Scotch hits some political rocks
Diageo's dilemma: to tell its workforce first that they're getting sacked, or to let politicians in on the news beforehand?
The global drinks giant opted to give its employees priority, if only to tell them that they are being treated as dispensible.
So Diageo is paying the price of leaving Scotland's politicians to find out last week from the 91Èȱ¬.
Ministers, MPs and MSPs don't like it at all, as it leaves them scurrying around trying to look busy and in charge of events - when it's clear that they're not.
That's how you get to a political campaign to save the Johnnie Walker bottling and packaging plant in Kilmarnock, in which Diageo is cast as the villain.
But let's not pretend this is all about bad news presentation.
What lies behind politicians' and unions' irritation is a key challenge about jobs, about what government can do to save jobs, and the future of the whisky industry.
Depressed demand
The decision has a bit to do with the recession, in that whisky demand is depressed.
But this is much more about restructuring for the long-term - which, of course, is more easily achieved during a recession, when workers are under pressure and less able to kick back.
Recession allows managers, across all sectors, to drive change they might have had in mind for years.
It's also worth bearing in mind that whisky, more than any other industry, has to plan on production and then maturation, leading to sales so far off that these bottles might well be for sale during our next recession.
The closure at Kilmarnock (700 jobs to go) and Port Dundas distillery and cooperage in Glasgow (140 more redundancies) is part of a package that includes substantial investment in Fife and Clackmannanshire (400 jobs being created).
The idea seems to be that the company will develop more efficient production lines, while cutting transport costs between the distilled product, the bottling plant and the departure point for exports.
And not far behind this is a threat to move more bottling overseas.
Cheaper locations
Already, between 10% and 20% of output - at the cheaper end of the blends market and, for tax reasons, to Australia - leaves Scotland in bulk rather than bottles. Diageo sends less than half that proportion.
A rule is being introduced by law that would require single malts to be bottled in Scotland, when none are bottled elsewhere at the moment.
But for the dominant blended market, the cost advantages of overseas bottling, close to market and in cheaper locations, may prove much more damaging than the Kilmarnock news for the quarter of whisky jobs on those production lines in Scotland.
What has become a political battle to save jobs, mainly focused on Kilmarnock, raises lots of questions. Here are three...
What can any government do in the face of a large powerful global company that wants to restructure and shed jobs?
The main lever over which the Scottish Government has control is that of financial incentives to stay.
That is limited by European competition and state aid rules, and by a lack of government cash.
It's also debatable that taxpayer money should be poured into retaining a facility that doesn't have its owner's confidence.
Shed jobs
Second, is government well prepared for this challenge?
It used to be for Scottish Enterprise to know such a closure was on the cards, then to prepare and deliver the response.
That's not its role any more. The lead economic development agency is focused on the 2,000 or so companies with the best growth potential, rather than those most likely to shed jobs.
There were contacts with Diageo ahead of the announcement, but it clearly wasn't the kind of close, trusting relationship where plans were shared.
The local enterprise network is now disbanded.
East Ayrshire Council has responsibility for local economic development, and being one of the smallest local authorities in Scotland, it's poorly resourced for this kind of challenge.
Success story
Third, does it make any difference in this case that Scotch whisky has to be distilled and matured in Scotland?
This is not a widget that can be produced anywhere else in the world, where cost factors are cheaper.
Diageo has around 40% of the market, and benefits hugely from the extraordinarily successful branding of Scotch as a premium product.
Of course, Johnnie Walker and Diageo's own marketing have contributed to that success story.
But it is more vulnerable to bad publicity if this political campaign gathers momentum.
On Monday a small-scale Highland distiller suggested a boycott of Diageo products, which may smack of self-interest.
Broken promise
But it's a company which has been here before.
When Guinness bought out The Distillers Company Limited in 1986, the next year creating United Distillers from its merger with Bells, a broken promise that the new company's headquarters would be in Scotland led to a boycott by Scottish customers.
That would later become Diageo, and clearly, that boycott hasn't hurt its growth as a global drinks company.
But this protest is a reminder for the London headquarters that, even if you have offices in 80 countries and sell into 180 markets, having custody of such a large share of the Scotch whisky industry carries responsibilities beyond shareholder value.
Hullo, I'm Douglas Fraser, and I'm business and economy editor at 91Èȱ¬ Scotland. Welcome to my blog, where you can read my take on money matters, viewed from a Scottish perspective.
Comment number 1.
At 7th Jul 2009, cernow wrote:Hello,
all right and true Mr Fraser. But in modern times responsibility is hard to find and even harder to make fast somewhere or with someone.
Looking at share prices and the value they represent Diageo has no home and no special responsibility towards Scotland or to Scotch whisky. Therefore there is - in the eyes of the decision makers - no special responsibilty towards Kilmarnock. And tradidtion does not count at all.
The responsibility of Diageo is laying at keeping the value of the shares that were issued high and to take that value even higher.
That responsibility is distributed over the whole world. And because of that responsibility lies not towards real people but towards mostly anonnymous shareholders.
There is only one sector of whisky making where romanticism has still a place - in marketing.
To give up Kilmarnock and to close Port Dundas is a strategic decision made at the headquarters of an international company.
That a Scottish area loses many of its jobs is a collateral damage.
People who have worked there for generations should be proud of their achievement but should not stand in the way of development.
It was good as long as it lasted but now it has to be over unfortunately.
That is the point of view modern decision makers take.
Politics and politicians will not change that. The factual constraints you know.
One could argue if it is right that decions that affect so many people are made at the headquarters of companies by powerful men and - to a lesser extend - women who are paid ridiculous sums to do just that and who are not controlled or watched over in a satisfying way. Nor are such decisions legitimised in a democratic way.
We have learned in a very hard way that all hell broke lose when money really tried to take over the world.
We all feel the consequences. But can the people of Scotland vote against this decision? They can not. They can vote for or against politicians but they can not vote against Diageo and her board of directors.
That is the scandal in my view.
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Comment number 2.
At 7th Jul 2009, redrobb wrote:I take it this companys new site in the Kingdom of Fife is classed as green field development. Therefore does it secure some form of developmental grant assistance with funds from local, regional or national programmes? Very much akin to the building (same industry) Im sitting having lunch in at the moment, but as the crow flies they relocated circa 20 miles coincidentally into another region just as green. Call me ye olde cynic, I suspect there has been a lot of number twitching from the captains of industry hailing from the accounting field! Much of the same vain that brought us the blockbuster Mother of all Credit Crunches featuring those that did very well thank you aka pension pots & money stashed in offshore accounts! This example of global business (exploitation) clearly shows how impotent government really is e.g. The Phoenix Four, not forgetting the wannabee Scots variety silicon glen no more, and aspirin alley just round the corner!
So just what is wrong with indigenous protectionism for anything grown, designed or manufactured in this country combined with untouchable global patents, anyone nation infringing having punitive action taken against them! In days gone by a visit from a passing gunboat sufficed, heck wait a minute weve got a few Nuke subs hanging about doing nowt! Throw in an added threat of putting in irons the captains of industry behind all these so called productivity improvements or alleged competition threats. In relation to this specific industry I can however smell an element of hypocrisy. Hmmm whats that other word that begins with a c? Cartel! Appropriately filling their respective coffers in times of greed and not need!
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Comment number 3.
At 7th Jul 2009, nine2ninetysix wrote:Diageo`s history did not start in Kilmarnock or Scotland. It started in Bologna, Italy where Justerini, the J of J&B fame, fell in love with an opera singer and followed her to London taking with him his distilling uncle`s recipes.
The breadth of Diageo gives rise to the problem, to quote the company`s own values
"We strive to create mutually fulfilling relationships and partnerships".
Obviously they are not finding themselves fulfilled and want to end the romance dating back to 1820 with Kilmarnock
Other industries have come and gone in the area. The whisky workers stayed in work when other jobs disappeared. It is their turn now to diversify and retrain or move. It is the nature of the world we have created.
I still don`t drink Guinness after a previous betrayal, it makes no difference to Diageo because I do drink Walkers.
The Scottish Government needs to react quickly and yes East Ayrshire is too small, a unified Ayrshire would be better placed. Expect no help from Westminster or Brussells.
As for the rest of us, buy local and beware of conglomerates, be they banks, brewers, or supermarkets, they are bad news.
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Comment number 4.
At 7th Jul 2009, Robabody wrote:Interestingly enough while it may be the rationale of companies to ensure the best possible return for shareholders it is the role of our legislators to legislate! And what better cause than the protection of our national drink ?
That the major players in the industry have quietly been getting away with product dilution over the years is beyond doubt. Unfortunately some of these questionable practices have filtered through to smaller outfits.
Central malting, bulk use of foreign grain, reductions in local cooperage, etc., all against a background of the myths associated with the Misty Glen and rolling Strath.
The question is, when does Scotch whisky stop being Scotch ?
Well heres a starter for 5:
1) Our legislators should step in to ensure not one drop of Scotch blended, malt or otherwise leaves this land without being bottled here. No bulk sales to anyone if they want to make whisky using our stuff for the base, then bring their version here for blending.
2) Introduce the appellation methodology to the product insist on a local % of grain, water, peating, workmanship etc before the product is allowed for sale/marketing.
3) Use labelling legislation to ensure providence and ownership is clear (Johnnie Walker blended in Kilmarnock move from Kilmarnock and you lose the label due to loss of providence).
4) Where distilleries are closed / mothballed they are given government protection to ensure that they are not butchered and components sold of abroad or elsewhere. If they remain out of operation for more than (say) five years the Govt to buy and sell them on to other interested parties
5) Change business legislation so that the ethos becomes best possible return for shareholders only when conducive with the best interests of the local community.
Will I hold my breath for the Westminster Weary Willies to act? No, the fearties will let us down again and another great Scottish industry will head down the tubes.
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Comment number 5.
At 9th Jul 2009, Dean MacKinnon-Thomson wrote:3. nine2ninetysix
Your sentiments of buy local is well placed.
The key to directing free markets down the directions we desire as a nation lies in the art of consumer purchasing power.
An educated consumer, who with every purchase effectively is placing a vote with the product purchased is central. If we have consumer who refrain from purchasing anything not local this shall compell firms to alter their practices in how they manufacture/provide goods/services.
Thus lets empower the consumer further through educating them of the contents of goods they buy, of where those goods were made/farmed/bottled etc. Lets change things in a way free markets always understand- through sales numbers.
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