The issue of a minimum unit of pricing of alcohol has been hovering over the UK drinks industry for almost the last decade, but is to become reality now that Scotland has the legal power to introduce it. Former Bargain Booze managing director, Keith Webb, who has long lobbied the government on how alcohol revenues and duty fraud can be managed better, assesses the likely impact of MPU and how wine in particular will be at the centre of alternative moves by the Treasury to raise income from alcohol other than through straight duty.
Those in the drinks industry who think the introduction of minimum unit pricing on alcohol on alcohol in Scotland won’t affect them need to read on. MPU could just be the first step in a number of new, imaginative ways that governments can use the drinks industry to raise revenues, warns Keith Webb.
The recently announced legal clearance for the Scottish Government to introduce minimum unit pricing (MUP) on alcohol in that country may, on the surface, have few connotations for the wine trade, however, it’s worth taking a little time looking back as to how we got here before getting out the crystal ball.
Although there has, seemingly for ever, been a temperance movement of sorts engaged in the alcohol industry there have been overt and covert drivers in recent years. The overt one touches on an almost unspoken, but festering away, feeling in some quarters that it is not ‘right’ that the common-sense, moderate majority should be asked to dig deeper and deeper into their taxable income to provide managed/curative remedies for what are viewed as self-inflicted illnesses or damage. This has grown to cover tobacco consumption, obesity and, of course, alcohol consumption. As consumption grew, and the health effects became more and more expensive, the clarion call of “Something must be Done” grew louder and louder.
It’s worth noting here that my first high level contact with government on this area came during my time at Bargain Booze, now a part of Conviviality which I helped float in 2013. I had meetings with the UK government at high levels (arranged by my then chairman, the late Roger Peddar) both in the House of Commons and Portcullis House. The proposition being driven by myself was that the unfettered proliferation of duty fraud activity, often in plain sight, was not only very damaging to the country’s finances but, on a purely business level, also very damaging the Bargain Booze franchise estate, the vast majority of whom trade legally, decently and honestly.
All about the money
Let’s be clear, the real political push behind addressing duty fraud was around government revenues, but moving the conversation past an almost laissez faire position was very hard yards and required the engagement of influential individuals such as James Lowman at the Association of Convenience Stores and, crucially, Miles Beale at the Wine & Spirit Trade Association. Dealing with duty fraud became inextricably entwined with MUP when the potential huge ‘pay rise’ for the criminals was made clear behind closed doors. On one level it’s another side to the now annual debate around alcohol duties. Their huge level in the UK made the market here a magnet for those whose calculators showed how much money could be made by avoiding it.
So, MUP – probably at 50p per unit. For the wine trade it will, at the moment, make very little difference. With the huge push towards premiumisation ongoing even a 50p MUP will have no effect. In reality, the real targets here are the ‘White’ Cider and ‘Super-Strength’ lager categories. Unless some very clever loopholes are created in the law this is going to hit the very businesses who have generated such a high profile (on relatively low volumes) – the ‘Craft” Industry. A number of very high-profile businesses will be looking very carefully at how this new law impacts their over-arching proposition.
Wine then – nothing to see here right? Not so fast. With the Welsh Government already joining in the MUP bandwagon it will, probably, only be a matter of time before England and Northern Ireland join in as well. There is the real prospect of the level being set at different levels and this will add a huge administrative burden on businesses. Might they be tempted to recover this new cost from the wine category at a time when the spirits and beer ones may be driven down volume-wise as the ‘value’ end is priced upwards?
There are two other areas of potential impact – neither enshrined in this new area of law, but nevertheless the subject of many late nights poring over spreadsheets in the bowels of the Treasuries. Firstly, that of a variation on the Laffer Curve of Tax revenues. Any meaningful effect on the ‘Health of the Nation’ to a level that produces a reversal of the current levels of self-imposed(?) harm requiring tax-payer’s interventions will happen long after the necessary, logical, reduction in harmful consumption has delivered a lowering of the tax take via duty.
There is a case to be made that one consequence may, in fact, be a reversal of the hard fought for cessation of ‘escalator’ duty rises every budget. I do recall studying OBR forecasts a few years ago and looking in incredulity as the total alcohol tax take amount seemed to be entirely dependent on the wine category delivering ever steepening levels of growth to more than compensate for forecast declines in almost all the others. Might wine, again, be the cash cow to be milked?
The second, and more sinister for the long term, is that of ‘Creep’. Once government of any hue gets its hands on a lever of revenue it is usually very difficult to get it to give it up. However, as you know, VAT is paid on the ultimate selling price of any good. Although many wholesale businesses choose to publicise their margins at a notional retail, a fair proportion actually use a POR calculation driven by the ‘cost’ being their wholesale price plus VAT on that cost. Of course, the true cost is the vatless wholesale price plus the VAT payable on the selling price – or ‘Net on Gross’. This latter method produces a lower ‘margin’ than POR and, in my current business advisory role, has been the answer to many questions of ‘why isn’t my margin ‘right’’.
A 50p per unit MUP will raise retails at the ‘bottom’, so increasing the tax take. At some point, in the not too distant future, it’s not much of a leap to imagine Chancellors around the UK thinking “if I put the MUP up, prices go up, so my tax take goes up……..”
I would suggest that for the wine trade it’s these latter two propositions that provide the real longer-term risk.
- Keith Webb is chief executive of Aiden Associates Limited Business Advisory Services. He is also former trading director of Spar (UK), One Stop and managing director of Bargain Booze prior to him becoming an executive director Conviviality Retail PLC post its float in 2013. He and his associate network now act as advisors to the trade and have interests in the beer, spirits and wine sectors. You can contact him at email@example.com.