In anticipation of Estonia joining the EU, Finland reduced its alcohol taxes substantially in March, hoping to prevent a huge increase in cross-border shopping. Ben Cooper discussed the impact of the tax cut with Jaakko Uotila, managing director of Alko, Finland's state-owned retail monopoly.

The entry of 10 new countries is likely to affect all EU economies in many ways over the medium to long term but arguably nowhere in the community have the effects impacted more immediately on the alcohol market than in Finland.

Indeed, Finnish consumers felt the effects of Estonia joining the EU two months prior to its entry on 1 May. On March 1, the Finnish government reduced alcohol taxation substantially, cutting spirits taxes by 44%, beer taxation by 32% and the tax on wine by 10%.

The move was an attempt to forestall a significant increase in cross-border shopping. Estonia's alcohol taxes are far lower than Finland's and its entry into the EU would effectively mean the removal of any limits for personal importation. A 50cl bottle of low-end vodka costs about €3 to €4 in Estonia against €12 in Finland prior to the tax cut, and around €8 after March 1.

But the tax cut was always likely to increase domestic spirits sales at least for a few months, with retail prices for spirits falling by between 20% and 35%. According to the Finnish state-owned retail monopoly, Alko, white spirits rose by 24% in the first five months of 2004 against the first five months of 2003, while sales of brown spirits were up by 15%. Given that January and February were fairly static, it is clear that the tax cut had a considerable impact.

"First, obviously it increased the sales of spirits because the tax cut for spirits was the biggest in terms of retail price," Alko's managing director, Jaakko Uotila, told just-drinks. "So it is no wonder that the sales of that category really increased quite a lot in the first months." Beer and wine sales were less affected by the tax cuts, with retail prices falling by 15% for beer and by 3%-4% for wine.

However, the increase in domestic spirits sales will be offset by the expected increase in cross-border shopping and this has already been seen in the May statistics. "We have already seen some let's say stabilisation in our growth," said Uotila.  "We still have in the month of May growth of 20% in spirits and 11% in the other spirits but we do definitely expect that the growth of our sales will reduce once the summer season starts and people take holiday trips to Estonia."

Even before Estonia's entry into the EU, there was still a considerable volume of cross-border shopping, albeit subject to personal limits of 32 litres of beer, 5 litres of wine and 2 litres of spirits. The Helsinki-Talinn tourist route is travelled by around 6m Finns a year, according to Euromonitor.

Although cross-border shopping will increase in spite of the tax cut, Alko expects its sales for 2004 to be roughly the same as 2003. But without the tax cut, domestic alcohol sales would have been more significantly affected. Given that Alko and Finnish grocery retailers, who are permitted to sell beer up to 4.7% abv, will still be losing considerable sales to the cross-border trade, not to mention organised and informal bootlegging, there is likely to be continued pressure for a further reduction in alcohol taxation.

"It is much too early to comment on that," Uotila said. "We have to see what is going to happen now this summer and what has been the impact on the alcohol business in Finland.  So I think we still need to wait a few more months to see if there is a need to make any more adjustments."

As head of a government-owned, though independently operated, retailer, Uotila's position on this is not surprisingly somewhat delicate. "There may be some hesitation to go further down in the taxation. Of course it is a political decision and as a company we cannot comment on that."

High Taxation

However, the possibility of an increase in bootlegging remains a particular concern for the government. High taxation is designed to control the supply of alcohol and help to limit alcohol abuse but rampant bootlegging can undermine such policies. If in spite of the tax cut, bootlegging increases, it could prompt Finland to review its high tax approach. Indeed, the tax cut was not only aimed at protecting domestic sales and tax revenue; it was also designed to make bootlegging less attractive and prevent a steep rise in unregulated consumption.

"The work done by the government has been to try to avoid the bootlegging and all types of smuggling," said Uotila. "That has been the main issue because theoretically you could have a situation when our stores would not be selling much more and you have the same products in the street and the garages. That has been an issue and a major reason behind the tax cut."

However, at this stage it seems too early to judge how the battle against the bootleggers is going. "We need to wait for a couple of months. At least today there seems not to be any major bootlegging but of course it is a bit too early to comment on that but the first reaction on that seems promising."

It is not only the entry of Estonia into the EU that has made 2004 a landmark year for the alcohol market in Finland. On January 1, 2004, Finland finally abolished personal import quotas on alcohol for travellers from other EU countries, which had been retained since it joined the EU. However, while there had been much discussion of the possible impact of these changes - similar limits were also abolished in Sweden and Denmark at the same time - according to Uotila domestic sales were not dramatically affected by increased personal importation in the first part of 2004.

"There was a big media discussion," said Uotila, "but nothing happened but the nearest cheap country would be Germany and it was the wintertime." However, Uotila conceded that there could be some delayed effect from the January changes during the summer when more Finns will be travelling to lower tax markets such as Germany and Denmark.

Where the combination of the January changes and Finland's tax cut have had some marginal effect is on the border with Sweden. Unlike both Finland and Denmark, Sweden has not reduced alcohol taxation. This leaves the Swedish market exposed to cross-border shopping with Denmark but it also has a substantial border with Finland too and, following the Finnish tax cut, Swedes can save money by buying alcohol in Finland.

The saving grace from the Swedish exchequer's point of view is that the Finland borders Sweden in a comparatively sparsely populated region though Alko estimates that it has gained about €1m in additional revenue from Swedes shopping in its stores in the northern part of the country. Although on a comparatively small scale, this again serves to illustrate the influence comparative excise rates play in the alcohol market, particularly in the Single Market environment of the EU.

When Finland joined the EU in 1995 it was expected to have a significant impact on its highly regulated, highly taxed alcohol market. While there were changes, such as the end of the spirits manufacturing monopoly, Finland was given time to bring its alcohol policies more into line with the rest of the EU, so the retail monopoly was retained and so were the high alcohol taxes. Ironically, it has been the entry of another new state into the EU nine years later which has finally prompted a substantial cut in those taxes.