Tax increases are rarely introduced without resistance. Tax increases make life more expensive and can affect the demand for goods. However, the recent beer duty increase could also be an opportunity for the beer industry.
Increasing product prices is very difficult. Price increases usually happen when the public is more understanding e.g. at the beginning of the year – linked to inflation – or upon statutory tax changes. Increases in beer duty belong to the latter group. If the public is aware of the duty change they will not be surprised of its eventual reflection in the price they pay. This opportunity to increase price is an opportunity to increase prices higher than what is strictly necessary in order to improve the bottomline of a business.
On 13 March, 2017, the beer duty increased for the first time in 5 years. By way of illustration, the current increase (3.81% or 71p/hl/%) means that breweries need to increase their price by 96p on a 30l keg of 4.5% ABV beer. However, as outlined above, the price increase will not be the same as the increase in duty, as this is an opportunity to apply round pricing, realign prices within portfolio and improve absolute margin on products.
For breweries on the progressive beer duty scheme, the excise increase is even less (as little as 48p on the same keg). If they followed the absolute price increases of others they would realise higher absolute margin increase on their products.
There are some concerns though that could threaten this opportunity:
- While it is highly unlikely that the duty increase will be entirely absorbed, it is possible to delay the passing on of this duty increase. This can be a competitive advantage for those who can afford it. However, if it is done simultaneously or reciprocated by others, a price war is easily induced which could be detrimental to the overall value of the beer market. NB: It could already be the case, if some of the price increases at the beginning of the year incorporated the anticipation of this change in duty.
- The increase in the price the consumer pays is not set by the breweries. The value added in the rest of the supply chain (margins, mark-ups, commissions, etc.) is based on relative calculations i.e. using fix percentages as opposed to absolute amounts. As a result, the actual increase in final consumer price can be substantially higher than that introduced by the brewers.
- Price changes can affect demand and thus sales volumes. Theoretically the demand for most excisable goods (e.g. petrol, alcohol, tobacco) is relatively inelastic. However, any substantial increase might put this assumption to test.
- Price increases are likely to further increase the relative gap between on-trade and off-trade and can accelerate the shift towards beer consumption at the home which has its own implications on beer distribution, marketing strategies and product development.