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A week which began well for the drinks industry when the UK government's Alcohol Harm Reduction Strategy eschewed tougher legislation, took a turn for the worse when the UK Budget unveiled increases in beer and wine duties and the introduction of tax stamping for spirits. Chris Brook-Carter weighs up the industry's response.

A week is a long time in politics, and the last seven days have certainly been long for the UK drinks industry as it waited on the UK government to unveil two crucial policy directions.

On Monday, the governments' long-awaited paper on alcohol harm reduction finally surfaced after months of debate and investigation into a problem estimated to cost the UK £20 billion a year. As reported here at the time, the drinks industry couldn't feel too aggrieved at policy suggestions that leaned heavily towards co-operation between business and the authorities, and largely backed the status quo of self regulation on vital issues such as advertising.

However, if the drinks industry had raised a refreshing glass to the level of understanding between government and industry on Monday, those toasts revealed a decidedly sour taste by Wednesday when the Chancellor, Gordon Brown, announced duty increases and introduced tax stamping for spirits in his annual Budget speech.

The Chancellor announced that duty on wine will increase by 4p bottle and on beer by 1p - increases that were unsurprisingly unpopular, although not altogether unexpected.

"We are disappointed that the Chancellor has ignored the sound economic case put forward by the brewing industry and imposed a further increase in excise duty on beer, his fifth since coming to power," says John Dunsmore, chairman and managing director of Scottish Courage, the UK's leading brewer. "It's bad news for British pubs, British brewers and beer drinkers alike,"

There are fears too from within the financial community that Chancellor Brown's continued increases in beer duties will have a long-term negative impact on the industry.

"The 1p per pint rise is contrary to what they [the industry] were requesting," says Mike Maloney, head of brewing at KPMG. The rise, he said, increases the discrepancy between duty in the UK and rest of the EU, and once more brings into question the degree to which the policy is encouraging the black market.

"The disparity makes them [UK brewers] uncompetitive, the increase makes them more uncompetitive. From the brewing industry perspective it all seems to be going one way," says Maloney. "It could have been worse; there are a number of pressures coming from medical circles and the government could have increased tax and claimed it was a right and proper tax but the industry will still be disappointed, I wouldn't say they got off lightly."

Quentin Rappoport, director of the Wine & Spirit Association, was equally worried of the effect another increase in duties is going to have on a wine industry already struggling with pricing.

"A wine duty increase in line with inflation is not as innocuous at it may seem," Rappoport says. "Indeed, last year's rise at the same level had a devastating effect, cutting sales growth in the sector by three-quarters. Today's increase will inflict further significant damage, both to the trade and to Treasury revenues, as even more shoppers will go abroad to buy cheaper.

"It is also galling that, having asked for our advice on the appropriate timing for introducing duty increases, the Treasury has totally disregarded our recommendation of a four week minimum," Rappoport continues. "The trade yet again will have to move heaven and earth to implement the changes virtually overnight. Again, it will be the smaller firms which will be hit most."

There was of course some good news. Tax on sparkling wines, cider and spirits were frozen. And for small brewers, the Chancellor doubled the threshold for companies that can claim 50% tax relief on their first million litres, to include brewers with a total production of up to 6m litres.

However, Maloney believed this move, in particular, was a poor offering from the Chancellor as it was far less than the industry wanted and would reduce the amount of tax paid by the brewing industry by very little. "It's positive as it makes micro-brewers more competitive but it doesn't go as far as the brewing industry hoped and in my mind, while a step in the right direction, it is superficial," he said.

But despite the noise made around tax increases, the greatest blow to the industry was dealt by its political failure to stop the introduction of tax stamping to combat fraud in the spirits industry.

The best efforts of the Scotch Whisky Association (SWA), the Gin & Vodka Association et al. were not enough it seems to prevent Brown from announcing on Tuesday that, despite asking the industry for workable alternatives, he would be introducing tax stamping because of the "continued high levels of spirits duty fraud".

However, Brown said he would "help the trade financially" by deferring payment for the stamps and by helping with capital investment. The measure has done little to sweeten the news.

"The introduction of strip stamps for spirits is one of the largest regulatory burdens of this budget," Rappoport said. "It is a devastating blow to a highly efficient UK industry and, frankly, an example of the worst kind of policymaking. We have worked long and hard to prove that this measure isn't effective but the Government has not listened. Countries across the world, from South Korea to Greece, have tried to impose such a system and quickly found that it is useless, and abandoned it. What does Gordon Brown know that they don't?"

In the lead up to the Budget, the spirits industry had worked hard to set out an alternative proposition to the tax stamping plans. It argued that close co-operation between Customs & Excise (C&E) and the industry must be the first response. It also argued for a tighter system of guarantees, strengthened warehouse and licensing controls, and the making of better use of existing 'track and trace' systems.

But the government, in a statement released though HM Customs & Excise, argued that the impact of the alternative proposals had fallen "significantly short of that estimated for tax stamps."

"As a whole, the package contains a number of inherent weaknesses: it leaves the door open for displacement to other types of fraud, most notably inward diversion; it stands to be undermined by a complicit party; and it does not address the issue of identification - the ability for consumers, retailers and Customs officers to distinguish readily between licit and illicit product. As a consequence the anti-fraud impact of the package falls significantly short of that estimated for tax stamps," the statement said.

However, Rappoport countered by suggesting that tax stamps would not deter the fraudsters. "Strip stamps are no deterrent to fraudsters - who just produce counterfeits - and will cost legitimate traders millions in unwanted bureaucracy and compliance costs. It is a particularly big hit for smaller businesses, of which there many in this sector. In a Budget claiming to support small firms and encourage enterprise, this announcement is a cruel irony."

James Espey, chairman of international business development and industry relations at Scotch group Whyte and Mackay, agreed: "This is a bitter blow. The industry's alternative package of measures to tax stamps offered a far superior and multi-faceted approach to tackling fraud and I am disappointed that the Chancellor has not taken these enhanced solutions on board.

"While we welcome the announcement that the Treasury will look to help companies with the cash flow and capital investment implications of tax stamps I am sceptical as to what extent this will offset the true cost to companies of implementing tax stamps. Small companies, who are already operating in a fiercely competitive marketplace, will be the hardest hit."

That question of the "true cost" of the tax stamping plan is the one that will weigh most heavily on the spirits industry - an industry that prides itself on an efficient production process, particularly at the bottling and labelling end. To now add an extra step into that process could be very onerous.

"A lot of producers will be concerned with production efficiency," says KPMG's Mike Maloney. "It is impossible to quantify the cost. The government sees a significant increase in revenue on the back of this. [But] the devil is not so much in the detail but in the implementation

Expert Analysis

The Market for Alcoholic Drinks in the United Kingdom

Euromonitor's Market Direction series provides invaluable standardised-format analysis for 52 established and emerging markets. Like-for-like comparability ensures consistent, usable data between product sectors and countries, while our analysts working in the field add true 'local flavour' market information to each report.

Each Market Direction title investigates new product developments, distribution trends and demand factors in addition to providing company and brand share data, retail sales statistics and sector performance analysis.

A key component in Euromonitor's alcoholic drinks analysis is our on trade vs. off-trade sales data. Each report gives a detailed insight into on and off-trade channel developments, volume market shares, new products and licensee and distributor relationships.

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