7: Cumulative burden of taxation, regulation and extra costs

Impact of added costs

We are grateful to the UK Government for its leadership in seeking reduction of the burden of regulation and the cut in costs that may result. However, the competitive pressures and tight margins cannot be isolated from consideration of excise taxation as they result from an accumulation of costs, regulation and taxation that when taken together, impact on our industry. This is because compliance costs have to be borne somewhere. There are two possibilities. Either these costs are passed on to consumers and as a consequence prices rise, volumes will fall and revenue reduces. Or as happens particularly in the Off trade due to the price pressures, the costs are passed back to the producer. A second alternative is that production is moved overseas or retailers source from continental producers.

Rising production costs

Much press attention has rightly been given to the rise in food prices and how the long era of falling food prices have come to an end. The alcohol sector is no different. Since production costs can add up to some 88% of the factory gate price before Excise duty and VAT is added, the recent increases are likely to push up retail prices in 2008. A GVA/SWA survey of spirit producers has shown that the most significant increases have been:

• Energy. Energy costs have increased 5-10% in 2007.
• Neutral spirits and Raw materials. Neutral Alcohol costs increased by 7-15%. These changes were largely due to the Increases in cereal prices which were up 100% by the autumn (compared to 12 months previously)
• Transport. Increases of 8%
• Glass. Average costs have gone up 9% in 2007
• Packaging. Increases of 9%.

Compliance costs

Costs resulting from Duty stamps amounted to approx. £4-5 Million) and there has been considerable disappointment that grants of only £270,000 were allocated out of £3M that was announced by the Chancellor at the time. These costs have come at the same time as increases in Packaging Waste Levy/VALPAK and the Climate Change Levy

Resultant impact

From the above, it can be seen that overall production costs have risen overall by a significant percentage for the second year in succession. Besides the worries over higher energy prices, our sector has particular concerns over future prices of ethyl alcohol (also known as neutral alcohol). This is the core component of our finished products, be they gin, vodka or pre-mixes, and can alone account for up to 38% of the production costs.

Price and availability and market price of Neutral Spirit.

This will be related in 2008 to:

• World prices for cereals, sugar or molasses
• Pressures from competing markets for these raw materials
• The tightening of quality and traceability standards in the potable alcohol industry
• And if traders look to import from alternative suppliers from third countries, the EU tariff on ethyl alcohol imported from third countries is also relevant

The one thing that is clear is that these pressures will not reduce, nor will the price. Added to this, switching of supplies from cereals to molasses (or vice versa) has been made the more difficult by the new EU Spirit Drink Regulations. The resultant impact is clear:

• These price increases and availability concerns will have a major impact on production costs for the foreseeable future
• Producers will have to pass these cost increases on across the board in 2008 in both the On- and Off-trade. As a result, retail prices will increase significantly.
• Retail price increases in the order illustrated above will feed into the shopping basket and fuel inflation at a vital time for restraint.
• Looked at a different way, these retail price increases would have a similar impact to a tax increase in terms of the impact on the market and the consequence that revenue returns may further reduce
• There is no room for further tax increases on top of these cost escalations.