Retailers’ duty to pass on hikes

02 April, 2010

Even when you’re prepared for it, a punch to the stomach still hurts. Alistair Darling warned the wine industry in March 2008 that the annual duty escalator would be 2% above inflation until 2012 (subsequently extended to 2015), but there were still a few optimists who hoped he might change his mind, given the parlous state of the trade. Fat chance. The low blow came, as predicted, in the recent Budget.

The latest 5.1% duty increase (equivalent to 8p) takes the Chancellor’s share of a 75cl bottle to £1.69. If you add VAT (64p on a bottle at the average retail price of £4.32), the Treasury trousers more than £2.30 every time one of us pulls a cork or twists a screwcap. In light of what happened to the cider industry last week (a duty increase of 10% above inflation) you could argue that wine got off lightly, but that would be to ignore the bigger picture. Since March 2008, UK wine duty has mushroomed by over 25%, making it the third highest in the EU behind Finland and Ireland.

You can’t blame Alistair Darling for clobbering the booze industry. With empty coffers (even the latest, revised figures predict public borrowing will hit £167 billion this year), he needs to raise money from somewhere. Income tax hikes are politically dangerous this close to an election, but drink is an easy option. With all the bad publicity about binge-drinking, not to mention the pressure from the health and anti-alcohol lobbies, taxing alcohol looks responsible, too.

Taken cumulatively, the duty increases of the past five Budgets are the biggest since the early 1980s. Governments always use wine as a source of revenue in recessions. The increases in the early 1980s (13.9% in 1980, 16.9% in 1981 and 12.2% in 1982) and the early 1990s (7.7% in 1990 and 9.3% in 1991) make that clear. In the 35 Budgets since 1978, the average duty rise has been 3.5%, a figure which includes 10 Budgets when it was frozen and one when it was cut by 19.9% in 1984.

I can’t see the next government changing tack on alcohol duty. We already know what the Labour party’s position is and if the Conservatives get in, they have pledged to increase duty on “problem drinks” such as RTDs, super-strength beers and ciders. I doubt they will go easy on “non-problem” drinks either. Whoever wins the election, wine duty will continue to rise at 3.5% or more for the foreseeable future.

If duty increases are a fact of life, however unwelcome, their application is in the hands of the wine trade. I’ve always argued that duty is a consumer tax that should be passed on to the end user. Unfortunately, this seldom happens. All too frequently, the major retailers ask suppliers and agents to absorb duty hikes so that they can maintain price points. Occasionally, they make a contribution themselves.

As a spokesman for the Royal College of Physicians put it last week: “Duty is an imperfect demand management tool, which raises money for the Treasury. We are worried that many supermarkets will simply absorb the proposed increase and continue providing discounted deals that encourage consumers to drink more.”

Duty should be added to the bottom line as a matter of course, rather than seen as a subject for negotiation. If duty keeps increasing by 8p a year (as Alistair Darling wants it to), then a wine that costs £4 today should sell at £4.40 in five years’ time, just to reflect the Treasury’s larger take. Was that a flying pig I saw floating past my window? Such is the over supply in the wine business (and the queue of wineries desperate to dump booze at any cost) that this is unlikely unless the retailers take a common position on applying alcohol duty to retail prices.

If they don’t, decisions about the pricing of wine may be taken elsewhere. How long will it be before the next government makes it illegal to sell wine below cost or introduces a minimum price per unit of alcohol? How long before they stamp out the practice of using discounted wine to drive footfall in stores? One benefit of the higher duty rate is that it may kill off three-for-£10 deals, but don’t count on it. The likes of Asda and Tesco, absorbed by their own turf war, may continue to fund such promotions.

The wine industry needs to act now to price its products at a level that reflects what it costs to make, bottle, ship and sell them. More to the point, it must do so in a way that reflects the beating it’s taking from the Treasury.




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