1992 and 2002 were based on ONS figures for regional (GVA). The estimate for 2012 was based on the most recent Scottish GDP data available for 2011 and 2012 and economic activity indicators for the last quarter of

26 The Scottish Government s most recent cash estimate of GDP was 109 billion for 2011 which is similar to the estimate of billion shown in Table A.3 for The same source of data shows a cash estimate of GDP of 74 billion during 2002 which is also similar to the estimate of 75.9 billion for 2002 from Table A.3. 25