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Scotch Whisky and Brexit©1

Case Study

2017

1.0 Introduction

In 2016, Britain held a referendum on the future of the United Kingdom (UK) and the European Union (EU). The Conservative government had promised the British people a vote on whether the UK should remain a member of the EU or not. The expectation was that the majority of people in the UK would vote to remain a member of the EU but in 2016 the British people voted to leave the European Union. The result shocked the UK Government, the EU and the international community. It was unexpected and would have profound implications for both the UK and the EU. Strategically, it is a current and significant issue which will have a global impact in terms of political and economic relations that will affect UK industry, businesses and international trade. Negotiations have started and the UK is due to leave the EU in 2019.

Scotch Whisky exports are one of the largest contributors to Britain’s balance of trade in goods with 90 per cent of the whisky produced being sold internationally. Total exports of Scotch Whisky represent £3.8 billion; of which, £1.2 billion are exported to the EU (Scotch Whisky Association, 2016). As a result, Brexit is of strategic significance to the UK, Scotland and the Scotch Whisky Industry.

2.0 Context

The United Kingdom signed the European Communities Act in 1974 and the European Union (EU) was formed following the signing of the Single European Act, created in 1986, also leading to the formation of the Single European Market and the European Monetary Union (EMU) (Doole & Lowe, 2012).

The European Single Market which the UK is currently a member of is defined by Doole & Lowe (2012) as a ‘common market’, a level of economic integration which Hill (2014:258) suggests “has no barriers to trade among the member countries”, a common external trade policy, and free internal movement of factors of production, labour and capital. Doole & Lowe (2012) agree and both suggest the Single European Market, which aims to facilitate effective competition from European businesses in the increasingly interdependent world economy, gives the UK the benefits of no internal tariff barriers, common product standards which remove internal technical barriers to trade, free movement of labour, and reduced internal bureaucratic delay through abolished transportation permits and quotas.

1 ©2017 This case study was written by Dr John R Thomson (Senior Lecturer in Marketing) and David Gebbie who graduated from Edinburgh Napier University in 2017.

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In today’s interconnected global economy, size matters. The European Union is the second-largest economic bloc in the world, with a gross domestic product (GDP) of $16.2 trillion in 2015 compared to the United States (U.S.) at $17.9 trillion and China’s $10.9 trillion (figure 1.) Without the United Kingdom (U.K., 2015 GDP of $2.8 trillion), the EU and its 27 remaining countries will still be the second largest with a GDP of $13.4 trillion (See Figure 1 below). What is more, a handful of countries are interested in joining the union (candidate members range from Montenegro to Turkey).

Disconnecting from a large economic powerhouse hurts, and it can hurt a lot. The wave of globalization since the 1970s has intertwined many economies. The most thriving are those that have opened themselves up (like South Korea and Singapore.) The European Union has been the most far-reaching project in economic integration ever — bringing together 28 countries.

3.0 UK

However, on the 23rd of June 2016 the UK in a national referendum voted to leave the EU, becoming the first full member state to leave the common market. As a result, David Cameron the Prime Minister of the UK resigned leading to a period of uncertainty. A new leader of the Conservative Party was selected and became Prime Minister of the UK and in charge of the negotiations to leave the EU and with responsibility to trigger Article Fifty of the EU Treaty by the end of March 2017. This has now been done and stipulates that the UK and the EU have two years to agree the terms of ‘Brexit’ (Hunt & Wheeler, 2017). As this is the first time that Article Fifty of the Treaty has been used by a member state, much uncertainty remains and the two year timeframe appears to be an aspiration for both parties. In reality, it could include a transitional arrangement to provide both the UK and the EU sufficient time to disengage from their relationship as partners within a common market to an agreed future relationship that accepts the decision of the British people whilst acknowledging the UK as a close neighbour for strategic and security reasons as well as a significant market and trading partner with many countries in Europe.

4.0 UK and Europe

The UK’s decision to leave the EU is being depicted by politicians in Europe and the media as a ‘divorce’. Humanising the relationship stirs emotions in all countries within Europe and between trading partners. It personalises the process, negotiations and outcomes and fosters an impression of ‘us’ and ‘them’ and the

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perception of either a ‘hard’ or ‘soft’ Brexit raising a number of key issues and fuelling continued uncertainty both politically and economically.

A key area for discussion emerging from the Brexit decision surrounds the UK’s trade status with regards to the EU and the Scotch Whisky Association’s (2016) assertion that the uncertainty of whether Britain will have “European Economic Area (EEA) status, like Norway, or 'a more distant relationship’ based on a Free Trade Agreement with the EU, like Canada or Switzerland”. The trade status and type of agreement will be very important to the industry. Either way, it has been suggested that the EU may take a tough stance on negotiations with the UK to prevent other countries from exiting the EU (Wharton Business School, University of Pennsylvania, 2016).

In terms of the possible outcomes of Brexit, Dimson et al. (2016) report that becoming part of the European Economic Area is generally perceived to be the “least costly option”, while the creation of a Free Trade Agreement (FTA) is favoured over total separation from the EU. The alternative would be for the UK to revert to World Trade Organization (WTO) rules and regulations which exist but historically have proven hard to implement in practice. However, Wilmot (2016) suggests that Britain's rejection of the ‘status quo’ is effectively an opt-out from the EU’s single market and its interlinked FTA’s, limiting Britain's negotiation choices. Niblett (2016) adds that re-negotiations following this rejection will produce less favourable terms than pre-Brexit, increasing the barriers to the single market, whilst trade deals with non-EU trading partners, including many emerging markets where Scotch whisky has found success. This could mean negotiating from a weaker position.

Further evidence regarding Britain's ability to gain continued access to the single market was highlighted by the seven years it took for Canada to agree and sign its Comprehensive and Economic Trade Agreement (CETA) with the EU entitling Canada to lowered tariffs and trade barriers between the two parties (European Commission, 2016; BBC, 2016a). Despite the European Commission President Jean-Claude Juncker’s argument that this is dissimilar to Brexit as CETA relates to removing trade barriers rather than in his view Brexit which relates to erecting trade barriers thus raising “fresh concerns about future UK negotiations with the EU on a Brexit trade deal”(BBC, 2016a).

On the other hand, Wagstyl (2016) quotes Markus Kerber, director of the German employers’ group BDI, proposing that erecting trade barriers would be “foolish” and detrimental to both parties, although Kerber does suggest they cannot remain as low as pre-Brexit or undermine the single market, therefore for the UK it may still increase trading costs with the EU (Wharton School, University of Pennsylvania, 2016). Furthermore, the Scotch Whisky Association (SWA, 2016) propose that “Scotch Whisky will not face a tariff on exports to the EU” as the WTO, who enforce trade agreements between the two parties which supersede arrangements made by the EU, have rules in place which will maintain tariffs at zero percent. The SWA also

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add that in markets such as the US, Mexico and Canada where zero percent tariffs already exist, these will continue to exist, allowing for the industry to be protected throughout the EU and globally, although they do suggest that “the precise mechanisms for some markets will have to change”, and other measures may be required to ensure continuity.

Another emerging issue surrounds the potential effects on exchange rates, and the strength of the pound. Blitz (2016) highlights the “pound’s dramatic post-Brexit vote fall”, followed by stabilisation and another slide in value after the March 2017 Brexit deadline was set, presented in Figure 2 below.

Figure 2 - Pound to Euro Exchange Rate, August-November 2016 (Blitz, 2016)

The instability of the exchange rate prior to triggering Article Fifty is evidence of growing uncertainty surrounding the strength of the UK currency pre and post Brexit.

While Bowler (2016) argues that this falling pound benefits exporters as currency depreciation makes their products cheaper for foreign customers, and therefore increasingly competitive, issues surrounding uncertainty and economic instability remain, with Kokotovic & Kurecic (2016) suggesting that “exports depend upon strong productivity and the overall macroeconomic situation”, which this instability does not promote.

Additionally, a debate has also emerged surrounding the social influence of Brexit on the UK as a ‘Brand’, and the possible impact on consumer perceptions of companies and products branded in relation to the UK and Scotland and their country of origin. Bacon (2016) suggests that a country that uses country of origin branding to market a product / service internationally may face increasingly “isolationist” or “regressive” perceptions from foreign consumers, reducing their current competitive advantage. Peel (2016) also highlights “deep divisions” within the UK, including a socio-geographical divide separating Scotland and Northern Ireland; both of whom, voted to remain in the EU and the remainder of the UK who voted to leave the EU. This is reinforced by Wharton Business School (2016), who describe Scotland as “pro-European” and Hunt & Wheeler (2017) who highlight that 62 percent of the voters in Scotland voted to remain in the EU. This might be deemed to protect Scotland and the Scotch Whisky Industry from any backlash to the UK’s decision to leave the EU

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but it is not guaranteed that the reputation and image of Scotland within the UK will not be adversely affected by Brexit.

5.0 The Scotch Whisky Industry

The Scotch Whisky Industry operates within the UK and the majority of its operations are located in Scotland. The word “Scotch” has legal protection and signifies that Scotch Whisky is produced in Scotland. However, Scotch whisky competes within the general whisky market which includes other varieties of whisky such as Irish, Japanese, Indian and North American whisky and whiskey brands (Russell & Stewart, 2014). The whisky industry is classified within the alcoholic drinks category which includes other alcoholic products such as vodka and gin, and other beverages such as beer and wine. The Scotch Whisky Association (2012) split the Scotch whisky industry into five categories as defined by UK regulations. These are presented in Table 1 below:

Table 1: Categories of Scotch Whisky

Scotch Whisky Categories

Single Malt Scotch Whisky

“A Scotch Whisky distilled at a single distillery (i) from water and malted barley without the addition of any other cereals, and (ii) by batch distillation in pot stills. From 23 November 2012, Single Malt Scotch Whisky must be bottled in Scotland.”

Single Grain Scotch Whisky

“A Scotch Whisky distilled at a single distillery (i) from water and malted barley with or without whole grains of other malted or unmalted cereals, and (ii) which does not comply with the definition of Single Malt Scotch Whisky.”

Blended Scotch Whisky

“A blend of one or more Single Malt Scotch Whiskies with one or more Single Grain Scotch Whiskies.”

Blended Malt Scotch Whisky

“A blend of Single Malt Scotch Whiskies, which have been distilled at more than one distillery.”

Blended Grain Scotch Whisky

“A blend of Single Grain Scotch Whiskies, which have been distilled at more than one distillery.”

Source: Scotch Whisky Association (2012)

The sale of Scotch whisky overseas increased for the first time in three years in the first six months of 2016, preceding the UK’s decision to leave the EU. The industry exported 533 million bottles (BBC, 2016b). The Scotch Whisky Association (2015) estimated that Europe accounted for 39 percent of Scotch Whisky exports. France

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was deemed to be the top market for blended Scotch whisky with 14 percent of global exports and 37 percent of EU exports. The United States of America (USA) was the top market for Single Malt Scotch with 11 percent of global sales and France was the largest European market with 10 percent of Single Malt Whisky sales. By the middle of 2016, the BBC (2016b) highlight the fact that France remained the biggest market for Scotch whisky and overall the EU remained a significant market for Scotch Whisky with 39 percent of global sales.

The Scotch Whisky industry is dominated by large multinational drinks companies and very few companies within the industry remain in Scottish ownership. Most Scotch Whisky companies are now part of multinational companies within the Alcoholic Drinks Industry. In 2015, Diageo had the largest market share of Scotch Whisky with 36 percent market share including major international brands such as Johnnie Walker blended whisky. Diageo own distilleries including Lagavulin and Talisker and produce over a third of all Scotch Whisky. The next largest company is Pernod Ricard, owners of the Glenlivet, Aberlour and Chivas Regal distilleries with 19 percent market share; whilst, William Grant and Sons who produce Glenfiddich and Grant's have 7 percent market share. The latter being the only producer of Scotch Whisky that remains under Scottish ownership (Schrieberg, 2016).

A key strategic issue for the Scotch Whisky industry is legal protection for Scotch Whisky and its trademark. While the UK Government (2009) highlight that Scotch Whisky is influenced by UK regulations on packaging, labelling and ensuring products are created and bottled in Scotland, the Scotch Whisky Association (2016) also acknowledge that many of the current rules and regulations followed within the industry are created at the European level. The European Parliament (2008) currently regulates the definition of Scotch whisky, the descriptions of Scotch products, and their presentation and advertising standards. Doole & Lowe (2012:9) support the suggestion that currently UK businesses operating internationally are influenced by “domestic laws” which in this context relate to UK regulations but also “international laws” when it refers to the harmonisation or standardisation of laws within the EU’s “regional economic grouping”. Therefore, the industry needs to take account of and comply with both UK and specific laws and regulations within Europe.

Therefore, discussion surrounding Brexit’s influence on such regulations within the Scotch whisky industry has emerged. Current EU rules impact “almost every facet of trade in Scotch Whisky”, dictating product definition, bottle sizes and labelling (Symon & McCulloch, 2016). Russell & Stewart (2014) highlight the legislation stating that Scotch must be matured in casks for at least 3 years, in Scotland, which evidences the current protection the industry receives from the EU regulations surrounding the product’s definition. Therefore, the Scotch Whisky Association’s (2016) suggestion that if Britain negotiates an EU relationship based on a Free Trade Area (FTA), new British rules and regulations might be required to replace the current EU rules and regulations. However, as with the majority of factors

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surrounding Brexit, uncertainty remains and the UK’s future relations with the EU is subject to the negotiations that are currently taking place between the UK and EU.

Additionally, Scotch whisky products are often cited as prime examples of those which utilise the aforementioned Scottish ‘geographical branding’, building what Tregear & Gorton (2005:399) describe as positive reputations “with reference to their geographic origin”. As a result, Scotch whisky generally benefits from consumers’ positive perceptions and high valuations of brands which are developed alongside Scotland’s internationally renowned origin for such products (Pike, 2009; Doole & Lowe, 2012). This positive consumer response to the industries products may be particularly advantageous in existing markets within the EU and emerging markets including those within the EU such as Turkey, who exhibited a steady increase in Scotch imports to-date (Marketing Weekly News, 2016). In Turkey, Scotch whisky is perceived as an ‘aspirational’ product symbolising success and status within the emerging middle class which has stimulated growth and sales (Trocchia et al., 2014; Fraser, 2013). Therefore, Scotch Whisky as a successful international branded product raises the issue of the impact of Brexit on the reputation and standing of the UK as a country of origin brand and its standing within Europe and the international community. The impact on British and Scottish branded products is unclear and will unfold over time.

As one of the UK’s largest exports, the ongoing debate surrounding Britain's trade status regarding the EU is relevant to the Scotch whisky industry. Scotch whisky’s access to many markets, including those which are currently seen as ‘emerging’, are largely facilitated by Britain's use of existing EU trade deals and free trade agreements (Scotch Whisky Association, 2016; Dow & Jung, 2011). The Scottish Parliament (2009:6) in their literature and documents use Scotch Whisky distiller William Grant & Sons as an example, highlighting that their “distribution network comprises wholly-owned, joint venture and third party distribution companies”, exemplifying a complex international distribution network benefitting from trade deals. This highlights that although the source of Scotch Whisky as a product is firmly grounded in Scotland, the growth, expansion and continued success of the product will be determined by the continued protection and support of current government and industry stakeholders as well as international partners.

6.0 Exploratory Research

As Brexit is an emerging event, and the issues are not yet clearly defined, a small sample of exploratory research was carried out in early 2017. It provided an opportunity to gain fresh insights into the prevailing thinking regarding Brexit and its possible impact on the Scotch Whisky Industry (Saunders et al., 2015). As exploratory research is often used as part of a sequence entailing further research, often of a more focussed and quantitative nature, the exploratory research may be inconclusive but could well identify areas for further research (Bryman & Bell, 2011; Saunders et al., 2015).

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A number of strategic issues have emerged earlier in this case study and these were explored using a small sample and exploratory research. The primary data was collected using semi-structured interviews with interviewees from the Scotch Whisky Association and an Edinburgh based Scotch whisky company.

The research used ‘purposive sampling’, as is common within qualitative research. This is a non-probability form of sampling where people and organisations are selected due to having a direct reference to the study’s research (Bryman & Bell, 2015). Therefore, the research sample consisted of experts within the industry to ensure that they were able to provide quality contributions within the relatively unstructured interview format which is often recommended for exploratory research (Saunders et al., 2015).

The specific type of ‘purposive sampling’ used was ‘snowball sampling’, with initial contact being established with someone important within the industry and relevant to the study, who then provided access to other relevant people who then volunteer to participate and due to their knowledge and experience add value to the issues raised in the research (Bryman & Bell, 2015; Saunders et al., 2015). This was suitable within the context of the research as the concerns regarding the non-generalisable nature of ‘snowball sampling’ are not relevant within qualitative research (Bryman & Bell, 2015). Furthermore, as the method used on a relatively small, controlled scale, common issues such as unintended and duplicate responses can be avoided (Baker & Foy, 2008), although the risk of the sample being homogenous, providing similar responses due to the similarity of interviewees, remains (Saunders et al., 2015).

Finally, as regards the primary research, whilst it is suggested that a sample of twenty-to-thirty participants is the minimum required in a qualitative study, Bryman & Bell (2015) highlight that this is not always possible due to time and cost constraints and for exploratory research less emphasis should be placed on the sample size and perhaps more emphasis on the quality of the sample. In this research, a sample of four experts was adopted and the questions formulated incorporated the emerging issues and themes discussed earlier in the case study.

The Findings of the primary research can be found at Appendix 2 and should be read in conjunction with the information in the Scotch Whisky and Brexit (2017) case study.

Appendix 1 ASSESSMENT

In this assessment, you are required to critically analyse and evaluate the Scotch Whisky and Brexit (2017) case study to be able to complete the following tasks:

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1. Carry out an environmental analysis of the Scotch Whisky and Brexit (2017) case study and using international marketing theory justify your analysis of the case study and discuss the key strategic issues facing the UK and the Scotch whisky industry after the UK leaves the EU.

2. Apart from the UK, choose ONE country that is currently a member of the EU and evaluate the specific opportunities and threats for the Scotch Whisky Industry trying to maintain its market share and grow its business in your chosen member country. Students are expected to carry out some secondary research of their chosen country and to use international marketing theory to support their answer to this question.

The Marking Scheme for the assessment can be seen at Appendix 2.

Your report should be 3,000 words. APA referencing

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BIBLIOGRAPHY

Bacon, J. (2016, May 5). What would Brexit mean for Marketers. Marketing Week (Online). Retrieved from https://login.ezproxy.napier.ac.uk/login?url=http://search.proquest.com.ezproxy.napier.ac.uk/docview/1786978367?accountid=16607

Baker, M. J., & Foy, A. (2008). Business and management research: How to complete your research project successfully (2nd ed.). Argyll: Westburn Publishers.

BBC (2016a, October 30). Ceta: EU and Canada sign long-delayed free trade deal. BBC Europe. Retrieved from http://www.bbc.co.uk/news/world-europe-37814884

BBC (2016b, September 16). Scotch whisky exports “up for first time in three years.” BBC Scotland business. Retrieved from http://www.bbc.co.uk/news/uk-scotland-scotland-business-37379947

Bowler, T. (2016, June 29). Brexit: Who is affected by the falling pound? BBC Business. Retrieved from http://www.bbc.co.uk/news/business-36641174

Bryman, A., & Bell, E. (2011). Business research methods (3rd ed.). Oxford, United Kingdom: Oxford University Press.

Bryman, A., & Bell, E. (2015). Business Research Methods (4th ed.). Oxford, United Kingdom: Oxford University Press.

Dimson, J., Hunt, V., Mikkelsen, D., Scanlan, J., & Solyom, J. (2016, December). Productivity: The route to Brexit success. Retrieved from http://www.mckinsey.com/global-themes/europe/productivity-the-route-to-brexit-success

Doole, I., & Lowe, R. (2012). International marketing strategy: Analysis, development and implementation (6th ed.). London: Cengage Learning EMEA.

Dow, R. A., & Jung, S. (2011). Strategic Management of Channels of Distribution and Integrated Marketing Communications: Essay on the Scotch Whisky Industry. International Journal of Business and Social Science, 2(22), 108–113.

European Commission. (2016, December 16). CETA: Chapter by chapter. Retrieved January 4, 2017, from European Commission: Trade, http://ec.europa.eu/trade/policy/in-focus/ceta/ceta-chapter-by-chapter/

The European Parliament (2008). REGULATION (EC) No 110/2008 OF THE EUROPEAN PARLIAMENT AND OF THE COUNCIL of 15 January 2008 on the definition, description, presentation, labelling and the protection of geographical indications of spirit drinks and repealing Council Regulation (EEC) No . Official Journal of the European Union

Fraser, D. (2013, January 9). How scotch whisky conquered the world. BBC Scotland. Retrieved from http://www.bbc.co.uk/news/uk-scotland-20946411

Hill, C. W. L. (2014). International business: Competing in the global marketplace (Global ed.). New York, NY, United States: McGraw Hill Higher Education.

Hunt, A., & Wheeler, B. (2017, February 15). Brexit: All you need to know about the UK leaving the EU. BBC Brexit. Retrieved from http://www.bbc.co.uk/news/uk-politics-32810887

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Kokotovic, F., & Kurecic, P. (2016). THE CASE OF BREXIT: AN ANALYSIS OF THE POLITICAL AND ECONOMIC FACTORS. Development and Entrepreneurship Agency (VADEA) - Economic and Social Development: Book of Proceedings

Marketing Weekly News. (2016, February). Technavio Research; Innovative Product Marketing and Promotions to Drive the Global Scotch Whisky Market through 2019, says Technavio. Retrieved from https://login.ezproxy.napier.ac.uk/login?url=http://search.proquest.com.ezproxy.napier.ac.uk/docview/1765960434?accountid=16607

Niblett, R. (2016, June 24). Brexit: The Reality. Retrieved October 24, 2016, from Chatham House: The Royal Institute of International Affairs, https://www.chathamhouse.org/expert/comment/brexit-reality

Peel, Q. (2016). Britains new global role after Brexit. Retrieved November 1, 2016, from Chatham House, https://www.chathamhouse.org/publications/twt/britain-s-new-global-role-after-brexit

Pike, A. (2009). Geographies of brands and branding. Progress in Human Geography, 33(5), 619–645.

Russell, I., & Stewart, G. (2014). Whisky: Technology, production and marketing handbook of alcoholic beverages series (2nd ed.). Amsterdam: Academic Press.

Saunders, M. N. K., Lewis, P., & Thornhill, A. (2015). Research methods for business students FT Prentice hall: Harlow research methods for business students (7th ed.). Harlow, England: Financial Times/ Prentice Hall.

Schrieberg, F. (2016, September 28). The 4 companies behind 3/4 of all scotch whisky production. Forbes. Retrieved from https://www.forbes.com/sites/felipeschrieberg/2016/09/28/the-4-companies-behind-34-of-all-scotch-whisky-production/#3043c5532df5

Scotch Whisky Association. (2012). The Five categories of scotch whisky. Retrieved February 28, 2017, from Scotch whisky association, http://www.scotch-whisky.org.uk/understanding-scotch/scotch-whisky-categories/

Scotch Whisky Association. (2015). Statistical Report 2015. Scotch Whisky Association.

Scotch Whisky Association. (2016). Brexit - what now for scotch whisky? Retrieved November 1, 2016, from http://www.scotch-whisky.org.uk/news-publications/news/brexit-what-now-for-scotch-whisky/#.WCcblvmLTIU

The Scottish Parliament. (2009). SPICe Briefing: The Scotch Whisky Industry. Retrieved from http://www.parliament.scot/Research%20briefings%20and%20fact%20sheets/SB09-76.pdf

Symon, K., & McCulloch, S. (2016, July 12). SCOTLAND’S KEY SECTORS SPEAK OUT ON A TURNING POINT IN HISTORY. Scottish Business Insider. Retrieved from https://login.ezproxy.napier.ac.uk/login?url=http://search.proquest.com.ezproxy.napier.ac.uk/docview/1807837256?accountid=16607

Tregear, A., & Gorton, M. (2005). Geographic origin as a Branding tool for Agri-Food producers. Society and Economy, 27(3), 399–414.

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Trocchia, P. J., Saine, R. Q., & Luckett, M. G. (2014). Ive wanted A BMW since I was A kid: An exploratory analysis of the aspirational brand. Journal of Applied Business Research (JABR), 31(1), 331–344.

UK Government. (2009). The Scotch Whisky Regulations 2009. Retrieved from legislation.gov.uk, http://www.legislation.gov.uk/uksi/2009/2890/contents/made

Wharton Business School, University of Pennsylvania. (2016, June 24). Brexit breakdown: What’s the likely impact? Retrieved November 15, 2016, from Knowledge@Wharton, http://knowledge.wharton.upenn.edu/article/brexit-breakdown-whats-likely-impact/

Wilmot, S. (2016, June 25). Why the U.K.’s “Brexit” Move Will Raise Trade Barriers. Wall Street Journal. Retrieved from http://search.proquest.com.ezproxy.napier.ac.uk/abicomplete/docview/1799324633/fulltext/309C2D1A181E4C0FPQ/1?accountid=16607

APPENDIX 2 PRIMARY RESEARCH - FINDINGS

Emerging themesHaving interviewed four industry experts, a number of themes relating to the general impact of Brexit on the UK emerged:

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UncertaintyEvery interviewee explicitly highlighted the general uncertainty surrounding Brexit and its influences, particularly on Scotch whisky, and this position of uncertainty underpinned the majority of responses throughout:

“The industry's view on Brexit starts from a position of uncertainty” (Interviewee 1)

The uncertainty identified earlier in the case study was apparent among industry experts, with each highlighting that pre-negotiation, definitive answers on Brexit’s impacts on the industry were unobtainable. Much of this uncertainty stemmed from the unknown results of future UK-EU Brexit negotiations.

Market AccessThe uncertainty surrounding the key negotiation factor of market access was clear:

“I simply don't know or think anybody knows how the UK will engage with the EU market” (Interviewee 4)

However, despite the above suggestion, Interviewee 1 suggested the Government's White Paper on Brexit provides a reference point, and therefore some certainty, including market access priorities including “single market withdrawal”, “agreeing an FTA with the EU”, and “striking different trade deals around the world”.

This relates to another emerging theme, in that although interviewees largely agreed with earlier suggestions in the case study that Britain's rejection of the ‘status quo’ limits the chances of an improved EU situation, they perceived new opportunities outwith the EU, as evidenced by Interviewee 2 when discussing Brexit’s effect on trade deals:

“I can't see us benefiting within Europe from this happening; the only thing I can see us benefitting from is outwith Europe.” (Interviewee 2)

Interviewee 1 highlighted the UK’s benefits from pre-Brexit UK-EU trade deals, including the protection, low taxes and low tariffs provided in export markets, which interviewees’ perceived as so extensive, the consensus was that regardless of the negotiation results, the post-Brexit deal would be less beneficial, further reinforcing Niblett’s (2016) suggestion earlier in the case study. Furthermore, Interviewees 1 and 2 emphasised the Single Market’s importance to Scotch, being the largest Scotch market, and containing the largest country market in France, confirming the BBC’s (2016b) suggestion earlier in the case study. However, Interviewee 1, a previous trade negotiation participant, stressed the complexity and challenge of negotiating a new FTA with the EU, resulting from the number of parties involved, and the priority tradeoffs required to find a ‘sweet spot’.2 However, the participant did highlight that from the industry’s perspective, it may be relatively less complex:

“...from our side [Industry] we think it's relatively straight forward, but we’re part of a wider negotiation with many different competing interests...” (Interviewee 1)

This creates a perception that Scotch can ensure the UK government considers, and represents, their market access priorities during negotiations. In line with this, and

2 A ‘sweet spot’ is one where there is a general consensus that offers benefit (s) to all parties in a negotiation.

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despite the perception of inferior post-Brexit negotiation results, optimism of achieving a deal was prevalent:

“I would have thought some sort of negotiated position will be reached.” (Interviewee 2)

This opinion resulted from the view that two years of negotiations without any results, and therefore reliance on WTO rules, are unlikely. Interviewee 3 expanded on this, perceiving that existing terms will largely be replicated, and that beyond minor loopholes or obstacles the industry's single market access will be unaffected. However, Interviewee 1 perceived potential customs rules alterations, such as “additional certifications” or “a border”, when exporting to the single market, increasing the complexity of accessing the market, highlighting the uncertainty.

However, post-Brexit market access outwith the EU was perceived more optimistically, with the majority of interviewees highlighting the opportunities Brexit may provide to create trade deals with emerging markets including China, India, Latin America and Africa. There may be opportunities to negotiate ‘freely’ and ‘productively’ in such markets where there is huge Scotch growth potential, but this relies on UK-EU negotiations going smoothly.

Therefore, a theme of pessimism was evident in regards to UK-EU trade deal negotiations, and although there was optimism for external deals, Interviewee 2 summed up the situation as:

“Any of the above [trade deals] not happening is a step backwards.” (Interviewee 2)

TariffsUncertainty was also evident surrounding post-Brexit UK-EU tariffs, with Interviewee 1 suggesting that although other products may face tariffs, Scotch will not:

“One of the few hard facts of Brexit is that because of existing trade rules between the EU, Japan, America and Canada, there will be no tariff on Scotch Whisky going into the EU.” (Interviewee 1)

This reinforces the Scotch Whisky Association’s (2016) proposal that WTO enforced trade agreements between the two parties will supersede post-Brexit EU arrangements. Nevertheless, Interviewees 3 and 4 showed concerns that tariffs may emerge:

“...if there's increased tariffs put on so we lose our level playing field in Europe, and we don't manage to get a deal which puts us in a similar position going forward...” (Interviewee 3)

Therefore, perceptions toward whether Scotch will be influenced by new EU tariffs were varied, and although the perceived introduction of such influential barriers is unlikely, the uncertainty is evident.

Rules/RegulationsThe regulations which will govern the industry post-Brexit were also surrounded by uncertainty. Interviewees 1 and 2 reinforced Symon & McCullochs’ (2016) proposal that EU rules broadly influence the industry. Both highlighted the importance of the protection, described by Russell & Stewart (2014), that Scotch currently receives through existing EU trade deals, largely in ensuring that products wrongly marketed

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as Scotch cannot undermine genuine products, and the importance of ensuring this is maintained:

“We value the rules we’ve got at EU level in labelling and bottle sizes and the definition of our product” (Interviewee 1)

Following this confirmation of The European Parliament’s (2008) legislation, all four interviewees expressed expectations of this maintenance through the UK government adopting these regulations into their own law, with Interviewees, 2, 3 and 4 suggesting that such legislation is so ‘embedded’ and ‘ingrained’ between the two parties, benefitting both, and would take so long to extricate from the EU level, that it will be replicated”

“I expect and hope the Scottish/British government in future will adopt all these definitions into their own law.” - Interviewee 2

Furthermore, Interviewee 1 proposed that when Brexit occurs, the UK government proposes to copy “effectively every EU rule” in Scotch’s sector in UK law, before they “amend, repeal, and keep as they see fit”, therefore suggesting the majority of relevant legislation will be maintained. Additionally, Interviewee 3 suggested Scotch likely has enough influence to ensure any changes would be minimal:

“I’d hope the industry has enough influence to deal with this but with this unknown you never know...” (Interviewee 3)

However, as this quote highlights, uncertainty again remained regarding potential changes. One concern highlighted by Interviewee 1 was that as Brexit will remove the UK’s “influential voice” and “seat at the table” in the EU, the two parties may begin to diverge in terms of rules and regulations, based on the suggestion that:

“These rules tend to evolve over time” (Interviewee 1)

Suggested changes included the EU’s definition of whisky and the maturation requirements within, labelling rules and bottle sizes. The latter was expanded on, highlighting that as Scotch companies have invested millions into more efficient, environmentally friendly bottling lines capable of producing “600 bottles a minute”, loss of standardised sizes, and therefore the need to adapt “on nearly an hourly basis”, would add huge costs.

Interviewee 2 also evidenced concerns over changes in terms of a potential tax increase in the UK and Scotland, suggesting:

“...those processes which don't require to stay in Scotland, won't stay in Scotland.” (Interviewee 2)

They proposed that while firms are required to mature Scotch in Scotland, activities including IT, marketing, bottling and packaging can be moved to less taxed countries, damaging Scotland’s domestic economy and influencing competition.

Finally, Interviewee 4 highlighted the potential loss of the ‘EU Emission Trading Scheme’ which governs energy use during production, allocating a yearly carbon allowance, with a credit trading scheme for those who exceed this, evidencing the uncertainty and potential influence by stating:

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“What is the Brexit version of that scheme? Will that increase energy costs?” (Interviewee 4)

CurrencyA potential result of this uncertainty is the aforementioned depreciated pound (Blitz, 2016). The perceived effects of this on the industry were mixed, although all four respondents explicitly agreed with Bowler’s (2016) suggestion that exports will benefit, along with the industry due its alignment:

“The Scotch Whisky model is largely domestic raw materials and largely exported finished product.” (Interviewee 2)

Interviewee 2 highlighted this “skew” in terms of exports being greater than imports, which Interviewees 1, 2 and 3 suggested has already provided benefits evidenced in increased sales:

“Undoubtedly there has been a Brexit bounce for the industry on the back of Sterling's weakening.” (Interviewee 1)

This respondent elaborated, suggesting “currency was clearly a big driver” in November 2016’s export figures being 25 percent higher than November 2015’s, building on the pre-Brexit sales increase identified through secondary research (BBC, 2016b), evidencing the benefits and increased competitiveness imparted. Furthermore, Interviewees 1, 2 and 3 all suggested this depreciation, and its benefits for Scotch, may be sustained ‘for quite some time’, or ‘at least medium term’ as negotiations continue, although again specifics remained uncertain.

However, Interviewees 3 and 4 voiced concerns over increased raw material costs, particularly in the maize which their distillery predominantly imports from France and other European countries, which has become increasingly expensive. Furthermore, Interviewee 3 suggested the alternative would be using UK wheat, which due to the depreciated Sterling has become a more attractive export, resulting in increased pressure and competition for the resource from overseas, highlighting a potential negative currency influence.

Despite this, an overall theme of optimism was apparent due to the industry’s export focus, evidenced in the statement that:

“The devaluation of a domestic currency for an industry like ourselves is perfect.” (Interviewee 2)

Domestic EnvironmentAnother theme which emerged was discussion around domestic strength and its importance. Interviewee 3 felt that despite Brexit the government must ensure there is a “platform domestically to invest and grow”, and a home environment which “supports businesses”. Interviewee 4 thought that a potential improvement in this regard as the UK may value the Scotch industry more than the EU, proving an improved competitive base and increased promotion of the industry.

And, Interviewee 1 felt that domestic collaboration was evident within the industry post-Brexit:

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“...there's a lot of collaboration, a lot of intelligence sharing, a lot of working together...” (Interviewee 1)

The same respondent expanded on this, suggesting in terms of rivalry, he perceived that Brexit was not seen as a competitive opportunity for firms to “steal the march” on one another, which linked to Interviewee 2 and 4s’ perceptions that Brexit will equally affect all industry members, suggesting that following a negative impact:

“Scotch whisky as whole would suffer, but one company wouldn’t suffer over another.” (Interviewee 2)

This enduring ‘level playing field’, was suggested by Interview 4 to result from the Scotch Whisky Association (SWA) acting as a lobbying body during negotiations. Overall, perceptions appeared to be that Brexit will not affect competition between domestic firms.

However, within such discussion, Interviewee 2 perceived Brexit may result in UK immigration restrictions, and potential expertise from skilled immigrant workers may be lost or restricted, also suggesting current EU nationals “have no protection to ensure they will remain in the UK beyond Brexit”, potentially causing those within the industry to leave, and exacerbating the issue.

Furthermore, Interviewee 2’s aforementioned concern over Scotch processes being moved abroad if taxation levels increase also relates to domestic strength, potentially weakening the economy and reducing domestic supplier and service provider numbers. Interviewee 3’s suggestion of the depreciated pound increasing competition for UK wheat is also relevant, as this would reduce the availability of a key domestic resource.

However, Interviewee 3 perceived that the “shock” of Brexit may have a positive influence domestically, causing firms to:

“...go back to basics and really look at the fundamentals of the business.” (Interviewee 3)

The respondent perceived that firms may benefit from Brexit’s potential influences through becoming proactive and refining their processes.

Competing in EuropeAnother topic of discussion was Brexit’s impact on Scotch’s ability to compete in the European market, with Interviewee 1 providing previously unidentified primary information that:

“...over recent years a much more competitive whisky market has emerged...” (Interviewee 1)

This increased competitiveness was seen as a result of the different existing whisky varieties identified by Russell & Stewart (2014) showing significant growth and success, although Interviewees 1 and 4 suggested Brexit would not affect Scotch’s ability to compete:

“...I don't think there's any great sense of a significant change in the competitive balance across the different whisky categories.” (Interviewee 1)

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Interviewee 1 perceived this due to the EU not having trade deals with other whisky producing nations, causing a ‘level playing field’ to remaining, whilst Interviewee 4 perceived that Scotch does not compete directly with other whisky varieties due to its differentiated nature, echoing the ‘positive perceptions and high brand valuations’ identified in secondary research.

However, Interviewee 1 also highlighted that this perception pended on an UK-EU Free Trade Agreement (FTA), which evidently divided opinions as Interviewee 2 evidenced concern that Brexit may provide an opportunity for countries to put up trade barriers and protect their domestic products, a possibility which Interviewee 3 reinforced, highlighting that increased EU tariffs would, remove this ‘level playing field’, potentially driving up prices and damaging competitiveness.

Therefore, an overall theme of differing perceptions emerged in this regard, again linking back to uncertainty created by the debate surrounding trade deals.

MarketingWhen questioned directly on whether respondents perceived Brexit would affect Scotch whisky’s marketing, a topic with scarce relevant secondary information available, all four suggested it would not, creating an emerging theme that it was unlikely, but yet again uncertainty remained:

“If you're going round a hypermarche in France or you're in a bar in Italy, I don't think you're going to see a significant difference in that marketing over the next 10-20 years.” (Interviewee 1)

This confirms a lack of certainty and data through secondary research, whilst also suggesting the respondent did not believe the ‘complex international distribution networks’ which The Scottish Parliament (2009) alluded to, will be affected.

However, many indirect suggestions that the marketing of Scotch whisky may be affected materialised throughout the interviews. For example, although Interviewee 1, who proposed that tariffs will not be imposed for EU access, suggested it would be “hard to see” where the necessity for increased prices would originate from, Interviewee 2, who perceived potential tariffs, suggested these could result in increased prices. Furthermore, Interviewee 3’s discussion regarding competition for raw materials included a suggestion that if UK wheat exports lead to a shortage which forces the industry to import materials, prices may be driven up. Additionally, Interviewee 4 suggested:

“Pricing probably could be forced to increase...” (Interviewee 4)

Therefore, throughout the differing perceptions and uncertainty, potential price increases were evidently considered.

Promotion was also mentioned through Interviewee 1’s suggestion that the Industry must ensure the UK government replicates the current EU funding to promote Scotch in Europe, alluding to potential loss of promotion power resulting from Brexit. Furthermore, Interviewee 4 perceived that the EU was incapable of limiting Scotch advertising as the necessary ‘blanket’ laws would impact other spirits, evidencing that positive and negative perceptions emerged in this regard.

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Consumer PerceptionsWhen discussing Brexit’s impact on European perceptions of the UK as a ‘Brand’ and Scotch whisky, Interviewee 1 disagreed with Bacon’s (2016) proposal of these facing negative effects, suggesting that no industry members have raised the issue, and that there is no evidence of EU consumers’ attitudes changing towards UK products. However, Interviewees 2 and 4 agreed with Bacon, suggesting that ‘Brand UK’ will face “kickback”, whilst also echoing the research interpretation that Scottish brands may be insulated:

“I think we have a degree of detachment from the fallout that Brand Britain will get.” (Interviewee 2)

Both respondents suggested this ‘detachment’ stemmed from the UK being associated with London, whilst Scotch is associated with Scotland, which can be interpreted to exemplify ‘geographical branding’ (Tregear & Gorton, 2005). Interviewee 3 agreed, suggesting consumers can:

“...differentiate Scotland and Scotch Whisky from Britain and Brexit” (Interviewee 3)

Interviewee 3 suggested this resulted from Scotland’s majority vote to remain in the EU, echoing the Wharton Business School’s (2016) suggestion that Scotland is “pro-European”, before agreeing with the overall theme that even if Brand UK is affected, Scotch whisky will not be harmed.

Scotch’s differentiated nature, largely based on its origin, was also evident in discussion, further concurring with Tregear & Gorton’s (2005) ‘geographical branding’, which all respondents agreed Brexit would not affect:

“...the authenticity, heritage, provenance and story behind Scotch Whisky, those cues aren't changing.” (Interviewee 1)

This suggests there is a perception that Scotch’s core branding will not be affected, which Interviewee 4 agreed with, suggesting that as long as it is made in Scotland, Scotch’s differentiation will remain.

However, while Interviewee 2 explicitly suggested European consumers perceptions of Scotch will not change, they also provided the sole negative perception, in that Scotch’s ‘identity’ and heritage may suffer if his aforementioned concern over processes being relocated abroad materialised.

This overall perceived lack of impact persisted within Scotch’s aspirational status in emerging markets:

“...it's seen in its own right as an aspirational product in parts of the world, the end consumer probably won't link it to Brexit.” (Interviewee 3)

This raises a notion of insulation from Brexit’s effects in terms of Scotch’s perception. Furthermore, Interviewees 1 and 2 both suggested that Scotch will still be a premium product, even if its origin branding was damaged:

“...it's a premium imported product, that won’t be changed by the sort of potential changes we’re talking about.” (Interviewee 1)

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The above exploratory research cannot be generalised but it may well be indicative of the prevailing thinking and concerns within the Scotch Whisky Industry. For this reason, it is timely and helpful in terms of the dynamic and evolving nature of the UK environment and its relationship with the EU and internationally within the global economy.

APPENDIX 2

MKT11104 GLOBAL MARKETING

REASSESSMENT

Scotch Whisky and Brexit (2017) Case Study

Matriculation Nunber:

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Weighting Mark

%

Essay Structure and process. 15

Selection and application of appropriate international marketing theory. 20

Environmental analysis of the Scotch Whisky and Brexit (2017) case study and 30

Identification and justification of the Key Strategic Issues.

Secondary research and evaluation of a ONE specific country that is a member of the 30

EU. Evaluation of the opportunities and threats for the Scotch Whisky Industry to maintain

its competitive advantage and market growth in the chosen country after the UK leaves the

EU.

References and bibliography. 5

TOTAL 100

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