Who would benefit from minimum pricing?

The fictional Horace Rumpole enjoyed a glass of Pomeroy’s non-vintage claret, but his real-life colleagues at the commercial bar will be able to afford first growths thanks to the nice (pun intended) earner that would come their way if the government seeks to impose minimum pricing of alcohol.

Alcohol abuse is high on the medical agenda, and rightly so. The National Institute on Clinical Excellence (NICE) wants the government to impose a minimum price per unit as the key way to promote sensible drinking.

Even the sale of tobacco, a proven carcinogen, does not face such restrictions. Drinks industry bodies rightly stress that minimum pricing will punish the majority to curb the excesses of a minority and highlight the flaws in the Sheffield University study on which the proposition is largely based, but nobody has addressed the practicality of how a minimum price regime would work, even if it were legal under EU competition law.

Into whose pocket would the extra revenue go?

Let’s start with producers. Would a minimum wholesale price regime work? Giving producers increased margins would anger the retail sector because their efficiency and buying clout would not be rewarded.

It could also distort consumer choice by encouraging production at the lowest end of the quality spectrum specifically for the UK market because producers would get a guaranteed (and inflated) price.

Consumer choice would also be affected by an in-built psychology that the minimum price was the normal price.

There is no incentive for rivals to produce better quality products at lower or equal cost. Premium pricing strategies for higher quality products would be threatened because consumers would be given the impression that all drinks of a particular alcoholic strength were of equal value.

What about the retailers? The blame for binge drinking is laid largely at the door of supermarkets and their heavy discounting; giving them constant extra revenue from a problem of their causing goes against natural justice.

But apart from that, consumer choice would again be distorted. Shelves will be stocked with products at the lowest wholesale price because they will provide the highest margin.

The spectrum of choice will be diminished. So it is highly unlikely that distorting competition law to introduce minimum pricing to the benefit of producers, retailers or both would pass muster in Europe’s courts.

The unspoken assumption is that the government would pocket the extra revenue. But how would that regime work?

Proponents of minimum pricing are keen to stress that it will not affect pubs because of their higher cost regime and consequent higher prices.

Pubs in general already charge more than the mooted minimum prices. So that rules out using the present excise duty structure to impose minimum pricing because any duty increase affects both on- and off-licensed premises.

Attempting to impose a two-tier structure of duties also begs the question of what happens to off-sales in pubs and cash and carry purchases by publicans and restaurateurs. Although their selling prices are likely to be above the minimum, a legislative framework will be required to ensure just that.

Nor can minimum pricing be static. Accounting for inflation and exchange rate fluctuations must be taken into account. Who bears the extra cost of inflation and who benefits from lower import pricing if sterling strengthens?

As Finance on Friday pointed out last week, banning below-cost selling is a simple idea beset by practical difficulties.

The same is true of minimum pricing. Any attempt to legislate will immediately create loopholes. No wonder the lawyers are rubbing their hands in anticipation.

Finance on Friday, 04.06.2010