Is this the end for £3.99 wine?

21 March, 2008

Some political commentators have joked about the Mogadon-like qualities of Alistair Darling's first Budget speech, but for the wine industry it was anything but a snooze. Even those of us who have argued that wine is too cheap - and that the average price of a bottle

needs to be closer to £4.50 than its current £4.01 - were surprised by the severity of the 14p duty increase.

The decision makes UK wine drinkers the most heavily taxed in the European Union. The £1.46 they have to pay on every bottle is even more than their counterparts in Ireland (£1.39), Sweden (£1.21) and Finland (£1.08).

More significantly, it is £1.46 more than French duty. As the chancellor sat down in the House of Commons, I could imagine retailers in Calais, not to mention the ferry,

and Eurotunnel operators, rubbing their palms in anticipation.

The duty increase has been presented in some quarters as a move to combat alcohol abuse and binge-drinking. This is misguided in my view. Higher prices may have some effect on consumption levels, but the chancellor's main motivation was to raise revenue. He admitted as much himself during an interview on Radio Four's Today programme.

With the takeover of Northern Rock and two very expensive wars to finance, Darling needs money from somewhere, and alcohol is a soft target.

The one bit of good news, relatively speaking at least, in the 2008 Budget is that the wine trade knows where it stands for the next few years. Duty will be increased by "2% above the rate of inflation" until 2012, assuming Labour stays in office that long. Instead of the guessing game that normally precedes the Budget (one company told me

it had considered five different scenarios this year, ranging from a 5p to a 35p increase), wine producers, importers and retailers can plan for the future. As Tim How of Majestic puts it: "Certainty helps, even if it's an unpleasant certainty."

The question everyone is asking now is: what next? The duty hike is too big to be absorbed by suppliers, especially given rising grape, transport, packaging and fuel costs. It is also too large for retailers to swallow, never the most likely of scenarios, it must be said. There may be brand owners who attempt to retain a competitive advantage by maintaining certain key price points, cutting quality and/or margins accordingly, but it's hard to see this as anything more than a short-term tactic.

For the first time in more than a decade, it looks as if the duty hike will be reflected in shelf prices. Constellation Europe, faced with an increased duty bill of around £24 million over the next year, was among the first to put up its prices. Troy Christensen's position is that "this is a government tax which is supposed to be passed on to the consumer. We're more than happy to do so".

What impact will this have on the price of wine? You should never underestimate the sharp-clawed competition between the likes of Asda, Morrisons and Tesco, but even the supermarkets must surely accept the logic of Christensen's argument. Set against a background of supply chain pressures and currency fluctuations, there is only one direction in which prices can move.

I suspect that we are about to wave good bye to bottles of wine at £2.99 (and good riddance, in my view) and possibly, before too long, at £3.49. Even at £3.99, effectively the UK wine drinker's favourite price point, choice will be severely curtailed. If you're happy to buy wine from South Africa, Argentina and possibly China, all well and good, but producers almost everywhere else are going to struggle to put half decent liquid in the bottle. On a £3.99 bottle of New World wine at 13% abv, the total tax is now £2.13, equivalent to 53% of the price.

At the time of writing, retailers are still considering their new pricing structures. As Dan Jago of Tesco comments: "All bets are off. It's a very fluid situation right now." I suspect that when the fiscal dust has settled, we are going to see a much greater range of price points. It may not be a bad thing if retailers and brand owners are forced to abandon 49p and 99p as their markers. After all, consumers are used to "jagged edge pricing" for petrol. Why not for wine? That way, the duty increase could be added to the shelf price every year.

I believe that this is the time to increase prices by more than the duty hike. "Commercial reality" may make retailers unwilling to move from, say, £3.99 to £4.49 on a given wine, but it would enable suppliers to invest in the quality of their wines, as well as marketing, promotion and advertising.

Now more than ever we need to explain to consumers that it's worth paying a little extra to drink better wines. Five years from now, the wine trade may have cause to thank Alistair Darling.

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