Retailers have most to gain from minimum pricing

There was some surprise in the summer when Tesco’s head, Sir Terry Leahy, said he would support a form of minimum pricing to combat alcohol abuse. Cynics say they now know why; according to the respected Institute for Fiscal Studies, Tesco would make an extra £230 million-a-year profit without lifting a finger.

To be fair to Sir Terry, the debate is about much more than extra profit – although he would never object to that – and the IFS paper offers a volume of fact on which to base discussions.

It takes as its base the only firm proposal to have been made so far – the recently defeated measure to introduce a minimum price of 45p per unit of alcohol in Scotland.

If such a policy was rolled out across the UK, the IFS calculates that an extra £700m a year would be generated for alcohol producers and retailers, virtually all from off-trade sales. Some producers might be able to improve their margins, but most of the extra revenue would flow directly to retailers’ bottom lines.

Tesco would generate an extra 9% in alcohol spending, Asda 11%, Sainsbury 7% and Morrison’s 8%. Retailers whose range focuses on higher quality would hardly benefit at all. Spending at Waitrose would rise by 2% but Marks & Spencer would derive no extra income.

Discount retailers such as Lidl, Aldi and Netto would be the biggest proportional winners, their alcohol sales values rising by 20%, 16% and 12% respectively.

The IFS study is based on data on consumer spending in off licensed premises in 2007, the latest figures available. It shows that 85% of all alcohol units are sold at less than 45p, including 91% of lager, 90% of cider and 87% of spirits. Of the much-criticised alcopops, just 9% of units retailed at below 45p. The average unit of cider sold at 25p, lager at 33p and alcopops at 69p.

The IFS study confirms the general perception that when less affluent households buy alcohol they purchase at the economy end of the price range; consequently, minimum pricing would have a disproportionate effect on them.

A major obstacle to the introduction of minimum pricing, over and above the fact that it would penalise the vast majority who drink in moderation, is that taxation is governed by European Directives. These mean that while it is not permissible to tax directly the number of units in wine or cider, governments are free to do so on beer and spirits.

The IFS calculates that current implied UK taxes per unit are 17.3p for beer and 23.8p for spirits, while a bottle of 9% strength alcohol (who produces that today?) is effectively taxed at 25p per unit but a 14% wine is taxed at only 16.1p a unit. If correct, redressing those disparities could cause major change to the UK drinks market, but the IFS makes no attempt to calculate how consumption patterns might change with minimum pricing.

In conclusion the IFS researchers say: “Minimum alcohol prices would transfer large sums from consumers to those firms that retail and produce alcohol, but may target households that consume the most alcohol more directly than increases in alcohol taxes.

"However, higher taxes would generate much needed revenue. The government should seek to change European regulations on how alcohol taxes can be structured so that taxes can mimic the impact of minimum prices whilst ensuring the resulting revenues go to the Government and not the firms.”

At least we now know how big a problem is being discussed.

Finance on Friday, 01.10.2010