Distillers Company Plc

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Distillers Company Plc

Distillers House
33 Ellersly Road
Edinburgh EH12 6JW
Scotland

Absorbed by Guinness plc
Incorporated: April 24, 1877

The Distillers Company Limited was once one of the most important and powerful companies in the United Kingdom. Distillers dominated the Scotch Whisky industry, controlling over 80% of the domestic market and almost 75% of the worldwide market. Distillers’ brands included Dewar’s, the number one Scotch in the U.S., Johnnie Walker, Red and Black labels, the most popular Scotches in the world, Gordons vodka and gin, and over 60 other labels. The company successfully diversified into industrial and medical chemicals, yeast production, glass production, and plastics. Profits were impressive, and this conservative 19th century company reinvested wisely.

Yet, the company’s markets began to shrink as its competition became more aggressive, and lawsuits and their settlements crippled both its profits and public image. In 1986 Distillers, founded in 1877, was purchased by Guinness plc, the brewery company, for £2.5 billion. The new owners quickly moved to absorb the company, rather than operate it as a subsidiary. Distillers Company Limited, once synonymous with Scotch Whisky, disappeared forever.

Distillers was founded at a time when technology was transforming what had been essentially a cottage enterprise into a modern industry. For centuries pot stills had been the only way to make whisky. A pot still is a large iron pot suspended over an open fire. Pot distillers used only barley, which they boiled, mashed, and fermented to form a “wort.” This wort was the key to a single malt Scotch whisky. In the second half of the 19th century a new kind of still was invented. The “patent still” is a sealed pressure unit which makes use of various cereals including, but not limited to, barley. The product of patent stills is generally called “grain, or neutral spirits.” The main difference between the two processes is that the patent still produces a larger volume less expensively. It is generally conceded that pot stills produce a better quality product. Certainly, pot or malt distillation produces a distinct product, full bodied, with a peat smoke flavor. (The barley is dried in peat kilns in the pot still process.) The “neutral spirits” distilled by the patent process were blended with the “malt spirits” made in pot stills, creating “blended Scotch whisky.” The quality of these blends varied greatly, according to the amount of malt in the blend.

The industry which Distillers eventually was to control reacted adversely to the technological innovations. Pot distillers, patent distillers, blenders, farmers, and whisky brokers all fended for themselves. Since the consumption of whisky was on the rise, it appeared that there was enough room for everyone. An attempt to form a trade association merely revealed that differences in the industry were great. All that came out of this attempt to organize was a limited association of malt distillers called the Northern Scotland Malt Distillers Association. The association was composed of 61 independent malt distillers who gathered regularly to express their opinions. No one distiller produced sufficient whisky to have any control or even influence over the others, consequently little was accomplished. The one issue upon which they were all agreed was that they needed a government approved definition of “Scotch Whisky” which recognized malt spirits as the distinguishing factor.

The patent distillers had a more modern attitude toward business. Though consumption was rising sharply, the unrestricted competition between individuals was seriously damaging profit margins. In 1877 six patent still operators joined forces and formed a company which they called Distillers Company Limited. Although it was not involved in either malt distillation or blending, Distillers quickly acquired a large share of the grain spirits market. The largest blenders—Buchanan, John Walker & Sons, and the Dewars brothers—immediately recognized the power Distillers had in controlling 70% of the grain spirit market vital to their blending. For more than 30 years the three blenders competed intensely with Distillers, going so far as opening their own distillery, a project they quickly abandoned because of prohibitive costs. Though these three largest companies refrained from distilling, many others took their place. The 1890’s were the best years for whisky makers; they could not produce enough to meet demand. Distilleries could be found all over Scotland. Even Distillers, which had already firmly established its reputation as a conservative firm, purchased two distilleries and built a third (all were malt distilleries, a first for the company).

This prosperity did not last for long. In the 10 years prior to 1900, the peak of the demand for whisky, the number of distilleries in Scotland nearly doubled. When the Scotch market went dry due to a combination of general economic turmoil, high taxes, and temperance movements, many of these new distilleries were left with large quantities of well-aged, unsellable Scotch whisky. Distillers, meanwhile, had been conserving its resources and expanding at a comparatively slow rate. After the market suffered the downturn, Distillers instituted its policy of consolidation. Using profits from its newly diversified subsidiaries in industrial alcohol and yeast, the company purchased competing patent stills at reduced prices and subsequently closed them; the company also bought the excess stocks of whisky; other stills purchased were transformed into additional industrial alcohol and yeast plants. By 1922 Distillers owned all but one patent still in Scotland, all but one in Ireland, and all but two in England. If the three largest blenders were worried when Distillers controlled 70% of the patent market, they were in a state of near panic in 1923. As a result, in 1925 Buchanan, John Walker & Sons, and Dewars amalgamated with Distillers; they had little other choice. The men in charge of each of these blending companies received a seat on Distillers’ board of directors.

Distillers also survived World War I intact, while many other companies failed. War restrictions affected the industry severely. High taxes, import restrictions on foreign grain, and a general feeling that whisky hurt the war drive all served to place constraints on the industry.

Throughout the war Distillers continued its policy of consolidation. After the war and after the absorption of the three largest blenders, management at Distillers decided to continue its acquisition program. Its next target was the northern malt distillers. Prior to 1925 Distillers owned only three of more than 70 pot stills in the country (the amalgamation with the blending companies brought them several more). Depression conditions after 1929 left many independent stills ready for takeover. By 1934 Distillers dominated all three phases of the Scotch whisky trade: it had purchased many pot stills and now owned or had a large share in 54 malt distilleries. These random and haphazard new holdings were organized as the company’s Scottish Malt Distillers subsidiary. Distillers now controlled the largest grain and malt distilleries and the largest blending facilities.

Interestingly enough, this large company, controlling over 90% of the world’s Scotch whisky market, remained almost anonymous. Distillers never printed its name on a bottle of Scotch, and its operations often seemed to be those of a kind of ultimate secret conglomerate. Only one man, up to this time, made a name for himself and garnered a degree of publicity. William Henry Ross gained distinction with Distillers for his role as the company’s arbitrator to the rest of the industry and the government. He became managing director of Distillers in 1900 and its chairman in 1925. He was said to be responsible for the consolidation policy which proved to be so successful during the early part of the century.

Sometime during the mid-1920’s a Canadian bootlegger named Sam Bronfman approached the Distillers board seeking aged whisky stock that would be in demand after the end of Prohibition in the United States. Bronfman already had a previous agreement with Distillers to distribute their liquor in North America. Sam Bronfman now offered Distillers cash and a share of his company, which he expected to grow rapidly, in order to procure the aged whisky. He had already made a deal in Canada, giving him control of a large distillery and the “Seagram” name which went with it. Distillers did not have any marketing structure in North America, and they reached an agreement with Bronfman. The Bronfman company’s name became Distillers Corporation-Seagrams Limited.

Bronfman’s firm was small, and he had to make a successful entrance into the American market if he was going to accomplish his dream of a liquor empire. Prohibition ended in 1933, and Bronfman thereafter did quite well. So well, in fact, that he thought he was entitled to a better price on the whisky he imported from Distillers. The board of directors at Distillers disagreed, Bronfman traveled to Scotland to argue his case: the conservative management at Distillers and Bronfman abruptly ended their business relationship when Bronfman was thrown out of the board room. Bronfman vowed to take revenge on Distillers, and he accomplished his goal. His Canadian blends dominated the important U.S. market for some 40 years. His Cutty Sark Scotch even ranked number one in sales in America for a short period of time. Bronfman kept the word “Distillers” in the company name and did nothing to counteract public confusion (the company name was eventually changed to Seagram Corporation by his sons in 1979).

World War II brought back many of the same problems that Distillers had faced during World War I. This time, however, Distillers was so large and diversified that the war proved to be a benefit. Even though the whisky market was depressed, the company more than compensated for any loss of profits with earnings from its chemical and biochemical subsidiaries: industrial alcohol and solvents, yeast and grain were all crucial to the war effort.

The late 1940’s and 1950’s were a successful time for Distillers. The company did not release any market statistics during this time, but experts say that the company retained its impressive share of the Scotch whisky market. That success was extended into new markets in South America, Africa and Asia, with Japan emerging as a particularly important new market. Distillers also added other liquors to its product line, including Gordon’s gin and vodka. Distillers’ subsidiaries were doing as well, or better, than the parent company. Distillers Company Biochemical had become an important manufacturer of drugs in the United Kingdom. It was from this company’s activities, however, that the beginning of the end came for Distillers.

In the late 1950’s the German pharmaceutical company Grunenthal created, tested and won government approval for a new sedative which it believed to be the safest sleeping pill to date. In addition to its other attributes, Thalidomide was suicide-proof. The company said that it was almost impossible for an overdose to cause death.

Distillers Company Biochemical purchased the rights to manufacture and market Thalidomide in the United Kingdom and Commonwealth. It was a doctor in Perth, Australia who connected Thalidomide to an occurrence of birth defects in late 1962. Others soon verified his initial findings, and Thalidomide was taken off the market. However, before the tragedy ended some 100 British babies (almost 10,000 worldwide) were stricken with defects ranging from missing limbs to severe mental retardation. Distraught parents immediately brought lawsuits against Distillers Company Biochemical and its parent company Distillers.

For ten years Distillers engaged in litigation, slowly settling with several individual families. A large number of families, 62 altogether, banded together in the hope of a larger settlement. This group was led by the father of a “Thalidomide child” named David Mason. Mason became something of a national hero in his battle against the large company. Distillers had argued all along that while the company had conducted tests on its own, the drug had been approved by both the West German and British governments and that the sole responsibility for the effects of the drug should not rest solely with the company. For a time there was public sympathy for the company’s position. However, as litigation began to seem interminable, the public came to believe that Distillers was attempting to avoid compensation for the children and their families. By 1973, after 10 years of litigation, Distillers’ reputation was badly damaged. Members of Parliament, along with various interest groups, were beginning to speak against the company. The company eventually settled the joint suit by establishing a £25 million fund for the support of the Thalidomide children throughout their lives.

In 1969 Distillers sold its entire chemical holdings to British Petroleum for £90 million of British Petroleum stock and cash. Distillers’ chemical interests had provided a steadily growing source of revenue since 1900. The loss of this income was to hurt the company in the 16 years leading to its demise. Distillers had always relied on its subsidiaries during the frequent downturns in the volatile whisky market.

The early 1970’s were, despite the lingering litigation over Thalidomide, a profitable and busy time for Distillers. The company entered joint operations in both glass and plastics. It expanded its brands to include a line of Australian wines and brandies, and it acquired control of the popular Tanqueray gin. In 1973 the company took over the popular Pimms flavored gin line. Profits reached £100 million for the first time in 1980. During this time the company also built a large new distillery capable of producing one million gallons of spirits a year.

The steady rise in profits fell sharply in the early 1980’s. In 1978 the company became involved in a feud with the European Economic Community (EEC). The EEC ordered Distillers to refrain from charging British wholesalers more for Scotch which was to be exported than for Scotch which was to be sold domestically. Chairman J.R. Cater did not appreciate what he considered meddling in the company’s internal affairs. The very same day that the EEC notified him of its decision, Cater removed all Johnnie Walker Red Scotch from the British market. At the time, Johnnie Walker Red was the most popular Scotch in the world with approximately 15% of the total world market. Estimates place the popular Scotch at 75% of the European market. While the feud and boycott lasted six months, Johnnie Walker Red lost market shares that it has been unable to replace since.

The fall in profits is also blamed on poor marketing in the United States. Distillers had always allowed American companies to distribute its liquor. While the company lost a considerable amount of profit to these distributors, it believed that was an effective means of marketing the company’s products in the United States. That may have been so; by the early 1980’s it had ceased to be true. The indigenous competition was more aggressive, and Distillers’ U.S. market share eroded rapidly. Another weakness, traditional with Distillers, was in advertising. Distillers’ competitors had better, more up-to-date advertising strategies.

Profits for the company peaked in 1983 at £139.2 million. 1984 profits dropped by more than £11 million. Industry analysts warned that the company’s management was not active enough. In 1985 Distillers started to sell some of its British Petroleum stock for ready cash. The ploy did not provide enough cash to halt the slide in profits, and soon Distillers was ripe for a takeover. Argyll, a British supermarket chain, took advantage of the opportunity in December of 1985 in a hostile takeover attempt. When it became obvious that Distillers could not successfully defend itself, Guinness offered its services and soon became the company’s choice in the takeover battle. Before another year passed Distillers had been absorbed by Guinness.