Rabobank’s stark Scotch warning: Independence will hurt whisky industry


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Rabobank says the exact impact of independence, if it happens, remain to be seen, but warns that Scotland risks being frozen out of the EU (and its free market access) until 2018 at the earliest
Rabobank says the exact impact of independence, if it happens, remain to be seen, but warns that Scotland risks being frozen out of the EU (and its free market access) until 2018 at the earliest

Related tags Scotch whisky industry Scotch whisky association European union Scotland United kingdom

Rabobank believes the short-term impact of Scottish independence on the whisky industry would be negative – affecting access to export markets, foreign exchange, taxation rates and input costs.

In a report released today ‘Going Scot Free: How Scotland’s Bid for Independence Could Affect the Scotch Industry’, Rabobank says Scotch whisky companies are increasingly worried about the effects of independence, and flags up what it claims are the risks, many of which the Scotch Whisky Association (SWA) also revisted last Thursday​.

In our opinion, possible short-term benefits of a ‘Yes’ vote are small, while the downside risks are significant,”​ writes Elena Saputo, from Rabobank’s Food & Agribusiness Research and Advisory.

“While some not that Scottish independence has the potential to boost sales of Scotch, Rabobank believes that, on balance, the overall short-term impact on the industry will be negative,”​ she adds.

The EU accounts for 37% of Scotch sales, and Saputo says Rabobank believes Scotch whisky will face impeded access to EU markets in the event of a ‘Yes’ vote – due to an (at least temporary) loss of EU membership and the free trade agreements with the bloc that this brings.

Scotland faces EU exile until 2018 at the earliest

“Although Scotland would be expected to reapply for EU membership, admission would probably not happen any sooner than 2018, leaving the Scotch sector at risk of seeing higher import tariffs in its core markets for at least two years,”​ Saputo writes.

The analyst warns that Scotch could lose momentum against other spirits categories, but suggests that the nation could follow the Norwegian example and join the European Economic Area (EEA) and the European Free Trade Association EFTA) to gain market access without membership.

“The one caveat to this option is that it would require Scotland to accept and implement EU regulation while forfeiting all influence on it, which could prove to be a sensitive issue in a newly independent country,”​ she writes.

A second challenge could be the loss of Geographic Indication (GI) status, which protects Scotch under EU law in member states; losing this could mean an increase in copycats and fakes both in the bloc and abroad.

However, Saputo said the Scotch Whisky Association (SWA) recently announced membership of the Organisation for International Geographic Indications Network (origin) to support the sector in the event of a ‘Yes’ vote.

Agreeing new trade deals will be ‘mountainous task’

Looking beyond the EU, seven of Scotland’s Top 10 export markets for whisky are non-EU, and Rabobank warns that the Scottish Government would have a “mountainous task”​ to procure new trade agreements with these markets following independence – without EU or UK support.

Scotch exports were worth £4.3bn in 2013, making it Scotland’s second-largest export product behind oil and gas, and the US, Singapore, South Africa, Taiwan, South Korea, Mexico and Brazil are the largest non-EU export markets in order of size.

“Furthermore, the Scotch whisky industry would lose on-the-ground support and marketing of UK embassies around the world, which has been of great important to the success of Scotch, according to many in the industry.

Saputo also warns of risks relating to foreign exchange – due to uncertainty over the likelihood of a currency union with the rest of the UK – that could lead to wild pricing issues for Scotch businesses and erode margins.

Higher borrowing costs and taxation

Other risks raised by Rabobank relate to interest rate rises – increasing the cost of borrowing for Scotch producers and affecting infrastructure planning – and the prospect that ‘Yes’ could be forced to tax the Scotch industry at a higher level to plug fiscal gaps in the years after independence.

Finally, Saputo says the Scotch whisky industry could face increased volatility in input costs as a result of losing EU subsidies to Scottish farmers.

“The EU Common Agricultural Policy (CAP) currently provides price support to barley farmers in Scotland, but this support would most likely disappear if Scotland becomes independent,”​ she writes.

“It is uncertain whether Scottish farmers will be able to produce sufficient amounts of barley without this support from the EU, which could face Scotch producers to pay more for local barley or support their barley from other markets,”​ the analyst adds.

David Frost, CEO of the SWA, told BeverageDaily.com that his powerful trade association - members include Diageo, Beam Suntory and William Grant & Sons - isn't going beyond the statement it re-published last week taken from its May 2014 Annual Review.

This lays out the benefits of membership of the UK for the Scotch whisky industry, but stops short of endorsing the union while calling for further clarity on how an independent Scotland could deliver a similarly supportive business, regulatory and export environment.

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Scotch after Independence

Posted by Donald Blair,

Scotch Whisky – “A Scottish Success Story”?

Scotch whisky has been flat-lining for almost four decades. Since 1974 the number of bottles sold worldwide has risen by a miserly 14%

Global GDP has risen, in real terms, by 331% over the same period (see below) . Global population has risen by 173%2 and global GDP per capita has risen by 190% in real terms over this same time

Around 83% of the industry is controlled from outside Scotland

The two biggest Scotch whisky companies (Diageo & Pernod Ricard) are headquartered in London & Paris respectively. So are almost all the people in Main Board or Executive Committee positions in these multi-national Scotch whisky companies.

The Scotch whisky industry claims to employ around 35,000 people directly or indirectly in Scotland. Had the industry simply matched global economic growth in the last four decades it would now be employing over 80,000 people in Scotland2

The average export value of Scotch (a mere £3.47 per bottle) generates total export revenues of £4.3 bn. yearly. Had Scotch simply matched global growth that figure would now be over £11.3 bn1

The highly-regarded Edinburgh economist and FT columnist, Professor John Kay, estimates that only around 2% of the £25 billion global revenues stay in Scotland. Industry experts agree

North Sea oil, a finite resource, generated around £4.7 billion tax revenues for the UK in the year 2013/14. A properly-run Scotch whisky industry could match that and more from its £25 billion global retail sales. And Scotch won’t run out in 10, 20 or 50 years’ time.

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