By the barrel: The changing face of Scotland's distilleries

The Isle of Harris may well have a long history of whisky production. It’s just that, if it does, none of it was legal.

That there isn’t a history of distilling on Harris seems curious, given how closely the drink is linked with the other islands that make up the Hebrides. One theory is that new productions struggled to compete with the illegal stuff.

Whatever the reason, when the Harris Distillery opened its doors in September 2015 in Tarbert, towards the south of the island, with the mainland on one side and the Atlantic on the other, it was a first for the island.

Running through the story behind the distillery, Simon Erlanger, the company’s managing director, describes the project, aimed at creating jobs and generating economic growth, as the biggest development on the island in a generation.

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He told Holyrood: “Our chairman, Anderson Bakewell, who has been connected to Harris for about half a century, is a passionate lover of the island and he often pondered what could be done about the declining population, and the deteriorating demographic. Young people tend to leave and be replaced by older people, and it is not the healthiest of situations.”

Bakewell did not have a background in the industry before the venture – in fact, Erlanger says the chairman knew very little about whisky production at first – but “he had this idea that a whisky distillery generally lasts for a long time”.

“As long as it produces a fine product, and it succeeds in its business, then it could provide sustainable employment, and indirectly, and perhaps more importantly, by spreading the name of the Isle of Harris through a bottle of spirits, it raises awareness of this amazing place, and should encourage more tourists to visit the island. Some of those will be general tourists, but also, if you can put the Outer Hebrides on the whisky trail, then it becomes another destination for whisky tourism, which we know is a big earner for the economy in Scotland anyway.”

And so, back in 2007, Bakewell formed the company, and began looking for a plot of land on which to build a distillery – which, given the terrain, took quite a long time.

Bakewell then recruited Erlanger as managing director and a fellow director, Ron McEachran, a previous CFO at Whyte and Mackay. The three of them put a business plan together and raised funds from the Scottish Investment Bank, Highlands and Islands Enterprise and the Scottish Government. It opened its doors  just over 15 months ago, with the company putting the first lot of whisky into barrels about seven months later.

The plan was to use the island’s natural assets to boost its economy, provide employment and help address the demographic problems that Bakewell identified a decade ago, but in some ways, the distillery’s story goes much further than Harris. Whisky plays a critical role in the Scottish and British economies at every level from the local up to the UK’s balance of payments.

The drink is of critical importance to Scotland, with new figures – released in January – showing the industry contributes £5bn to the economy each year, while supporting more than 40,000 jobs. It is also the largest net contributor to the UK’s balance of trade in goods.

The report, ‘The Economic Impact of Scotch Whisky Production in the UK’, shows that without whisky, the UK’s trade deficit in goods, currently sitting at £115bn, would be three per cent larger.

Exports of Scotch whisky are worth around £4bn each year, while imports in the supply chain, such as packaging for products and casks for maturing spirit, total only £200m. The Scottish Whisky Association puts the industry’s trade balance at £3.7bn.

Whisky is the UK’s biggest food and drink export and exports continue to rise, with almost 900 million bottles exported between January and September last year – an increase of three per cent on 2015.

Welcoming the figures, UK Environment Secretary Andrea Leadsom said: “Scotch whisky is a driving force of the UK food and drink industry, accounting for nearly one-quarter of all our food and drink exports each year. It’s fantastic other businesses are following suit and exporting around the world.

“I want to build on the significant global opportunities for our food and drink businesses by giving companies the skills and confidence to start tapping into new international markets.”

The industry employs more than 10,500 people directly in Scotland, with almost £1.3bn paid in salaries. And with around 7,000 of those jobs based in rural areas, the industry plays a critical role in supporting local economies.

There are currently 119 distilleries licensed to produce Scotch whisky, and the last few years has seen a proliferation of smaller, newer businesses, with 14 distilleries starting production since 2013 – including the Harris Distillery – and a further eight set to open during 2017. There are currently up to 40 new distilleries at various stages of planning and development across Scotland.

Alan Wolstenholme is chair of the Scottish Craft Distillers Association, which was founded to encourage the growth of smaller craft distillers in Scotland.

He told Holyrood: “The whole phenomenon of small craft distilleries in Scotland is relatively recent. It was enabled by changes in legislation surrounding distilleries, because it used to be almost impossible to start up a small distillery, even though that sort of thing has been happening in America for a decade or two. But the manner in which regulations were interpreted was reviewed five years ago – it used to be that no still under 1,800 litres was given a license – and HMRC changed their position, and said that if someone produced a decent business plan then they would consider giving a license, and lots of people took them up on it.

“That is why there is such a plethora of small distilleries – I would call it a renaissance – of the scale you might have seen a couple of hundred years ago, and quite different to the large, established firms – international companies – which make up most of the membership of the SWA.”

The growth in micro-distilling led the SCDA and SWA to sign a memorandum of understanding last week, with both organisations exploring ways to cooperate and grow the industry. Wolstenholme says the SWA has been very helpful – even if the organisations differ in many respects.

“There is a real energy at this small scale, and a lot of people are trying to jump on the bandwagon, at different scales and in different manners. A lot of the micro-distillers might be doing whisky, but they are doing a damn sight more gin. SCDA members didn’t start the gin renaissance, other places had already switched attention to gin a few years back, but having got set up and finding that gin is something to make today and sell tomorrow – and so is much better for cash flow than whisky – they have caught the wave of the interest in gin, and there are now several very exciting brands within the SCDA that are striking a chord with consumers, who seem to enjoy the more interesting small-scale products.”

And so whisky is not the only spirit to see a growth in sales, with gin distilleries springing up across Scotland, in part because of the changes in regulations Wolstenholme describes.

In fact, around 70 per cent of the gin consumed in the UK is produced north of the border. UK exports of gin were worth nearly £400m between January and October, an 11 per cent increase on 2015, and total gin sales broke the £1bn mark in 2016.

In 2010, gin sales, at £774m a year, were about half those of whisky. Today, both are worth about £1.2bn. By 2020, gin sales are projected to grow to more than £1.5bn.

It is the speed with which gin can be produced that drew in Harris Distillery, even if the business admits surprise at how popular their product has been.

Erlanger says gin was “always part of the plan” – in part because of the advantages described by Wolstenholme.

He said: “When you are waiting for whisky to mature, the working capital requirements of a distillery means there is a cash drain, and so making gin, or welcoming visitors, or selling casks of spirits to individuals, are ways of bringing in early revenue. But gin, and the visitor centre, does more than that. If you make a success of it, and you put out a really good spirit and start telling your story, then it creates an awareness for the arrival of the whisky further down the line. That is what we are trying to do – build a reputation, through Isle of Harris gin, which hopefully then creates anticipation for the whisky, when it is ready.

“The gin has been absolutely phenomenal, it has more than doubled our expectations. In fact, we had to announce an Isle of Harris gin drought in October, when we ran out of bottles. But it has surpassed all of our expectations, it has been so well received. We put a lot of focus into the bottle, and we actually won about eight design awards for the bottle itself.

“We have a very unusual distribution strategy, in that we don’t sell through any distributors or retailers. We only sell direct to the consumer, and that is primarily because we want to draw people to the island. If we can connect with our consumers directly, we can start telling them about Harris and hopefully entice them to make it their destination for their holidays. Gin is a crowded market and it has proliferated hugely with new markets, so if we can do something to set us apart, so we don’t have to fight for shelf space with all of the other gins, that obviously helps as well.”

Yet in a fiercely competitive market, distillers have raised questions over what effect the Brexit vote could have on sales.

SWA figures suggest that more than 90 per cent of Scotch Whisky is sold outside the UK, and that, out of the £3.8bn-worth of exports last year, £1.2bn – almost a third of the total – was sold to the EU.

Yet the industry remains optimistic, in part because the current EU tariff is set at zero, and World Trade Organisation (WTO) rules mean it will not change post-Brexit.

But the SWA has warned that sooner or later, the UK will lose access to the EU’s free trade agreements (FTAs), and that unless there are transitional arrangements, Scotch will lose significant tariff reductions in certain markets. In the long term, the UK will need to negotiate its own FTAs or rely on WTO rules.

Announcing a consultation with SWA members on the implications of Brexit, David Frost, the organisation’s chief executive, said: “We are calling on the UK Government to bring clarity to the transition to Brexit as soon as possible, and to negotiate to ensure that the current open trading environment is not affected. Finding practical ways forward on export practicalities and on free trade agreements should be high on the agenda as negotiations begin in the coming months. We plan to play an active role in influencing this whole process to ensure that Scotch remains a product enjoyed across the globe.”

The shape of any sort of post-Brexit trade deal will have huge implications for the industry, even if it may be years before any real clarity emerges over its final shape. In the meantime, whether it is gin or whisky, the industry looks reasonably confident for the future.

Harris Distillery put its first batches into casks around nine months ago, and although Erlanger is reluctant to provide a precise date for its bottling – insisting “it will be ready when it’s ready” – the first lot is likely to be ready for consumption in four or five years. By then, surely, the shape of the UK’s post-Brexit trade relationships will be settled.

Still, that is a problem for politicians, not whisky producers, and for Harris Distillery the key question is what the first whisky in the island’s history will taste like.

Erlanger says: “We believe we have put in place all the elements to assist the whisky in maturing very nicely. We have a really superb new-make spirit which we are very proud of, we are only using the best casks – we buy nearly all of them from one Kentucky distillery – and then we have the Harris climate, which is obviously the big unknown, because there is no history, but scientists tell us the climate, which is pretty ferocious – though we prefer to call it ‘elemental’ – is likely to be conducive to producing a good single malt.

“So that is a roundabout way of saying that in about four years, we hope to have something that is worthy of the name Isle of Harris. But the board is adamant we won’t bottle it if it is not ready. So that is where producing plenty of gin, and inviting lots of people to visit – we had 69,000 visitors in our first year – helps the business relax and wait until the whisky is as good as it needs to be, because the worst thing you can do is bottle a whisky when it is too young.”