On 1st August 2023, the Alcohol Duty system will be simplified, taxing all alcoholic drinks based on their alcohol by volume (ABV) - the biggest reform of alcohol duties for more than 140 years.
This new system will replace the current Alcohol Duty system, which consists of four separate taxes covering beer, cider, spirits, wine and made-wine. Starting in August, there will be six standardised alcohol duty bands across all types of alcoholic products, and these bands will apply to all individuals and businesses involved in the manufacture, distribution, holding and sale of alcoholic products across the UK. For a summary of the new system, take a look at this post: Alcohol Duty Rate Changes Explained or visit: gov.uk
Regency Commercial Manager (Beverage) and multi-site pub owner and operator, Martin Renwick shares his thoughts on how the duty changes will affect consumer drinking habits and the impact this may have on operators - with suggestions on how to maximise the sales opportunity presented by the changes, as well as protecting margins. Here's what Martin says...
With these tax changes on the horizon, there's evidence to suggest that 'drinkflation' has already occurred with multiple rebrews and reformations being announced by major brewers to offset the rising duty costs – in addition to the increasing costs of production.
Carlsberg UK are the first to make a significant shift to capitalise on the new duty threshold, with Carlsberg Pilsner set to be rebrewed to 3.4% ABV.
Earlier this year, Foster's dropped their ABV from 4% to 3.7%, Old Speckled Hen's ABV fell from 5% to 4.8%, Spitfire Amber Ale dropped from 4.5% to 4.2% and Bishops Finger was lowered from 5.4% to 5.2%.
Old Speckled Hen producer and pub chain Greene King said it:
"…continues to look at ways we can absorb those increasing costs to ensure we continue to offer our customers the same great value and taste".
The producer of Spitfire and Bishops Finger, Shepherd Neame, said:
"Consumers are increasingly choosing drinks with a lower alcohol content as part of a healthy lifestyle - we hope this will encourage more people to try our award-winning flagship beers."
The alcohol research group at the University of Sheffield said that if breweries reduced alcohol percentages by just 0.35 they could save an estimated £250m on tax.
However, while the media may be suggesting that these ABV reductions demonstrate radical action from brewers, these measures are not new… Brands such as Stella Artois have reduced the ABV multiple times over recent years – and most importantly, they have remained firmly in the top 10 lager brands. It would therefore suggest that consumers are unlikely to change their drinking choices and habits based on these product changes.
Furthermore, with the hugely successful launch of lower ABV products over recent years, including premium beers such as Birra Moretti and Madri (both with an ABV of 4.6%), there has already been a shift in consumer demand, with the previously dominant 5% premium continental beers now sharing the market with these brands. This would suggest that consumer choice is more influenced by how the beer is marketed, not simply the ABV.
While the beer category makes adjustments to reduce the negative impact of the duty changes, sparkling wine producers are set to benefit from a reduction in duty, while duty on still wines will go up by 44p per bottle. For this reason, we may see a boost of renewed momentum for prosecco (which seemed to lose steam in the UK market before Covid-19). This also creates greater opportunities for sales of English sparkling wine, which has doubled the number of hectares planted under vine over the past eight years.
One of the biggest winners will be producers of cider with an 8% ABV and below… Providing these efficiencies make their way down the supply chain to operators, the tax cut and Small Brewers Relief could reverse the negative affect of 2019’s tax increase on ‘made-wines’, and in particular could benefit fruit ciders brands such as Sweden’s Kopparberg and Rekorderlig, as well as Strongbow Dark Fruits. There is a potential opportunity for operators to make strong margins on these products, which are perceived by consumers as a more premium option when compared to apple cider.
On the flipside, while the ‘ready-to-drink’ (RTD) category has proven to be particularly buoyant in the UK (boosted by lockdown trends!), a potential revival of fruit ciders could destabilise this growth, as both categories play in the same occasions and appeal to broadly the same consumer groups.
The standard rate of duty for spirits over 22% ABV is increasing by 10.1% but there are new bandings for products with less than 22% ABV and less than 3.5% which will reduce duty vs. current rates.
So what can operators do?
1. Stock up on key lines
As these changes don’t take effect until the 1st August, should cash flow allow it, we’d recommend increasing stock levels for key lines that will be affected by the increases, with a focus on products with a longer shelf life – spirits, wine, fortified wine for example.
2. Consider alternatives to protect profit margins
Wholesalers will have no choice but to pass these increases on to operators, so get ahead of the game and speak to your Regency Procurement Manager to ensure you fully understand new pricing and how it affects your margins and cost per product. We may be able to suggest suitable alternatives at a lower ABV to offset the increases and protect profit margins.
3. Maximise opportunity to capitalise on tax reductions
The Regency commercial team continue to work in partnership with suppliers and brand owners and will negotiate on the behalf of Regency members to ensure the duty efficiencies (i.e price reductions!) are seen in the prices paid by operators. It can’t just go one way!
4. Update menu pricing and ABVs (with possible financial support from brand owners)
Now is time to conduct a full drinks menu review, as well as checking all POS, price boards, signage and digital menus and pricing on apps. This creates a huge amount of admin and can be costly. We have been offered generous support packages from our brand owners to help lessen the cost to operators.