Alcohol - minimum unit pricing - continuation and future pricing: interim business and regulatory impact assessment

7. Scottish Firms Impact Test

This section sets out, in general terms, the impact of a change in the minimum price per unit on specific sectors of the alcohol industry. The alcohol industry is defined as the combination of alcohol manufacturing, the wholesale of alcohol, retail sale of alcohol and the sale of alcohol in beverage service establishments. The detailed costs and benefits analysis of our preferred price is highlighted in Section 5.

In 2020, there were 502 business units in Scotland with 11,500 jobs in the manufacture of beverages (both alcoholic and non-alcoholic) in Scotland. The manufacture of spirits, cider and beer had total employment of 10,000 and a total turnover of almost £4.2 billion in 2020, with a Gross Value Added of almost £2 billion (Table 65).

The manufacture of spirits makes up the majority of the production, with a workforce of 8,500 across 320 business units and turnover of £3.5 billion. The top five local authority areas in terms of GVA in 2020 (Glasgow City, West Dunbartonshire, Fife, Moray and North Lanarkshire) – predominantly Central Belt locations – together accounted for 31% of the business sites, 61% of employment, 62% of turnover and 68% of GVA in the spirits sector.^[94]

The Scotch Whisky Association estimate that the industry supports a further 42,000 jobs across the UK, and 7,000 of these are in rural and highland communities^[95].

Table 66 presents the output and employment of the Scottish spirits sector since 2008. Given the significance of exports, changes in the latest years could be impacted by Brexit and the Covid-19 pandemic.

In 2019, the largest industry for international exports continued to be the manufacture of food and beverages with exports worth £6.6 billion, almost one fifth (19%) of Scotland's total international exports. Spirits made up 82 per cent of food and beverage exports, and 15.5 per cent of total Scottish exports in 2019. Between 2018 and 2019, the export of spirits increased by £240 million, or 4.6 per cent.^[96] The industry also relies on Scottish agricultural commodities as inputs.

Production supply chain

Spring and winter barley are grown in Scotland and the UK. Spring barley is the dominant barley crop grown in Scotland and production is hugely reliant on the strength and long-term confidence of the Scotch Whisky industry. In 2020, 57% of barley was sold for malting, and in 2021 both spring and winter barley account for 60% of crop production^[97]. If the reduction in domestic sales as a result of any minimum unit pricing were large enough, there is the possibility of a reduction in demand for grain from Scottish farmers. However, over 90% of Scotch Whisky is exported, so any decline in Scottish sales is anticipated to have a minimal impact on grain producers.

In Scotland, the retail sector (off-trade) consists of a small number of large supermarkets who dominate alcohol sales, a number of smaller supermarkets, a decreasing number of specialist retailers and a large number of smaller grocers and convenience stores.

The hospitality sector (on-trade) consists of a small number of national chains and a large number of small pubs, clubs and restaurants. Independent pubs are increasingly being taken over by large beer producers^[98]. In Scotland in 2022, there were 16,560 premises licences in force: 11,405 for the on-trade and 5,155 for the off-trade^[99].

Those areas of business most likely to be affected by a minimum price per unit in terms of costs are the off-trade sector – where prices are lower than the on-trade – and producers.

Economic impact on Scottish alcohol industry

Initial findings from the PHS evaluation of the impact of MUP at 50ppu on the alcoholic drinks industry in Scotland^[100] found that:

• Overall, the effect on retailer revenues was small as increased margins compensated for decreased volumes (though the impact depended on the mix of alcoholic drinks sold pre-MUP).
• The effect on producer revenues and profitability was negative but small: MUP reduced the volume of alcoholic drinks produced in Scotland (compared with expected volumes in the absence of MUP) without impacting wholesale prices, but MUP generally only affected a small share of producers' turnover.
• No retailers or producers reported closing local units, reducing staff numbers or reducing investment as a result of MUP.

The final evaluation of the economic impact of MUP broadly confirmed these findings^[101]. The report concluded that the evidence gathered is not consistent with MUP having significantly impacted the performance of the alcoholic drinks industry in Scotland.

Quantitative analysis was carried out across sub-sectors of the alcohol industry for five key metrics, namely: the number of firms; employment; turnover; Gross Value Added; and output value. The analysis found no strong evidence of observable impacts following the introduction of Minimum Unit Pricing across the sub-sectors examined (specialised retailers; non-specialised retailers; On-trade retailers, Wholesale, Spirits producers; Beer producers; and Malt producers.)

These results were broadly validated out by an accompanying qualitative analysis using longitudinal case studies and mini case study interviews from areas of the industry identified as where the effects of MUP might be relatively greater. This included a national chain of supermarkets, a large spirits producer, a large brewer, a spirits producer supplying own-label products and a small brewer, along with individual small and specialist retailer and representatives of the on-trade.

The analysis found a 'new equilibrium' of industry performance in Scotland, characterised by lower volumes but higher prices that largely balanced out. There were no reported direct impacts of MUP on store or facility openings or closures or staffing. Key themes emerging from the studies indicated that:

• Private labels were seen as most likely to face challenges due to low volume high-cost trends, while the main beneficiaries are those 'first premium' brands just above the MUP price point.
• Overall effects on retailer profits were felt to be small with increased margins compensating for decreased volumes, with the effects depending on the mix of alcoholic drinks sold pre-MUP. However, the evidence was more mixed when considering different retailer types, with qualitative evidence that convenience stores had seen a reduction in revenue, particularly if a large share of their income had come from the sales of low-cost high strength alcohol.
• Challenges for some producers around price compression and ongoing engagement with retailers about whether perceived MUP-related profits could be shared vertically.
• Limited evidence of any changes related to MUP in terms of the market share of different retailer types or the on- and off-trade.

The research noted two other findings from its engagement:

• MUP appears to be consistent with and potentially accelerating other drivers of performance such as a perceived 'premiumisation' of consumer preferences towards branded and more expensive products.
• The impacts of MUP on consumer and producer responses were perceived to 'play out' quickly – with the major changes as a result of MUP taking place by the first half of 2019, and that industry had 'moved on' since then with MUP largely not a major day-to-day concern.

The degree to which an updated price level would be considered as a major change by industry will depend on the extent of the preferred price and its impact on demand. Case study participants were wary of any future increase in MUP, which they believed could have more significant impact on the alcoholic drinks industry in Scotland, and their business. They were also concerned about how any further changes to MUP would interact with DRS and the additional costs and logistical challenges this could create.

As set out in the Costs and Benefits section, a preferred price of 65ppu represents an increase on MUPs original level in real terms (i.e after adjusting for inflation). The modelling estimates that this will lead to increased revenues entering the industry overall, although with a larger share of products captured there is also the potential for increased market distortions and adverse impacts to producers of high strength low cost products or small retailers who have a large share of their sales comprised of impacted products.

Costs to retailers – off-trade

The off-trade sector is more greatly impacted by a minimum unit price than the on-trade sector. The average price per unit in the off-trade in 2021 was 64 pence compared to £2.04^[102] per unit in the on-trade. In 2021, a period with covid restrictions in place, 85% of pure alcohol volume was sold through the off-trade, while in recent years around three-quarters of the volume has been sold in the off-trade.

The off-trade is dominated by the large supermarket chains (Asda, Tesco, Morrisons, Sainsbury's and Waitrose) and discounters (Aldi and Lidl) who compete aggressively on price across a range of products, including alcohol.

Three full years after implementation, the impact of MUP was a net reduction of 3.0% (−4.2% to −1.8%) in the total volume of pure alcohol sold per adult in Scotland, when using a method that accounts for sales in England & Wales (best available geographical control) and after adjustment for other potentially confounding factors. This reflects a 1.1% fall in Scotland in contrast to a 2.4% increase in England & Wales.

The reduction in total alcohol sales was driven by a 3.6% (−4.8% to −2.5%) reduction in sales of alcohol through the off-trade. We found no evidence to suggest that MUP caused any changes in per-adult sales of alcohol through the on-trade.

The overall reduction was driven by reduced per-adult sales of cider, perry, spirits and beer through the off-trade, although this was partially offset by increased off-trade sales of fortified wine and, to a lesser extent, wine.

However, there is evidence that reduction in sales volumes was more than offset by an increase in prices^[103] in general. Despite the general reduction in sales volumes, the overall monetary value of these sales increased at a greater rate in Scotland than in England & Wales or between the previous two years in Scotland prior to MUP being implemented.

While there is evidence that revenues may have increased overall in the retail sector, it was not universal, with some evidence that smaller retailers, particularly those that had a large proportion of sales of low cost and high strength alcohol, saw a fall in revenue.

With the policy divergence between Scotland and England after the introduction of MUP there is the possibility that Scottish retailers, particularly those located close to the border, may be adversely impacted by cross-border purchasing. PHS^[104] found that while there were instances of cross-border purchasing it was infrequent and the degree to which it was a result of MUP is unclear. Licensing near the border did not show a shift from Scotland to England following the introduction of MUP legislation.

The Costs and Benefits section sets out more detailed information on the potential impact to retailers at our preferred price.

Pricing

There would be costs to retailers associated with a change to the level of the minimum price, such as re-pricing products, altering bar codes and shelf tickets. Retailers that operate on a UK-wide basis – predominately large supermarket chains–- may incur costs associated with a different pricing and promotion regime operating in Scotland, but with MUP having been in place in Scotland since 2018 and Wales since 2020 systems will already be in place to manage such differences.

Costs to wholesalers

Compliance with MUP is a mandatory condition of a premises and occasional licence. In relation to wholesalers, MUP does not apply to sales to trade, regardless of whether the wholesaler holds a premises licence. MUP applies to retail sales made by wholesalers.

Costs to producers

The overall reduction in sales following the introduction of MUP at 50ppu was driven by reduced per-adult sales of cider, perry, spirits and beer through the off-trade, although this was partially offset by increased off-trade sales of fortified wine and, to a lesser extent, wine.

Producers that will be most affected by a minimum price are those whose production consists of a significant volume of products which would be priced below the minimum unit price in the absence of regulations.

At the level of 50ppu, these producers are the ones whose main production focuses on own/ private label products. In the case of ciders, some of the cheaper brands are produced by global companies such as Heineken, which are major drinks companies producing a whole range of alcohol products. These companies are likely to be affected to a minimal extent, due to the relatively small proportion of total sales that will come from the Scottish market.

Previous BRIAs for the introduction of MUP identified two companies as being significantly involved in own/ private label whisky production in Scotland: Whyte & Mackay and Lomond Group. Both of these companies produce branded products, as well as own/ private label, and both supply the UK market. Both Whyte & Mackay and Lomond Group produce spirit products which are popular in Scotland.

The economic impact evaluation of MUP^[105] found that while there was no strong evidence of an industry wide impact on the key metrics, this does not imply no impacts at all. Private labels were seen as most likely to face challenges due to low volume high-cost trends, while the main beneficiaries are those 'first premium' brands just above the MUP price point.

Jobs

While the evidence highlights that the introduction of MUP did not lead to any significant employment impacts, the potential impact as a result of changing the level depends on the extent to which the preferred price impacts demand. It is likely that value products (i.e. products currently priced at the minimum price and/or would be priced lower in the absence of MUP) will still be sold although in reduced quantities should the minimum unit level increase, and likely at the preferred price.

Small retailers

The overall impact for small retailers is likely to be limited, as the proportion of their turnover made up of alcohol sales directly affected by MUP is small in comparison to turnover from alcohol products not affected by MUP and all other product lines.

The University of Sheffield modelling, based on the responsiveness of consumers to changes in price, suggests that, although the volume of sales in off-sales premises will reduce, the value of sales will increase. MUP effectively sets a price floor and impacts on the ability of multiple retailers, such as the larger supermarkets, to set low prices for alcohol. Prior to the introduction of MUP, larger supermarkets would use alcohol as a 'loss leader' and there is some evidence this continues to be the case (though with the price floor created by MUP, the extent to which this practice can take place is limited). MUP is advantageous to smaller retailers in this regard, as the observational study on small retailers^[106] found, as it creates a level playing field for alcohol and allow them to be more competitive on price compared to the larger supermarkets.

Evidence for PHS^[107] found that in the first year following the introduction of MUP for alcohol, the average price of alcoholic drink products in the off-trade increased in Scotland to a greater extent than in England & Wales or between the previous two years in Scotland prior to MUP being implemented.

Supermarkets tended to have lower pricing than convenience stores before MUP, but prices in supermarkets increased more than convenience stores, such that both sectors had similar pricing after MUP was implemented. While a decrease in the level of MUP would likely see the gap widen again, it is likely that an increase in the level of MUP would see this levelling of pricing across the sectors remain, and at the least prevent the impacts of inflation from eroding the real value of the minimum price to a level which would allow supermarkets to lower prices relative to the convenience sector.

While finding no strong evidence of industry wide impacts, the MUP evaluation^[108] found that one or two of individual smaller or specialist retailers perceived that MUP had reduced their revenues or profits or limited opportunities for growth. However, this was not to an extent that affected staffing or store viability. Others reported no impact.

Small specialist retailers

A change in the minimum price level may improve small specialist retailers' ability to compete on cheaper priced products. In addition, they may be better able to compete on non-price attributes, such as better product information and individual customer service.

For some small specialist retailers, such as wine merchants and whisky shops, their product range is such that they are unlikely to be directly affected by a minimum price, as they tend to specialise in premium products.

While finding no strong evidence of industry wide impacts, the MUP evaluation^[109] found that one or two of individual smaller or specialist retailers perceived that MUP had reduced their revenues or profits or limited opportunities for growth. However, this was not to an extent that affected staffing or store viability. Others reported no impact.

Small producers

Scotland has a thriving craft brewery sector producing a variety of beers, supplying beers of varying styles and alcoholic strength. There are over 100 craft breweries in Scotland^[110],^[111]. These are generally premium products sold at relatively high prices compared to 'mainstream' high volume brands, and are therefore unlikely to be affected by a minimum price per unit.

There are currently 146 operating Scotch Whisky distilleries across Scotland^[112]. While production is dominated by large companies with multiple distilleries, there are still a small number of independent distillers (who own and operate only one distillery)^[113]. A further 14 whisky distilleries are planned to open in the coming years.^[114]

In addition, Scotland is also part of the growth in the market for gin, and Scotland is now responsible for 70% of the UK's gin production^[115] with 220 Scottish gins^[116] from over 90 distilleries^[117]. This follows a growing international trend in the spirits industry which is, in part, a reaction to the domination of the market by large companies and mainstream brands.

The output from small scale whisky and gin activity tends to be premium products retailing at premium prices.

The PHS economic impact study included a small brewer in its qualitative case studies, reflecting that some small brewers produce primarily for the alcoholic drinks industry in Scotland, meaning that a large share of their products was likely to be affected by MUP (either directly or indirectly because of price adjustments). No strong evidence of impacts was found^[118].

Small on-sales premises

On-sales premises, in general, are likely to be affected less than off-sales premises by a minimum unit price, as the price of alcohol in on-sales premises is generally higher than in off-sales premises. The average price per unit in the off-trade in 2021 was 64 pence compared to £2.04^[119] per unit in the on-trade.

The Sheffield modelling estimates that retailer revenues in the on-trade would fall as a result of the increase in MUP to 65ppu. However over the three years following the introduction of MUP at 50ppu , PHS found no evidence to suggest that MUP caused any changes in per-adult sales of alcohol through the on-trade.^[120]

While the on-trade was more adversely impacted by the Covid-19 pandemic, the average price of sales has also increased at a greater rate than in the off-trade. The relative impact of the preferred price is therefore expected to remain negligible for the on-trade.