Denmark still facing taxing challenge
The Danish drinks market has seen two major changes during the last five months with a hefty tax cut for spirits last October and the abolition of personal import quotas for beer, wine and spirits at the beginning of 2004. In the second of a series of articles on Scandinavia, Ben Cooper examines the impact of these events in the context of the general development of the Danish alcohol market.
The last six months have seen two crucial legislative changes exerting a major influence on the Danish drinks market. In October, the government reduced taxation on spirits by 45%, a step taken in anticipation of the removal of the personal import quotas for alcohol in Denmark, Sweden and Finland on 1 January 2004.
Whilst the desired effect may not have been to boost spirits consumption per se - alcohol consumption in Denmark as in most EU countries remains a politically sensitive area - the Danish government wanted to reduce the amount of cross-border shopping by Danes in Germany where alcohol taxes are lower. This was all the more imperative given the changes to import allowances on 1 January.
Certainly, since October, there appears to have been a strong rise in domestic retail sales of spirits. One can assume this is replacing some of the volume of Danish cross-border shopping in Germany. According to the major Danish supermarket retailer, Dansk Supermarked, spirits sales are up by 50% in volume terms in the period since the tax cut. Official data for the period is not yet available but Dansk Supermarked believes that its figures are in line with the market as a whole.
While to a degree a bulge in sales was created by people holding purchases until after October, Dansk Supermarked predicts that spirits growth for the full year from October 2003 will be in the region of 30% to 35%.
While the Danish spirits tax cut has reduced the price differential with Germany, it has increased the price gap with its other near neighbour, Sweden. Swedish companies have complained since the October tax cut that cross-border shopping by Swedes in Denmark has increased and this is certainly reflected in Danish supermarkets closer to Sweden, Dansk Supermarked reported.
However, the tax cut only applied to spirits. For beer and wine, there is still a considerable price difference between Denmark and Germany and the cross-border shopping between the two countries has increased since 1 January. From the beginning of the year, Danish import quotas fell into line with the rest of the EU, with travellers allowed to bring back up to 10 litres of spirits, 90 litres of wine and 110 litres of beer. Also from 1 January, a Danish regulation requiring travellers to spend at least 24 hours out of the country in order to bring back purchases was repealed. "We have seen a big impact," says Dansk Supermarked's Jens-Peter Lund. "We see a lot of Danish consumers travelling to Germany pulling trailers behind their cars to pick up crates of beer and wine as well."
Although this cross-border activity has increased since 1 January, there has been a considerable volume of cross-border shopping for many years, since Denmark joined the Schengen agreement which abolished border controls. Danish consumers had been buying alcohol in Germany in relatively large quantities regardless of the previous import quotas and regulations. "There had not been any control at the border for some time and people just bought what they needed," Ulla Mouritsen, drinks analyst at the Danish Jyske Bank, told Just-drinks.com.
Danish brewers have been lobbying for many years for harmonisation of duties between Denmark and Germany but so far their attempts have been unsuccessful.
"Private imports are still increasing and unfortunately from an authority point of view smuggling is also increasing," says Margrethe Skov of leading Danish brewer, Carlsberg. Carlsberg reckons that German-bought beer accounts for some 20% of Danish beer consumption.
Interestingly, while the Danish brewing industry is campaigning for a reduction in beer excise in Denmark, much of the volume being sold in Germany is Danish-produced beer so does not necessarily constitute lost sales. "We are in the lucky position that when it comes to Danes driving across the German border they almost entirely buy Danish beer," says Skov. "It is Danish beer, produced in Denmark, transferred to Germany and brought back by Danes. It is not lost to us; it is in fact lost to the Danish income from excise taxes."
However, the increasing prevalence of organised cross-border smuggling should be a concern to all. "We believe the only way to solve the problem as we see it is for all EU countries to agree on having the same level of excise taxes. It's the only way to solve it."
But far from hoping for a reduction in excise duty, Danish brewers can instead look forward to an effective increase this October. Skov explained that a change in the way excise is calculated, from October 2004, will result in the excise charged on some 70% of domestically-produced beer rising while it effectively drops for the majority of imported beers. Carlsberg anticipates that this will only increase cross-border shopping and smuggling.
The popularity of beer-drinking in Denmark, underlined by the fact that one of the biggest names in global brewing, Carlsberg, is Danish, represents a key difference between Denmark and its other Scandinavian counterparts. In fact, while Denmark like other Scandinavian countries is a relatively high tax economy - its 25% VAT rate is among the highest in the EU - with high public expenditure and a well developed and financed public service sector, it does not fit the Scandinavian model with regard to alcohol.
In terms of alcohol consumption patterns, Denmark arguably has more in common with Germany than with Sweden or Norway. Like Germany, Denmark is primarily a beer-drinking country rather than a "spirit belt" market.
Denmark also joined the EU much earlier than other Scandinavian countries. It joined the then European Community in 1973, some 22 years ahead of Sweden and Finland. Norway, of course, is yet to join. Its high tax economy was never complemented with strict alcohol regulation as seen in the other Scandinavian countries. Unlike the other Scandinavian countries, the Danish alcohol market has never been controlled by state-owned retail or production monopolies.
While spirits consumption per capita in Denmark has been more or less flat for the past six years, per capita wine consumption has risen from 25 litres in 1993 to around 40 litres in 2003, according to industry analysts, Canadean. However, there are signs that the growth in wine consumption is now beginning to flatten off. According to Canadean, the light wine market in Denmark, which excludes sparkling and fortified wine, grew from 17.73m nine-litre cases in 1998 to 21.92m cases in 2002. While the compound annual growth rate was between 5% and 6% between 1998 and 2002, growth is expected to be significantly slower in the coming three years. Canadean forecasts that the light wine market will grow to around 22.89m cases by 2005.
As in other wine importing countries in Europe, it is the New World countries which have seen the most growth in recent years, with imports from France in particular in decline. However, Italian wines enjoyed considerable growth between 1998 and 2002, according to Canadean.
For retailers, the challenge is now to take share from competitors and to encourage consumers to trade up. "We have reached a level of 30 to 40 litres per capita and it's not realistic to have growth of 5% to 7% from that," says Jens-Peter Lund. "You have to take it from your competitors. Denmark is now among the biggest wine consuming countries in Europe. So our task is now to make people spend a little more."
Now that Denmark has become virtually a zero-sum market for wine, the need for harmonisation of taxation levels with Germany is greater than ever. Lund believes the only way total market volumes can resume stronger growth would be if Danish taxes on wine were cut. "The only way we can increase our sales in terms of volume will be taking away from Germany so we need to harmonise the level of taxes," he says. "Then we can increase again."
The other strong growth area of the Danish alcohol market in recent years has been flavoured alcohol beverages or ready-to-drink spirits (RTDs). The high-profile brands, Bacardi Breezer and Smirnoff Ice, were launched in summer 2001 and spring 2002 respectively, and are the market leaders. The market grew from virtually nothing to 937,000 nine-litre cases in 2002, according to Canadean. But as in other countries, the development of this area of the market has been controversial, with many alcohol pressure groups protesting that the products appeal too directly to under-age drinkers.
While analysts were at one stage forecasting continued growth for the RTD sector in Denmark - Canadean foresaw compound annual growth of 17.3% between 2002 and 2005 - the sector appears to have reached its peak and, as in other countries, RTDs are either flattening off or in decline. "It had a nice growth for one or two years but now it is declining dramatically," Jens-Peter Lund told Just-drinks. "The main branded spirits will retain volume but lesser products are fading dramatically."
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