AMID all the news of financial crises, credit squeezes, and job losses and with the spectre of recession looming, it is refreshing to meet someone working in an industry that is genuinely optimistic about the future.
Whatever happens to the global economy, all the evidence suggests that people will still enjoy their weekly tipple. If you are a Scotch whisky producer the news is even better as a huge proportion of the world is beginning to choose 'the water of lif
e' as their drink of choice.
Leonard Russell, owner and managing director of Ian Macleod Distillers, whose existing Scotch whisky brands include Glengoyne and Smokehead, draws on his cigarette and admits prospects have never looked so good.
"For the last 10 years I have watched while a lot of my contemporaries have made fortunes in booming markets like property," he says, braving the wind on a terrace outside his Broxburn headquarters. "Without sounding too triumphalist, after a long dip, our industry is finally beginning to boom as a number of emerging markets steadily come on stream. If a recession comes, people will still drink whisky. It's just a matter of being able to provide them with what they want."
Russell's firm, one of the largest independent family-owned firms in the Scotch whisky industry, has just posted its financial results and it expects next year's to be the best ever. Although it's a relatively small player in an industry dominated by giants such as Diageo and Pernod Ricard, growth has been achieved by tapping into the opportunity presented by a clutch of emerging markets including Brazil, China, Russia, and Taiwan. Waiting in the wings are Eastern Europe and India, which is the biggest market of all.
"It's a great time to be involved in Scotch," he says. "My whisky stock has significantly increased in value. This year our sales are up 15% and next year will be even better."
But there are concerns. Production costs have significantly increased on the back of price rises in malted barley, wheat and energy. Meanwhile, Alistair Darling's decision to increase duty – announced in the last budge – has outraged the industry, which is still flabbergasted by the decision to tax whisky, per degree of alcohol, higher than wine, cider or beer.
"At the moment the industry is very excited about the potential growth from emerging markets," he says. "They are all coming on stream at different speeds but the overall picture is the same: solid growth. As a result, we are producing at full capacity while laying stocks down for the future. Take China as an example. If, as looks likely, it develops a taste for luxury 12-year-old blended Scotch then we have to lay down now for the anticipated growth. It's precarious, as it means tying up capital for a huge amount of time."
It is exactly this sort of demand which Russell argues paints a bleak picture for the UK market, particularly the discounted end, which he argues is on the verge of drying up. Macleod & Co already sells 60% of its £20m a year sales overseas and has an existing network of distributors. Its other products include King Robert II (a blended range) and Chieftain's (single malts). They sell in France, Germany Belgium, Japan and the US.
"The UK market is not interesting any more. Our warehouses are bursting with capacity but that is primarily for the overseas markets. The industry has decided this is where it wants to sell its whisky so we now have a shortage of stock. Quite where the supermarkets will source their own-label Scotch from in the future I am not sure.
"Both Whyte & Mackay and Glenmorangie have announced plans to exit the bulk market, leaving supermarkets with a huge problem at the bottom end. In the future I am not sure whether they will be able to source their requirements."
Duty rises and a culture of discounting in the UK market come at a time when the Government is also pummelling the industry with a swathe of anti-binge drinking arguments and proposals to raise the age of drinking to 21 – something Russell believes is totally unnecessary.
"This is a good example," he says, holding up his cigarette. "Even though I own the company I can't smoke in the boardroom. It's a £50 employee fine and a £5,000 payment to the Department of Health. This is problematic as when we entertain clients from Asia, those guys like to chain smoke through meetings, so I insisted on this." He points to a new but, as yet, unused gazebo.
"What scares me is that the tobacco industry has been targeted by fairly powerful lobbying groups. It is true that smoking is bad for you but the best way a government can look after its nation's health is by education. It is damaging to the wine and spirits industry to consider that alcohol is as evil as smoking, which it isn't.
"Consuming small amounts of alcohol actually has health benefits. My grandmother drank half a miniature of whisky every day and lived until the age of 99. That's a good example of responsible drinking."
The gazebo may not have got much use but there has been no shortage of meetings in smoke-filled rooms with potential clients from Asia.
"We are very keen on Vietnam," he says. "It reminds me of Thailand 20 years ago. The demographics show that they have a large consumer group about to come online. They also have high inflation, which I'm guessing is fuelled by wage inflation so our target consumer group is growing rapidly.
"At the moment I'm in discussions to open a joint-venture company there. The market is not mature and there is an opportunity to build some business with a single malt and an entry level Scotch whisky."
Russell, the third generation to run the business, which was set up by his grandfather, also Leonard Russell, joined the firm after a stint with IDV, the drinks firm now merged into Diageo. In the mid-Eighties he was responsible for launching Castaway, a blend of wine and tropical fruits. The experience gave him an insight into how the "big firms" did things and a grounding in launching new products – something he used with the invention of the Islay malt Smokehead.
"I was drinking in Islay with some Scandinavian enthusiasts and I realised there was a huge market for something that was traditional in flavour but had really quite radical packaging. So we came up with Smokehead, which has created a great deal of interest."
The firm hit the headlines in April 2003 when it bought the Glengoyne distillery from the Edrington Group, transforming it from a whisky broker into a distiller. It was, he admits, fortuitous as whisky prices rose as soon as they completed. "Would I sell? One never says never but at the moment the price of our stocks is rising and we are expanding. Besides, what would I do?"
The full article contains 1168 words and appears in Scotland On Sunday newspaper.
