Getting the price of alcohol right

17 September, 2010

Barely a day goes by without some politician, academic, trade association, supplier, supermarket or charity making a pronouncement about the price of alcohol.

The flow of information and mis­information is so intense that it’s starting to become difficult to tell what might or might not happen, who supports what, and what the potential consequences will be for alcohol retailers and their customers.

Is the pricing debate just a lot of hot air and grand-standing by the protagonists, or will it have a long-term impact on the industry??In an attempt to unravel the confusion, here are the main proposals sitting on some official’s table somewhere, the pros and cons, and an assessment of just how likely they are to come to fruition.

Minimum unit pricingThe background: Inspired by a University of Sheffield study which has become the biblical text of the pro-minimum price brigade, most notably the SNP. Its plans for Scotland have crystalised in the past fortnight, with the party settling on a 45p-per-unit of alcohol retail price for all alcoholic products.

Sheffield has said that a 50p-per-unit minimum price in England could avoid 2,900 deaths a year, and that within 10 years of implementation there could also be 41,000 fewer cases of chronic illness, and 8,000 fewer injuries. Hospital admissions could fall by 92,000 and save the healthcare system £270 million a year, it argues.

Impact on prices: Although the media envisions an immediate ramping up of booze prices, the effect would be selective, hitting budget brands and certain product categories the hardest – including light spirits, wine boxes and own-label wine – and leaving others, such as RTDs, which (rightly or wrongly) take much of the flack for youth drinking, relatively unscathed (see table, below).

Hardest hit: Critics, including the Wine & Spirit Trade Association, say the measure is unfair because it implicitly affects the poorest in society most, those not necessarily drinking to excess but who are on a tight budget.

The University of Shef-?f­ield’s latest research argues that a 50p minimum price would add an extra £163 a year to the bills of harmful drinkers and only £12 to moderate drinkers.

A You Gov poll found that three-quarters of consumers wouldn’t change their consumption habits.

Obstacles: The SNP faces strong political opposition in Scotland and although the issue has been bandied around elsewhere in the UK, it has little support in Westminster. However, the real problem is the question of its legality in European law, as many legal observers suggest it is tantamount to price-fixing, which is illegal.

The Scotch Whisky Association points to a European Court decision last year which ruled against minimum pricing on tobacco in Austria, France and Ireland, and said that it was “not necessary in order to protect public health”.

Implications for retailers: As it would be a controlled price rather than a tax, retailers could actually benefit from higher till prices in the form of extra margin, although suppliers will find themselves in an improved bargaining position in price negotiations. However, there’s also the prospect of a big repricing task at the outset, regular reviews when the minimum price rises, and associated red tape of record-keeping.

There’s also the prospect of the measure being introduced on a localised basis, as some local authorities have suggested, and business being lost to neighbouring areas – a regional version of the old cross-border shopping problem. As Nick Grant, head of legal services at Sainsbury’s, told the Scottish Parliament’s Health & Sport Committee this year: “If you create a market for the man or woman in the white van, you’re putting the sale of alcohol into the hands of people who have no corporate responsibility whatsoever.”?Who’s for it: The SNP; various local NHS trusts and local councils, notably Greater Manchester and north east England; Alcohol Concern; Molson Coors; Welsh Assembly Health Minister Edwina Hart; the National Institute for Health & Clinical Excellence, which informs government policy; the British Medical Association; Alcohol Focus Scotland, and Scottish Health Action on Alcohol Problems. Tesco has said it will back any move a government might take in this direction.

Who’s against it: Main trade bodies including the WSTA, the SWA and the British Beer & Pub Association; the Centre for Economics & Business Research, and the British Retail Consortium.

Chances of it happening: The last Scottish Parliament vote on the matter proved inconclusive, with a small majority voting against, making it an uphill struggle for the SNP to get the measure through. Even if it does, Scotland goes to the polls next May, which could easily result in a repeal if the executive changes. Should Scotland or any interested English local authority force through the measure, a legal test case is a likely

scenario, leading to a protracted period of uncertainty.

Below-cost sales ban:?version oneThe deal: The retailer-favoured version of a ban on below-cost sales would see shops banned from selling any alcoholic product at below the cost of duty and VAT. This is the formula on which Asda based its voluntary ban on below-cost selling, announced with a fanfare in July. The table on this page shows just how Asda’s policy would (or would fail to) change the price on some key lines.

Impact on prices: Asda’s announcement seemed to be more about great PR, in truth, with little impact on shelf prices except at the very bottom end – budget spirits and the very cheapest promotional deals would be the ones to change.

However, BWS boss Adrian McKeon did say: “We are taking a leadership approach. Historically, we have sold below duty and VAT. Yes, there will be a commercial impact on the business, but it’s a price we are willing to pay. Our future offers will have to change.” If such a measure is forced through, it seems likely value brands and the cheapest own-label will simply be stripped out of supermarket ranges, rather than prices raised to uncompetitive levels.

Hardest hit: Given the impact on prices, it’s really only the bargain hunters who are going to be hit. Suppliers’ rrps on all product categories are, by definition, not going to be at below-cost levels.

Obstacles: There seems to be an acceptance from the industry that something is going to happen, and that the best it can do is lobby for the least harmful measure – and this seems to be the one. That given, it’s hard at this stage to see many obstacles being put in its path. There also seem to be fewer legal question marks than minimum unit pricing by taking this route.

Implications for retailers: While the measure is being aimed at cheap supermarket drinks, it also raises the prospect of outlawing bin-end sales by independents wanting to realise some cash on hard-to-shift stock.

Who’s for it: Asda, Tesco, Morrisons,the WSTA and the SWA. The boss of one prominent drinks supplier told OLN: “Supermarkets don’t want to be selling booze below cost – they’ve got into a competitive spiral where because one does it, they all do it. But they all know it’s not sensible and it doesn’t work.”?Who’s against it: Expect party political opposition if this is the proposal the coalition goes for, but other than that, the industry seems ready to fall into line.

Chances of it happening: The government has said some form of ban on below-cost selling will happen – it’s just the details that need ironing out.

Were any bookies involved, this would be the favourite. It ticks a lot of boxes: the retailers aren’t overly taxed by the idea, the red tape would be minimal and it’s relatively easily accountable.

The government can be seen to be taking action without actually alienating too many people. Long term, the issue will be whether it actually makes much difference – either on prices or binge-drinking.

Below-cost sales ban, version twoThe deal: As for version one, but with an element of production costs included in the calculation. It’s even possible that versions three, four or five could emerge from the government’s consultation on licensing, in which the below-cost ban is an element.

Obstacles: The big stumbling block is defining the cost of production and associated red tape. As one supplier told OLN: “The cost of making malt whisky is very different to making pear cider.” HM Revenue & Customs would assume responsibility for policing it, which could mean an audit of the production costs of every SKU of alcohol in the land.

Implications for retailers: Compared with version one, it would carry a significant extra burden. Including the production costs – or a proportion of them – would also set retail prices at a higher level. As such, it could prove to be a more effective measure in discouraging excessive consumption, but could hit sales through the till.

Who’s for it: Despite its relatively fiddly nature, it’s not without its supporters. Molson Coors’ boss Mark Hunter has backed a definition of below-cost as including a “minimal cost of production”. The Federation of Wholesale Distributors and the BBPA are both for some production costs being included, but not the full invoice amount paid by the retailer.

Chances of it happening: As proposals go, it’s not flavour of the month, but then again neither was version one – comprising duty and VAT – until Tesco came out in support of it earlier this year and set in motion a below-cost ban bandwagon.

Increase/restructure dutyThe deal: The government is already consulting over a review of alcohol taxation. Having had the chance in its snap Budget to raise taxes per se, that seems unlikely to be on its agenda.

What does seem more likely is a realignment of the duty regime to bring greater parity between different drinks categories. Cider has the most to lose, and spirits the most to gain. Brewers have been lobbying hard for lower taxes on beer on the grounds it is a lighter-abv product than wine or spirits. One pre-election Tory pledge was to whack extra tax on superstrength beer and cider, which the coalition has resisted doing thus far but probably won’t do for long.

Impact on prices: Unlike minimum retail pricing, there’s always the possibility that any duty increases on certain products wouldn’t be passed on in full to consumers.

Retailers have, on occasion, twisted suppliers’ arms to absorb duty hikes in the past, to avoid breaking price points, and if they were to employ such tactics again it would be suppliers rather than consumers who could lose most. And if retail prices don’t budge by as much as the government intended the impact on excessive consumption could be minimal.

Who’s for it: Diageo put its cards on the table two weeks ago with its plans to press the emergency stop button on the existing duty escalator for spirits, to allow other categories to catch up. Over time, it suggests this should move towards a system where every drinks category is taxed according to alcoholic strength, not alcohol category. The SWA says it could raise an extra £1 billion in revenue for the Treasury.

Who’s against it: The WSTA, which argues that there are “no problem drinks, only problem drinkers”, and that it would be ineffective to clobber drinks with tax just because they are perceived to be associated with problem drinking.

Chances of it happening: Having under-taken a review it’s highly unlikely the government will do nothing and a restructuring of the whole alcohol tax regime seems much more likely than just applying more tax across the board.

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