Scotland now to impose Minimum Pricing for Alcohol

This week the British Supreme Court cleared the way for the Alcohol (Minimum Pricing) (Scotland) Act 2012 to be enacted. The Scotch Whisky Association (SWA) had mounted a legal challenge to try to halt the price hike, which it said was disproportionate’ and illegal under European law. (Daily Mail) The Act will mandate that retailers have to charge a minimum of 50p per unit of alcohol. This will only affect the price of alcohol in off-licences and supermarkets. In the pub, the price of a pint with 5% ABV is already much higher than the implied price of £1.42. I went round three supermarkets – Asda, Sainsbury’s and Aldi – to see the biggest price hikes implied in the rise.

The extra profit is kept by the retailer, though gross profits may fall as sales volume falls. Premium brands only fall below the minimum price in promotions. With the exception of discounter Aldi, the vast majority of shelf space is occupied by alcohol above the minimum price. Further, there is no escalator. The minimum price will stay the same for the six years that the legislation is in place. However, the Scottish Government claims that 51% of alcohol sold in off-trade is less than 50 pence per unit. The promotions have a big impact. The Scottish people will be deprived of these offers. Many will travel across the border to places like Carlisle and Berwick, to acquire their cheap booze. Or enterprising folks will break the law by illegal sales. This could make booze more accessible to underage drinkers and bring them into regular contact with petty criminals. However, will it reduce the demand for booze? The Scottish Government website quotes Health Secretary Shona Robison.

“This is a historic and far-reaching judgment and a landmark moment in our ambition to turn around Scotland’s troubled relationship with alcohol.

“In a ruling of global significance, the UK Supreme Court has unanimously backed our pioneering and life-saving alcohol pricing policy.

“This has been a long journey and in the five years since the Act was passed, alcohol related deaths in Scotland have increased. With alcohol available for sale at just 18 pence a unit, that death toll remains unacceptably high.

“Given the clear and proven link between consumption and harm, minimum pricing is the most effective and efficient way to tackle the cheap, high strength alcohol that causes so much damage to so many families.

Is minimum pricing effective? Clearly, it will make some alcohol more expensive. But it must be remembered that the tax on alcohol is already very high. The cheapest booze on my list, per unit of alcohol, is the 3 litre box of Perry (Pear Cider) at £4.29. The excise duty is £40.38 per hectolitre. With VAT at 20%, tax is £1.92, or 45% of the retail price. The £16 bottles of spirits (including two well-known brands of Scottish Whisky) are at 40% alcohol. With excise duty at £28.74 per litre of pure alcohol, tax is £13.33 or 83% of the retail price. It has been well-known that alcohol is highly inelastic with respect to price so very large increases in price will make very little difference to demand. This is born out by a graphic from a 2004 report Alcohol Harm Reduction Strategy for England of the UK alcohol consumption in the last century.

In the early part of the twentieth century, there was sharp fall in alcohol consumption from 1900 to the 1930s. There was a sharp drop in the First World War, but after the war the decline continued the pre-war trend. This coincided with a religious revival and the temperance movement. It was started in the nineteenth century by organisations such as the Salvation Army and the Methodists, but taken up by other Christian denominations. In other words, it was a massive cultural change from the bottom, where it became socially unacceptable for many even to touch alcohol. Conversely, the steep decline in religion in the post-war period was accompanied by the rise in alcohol consumption.

The minimum price for alcohol is a fiscal solution being proposed for cultural problems. The outcome of a minimum price will be monopoly profits for the supermarkets and the manufacturers of alcoholic drinks.

It is true that a lot of crime is committed by those intoxicated, other social problems are caused and there are health issues. But the solution is not to increase the price of alcohol. The solution is to change people. The Revival of the early twentieth century, (begun before the outbreak of the Great War in 1914) saw both a fall in alcohol consumption and a fall in crime levels, that continued through the Great Depression. But it was not lacking of alcohol that reduced crime on the early twentieth. Instead, both reductions had a common root in the Christian Faith.

The Scottish Government will no doubt see a fall in sales of alcohol. But this will not represent the reduction in consumption, as cheaper booze will be imported from England, including Scottish Whisky. All that they are doing is treating people as statistics to be dictated to, and manipulated by, their shallow moralistic notions.

Kevin Marshall


Alcohol Concern’s anti-poor campaign

Although I am not in any way a socialist, I vigorously oppose anything where the poor and weak are made to subsidise the rich and the powerful. I also strongly oppose policy being enacted which will be to the net detriment of society as a whole. This is why I strongly oppose the latest report from Alcohol Concern “Binge – Drinking to get drunk: Influences on young adult drinking behaviours“. Before anybody gets the wrong idea, I support their concern about binge drinking, especially amongst minors. I also believe that if there were ways to improve this situation, then they should be enacted. However, if economic price incentives are involved, then one should also look at the unintended consequences.

The policy proposed is again a minimum price for alcohol. This has long been touted by the last Labour Government, the BMA and David Cameron. Yet none really understand the harm that it will cause to society. The proposal it to impose a minimum retail price per unit of alcohol of about 40p to 50p. This will not affect the cost in the pubs and clubs, where the cheapest pint of standard lager is around twice this level. It will dramatically impact the retail prices, in both small off-licences and the supermarkets. Below are some examples.

The way prices work is that premium products have not just premium prices, but larger profit margins both in absolute and in percentage terms. A minimum price for alcohol will invert this position. Suddenly a 3 litre bottle of cheap cider will have the highest profit margins not just in absolute, but also in percentage terms. This will create very perverse incentives for the retailer. One direct consequence will cause a rise in the price of drinks already over the minimum price. Consider the situation of the cheapest wine at £2.99 per bottle and the more mainstream wine at £4.99.

Even at 50p a unit, the cheap wine is still cheaper than the mainstream one. If the mainstream wine price remained unchanged, then the price premium to the consumer has dropped by 75%. Better quality has less of a premium. The retailer gets the margins reversed. The margin on the premium product goes from being 86% more to 48% less than the cheaper product. It makes sense for the retailer to increase the price. This increase might not be proportional to the cheap wine, but a least to make a greater margin in value terms.

Will the retailer end up making greater profit. This depends on something called elasticity of demand. To make less money on the cheap wine, demand would have to drop by over 72%. To make less money on the mainstream wine, demand would have to drop more than 53%.

Will this be of benefit to the supermarkets? It depends on the elasticity of demand. From Investopedia

Definition of ‘Price Elasticity Of Demand’

A measure of the responsiveness of the quantity demanded of a good to a change in its price. It is calculated as:

For the cheap wine the elasticity for break-even 72%/50.5% = 1.43

For the mainstream wine the elasticity for break-even 53%/25% = 2.12

Alcohol is well-known for being highly inelastic with respect to demand. That is elasticity measure is much less than 0.5. The supermarkets and the off-licences will make much, much larger profits on sales of cheap booze. With an elasticity of less than 1, consumers will end up spending more on alcohol than before, even though they are buying a smaller quantity. The biggest proportionate impact will be on those least able to afford that price rise. This is a double-hit. The poor spend a larger proportion of their income on alcohol than those on a higher income. They are also more likely to buy the cheaper forms of booze, which will have the larger percentage price rise.

The more equitable solution is to restructure the excise duties. The tax on alcohol should be shifted not just onto a per unit basis, but in such a way that it specifically targets the low-cost booze which is most attractive to minors. Therefore strong ciders (which I like), alchopops, and strong lagers should all have premium rates that are higher than, say, standard strength beers and wine. Weak taste drinks (Vodka, white cider) should have a premium over strong taste drinks such as real ale, whisky, or full-flavoured cider. This bigger added bonus is that there would a net gain in excise taxes, rather than just a gain in VAT receipts.

ASI on the Minimum Price for Alcohol

Uncharacteristically, the Adam Smith Institute has made a serious error in its economic analysis. The idea of alcohol being a Giffen good is certainly a contestable one. There are a couple of pertinent areas here. The first is whether alcohol in the UK meets the requirements of a Giffen good. The second is whether the pattern of discounting is such that installing a minimum price will create the Giffen good conditions.

The Conditions for a Giffen Good. (Descriptions here and here)

  1. A staple on which people spend a significant part of their income.
  2. Applies to the very poor.
  3. There are no close substitutes

The current state of play in the UK market.

1. The major supermarkets concentrate their promotions on premium brands. Most of the promotions for cider & beer are for premium brands. The wine promotions similarly are mostly for the more expensive (& often branded) varieties. Own brand (especially the budget brands) are less frequently and less deeply discounted.

2. Many promotions do not involve a gross loss for the supermarket. By allocating space for high volume promotions a small gross margin can generate a larger net profit than the full price low turn product. It is all about overhead absorption.

3. Promotions made more profitable by promotional & volume discounts from the suppliers.  As I regularly shop at more than one major supermarket I notice similar promotions across different supermarkets.

4. Many promotions are partly spurious. For instance I recently noticed a bottle of standard Cava at half price. The full price would significantly more the vintage variety. Or compare the undiscounted price per litre for large packs of beer with the smaller pack sizes. You will find the “undiscounted” price is often more expensive, indicating the discount is exaggerated.

5. Many people pay the top prices at clubs and pubs in city centres. Cheaper prices are obtained at local pubs (known as bars in the USA & on mainland Europe). Much cheaper still is the supermarket. So for English bitter beer, you pay £5 per pint (568ml) in a club in town centres, £3.50 in a local pub, £2 equivalent for a 500ml bottle, £1.40 for a 4 pack cans and £0.99 for the best offers of 3 x 8 440ml can packs. Therefore, there are many close substitutes without change of brand, though the quality and ambience may not be the same! Higher prices lead to the next best substitute, which is why many choose to drink at home, or on the street, rather than in the more sociable public houses.

6. The UK is a rich country. In spending power (purchasing power parity) is at least 35 times richer than in 1750 (or modern day Ethiopia). In nominal terms at least 200 times richer. Someone on the minimum wage with the proverbial wife and two kids, will have in excess of £1200 per month disposable income. If an alcoholic drinking the cheapest booze – 3 litres of 6% cider (at £1 per litre) a day, they would spend just 10% of their income on booze. At 70p per unit minimum (10ml of pure alcohol) they would see this rise to a third of income. This is the most extreme case. In practice, most problem drinkers consume less and do not get the cheapest alcohol from the cheapest source. There are opportunities for substituting to cheaper forms of alcohol and reducing other forms of consumption.

In its flawed analysis the ASI actually understates the case against the minimum price of alcohol. Any proposed level of pricing would simply be ineffective in reducing alcohol consumption.  It will merely serve to hasten the decline in pubs and drive people down market. Most of the discounting in supermarkets is aimed at getting consumers to move up market, where the larger profits reside. The only effective levels of seriously reducing alcohol consumption would be far above the bounds of political acceptability.