Accounting for Alcohol – part 13 “Accounting in Spanish co-operative wineries during the 20th century”
This is a brief summary of chapter 13 in our book, written by Francisco J. Medina-Albaladejo. This chapter focuses on co-operative wineries in Spain. They emerged in the late 19th century and have played an increasingly important role in the sector ever since – now accounting for over 70% of wine production in Spain. The chapter explores the accounting records of three Spanish co-operative wineries – Rosario (Murcia), San Isidro (Murcia) and Pinoso (Alicante) from the 1930s to the 1980s.
In the early part of the 20th century, the co-operative model was not very successful. Most wineries were under-capitalised, their financial position precarious and their management non-professional. They operated within the framework of the 1885 Commercial Code,5 which required the use of double-entry bookkeeping, through books such as libro de diario (journal book), libro mayor (ledger), libro de inventarios y balances (inventories and balances book), libro de actas (minute book) and the annual preparation of balance sheets. In essence, the accounting practices used by co-operative wineries before the 1940s directly reflected the characteristics of these organisations – small organisations composed of small and medium-sized landowners with no training in accounting, who followed simple administrative procedures and adopted accounting methods which were dictated by external state pressures in the form of legislation.
During the Francoist period, 1939-1971, financial support of the state saw a boom in co-operative wineries. However, the support provided by the Francoist regime did not contribute to the implementation of sound management policies. In accounting terms, a 1942 Act, and its attached regulations, established accounting systems that differed little from those that had already been put in place in the preceding decades. Single- or double-entry bookkeeping was required, depending on the complexity of the operations carried out by each co-operative, as well as annual balance sheets.17 The regulations also recommended producing annual reports, but this was optional.
After Francoism, the mid-1970s witnessed substantial changes in the wine market. Consumer preferences adopted a new pattern: instead of low-quality wine to be consumed daily as part of the Mediterranean diet, consumers began demanding smaller
quantities of better-quality wines, which were bottled and better presented in general. From the point of view of accounting, the state tried to adapt the existing legislation to the new conditions and bring it closer to European regulations. A 1971 decree made double-entry bookkeeping compulsory, regardless of region and the scale of operations, and also demanded that co-operatives submit a profit and loss account to the public regulators, along with the balance sheet and the annual report, which was no longer optional. In addition, the decree gave members the right, for the first time, to request information on administrative issues and accounts. The outcome of this decree was the homogenisation of accounting practices among Spanish co-operative wineries.
This is a brief summary of chapter 12 in our book, written by Stéphane Ouvrard, Hervé Remaud and Ian Taplin. The chapter describes the so-called Bordeaux Place, the organizing principle by which much fine wine from the region is sold. It is a marketplace with key actors (winery owners, brokers, négociants [merchants] and the officials within the city) interacting both contractually and on trust.
The authors note some form of organisation of the Bordeaux wine trade since the 1400s. The year 1745 saw the first classification of Bordeaux wine, which reflected quality and price. In 1855, the Paris Exhibition (promoting French products) first awarded medals to Bordeaux wine. This classification system has only changed twice since 1855. Today, the Bordeaux Place utilises the en primeur system. This is a futures system whereby customers (wine merchants of Bordeaux, distributors, final buyers) buy (and pay for) wine today, to be delivered about 18 months later. Deciding on the price from the producers perspective is, of course, a difficult one. The price has to cover the cost of producing, but for a substantial number of estates, marketing plays a more critical role in price setting than accounting. Wine producers can get help from brokers, obtaining indications about the price the market is willing to pay. But this is partial and somewhat biased, as merchants and the market prefer cheaper prices. In essence, wine producers base their decision on six main aspects (Remaud et al., 2015): vintage quality; how prices of similar quality wine have evolved over time; the level of stock on the market); the global economy at large, including interest rates, stock exchange prices and confidence in the economy; the status of the brand; and the extent to which an estate has been able to build a brand and not just a (high-quality) wine. This sounds like a great task for management accountants!
Accounting for Alcohol – part 11 “Accounting and wine in Anjou (Maine et Loire) during the 19th century”
This is a brief summary of chapter 10 in our book, written by Valentin Taveau and Béatrice Touchelay. They use the archives of the département of Maine et Loire and the
accounts books of two Maisons de vin, that of René-Jean Goubault-Lambert and that of Jean-Baptiste Ackerman-Laurance. The period covered is between about 1810 and 1870.
As the authors note, the archival records provide an example of accounting practices that were still quite in their infancy and reflect businesses that were not well managed. Indeed in that case of Goubault-Lambert, the authors suggest the account books are a chronicle of a bankruptcy foretold. The main book of account for was the Grand livre which recorded the transactions between the business and partners/customers and was classified by account type – similar to a general ledger today. The authors note little in the way of summary or analysis, and also not several periods throughout the financial years when days or weeks of time seem to be omitted. In the case of the Ackerman-Laurance business, the Grand livre is better maintained and more detailed and includes details about production, sales, inventory and payables – although the book dates from the latter half of the century, and be attributable to the business being taken over by the founder’s son. In both cases, it is interesting to note that the Grand livre captures personal/family transactions also. This is similar to many earlier books of account, where the business and family/owners were not separated as per the present day entity concept.
This is a brief summary of chapter 10 in our book, written by William Jackson, Audrey Paterson and Darren Jubb. The chapter examines some of the roles that accounting has played in the transformation of the whisky industry from its simple roots to its current complexity, with particular reference to the development of the Distillers Company Limited (DCL). It covers a period from 1850-1925. The scale of the whisky industry around 1885 was quite large, yielding about one-sixth of all revenue of the United Kingdom. As the authors note “given the scale and importance of this to the British government, it is easy to understand why excise/revenue men were swarming around the distilleries. Under these conditions it can be no surprise that the quality and completeness of accounting data would be of the very highest standard”.
The volume of whisky produced increased dramatically in the middle of the 19th century and some producers made initial attempts to cooperate in 1856 and 1865. Although the first attempt was short-lived, the second had more duration, and six of the larger grain whisky producers formally combined into the Distillers Company Limited (DCL) in 1877. In the 1890s, whisky boomed which ultimately led to the Pattisons crash in 1898. As noted by the authors “what followed was a period of lost confidence, retrenchment, falling sales, a recognition of overvalued stocks throughout the industry and a need to reduce the production of spirit. It was at this time that DCL began to adopt a pattern of activity that would see them attempt to rescue the industry from its woes. Recognising the overcapacity in the industry and the weakness of many of its players, DCL began to acquire distilleries, often at very low prices, and take them out of production in order to protect the future values of existing whisky stocks”. The came the First World War, which affected all business., but DCL became the UK’s sixth-largest manufacturing company by 1930. As the authors suggest “there can be little doubt as to the importance of accounting practices to this development”
This is a brief summary of chapter 9 in our book, written by Marie Sarita Gaytan.
Tequila, nowadays, is a globally popular drink. Its origins are from a drink (also from the Agave plant) called pulque. As a Spanish colony, Mexico, had vast supplies of agave. Technological advancements in the process of distillation, in the early 18th century saw the commercial production of mezcal, a generic name for all distilled agave spirits. Demand for mezcal from Tequila increased when Mexico gained independence from Spain in 1821. By the turn of the 20th century, tequila was being marketed in the US, and by 1907, there were 96 distilleries, producing upwards of 800,000 gallons a year. From an accounting perspective, this growth is likely to be driven by the perceived demand and profitability of tequila distilling at that time. Prohibition, later, increased the price of alcohol (and associated profitability) and created a new international smuggling enterprise along the US-Mexican border.
After Prohibition and the Second World War, Tequila sales to the US grew. In 1943, La Prensa reported that as much as $250,000 worth of tequila was being imported into the United States per month. In 1944 taxes on tequila and vodka imports were reduced
by 5 percent, which cut costs from $4.99 per fifth to $4.45 per fifth. Lower prices and new demand subsequently led to the first tequila “boom” : between 1940 and
1945, the production of tequila increased nearly 400 percent. Making
the most of these circumstances, Mexican distillers increased production in
order to quench the thirst of American consumers and benefited from increased sales and profits. Brands such as Jose Cuervo capitalized on the mounting interest and started to invest heavily in magazine and newspaper ads. By the mid-1950s, US-based distributors were spending upwards of $100,000 to promote the “Mexican beverage in cocktails and mixed drinks”.
And, of course, the story continued as tequila became the internationally known drink it is today
This is a summary of chapter 8 in our book, written by Julie Bower. The chapter explores accounting history in and around the Scotch whisky industry, looking at managing consumption, production and maturation. As the author notes, the whisky industry has some peculiarities around inventory management, financial management and even tax planning.
On the tax planning side, the author notes that “traditionally, the producers of spirits brands have shipped their products from their own, or shared, home market bonded warehouses to overseas distributors on fixed terms, splitting the profit between them on an ‘arm’s-length’ buyer–seller transaction basis”. Of course, this does not always apply, with the tax regime in Ireland for example, offering advantages to Irish whiskey (as opposed to whisky). With inventory, the time spent to mature creates issues too. The Immature Spirits (Restriction) Act 1915 stated whiskey must mature for a minimum of
two years, extending to three years in 1916. This three-year bonding (maturation) rule has remained in place ever since, meaning the industry’s stock maturity profile is significantly longer than other sectors. Finally, the chapter notes the chapter notes the issue of being able to finance the required inventory levels – the author cites the example of the value of maturing stock in Diageo as being around £4 billion – which of course has to be financed somehow.
This is a summary of the next chapter in our Accounting for Alcohol book, which was written by Viatcheslav Sokolov, Svetlana Karelskaia and Ekaterina Zuga. As the chapter (and post) title suggests, this chapter details accounting practices around vodka in Russia. For me personally, this was a very interesting chapter as I knew very little about accounting in Russia in general.
The chapter details accounting records around vodka dating from the early 1600s. In the 16th century, Russia gradually introduced a state monopoly over the production and distribution of alcoholic beverages. At this time, alcohol could be sold only in special drinking establishments owned by the state, known as kabaks. Profit generated by kabaks was captured made in kabak books, a special type of accounting register, and this profit was reported to the State. In 1649, a standardised system of accounting for alcohol was introduced State wide, and this remained in place until 1832.
In 1817, excise taxes were imposed on private alcohol manufacturers. The tax was based on actual the total output permitted by the producer. Producers recorded different types of beverages in a special book, where they registered the volume of product output, its bottling and delivery. Thes books were maintained using the double entry system. Later in 1895, the State for the first time issued a statute which described vodka, and effectively monopolised its production through strict controls on private producers. This implied Provincial Excise Offices played a key role in the accounting process. They kept ledgers to track cash flows, assets and settlements with the manufacturers, distributors and financial institutions relating to production and distribution of alcoholic beverages.
This is a summary of the next chapter in our Accounting for Alcohol book, which was written by Peter Cleary. The chapter reviews the accounting information produced between 1792 and 1864 by the Watercourse Distillery and how it was used and reported upon by the firm. The distillery was co-founded by Thomas Hewitt, John Teulon and Richard Blunt, with Hewitt (along with his cousin) eventually assuming full control of the business and re-naming it Hewitt & Co. While accounting books were not generally available in the archival records, a reasonable overview of accounting was obtained from other letters and journals.
During the 17th and 18th centuries, the city of Cork expanded, driven by an increase in trade via its port and in the number of buildings within its boundary. As with all cities at this time, Cork’s merchants possessed most of the wealth and were therefore at the forefront of these developments, facilitating further increases in their wealth and influence. As a result, they became known locally as the “Merchant Princes”. The Hewitt’s were among these “Princes”. Increased investment from Cork’s “Merchant Princes” invariably required additional accounting-based information to allow them to determine if, at the end of a particular time period, their commercial exploits had resulted in a financial gain. But, at this time, regular and systematic book-keeping was still rare. As revealed by the archival records, although no accounting books survived, certainly a profit account was maintained for each partner of the distillery. Letters and journals also reveal monthly “closing of the books”. Letter and correspondence also reveal issues with giving credit to customers. From about 1850 onwards, the letters reveal loss being made, and the eventual demise of the distillery.
This is a summary of the next chapter in our Accounting for Alcohol book, written by Karen McBride and Tony Hines. It explores accounting and controls for alcohol in the Royal Navy in the time of Nelson, and is a really interesting topic.
In today’s world, we may find it difficult to imagine, but beer and other forms of alcohol were part of the normal diet of a sailor in times past. As the authors note, beer was bulky to carry and required much room to store, and of course, it had a cost and needed to have an inventory level maintained and controlled. Thus, the British Royal Navy instituted rules and procedures to ensure alcohol use was controlled, both in terms of cost and volume per sailor. The authors provide some examples of forms used to comply with these regulations, and here is a great example from 1808:
It appearing that considerable quantities of wine and spirituous liquors have
been fraudulently run-on-shore from His Majesty’s Ships of War and Transports,
to the great prejudice of His Majesty’s Naval Service, and diminution
of the Revenue; for the better preventing of such practice in future, and
for punishing those who shall dare to continue or renew it, all Captains or
Commanders of His Majesty’s Ships or Vessels are hereby strictly required,
and positively directed, not to suffer any of those species to be ever issued
to the Companies, or any part of the Companies, of the Ships or Vessels
respectively under their command whilst in the Home Ports, nor at Sea, until
after the Beer is all expended.
The chapter is guided by Focault’s notion of governmentality. Rather than I explain this in the context of the chapter, the author’s words are very useful:
Foucault’s work observes that the unthinkable may become thinkable, where procedures and methods are put in place for one purpose but end up being utilised for another purpose that was not expected at first (Foucault, 1980). We argue that initially
the accounting and control of beer was determined for cost and provision
control; beer was issued for the seafarers’ health and well-being, replacing often
foetid water. Later it was used for the prevention of scurvy. Finally, it was used to
keep the men in a controllable but mildly inebriated state, which alleviated the
hardships they were under. Accounting was instrumental in this, as it provided
the means by which the allocation was measured and supplemented.
The chapter has many examples of how accounting was used in the control of alcohol on ships, including some comment on the Royal Navy’s own brewery in Portsmouth. It is well worth a read.
This post #4 in my summary of a recent edited book. Chapter 4 is written by Kazuhisa Kinoshita, and details the role of the Orion Brewery in the economy of the Okinawa region post the Second World War.
The Orion Brewery, while small in terms of the overall Japanese market, helped rebuild Okinawa and the dreams of the young. Okinawa was home to a large US air force base from the 1950s through to the 1970s, and the base became part of the local economy. Supplies to the base were a large source of income to the local economy, and in this environment, a “local” product to generate a sense of identity belonging for local people. This product came in the form of beer from Orion.
From an accounting perspective, the chapter looks at costs and output – in essence, cost volume profit analysis. The remote location of the Okinawa islands increased the cost of building a brewery, and limited the market size affected sales. There was also the effect of beer duties to be included in the decision, and the regional government were favourably disposed towards a lower beer duty. The end result was the construction of the Orion brewery in 1957, and it is still active to this day.
This post #3 in my summary of a recent edited book. Chapter 3 is written by Desmond Gibney and explores proposals to acquire the brewing sector by the British government during the First World War. Desmond draws on archival records of the Macardles brewery in Dundalk, Ireland.
One of the drivers for the government acquisition of the trade was the temperance movement, which combined with the need for men to fight the war brought the notion to the government. A quote from Thomas Whitaker MP summarises the issue very well:
Drink is the greatest cause of inefficiency, waste, and loss of time, and
consequent under-use of plant and machinery, and an output considerably
less than the largest possible. Its production and sale wastes food, coal, and
labour, and occupies ships, docks, and railways which are badly needed for
vitally important purposes.
At the same time, the brewing sector was a powerful lobby, and if the trade were to be acquired and shut down, compensation would be required. Desmond explores how valuations would be made, and reveals that a multiplier method would be used. This method would average profits from a number of years and then apply a multiplier would be applied. This method is still used to today, and today, like then, an issue was to ascertain the reliability of the accounting records used to calculate profit. The directors of the Macardles brewery took the opportunity in 1915 to ascertain the real value of their assets in preparation for any negotiations with the government. The proposed scheme did not of course happen, but it is interesting to look back 100 years ago and see techniques used today in use then.
This post #2 in my summary of a recent edited book. This chapter by Alonso Moreno analyses the narrative information disclosed by a Spanish brewery, El Alcázar, from 1928–1992. The objective is to determine if the tone of the corporate reports is related to profitability. Today, the brewery belongs to the Heineken group.
The study focuses on a document entitled Memoria which is, in essence, similar to the Chairman’s Statement. Software was used to analyse the words in this report to determine the tone of the words. The tone (positive or negative) was related to other variables such as performance (profit) and the person acting Chair of the board. Over the full time period, there were more positive than negative references, irrespective of the actual performance of the company. This is a phenomenon called impression management and is something a lot of companies engage in still today. The interesting thing about this study is that overall, a positive tone dominates, despite many political events during the timeframe.
Along with my good colleague João Oliveira, I recently edited a book titled “Accounting for Alcohol -An Accounting History of Brewing, Distilling and Viniculture”. It stemmed from my own research on accounting history at Guinness, the world famous brewer of stout in Dublin. The book has 15 chapters covering many topics around accounting and beer, wine and spirits. In this first post, I will summarise Chapter 1, which is titled “The introduction of accounting machines at Guinness” and is written by Carmen Martínez Franco and Martin Hiebl. Over the coming weeks, I will provide a similar summary of each chapter. I hope you like it.
This chapter tells the story of the introduction of accounting machines at Guinness in the late 1920s. These machines, a Smith Premier machine costing around £200 at the time, could be simply described as typewriters with a built-in calculation function. These machines were at the time a new technology. In the modern day, it may be hard for us to imagine that all invoices and statements to customers were typed. I can only imagine the difficulty of having to add and check the sums on each typed item. These machines offered a solution to this problem, and by association made the accounting department at Guinness more efficient. The numbers of staff reduced by about 11 in one year according to the authors, customers were able to receive statements on a monthly basis – something not possible before then – and checking of discount calculations were no longer required. It also allowed Guinness to develop standardised procedures around customer transactions. The authors cleverly compare this technology change of nearly ninety years ago to more contemporary technology changes in the accounting world. They conclude there were several similarities – good management, gradual implementation and delivered efficiencies.
The gentleman above is Michael D Higgins, the Irish president – of course he is well known to me and other Irish people, but just for the benefit for others you might read my blog.
In October, there will be a presidential election and Michael D is up for a second term of office most likely. In recent months there has been a lot of media attention as of how much the presidential office costs to run. The office does not have much power, but is a great representation of Ireland as a country. According to the presidential website, the cost is about €3.6 million per annum. The vast majority of this consists of staff and travel costs. However, in various media outlets I have heard numbers being mentioned about the costs of the police officers and army associated with the presidential office. At the link above, these count for about €250,000 in 2017.
So what you say! Well, are these costs relevant to the cost of the presidential office? Would they be avoided if the office ceased to be? I doubt it, as the army and police would be put back to their normal duties. So this is a simple example of costs not bring relevant, and thus they probably should be excluded from any comments or analysis. I would guess too that the kind of simple analysis I have done here might be applied to many other political figures. What is probably most important though is that the costs of the office of the Irish president are now being discussed and new controls and checks may result – which is a good thing.
Okay, from my previous posts now you know a little about cryptography. And, you also know that bitcoin (and other cryptocurrencies) is managed decentrally. In the bitcoin system, transactions are verified as genuine (among other things) by cryptography – you can imagine how useless the system might be otherwise. This is achieved through a blockchain, which I will now explain briefly.
A block is essentially a transaction or group of transactions – in bitcoin, each block contains a megabyte of data (presently). When a block is full, a new block is added – hence the term blockchain. As blocks are added, the cryptography used links a block to the previous block. This means that the transactions can be verified all the way back to the original block, and it cannot be tampered with.
Also, I already wrote a little about bitcoin mining, and from that post, you can see that the blockchain for bitcoin is public – in effect a public distributed ledger of every bitcoin transaction that has ever happened.
What does blockchain mean or accountants then? Well to start, blockchain is a technology which is separable from things like bitcoin. It is the verifiable ledger that may be most appealing to business and the world of accounting. Businesses may soon be using blockchain in a less public way than bitcoin, using some form of private blockchain. Let me try to give an example of how accounting is done today, versus how it could be done with a blockchain.
I formerly worked in the paper business, in the cardboard packing part. Back then and still I would imagine, pharmaceutical companies would not allows recycled paper, due to the risk of contamination. The company I worked for had to maintain records to show the sources of all materials in an order for a pharmaceutical company. Just focusing on the accounting, there are four ledgers at play – the paper supplier, the cardboard manufacturer, the pharmaceutical company and the end vendor. All while four may have quite integrated systems within their own company, all four are likely not linked. And if they were linked, how can the truth and verifiability of the transactions be maintained. Here is where blockchain can help. Using a blockchain and its encrypted data, one single transaction can in theory flow through all four ledgers – and remain unchanged and verifiable. Also, the pharmaceutical company in this example can be sure that records are intact and full traceability of materials used maintained. This is just one example, and anything that involves traceability could benefit – I am sure auditors would have many uses for blockchain technology.
So where is the catch? If blockchain is used privately within a firm, then we can trust the hardware involved – no bitcoin miners needed. The catch at present is the energy usage. To solve the cryptography used in blockchain takes a lot of computing power and thus energy. At present, the energy used for bitcoin processing alone in a year is similar to the power consumption of a small country like Ireland. Less energy guzzling ideas are being worked on.