Alcohol tax twists retailers' arms

Published: 21 March, 2008

how will rising DRINKS duty affect the industry, asks Rebecca Evans

The UK now has the highest level of wine duty in the European Union and the fourth-highest rate of spirits duty. Dire predictions of a chunky duty hike on alcohol have rumbled around the trade for months - and were proved right on March 12, as Chancellor Alistair Darling went for a straight revenue grab across all types of alcohol. Spirits was worst hit, attracting a duty increase of 55p a bottle, and wine did not fare much better. Still wine duty went up by 14p, sparkling by 18p and fortified wine by 20p a bottle.

Many suppliers, including US drinks giant Constellation, say they will be forced to pass the full cost of the duty increases to their customers. Constellation's senior vice president of sales, Peter Spencer, says it will lead to "a departure from the 49p and 99p price points" at retail.

He adds: "I believe this duty hike will mean prices across the wine category will rise substantially and that it will herald the end of wine at the £3.99 price point, as it is simply unlikely that any wine producer can sustainably supply wine at this price."

Smaller operators are likely to follow suit. Bill Rolfe of Pink Elephant supplier 10 International also says he will pass duty on to his customers, and retail prices must rise as a result. "This year, there have been small increases in the cost of dry goods. The strength of the euro has also put pressure on to importers of European wine. So, with the 14p duty increase it's likely that retailers will move on price. I would expect those £4.99 price points to move up by 50p." Thierry's commercial director Matthew Dickinson says its prices may go up on a case-by-case basis.

Spot the difference

Suppliers' calls for retailers to move on pricing post-Budget are not new - OLN has reported these year after year. But there is evidence that the combined effect of the higher-than-normal duty rises and the upsurge in costs of raw materials and energy will combine to force retail price points upwards.

Justifying the increase on wine, Chancellor Darling said: "In 1997, the average bottle of wine bought in a supermarket was £4.45 in today's prices. If you go into a supermarket today, the average bottle of wine will cost about £4." The question is - will the duty hikes make any difference at all to retail pricing?

Running out of options

Some drinks retailers say their prices will have to increase. Martin Swaine, of Yorkshire-based specialist retailer Rhythm & Booze, says his prices are likely to rise, and independent retailers have reflected those comments. The effect on the larger players is uncertain at the moment, as major retailers including Tesco and Majestic are locked in internal negotiations. If price rises to go through, it's unlikely that they will hit supermarket shelves immediately. It's the wholesale and independent sectors that will feel the effects soonest - and this on top of beer price rises earlier this year.

Parfetts Cash & Carry put up prices on cigarettes as soon as the duty rates were announced on March 12. Managing director Steve Parfett says alcohol prices will follow suit shortly. Parfett is an outspoken critic of what he says is the unfair dominance of supermarkets in the UK, and the inequalities in the market are highlighted by what happens post-Budget, he thinks.

"We do not have the buying power in the way the supermarkets do. We've had a flood of communication from our suppliers. Everybody is putting prices up and we will have to do the same."

Parfett doubts the duty hikes will have much effect on supermarket pricing, least not on deep promotions. "I'm as cynical as anyone on Tesco's recent statements about reducing harm from alcohol," he says. "It's cynical spin of the worst order."

Duty calling

The Treasury's planned inflation accelerator, which will see alcohol duty rise 2% above inflation for the next four years, is not a bad move, as long as it is evenly applied across the industry,

Parfett adds.

Fellow wholesaler Bestway Cash & Carry Group, which has 51 Bestway and Batleys branches across the UK, says the group will pass on costs to its retailer customers, but it will wait until present stocks have been sold. "We want to play as fair as we can with all our customers," managing director Younus Sheikh says.

And independent retailers are clear that the Budget will hit them harder than supermarkets. "It's bound to have more of an impact on smaller shops," says Beryl Banks of Fairview Off Licence in Gillingham, Kent.

"The government needs to be focusing on the supermarkets . I think the Budget was a load of nonsense. They've run out of money, so they decided to target alcohol."

Attol Cook, manager of Bournemouth's Down the Hatch, will "drip-feed" prices through as they buy new wholesale stock. "The government-imposed taxes get passed on to the consumer, who has to deal with that along with rising energy and fuel prices. In reality they will only pay so much. Margins get squeezed, independents feel the crunch and go out of business while the supermarkets prosper."

Cross-Channel consumers

On top of the increasing pricing gap between supermarkets and independents, there are other concerns associated with increased duty. The widened gap between UK and mainland Europe alcohol pricing could return the booze cruise to popularity, some think. James Tanner of Tanner s Wine Merchants and chairman of The Bunch group of wine merchants, says: "Mercifully, people have seen less incentive to go abroad for alcohol more recently, but that increase will sharpen people's interest in finding cheaper wine. People will be hopping across the Channel to France for the day either to stock up for themselves, or for events like

weddings."

Wine & Spirit Trade Association chief executive Jeremy Beadles agrees. "I think there's a very serious risk as wine prices go up. Consumers are clever enough to know that wine is cheaper across the Channel. It will be interesting to see whether ferry companies use this as an opportunity."

A WSTA survey of 1,000 consumers found one-third would increase their alcohol shopping abroad if prices go up in the UK.

The Association of Convenience Stores sees a worse effect - growing duty fraud. Chief executive James Lowman says: "The Chancellor has inherited his predecessors' tendency to put the interests of criminal bootleggers ahead of the needs of hard-working businesses. By putting up duty on tobacco and alcohol, Mr Darling is widening the differential between the prices in legitimate shops and those charged by illegal bootleggers who pay no tax and have no regard for the laws on responsible selling. This Budget does nothing to tackle this problem."

Beryl Banks says: " All that the Budget will do is encourage bootlegging". And the WSTA's Beadles also sees a potential rise in duty fraud. "It certainly provides a great incentive to fraudsters. It's up to the HRMC to keep up a very close surveillance," he adds.

But for the average consumer, the choice is likely to continue to be greater convenience and personal service at the corner shop, or cheaper prices at the supermarket. And independents will have to continue to play a very good game.

As independent retailer Samantha Jackson, of Scatchards in Chester, says: "We can't lie down and let it beat us. We'll all have to work a little bit smarter and a little bit harder."

Wine excise duty rates: top 10 EU countries

Country Duty rate

(£ per bottle)

UK 1.46

Ireland 1.39

Sweden 1.21

Finland 1.08

Denmark 0.42

Estonia 0.34

Netherlands 0.30

Belgium 0.24

Latvia 0.22