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Home / Business

Scotch shakes off its hangover

By Zoe Wood
Observer·
31 Mar, 2008 04:00 PM5 mins to read

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Coppersmiths in some regions are hiring apprentices for the first time in 15 years.

Coppersmiths in some regions are hiring apprentices for the first time in 15 years.

KEY POINTS:

In the Carsebridge Cooperage in Alloa, Ennio Morricone's theme from The Good, the Bad and the Ugly blasts overhead and the coopers beat time to the music.

The scene is as macho as a Sam Peckinpah western: beefy Scotsmen hammer the barrels, and the smell of sweat is
masked by the sweet, residual aroma of bourbon drifting from the secondhand casks.

But, as with the shipyards and the mines, few Scottish sons have been able to follow their fathers into the traditional trades related to whisky production as the country's industrial base has declined.

"Coopers were retiring and no one was coming through to replace them," says David Taylor, business leader at Carsebridge and president of the National Cooperage Federation.

Now, though, things are looking up. In the past year the major manufacturers - Diageo, William Grant & Sons, Edrington, Bacardi, and Whyte & Mackay's new owner UB Group - have all announced expansion plans, and at least half a dozen dormant malt distilleries, including Bruichladdich on Islay and Tullibardine in Perthshire, have reopened.

Export figures to be published by the Scotch Whisky Association (SWA) next month are expected to show that 2007 was another record year for the industry.

In 2006 exports of blended and malt whisky jumped 4 per cent to nearly £2.5 billion ($6.3 billion) - the highest ever value for shipments, overtaking the previous high of £2.4 billion set in 1997.

Whisky now accounts for a quarter of UK food and drink exports.

Each day the 30-strong staff at Carsebridge - one of two cooperages owned by multinational drinks giant Diageo - rebuild or repair up to 400 bourbon casks, imported from the US in flat-packs, in which to mature its whiskies, which include Johnny Walker and J&B Rare.

At the nearby Abercrombie distillers, the coppersmiths are hiring their first apprentices in 15 years. New projects include vast stills that will be at the heart of the new distillery being built at Roseisle in Speyside.

It will be Diageo's first major malt whisky distillery in Scotland for 100 years, part of a larger £100 million investment in its Scotch business.

The health of Scotland's whisky industry today is in marked contrast to 10 or 15 years ago, when there was chronic over-supply - the "whisky loch" - and distilleries were being mothballed. Indeed, five years ago analysts were concerned about the outlook for Diageo as its Scotch business, which generates a third of sales and half its profits, was in decline.

But analysts are wary that optimism could be misplaced if growth slows in markets such as China, where increasing numbers of an emerging middle class unwind by sipping Chivas Regal with green tea.

The vulnerability was shown during the Asian economic crisis, when exports dropped from £2.4 billion in 1997 to £2 billion in 1998 as sales in key markets such as South Korea dried up.

But SWA spokesman David Williams is optimistic: "The growth is sustainable because of the international dimension: Scotch whisky is now sold in 200 markets and the growth is broad-based."

Sales to China have increased from £1 million in 2001 to £60 million in 2006 and Williams also identifies India, where the Government recently lowered tariffs, as a huge opportunity.

The major players also insist it is different this time around. Bacardi announced a US$250 million ($315 million) investment in its Dewar's brand at the end of last year and Joaquin Bacardi, global brand director for Dewar's and great-grandson of the company's founder, says Scotch consumption will continue to grow as the former closed economies of Asia and eastern Europe open up to international brands.

"There will always be concerns about inflation in economies that are growing too fast but in this category, where consumers are accessing international brands for the first time, there is still going to be opportunity for growth," he says.

However, analysts link strong GDP growth to the success of Scotch and question whether it will stall if the emerging economies lose ground.

"Much of the optimism surrounding Scotch is based on the recent performance and potential of the Bric markets [Brazil, Russia, India and China]," says Alexander Smith, editor of industry title IWSR Drinks Record.

"There was oversupply in the 1990s and the question everyone is asking is whether that could happen again."

Nevertheless, Charles Allen, director of malt whisky and Scotch heritage at Diageo, is bullish and expects annual sales growth of 8 to 9 per cent to continue: "We still expect huge growth in Asia and Latin America and are encouraged that mature markets are returning to growth in certain segments."

Part of the reason Scotch is seen to be more resilient is that it has shed its bagpipes-and-shortbread image; the market leaders have developed sophisticated brand identities to tap into the aspirations of the newly wealthy in emerging markets.

"Scotch whisky is cool again," continues Allen.

"It is about large, international premium brands."

Indeed "premiumisation" has been a key trend as drinkers "drink less but better". Last year Pernod introduced Chivas Regal 25, a luxury blend that retails for around US$300, while Diageo introduced Johnnie Walker Blue Label King George V, which sells for US$500.

Ken Grier of the Edrington Group, which owns Macallan, argues that Scotch is now in the luxury goods bracket.

"There is a massive opportunity in emerging markets, where Scotch is seen as highly aspirational, like a Swiss watch or a grand cru wine in France."

- OBSERVER

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