the structure, conduct and performance of the Whisky industry and make recommendations as to its future

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Structure: Most of the distilleries in Scotland are registered as Scottish-owned companies, but in fact the majority of the turnover is dominated by few firms and is externally controlled by non-Scottish companies1. The major players are divided into two groups: multinational drink manufactures such as Diageo, Edrington, Fortune Brands and LVMH, who dominate 50% of the market; and Scottish companies such as William Grant, Whyte and Mackay, and Loch Lomond Distillery, who control 16% of the market. The rest of the market is made up off other smaller distilleries2. Their products are similar, but each company has created his own brands and image. Barriers to entry are high, because of levels of required marketing expenditure, which new entrants have to face3. As well as the Scotch Whisky Order (1990), that states that a whisky can only carry the name Scotch, if it is distilled and matured in Scotland.

Conduct: Mergers and acquisitions in the past have led to an industry structure, which could be described as oligopolistic. This structure may support collusions between the companies about prices. For the whisky consumer it is likely, that the brand image of a whisky is more important than its price. The industry is aware of this; approximately �7 million was spent by the Scotch producing companies on promotion in 20054. The industry as a whole aims to maintain their core consumers and to gain new groups of consumers in established and growth markets (e.g. China, India) at the same time.

Performance: Sales have steadily fallen over the last five years (16% in volume since 2001). The companies tried to win new customers by changing their advertising and packaging, but they failed. At present some companies are adopting a new approach: changing the products itself or at least its colour5. Even so, Scotch is one of the UK’s top five export earning industries6 and employs over 41.000 jobs directly and indirectly in supporting industries i7.

Supply and demand conditions: The supply conditions are good, as all the ingredients for whisky can be found in Scotland; plus there is a skilled workforce. However, the demand for Scotch is dropping, because the industry faces strong competition from substitutes in the spirit market (especially Vodka). Also younger consumers are not attracted by the product and older consumers (45+) are drinking less Scotch.

Government policy: The Scottish Executive and the Scotch Whisky Association are working closely together, for example to achieve fairer taxation for Scotch in the UK and EU. As well, they supported the introduction of duty stamps in order to reduce ‘grey’ (fake) market8.

Conclusion: The main challenge in the future for the industry will be: finding a balance between increasing a younger generation of consumers, whilst maintaining its traditional consumer base. Scotch whisky will continue to be sold on a quality platform to discerning consumers, but rationalisation in the number of brands available is probable. Declining brands might be eliminated and instead expansion into growth markets could be supported by the Scotch producing companies.

The majority of the Scotch sales are externally controlled; therefore Scotch can not longer be described as a real Scottish product. The Scottish Executive should carry on supporting the industry, but at the same time they should observe the ownership-structure.

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