OUTSIDE Diageo's vast Kilmarnock blending and bottling hall, a small crowd of staff wept and hugged each other as news filtered through that production of Johnnie Walker whisky would cease at the plant.
The Hill Street complex, which lies just north of the Ayrshire town's railway station, served as a historic link to the origins of the brand. It was in Kilmarnock in 1820 that John Walker, who had recently opened a grocery store, decided to sell a wh
isky under his own name that he had distilled on the premises. That whisky now sells more than 16 million cases a year in 120 markets worldwide, contributing £1 billion to Diageo's bottom line, making it by far Scotland's biggest brand.
This week, as staff filter back into work and begin a consultation that will eventually see the plant close down, the 189-year association between Kilmarnock and Johnnie Walker will end.
"This town will never recover. Kilmarnock is finished," said one long-serving female member of staff. "Generations of families have dedicated their lives to Johnnie Walker and helped make it what it is, and we get rewarded with the sack."
The move is part of a wider restructuring of Diageo's Scottish operation. As well as 700 job losses at the Kilmarnock plant, the drinks giant will also close its Port Dundas grain distillery in Glasgow and relocate approximately 80 office-based employees from Dundas House in Glasgow to another location in central Scotland.
The firm said the closures would take place over the next two years and make the business "more sustainable". It added that job losses would be offset by the creation of about 400 new posts through the expansion of the Cameronbridge distillery and packaging plant at Leven in Fife.
"These decisions have been extremely difficult to take," says Bryan Donaghey, managing director of Diageo Scotland. "We have only reached them after an exhaustive review of all the possible alternatives. I am sorry about the impact this announcement will have on our employees and their families in Kilmarnock and Glasgow and the difficulty this will cause in Kilmarnock where we are a major employer."
This week, as Scotland's First Minister Alex Salmond seeks a face-to-face meeting with Diageo's chief executive Paul Walsh to "consider the full impact of their proposals", top of his list of questions will be the company's overall plan for Scotland. Just 18 months ago, Walsh unveiled a £100m investment in Scotland including a new plant on Speyside. Since then, Salmond will ask, what has changed?
"The reality is that more than £500m has been invested in the Scotch whisky industry within the past five years, of which Diageo has contributed more than £100m," said one City analyst. "It has already moved to rationalise whisky production with the construction of a £80m distillery in Roseisle on Speyside. It is inevitable that Walsh will now look to rationalise bottling and packaging. The Kilmarnock site could not be expanded, whereas the Leven site can."
A small number of mega-sites created for production of liquid and bottling as well as packaging is a model that the beer industry has gradually adopted for the last ten years. Analysts say it is no surprise that Walsh, who has a background in beer, is looking to adopt this model for his major Scotch whisky brands that are enjoyed by millions of consumers across the world.
Johnnie Walker is a case in point. A quick glance at its sales statistics shows that it is an eye-wateringly large brand. It accounts for half of Diageo's Scotch whisky sales and £1bn of the group's £7bn turnover. At any one time there are seven million bottles waiting to mature at its 27 distilleries in Scotland, making it the third largest spirit and wine brand in the world. To put it another way, 178 glasses of Johnnie Walker are consumed every second.
Its early growth was attributed to the mercantile nature of the British Empire as the whisky was transported with goods to trading posts across the globe. The Johnnie Walker striding man, a dandy complete with top hat and swagger, was designed in 1909 and has graced every label since. Its breakthrough in the US came after prohibition when it muscled in on the North Americans' taste for Scotch. By the 1920s it was one of the first global brands, selling in 120 countries.
But its global appeal has come at the expense of popularity at home. For many in Diageo the irony has always been that while the striding man is known throughout the world adorning such prestigious events as Formula 1, in Scotland its success is largely forgotten.
John Wakely, of corporate finance firm The Angel's Share, says that before Wednesday's announcement he suspected the average consumer was not even aware of Johnnie Walker's links to Kilmarnock.
"Logically one could say this is akin to Scottish & Newcastle closing its Newcastle brewery," he said. "So that Newcastle Brown Ale is no longer made there. I certainly understand that type of association without question. But at the end of the day it is down to whether consumers care and in many cases that has not proved to be the case, unfortunately. How many Johnnie Walker drinkers know the Kilmarnock connection out of the thousands that drink it? I guess very few."
Last year Diageo posted a post-tax profit of £1.5bn but despite its success there is evidence that the downturn is beginning to affect the drinks industry. In February, Paul Walsh announced that he wanted to save around £100m in the next year as part of a restructuring of the business. The 500 job losses in Kilmarnock, the reorganisation of production in Ireland and other cost cuts across the group will achieve savings of around £120m a year by June 2010 with a further £40m by mid-2012. Although whisky has enjoyed more than a decade of growth there are signs that demand is slowing.
"The reality is that there is a lot of uncertainty in the Scotch whisky industry at the moment," says one City analyst. "Big volume brands such as Johnnie Walker and Chivas Regal have seen their volumes decline as retailers are destocking and driving down inventories.
"The Russian market has been particularly heavily hit. Scotch whisky there is sold through kiosks and they have suffered a large downturn which suggests a big credit issue in Russia. Asia is starting to slip. There is evidence in the US that the consumer is beginning to trade down while in Europe one of the largest markets, Spain, has been hammered."
It is a view echoed by Leonard Russell, owner of Glengoyne distillery. "There has been trading down, not to the cheapest, but to trustworthy good value brands. The days of sticking ribbons and bows and putting whisky into wooden bottles and expecting them to sell are gone. Consumers are now going to be looking more closely at what they are actually getting rather than incidental packaging."
But analysts argue that the downturn is only affecting whisky sales up to a point. They say that job losses would have come anyway as Diageo gets its cost structure in line as products get more price competitive. "In Glasgow we are investing £3m in our Shieldhall packaging plant," says a spokesman for Diageo. "We are expanding the Cameronbridge Distillery in Fife to the largest in Europe and in two years we will have built a £9m cooperage at Cambus near Alloa. While this has obviously been a very difficult decision and we are sorry for the families it has affected in Kilmarnock, most of Johnnie Walker is bottled at Shieldhall in Glasgow."
Salmond says that his intervention has already secured a "genuine consultation, which would consider alternative proposals, particularly concerning the Kilmarnock operation." It may be good news for the workers affected but it is a move that is already unpopular within the Scotch whisky industry.
As one industry insider said: "I frankly don't think it is any of Alex Salmond's business. Trying to force employers to keep on people that they don't need makes the UK less competitive and discourages inward investment. Who is going to invest in assembly plants in Scotland knowing that if they try to pull out, the Government is just going to jump on them? It's not a proper healthy business environment."
