A Deposit Return Scheme for Scotland: Final Business Regulatory Impact Assessment
This document is a revised version of the final Business and Regulatory Impact Assessment (BRIA) published by the Scottish Government on 16/03/20. It reflects changes made to the design of DRS by The Deposit and Return Scheme for Scotland Amendment Regulations 2022 laid in Parliament on 15/12/21.
7. Competition Assessment
7.1 Summary of Competition Impact Assessment Findings
172. This section assesses the potential impacts of the final scheme design on competition among producers and retailers in the Scottish market. DRS is not expected to have a material effect on competition, and the scheme design will not place any significant restrictions on particular suppliers operating in the Scottish market. The obligations placed on producers and retailers are not expected to have disproportionate impacts on any particular market participants, with the scheme design affording sufficient flexibility to accommodate a wide range of businesses.
173. In particular, the scheme has been designed with features that mitigate the potential impact on smaller producers and retailers. These include flexibility around the fraud-prevention measures to be adopted by producers and alternative collection mechanisms for smaller retailers. These mitigations will need to be kept under review as the scheme is developed and implemented.
174. Another area of potential impact is the Scottish border with England. Other deposit return schemes implemented internationally have seen some impact on cross-border purchasing habits as consumers modify their behaviour. In Scotland's case, the relatively low levels of population with easy access to the English market, and the low costs to the consumer of refunding any deposits paid, mean these impacts are again not expected to be significant. The decision to proceed with a Scottish DRS in advance of the rest of the UK creates increased potential for fraudulent activity, with non-DRS containers being transferred from England to Scotland in order to fraudulently obtain deposits. A degree of fraud is common in most international schemes and there is potential for this be amplified in Scotland due to the integrated nature of the UK drinks market. The final scheme design as described in the Regulations affords producers the necessary flexibility to adopt the most effective and efficient combination of fraud prevention measures for the purposes of the scheme. The Regulations have been strengthened to ensure SEPA is able to investigate and take action in the case of fraudulent sales of non-Scottish articles to retailers.
175. Finally, there is a need to consider the potential consumer response to any price changes caused by the scheme. International experience suggests that, once refunds are taken into account, the impacts of price changes are low and this section presents some demand and elasticity modelling which supports this conclusion.
7.2 Introduction
176. This Competition Impact Assessment analyses the likely economic impact of introducing a DRS on the competitiveness of producers and retailers of single- use drinks containers. It further considers the consequential impact on consumers in the Scottish drinks market.
7.3 Competition and Markets Authority Guidelines
177. The Competition and Markets Authority (CMA) defines competition as a "process of rivalry between firms" which in theory "encourages firms to deliver benefits to customers in terms of lower prices, higher quality and more choice".[24] A concentrated market, with a corresponding high degree of competition, leads firms to distinguish themselves from their rival firms in order to attract demand. Hence, if there are fewer firms in a market, the goods and/or services supplied are less varied and, subsequently, consumers have fewer options. Therefore, consumer choice depends on this rivalry between firms, with less rivalry leading to less consumer choice.[25] This is particularly evident in cases where goods are standardised or homogeneous, as it will be harder for consumers to determine the best option. However, in this case, firms may compete in other ways such as through branding and the use of different sales channels.
7.4 Competition Checklist
178. This assessment followed the guidelines set out by CMA, which outline how to determine any competition impact. These guidelines recommend considering four key questions in order to assess whether a proposed policy would have an impact on competition. These are:
- Will the measure directly or indirectly limit the number or range of suppliers?
- Will the measure limit the ability of suppliers to compete?
- Will the measure limit suppliers' incentives to compete vigorously?
- Will the measure limit the choices and information available to consumers?
179. These questions have been applied to the Scottish DRS with the assessment being primarily based on data on the Scottish drinks market provided by Kantar Worldpanel and the British Soft Drinks Association (BSDA) as well as further research gathered by Zero Waste Scotland. In order to allow for a more in- depth analysis, the first question has been divided into two sub-questions below, differentiating between direct and indirect effects on the number and range of suppliers. While the CMA guidelines solely make reference to suppliers as a whole, where necessary a distinction has been made between drinks producers and drinks retailers, in order to assess the varying impacts on competition.
7.5 Definition of Markets
180. Listed below are the markets and sectors which have the potential to be affected directly (downstream) and indirectly (upstream) by the introduction of DRS.
181. Markets directly affected:
- Drinks retailers and wholesalers selling onto the Scottish market (including the hospitality sector)
- Producers and importers of drinks for the Scottish market
182. Markets indirectly affected:
- Bottling
- Labelling and packing
- Packaging
- Glass production
- Plastic production
- Aluminium production
- Steel production
7.6 Overview of the Scottish Drinks Market
183. Multinational companies are the dominant suppliers in the Scottish drinks market[26] with Scottish markets supplied by a combination of Scottish production facilities, those in the rest of the UK and imports from the rest of the world. Food and drink manufacturing generates around £14 billion each year for the Scottish economy and accounts for around one in five manufacturing jobs.[27] Whisky production dominates the drinks industry, contributing almost 90% of the sector's GVA and just short of 75% of employment. However, large volumes of production are destined for the rest of the UK or wider export (£5.35 billion of Scottish distilling is exported internationally).[28] In common with the rest of the UK, there is growing interest in smaller producers such as craft brewers and distillers, with the number of small brewers increasing by 229% between 2010 and 2018.[29]
184. In total around 2.2 billion drinks containers are expected to be in scope of the DRS.[30] A breakdown of the percentage of containers by type can be found in Figure 1 below.
185. There is a wide variety of retailers operating in the Scottish drinks market from large supermarkets through to smaller retailers such as discounters, independents, "multiples",[31] "symbols",[32] and convenience shops. The largest volume of sales of single-use containers is by supermarkets, although these account for just over half of all total sales (Figure 2).
186. Smaller retailers are responsible for a significant proportion of sales overall. There are a large number of retailers operating in these categories. Around 50% of retailers (not including hospitality) have a retail space of less than 250m2 excluding storage space (Figure 3).
7.7 The impact of COVID-19 on the Scottish drinks market
187. The coronavirus pandemic has impacted the market for drinks containers in Scotland. Due to the series of lockdowns since March 2020, there has been a shift from out-of-home consumption such as workplaces, pubs, and restaurants to in-home consumption. What is much less clear is how long-lasting these emerging trends will be and if, or to what extent, consumption patterns return to those seen pre-pandemic.
188. The pandemic has had a particularly significant impact on the online drinks market, which expanded due to the shift from out-of-home to in-home consumption. This was the product of exceptional circumstances and, while the Scottish Government will continue to monitor developments, it considers there is no evidence to require a change in policy at this time.
7.8 Detailed Competition Assessment
Question 1a: Will the measure directly limit the number or range of suppliers?
189. No competition impact is anticipated. The overall Scottish drinks market is competitive (research by Zero Waste Scotland suggests the availability of more than 5,000 brands on the market) and DRS will not involve either awarding limited exclusive rights to supply the market, or introducing a licensing scheme restricting the number of suppliers. The regulations and criteria governing the scheme will not directly limit suppliers' ability to participate in the scheme. Any incentives for improving the quality of materials within the DRS, such as through a variable producer fee, will not constitute a direct restriction on participation in the Scottish market.
Question 1b: Will the measure indirectly limit the number or range of suppliers?
190. As set out in the Full Business Case Stage 1, implementing a DRS in Scotland will result in significant benefits in the form of improved recycling quality and quantity, as well as a reduction in litter. While the net present value of the scheme will be positive for the above reasons, the scheme will generate an increase in direct and indirect costs for suppliers of drinks containers in scope of the scheme. This section considers the implications of these costs on the competitiveness of suppliers in the Scottish market.
I) Impact on Producers
191. New producers: no competition impact is anticipated. New producers will face the same type and relative scale of costs as existing suppliers with regards to DRS and the scheme will not create any barriers to entry.
192. Producer fee: no significant competition impacts are expected. As outlined at paragraph 68, income for the scheme will be generated from three streams: the sale of materials collected through the scheme, unredeemed deposits, and a fee paid by producers. The producer fee is likely to be applied on a per-container basis and we anticipate the fee level will be determined, at least in part, by the type of material used in the production of the containers. Materials that attract a higher sale value for the scheme administrator, such as aluminium, are expected to be subject to a lower fee.
193. In the DRS Full Business Case Stage 1, the producer fee was calculated on a "whole of scheme" basis in order to understand the contribution required to achieve full-cost recovery. Further work has subsequently been undertaken to understand the impact of calculating the producer fee by material type. This approach takes account of the contribution that different material types make to the scheme in terms of material sales revenues. While it is acknowledged that the methodology may be further developed by any scheme administrator going forward, this initial work suggests producer fees ranging from 0.8p (aluminium and steel) to 1.8p (glass and PET) once the scheme reaches its steady state.
194. It is not anticipated that the fee will disproportionately affect particular types of producer. The variation in fee charged will be offset by differences in the underlying cost of the materials as more expensive materials will be subject to lower fees because of the higher resale value (see Table 6 below). In general, it is not expected that there will be significant shifts in material used given the costs involved and limits on the substitutability of materials. The degree to which a producer change in use of materials could result in a competition impact will be further explored in Question 2 under "Materials of containers".
195. Higher first year costs: no significant competition impacts are expected although the impact will depend on the final level of set-up costs and the funding model chosen. In addition to the ongoing fee, set-up costs associated with the scheme will require additional funding from producers, which again are expected to be raised on a per-container basis. The Full Business Case Addendum estimates set-up costs in the region of £28 million. If the costs passed on to producers were significant, there would be the potential for a disproportionate impact on smaller producers who could face higher relative costs raising capital. Funding models that required any additional charge to be in the form of a one-off payment would be likely to have a greater potential impact. A range of funding models should therefore be explored.
196. In addition, other first-year effects have the potential to largely or entirely offset the higher costs and mitigate these impacts. In the first year of the scheme, unredeemed deposits are likely to be higher as scheme participants restock their supply chain with DRS-eligible containers. This has been experienced by some other countries that have implemented a DRS. In Lithuania,[35] the return rate in the first year of DRS was approximately 75%, before growing to over 90% in the following year. If a similar impact were seen in the Scottish market, this would yield significant additional sums in year one of the scheme, based on current estimates of the number and value of returns. It should, however, be recognised that there may be restrictions on the ability of a scheme administrator to utilise such funds in its early years of operation. Again, this is explored further in the Addendum to the DRS Full Business Case Stage 1.
| Material type | Price per tonne (Jan 2019 average)[36] | Number of containers sold[37] |
|---|---|---|
| Aluminium Steel | £880 £114 | 845,952,852 |
| Clear glass Brown glass Green glass Mixed glass | £20 £17 £8 £15 | 559,586,695 |
| Clear PET Plastic Coloured PET Plastic | £110 £30 | 766,088,825 |
197. Changes in packaging processes: no or minimal competition impact is anticipated. It is expected that the majority of containers sold onto the Scottish market will incorporate new identifying marks once the DRS is implemented, allowing them to be easily distinguished as part of the scheme. Similar to other DRS, these are expected to include a DRS identifying barcode, which would facilitate automatic collection via an RVM, and a specific symbol allowing easy visual recognition for manual returns.
198. Labelling changes are not mandatory, and a series of options will exist to mitigate any potential competition impact. The options most likely to be open to producers are: 1) to amend primary packaging to include an identifying deposit mark and barcode; 2) to purchase adhesive labels from the scheme administrator displaying the deposit mark and barcode; 3) to continue using an international barcode but pay a higher producer fee to account for the increased risk of fraud. These three options offer a variety of solutions to suit the size of the producer/importer and could be overseen by a scheme administrator. It is anticipated that it would make financial sense for larger producers to change their primary packaging, whereas smaller producers/importers may choose an adhesive label or the higher producer fee, in order to avoid investment in primary packaging changes.
199. For producers who change their labelling, there will be some extra costs including any costs from redesigning labels and changes in production processes. Zero Waste Scotland estimates that these additional costs associated with marking the containers would be similar across all material types and therefore a significant competition impact is not expected on producers using different types of materials.
200. In the case of international products, it is the intention that the business importing the product for sale on the UK market assumes the obligations of the producer. Therefore, significant competition impacts falling specifically on domestic or international producers are not anticipated as a result of the introduction of the DRS.
201. DRS will only apply to relevant containers that are sold in Scotland. Therefore, any decision to use specific labelling associated with DRS could create additional costs for producers who supply to Scotland and other markets, compared to those who just supply the Scottish market. It is common for UK- wide producers to operate in markets where their primary competitors also serve the whole UK market and therefore there are no expected significant competition impacts on producers associated with the English/Scottish border. Were a single approach to the identification of packaging to be prescribed, it might give a competitive advantage to some producers. In order to prevent this, the approach taken to the identification of scheme packaging in the Regulations is intended to be as flexible as possible, allowing for producers and other sellers operating both in and outside of Scotland to find and adopt an approach that works the best for them.
202. Administrative costs of the scheme: no significant competition impacts are expected. While it is envisaged that there would be new requirements on producers, for example delivering monthly sales reports to the scheme administrator and registering for the scheme, these would build on existing requirements to track sales and production.
II) Impact on Retailers
203. The Regulations which establish DRS will obligate almost all retailers of products within the scope of the scheme to offer a return service, which will ensure DRS is cost-neutral to consumers who return the used containers. Retailers will be required to check the containers received fall within the scope of the scheme (potentially using a barcode and/or symbol as discussed above)[38] They will be able to charge a handling fee from the scheme administrator to fully compensate them for the costs involved in the collection, checking and storage of used containers. Retailers will have the option of refusing returns where the quantity of material is disproportionately greater than the volume of containers they would usually sell as part of a single transaction.
204. Retailers will be able to choose whether they operate the return service through the installation of a reverse vending machine (RVM) which would automatically check, collect and refund the deposit on returned containers or, alternatively, a system of manual collection and return (specific options for online retailers and the hospitality industry are discussed in more detail below). If they chose to install an RVM, the retailer would bear the costs associated with implementation and maintenance, although over time these would be covered by the handling fee they received. Generally, it is expected that high- volume retailers will choose to introduce RVMs as they will be able to process returns with greater efficiency, while low-volume retailers will choose to operate manual collection and return, as the costs and space requirements of an RVM may be prohibitive.
205. The choice will be clearly explained, and it is not anticipated that the smallest retailers (such as convenience stores) will opt for an RVM, unless they receive very high volumes of returns; nor that high-volume retailers would opt for manual collection and return. Typically, in other DRS a high proportion of overall returns are received automatically (for example 80% of returns are automated in Germany; 95% in Norway.[39]
206. For the purposes of this analysis, any potential benefits associated with retailers offering collections for deposit-bearing containers, such as increased footfall, are not considered. These would potentially mitigate the effects described above further.
207. Retailers using the RVM method: no significant competition impacts are expected. While the smallest retailers would not be expected to use RVMs, there is still the potential for some differential impacts by size of retailer. Given the much larger size of supermarkets, and the likelihood they will choose to install more than one RVM in many cases, the potential competition impacts are likely to be greater in the case of medium-sized retailers.
208. The cost of an RVM, which could vary from between £19,000 to £25,000 for a small machine and around £30,000 for a larger machine, is a potentially significant capital outlay and would represent a larger share of revenues for smaller retailers. Illustrating this point, Table 9 below sets out the proportion of average annual revenues that the upfront costs of a small RVM would represent for Symbol retailers compared to Multiples.
209. In addition to the financial costs discussed above, the loss of space associated with the installation of an RVM could potentially result in a loss of revenue for retailers. An example small RVM takes up around 0.5 square metres of floor space,[40] which would equate to between 0.45% and 0.15% of the average floor space of a smaller or medium-sized retailer (Table 10). While it is acknowledged that larger RVMs will likely be required by many retailers, it can be inferred from table 7 that the floorspace implications associated with the installation of this infrastructure are still likely to be modest. The revenue impacts of any loss of retailer space are likely to be smaller if retailers choose to substitute the RVM for lower-value stock, and the handling fee will compensate the return point operator for costs incurred in the delivery of this additional service.
| Retailer type | Symbols | Multiples |
|---|---|---|
| Revenue per store | £962,357 | £1,997,596 |
| Upfront cost of an RVM | £19,000 to £25,000 | |
| Upfront cost of an RVM as a share of annual revenue | 1.97% - 2.60% | 0.95% - 1.25% |
| Retailer type | Symbols and independents | Multiples | Co-ops | Supermarkets[43] |
|---|---|---|---|---|
| Average floor space (m2) | 123 | 282 | 310 | 3178 |
| Example RVM floor space (m2) | 0.53 | |||
| Example RVM floor space as a share of total floor space | 0.43% | 0.19% | 0.17% | 0.02% |
210. Retailers using manual collection and return: unlikely to be significant competition impacts. While it is expected that retailers receiving high volumes of returns would install one or more RVM, among those who do not install automatic collection there is the potential for competition impacts on those who receive relatively higher volumes of returns. This reflects the potential storage and handling costs associated with returns. Competition impacts will be mitigated by the handling fee which will be paid at higher levels to those receiving higher volumes. There is qualitative evidence from international DRS that implementation choices, such as the frequency with which collections are made, will have an effect on the level of differential impact felt by those operating a manual collection system.[44]
211. Both manual and automatic collection and return will require retailers to fund the returned deposits themselves until they are reimbursed by the scheme administrator. This will have a cash-flow impact. Analysis estimating the value of deposits received as a share of revenues for different types of retailers suggests this will not be significant (Table 9). This is based on the assumption that the number of DRS-applicable bottles sold by a particular store will be proportionate to the number of DRS-applicable bottles likely to be returned to the same store.
| Retailer type | Average annual revenues per store (£) | Estimated number of containers returned[46] | Estimated value of deposits per store (£) | Value of deposits as share of revenues |
|---|---|---|---|---|
| Independents | 342,789 | 54,467,446 | 4,531 | 1.32% |
| Symbols | 962,357 | 23,711,176 | 3,511 | 0.36% |
| Multiples | 1,997,596 | 134,858,122 | 22,731 | 1.13% |
212. This does not suggest disproportionate impacts on different types of retailers (Figure 4). The exact scale of any impact on small retailers will depend on the timing of the return of deposits by the scheme administrator, as well as the payment of handling fees that are designed to reimburse retailers for their costs. Given that both these payments are expected to be made on a regular basis, a significant competition impact is not anticipated in relation to cash flow as a result of retailers having to pay consumer deposits for DRS-applicable bottles.
213. Level of handling fee: no competition impact is expected. The value of the handling fee has not been decided and could in theory be variable depending on the retailer, although it is likely that a scheme administrator will work to agree a system-wide approach. The elements determining the handling fee (staff time, lost floor space, etc.) will depend on the collection system employed by the retailer. However, the fee should ensure that retailers are recompensed for delivering this service.
214. Online retailers: significant competition impacts are not anticipated. However, given this is a fast-developing section of the market, it may be necessary to monitor developments to ensure no new or unanticipated competition effects arise in the future. The recent impacts that the pandemic has had on the Scottish online drinks market which were highlighted in the previous section is an example of this. As discussed, the trends seen in 2020 were the product of exceptional circumstances and, while the Scottish Government will continue to monitor developments, it considers there is no evidence to require a change in policy at this time.
215. Around 5% of sales of containers within the scope of DRS are made by online retailers.[47] Under the final DRS, distance sellers (including online retailers) of single-use containers would be responsible for providing a method of container collection and deposit return.
216. The principal impact is likely to be felt by supermarket retailers. However, it is anticipated that they would be able to accommodate the requirements with modest adjustments and without significant competition effects. Currently, some supermarkets already operate a system that allows them to collect carrier bags, either from the same delivery or previous deliveries.
217. It is recognised that some distance sellers could incur higher costs as a result of operating a collection service due to the geographic distance between them and the consumer. The distance seller is entitled to recover these costs by charging a reasonable handling fee to producers. To keep these costs low the DRS Regulations provide significant flexibility to distance sellers as to how this obligation is to be discharged. In particular, it is anticipated that the vast majority of distance sellers will choose to discharge their obligation through a third party. Operating this as a system-wide service should create economies of scale and reduce the overall cost of providing distance takeback.
218. The DRS Regulations protect the distance takeback system from abuse by allowing the retailer to charge a temporary handling fee to the consumer to cover the cost of providing the takeback, to be refunded if the consumer returns a genuine scheme article. To provide additional protection, the Regulations are being amended to allow distance sellers to refuse to provide a takeback service in an individual case in which the proposed return contains a number of items of scheme packaging disproportionately greater than the number of scheme articles that retailer sells on average as part of a single transaction—this option is already available to bricks-and-mortar retailers operating a return point.
219. Retailers operating close to the border between Scotland and England: impacts are unlikely to be significant. Retailers in Scotland who are situated near the border could potentially suffer as a result of consumers shifting higher volume purchases to retailers in England who would offer identical products but at cheaper (non-DRS) prices. However, evidence of this impact from other schemes is limited and confidence levels attached to data sources for cross- border consumer purchasing habits are low.[48] A study on the possibility of the economic impact of a container deposit in the state of Kentucky in the USA found that grocery sales were likely to decline by 3.2% in counties that border non-deposit states.[49]
220. In order to investigate the potential competition impact in Scotland and given the lack of excise differentials with the rest of the UK, an investigation has been made into the proportion of the Scottish population who live within easy access of supermarkets in England. There are four supermarkets from six of the largest chains in the UK within five driving miles of the nearest border with Scotland, eleven within ten miles, and 13 within twenty miles.[50] All 13 of these are located in and around either Berwick-upon-Tweed or Carlisle. Six of the eight Scottish electoral wards which sit on the border with England[51] are mostly or entirely located within thirty driving miles from one of these two towns.[52] For the purpose of this analysis, it is assumed that these six electoral wards correspond to the areas of Scotland from which it is feasible for consumers to visit supermarkets in England.
221. Scottish Government statistics from 2017 show that the population of these six wards was approximately 65,100.[53] Scottish Census data from 2011 found that the average share of households with access to at least one car or van across the two local authorities, within which these wards sit (Scottish Borders and Dumfries and Galloway) was 78.8%.[54] Using this figure as an average for these six wards, the estimated population with access to a car or van who are able to shop at retailers in England instead of those in Scotland is approximately 51,300, or just under 1% the Scottish population (Table 10).[55]
| Electoral ward | Catchment town within England | Population[56] | Estimated population with access to a car or van[57] |
|---|---|---|---|
| Jedburgh and District | Berwick-upon-Tweed | 9,156 | 7,215 |
| Annandale East and Eskdale | Carlisle | 9,799 | 7,722 |
| Kelso and District | Berwick-upon-Tweed | 10,321 | 8,133 |
| Mid Berwickshire | Berwick-upon-Tweed | 10,387 | 8,185 |
| East Berwickshire | Berwick-upon-Tweed | 10,558 | 8,320 |
| Annandale South | Carlisle | 14,874 | 11,721 |
| Total | 65,095 | 51,295 | |
222. According to data provided by Kantar, 3.6% of supermarkets in Scotland are located in the wider border region made up of Dumfriesshire, Roxburghshire and Berwickshire.[58] This provides a rough catchment area for supermarkets which could be impacted by changes in cross-border consumption patterns induced by a DRS, although the population assessment above suggests the overall impact will be low, particularly as the price impact of DRS will be offset by the value of returned deposits as discussed below(see paragraph 236).
223. Familiarisation costs: no significant impacts anticipated. The introduction of any new piece of legislation, regardless of the size of the regulatory impact, will cause some degree of familiarisation costs for businesses within scope. Familiarisation costs usually have a relatively larger impact on smaller businesses, as these enterprises are less well-equipped to adapt and evolve with the changing regulatory environment. Given expected support from the Scottish Government these impacts are expected to be small.
224. Communication costs: no significant impacts anticipated. Retailers will have a degree of responsibility for communicating the impact of DRS on consumers, often using materials made available by the scheme administrator. This would carry some limited costs for the retailer (although some retailers may see benefits through being associated with the scheme). The costs associated with communications would likely be heavily concentrated in the start-up and initial phases of DRS and would progressively decline as behaviour change and adaptation to the new system takes place. An example of these costs is the cost of staff time used to explain the scheme to customers. A larger retailer will have more capacity and dedicated resources to carry out these activities than a smaller retailer. However, given expected support from the scheme administrator these impacts are expected to be small.
225. Impacts on the hospitality sector: no significant impacts anticipated. In general, the impacts on the hospitality sector will be the same as discussed above for other retailers. However, it is proposed that the sector will have the option of running a distinct "closed loop" system. This would remove the obligation to charge a deposit to the consumer but instead require an establishment to pay the deposit itself and retain responsibility for collecting and returning containers within the scheme. This section examines whether this aspect has the potential to generate specific competition effects.
226. The standard DRS system could be described as an "open loop" in that the consumer would typically take the deposit-bearing container off the premises of the retailer and be able to return it to any participating retailer rather than just the one where the container was purchased. In contrast a "closed loop" would operate where the container stayed on the premises and was returned to the original retailers without a deposit being charged. Instead, the deposit would be applied to purchases made by the relevant establishment from the producer or wholesaler, and the establishment would be able to claim it back from the scheme administrator following the collection of containers. For the purposes of this assessment, an assumption has been made that hotels, pubs and bars and full-service restaurants would be likely to choose to operate a "closed loop" arrangement.
227. Compared to the "open loop" system, establishments operating a "closed loop" would be responsible for meeting the deposit costs paid to the wholesaler but would not receive deposits paid from the consumer. Instead, they have to wait for these to be paid by the scheme administrator. Depending on how long this takes, there could be a small potential cash flow impact. However, the total annual value of deposits will be on average under 1% of turnover (Table 11) and assuming relatively frequent refunds are received from the scheme administrator, the cash-flow impact will not be significant.
| Estimated value of deposits on drinks sold as a share of turnover per pub/bar in Scotland | |
|---|---|
| Number of DRS-eligible containers sold in pubs/bars in Scotland per year[59] | 59,210,090 |
| Annual value of deposits on containers sold in pubs/bars in Scotland[60] | £11,842,018 |
| Number of pubs/bars in Scotland[61] | 2,840 |
| Estimated annual value of deposits per pub/bar in Scotland | £4,170 |
| Annual turnover of pubs/bars in the UK[62] | £21,320,000,000 |
| Annual turnover per pub/bar in the UK | £549,272 |
| Estimated value of deposits on drinks sold as a share of turnover per pub/barin Scotland | 0.76% |
228. In addition, establishments operating a "closed loop" system will be liable for the costs associated with failures to achieve a 100% collection rate. It is likely that there would be some degree of natural wastage, as result of customers taking the container away, or breakages. In order to investigate this, an estimate has been made of potential financial losses, based on low, medium and high rates of non-return in a closed loop system. This analysis suggests that the financial loss would not be significant (Table 12).
| Rate of non-return | Estimated annual value of deposits per pub/bar in Scotland | Estimated financial loss |
|---|---|---|
| 1% | £4,170 | £41.70 |
| 5% | £4,170 | £208.50 |
| 10% | £4,170 | £417 |
229. Since passage of the DRS Regulations industry has drawn the Scottish Government's attention to a product known as a 'crowler'. A crowler is a can (often 500ml) filled on demand in a bar or pub with any available beer, sealed, and are away for consumption in-home or on-the-go. This is an "open loop" system where the consumer takes the deposit-bearing container off the premises and can return it to any participating retailer rather than just the one where the container was purchased.
230. The Scottish Government understands that use of crowlers increased during the coronavirus lockdowns, albeit from a very low base. While exact figures for crowler sales volumes are not known industry estimates that c. 100 premises in the UK sell crowlers, indicating that the volume is very small in proportion to the size of the Scottish drinks market.
231. Crowlers clearly fall within the definition of a scheme article as set out in the original DRS Regulations (regulation 3, scheme articles and scheme packaging) and therefore are obligated under Scotland's DRS. Retailers selling them will be obligated to charge the deposit and return points will be obligated to redeem the deposit when a crowler is returned.
232. The Scottish Government accepts that, under the original Regulations, it was not clear who the 'producer' of a crowler was for the purposes of DRS. The Regulations will be amended to make clear that the person filling and sealing a crowler is the producer and therefore responsible for ensuring the crowler is collected and the deposit paid out, either directly or through a scheme administrator.
233. This is consistent with the guiding principle of producer responsibility. Crowlers are filled with a drink that would otherwise have been served in a reusable container (e.g. a pint glass or a refillable 'growler') and the pub or bar filling the crowler has made the decision to place it into single-use packaging. It is therefore right that they should bear the cost of ensuring the crowler is collected for recycling.
234. This will apply not only to crowlers but to any container that is filled by a retailer, i.e. a person selling directly to a consumer, that is within the scope of DRS.
235. Ensuring that crowlers and similar containers are treated in line with the principle of producer responsibility means that all drinks containers sold in the hospitality sector are treated equally under the DRS Regulations. However, in recognition of the different circumstances faced by premises selling crowlers compared to other producers obligated under DRS, producers that are only producers by virtue of selling crowlers will be exempt from the annual fee to register with SEPA. This fee will rise from £360 to £365 for eligible producers to cover the cost of regulating these additional producers.
Question 2: Will the measure limit the ability of suppliers to compete?
236. No significant impacts are anticipated given the overall low-price impacts expected to be associated with the scheme once returns are taken into account. The analysis throughout this section assumes that, although consumers would be able to claim back the deposit they pay on DRS- applicable purchases, there will be some degree of "real" cost placed upon them as a result of DRS. This will be a combination of the cost of unreturned deposits being incident on the consumer and the cost to them of complying with the scheme.
237. The nature of the scheme means that this cost will vary depending on the individual consumers' propensity to return DRS-applicable items and receive the deposit. There are a number of factors that will determine this, including:
- A consumer's total and disposable income
- Their views and preferences around recycling
- Their current recycling activity
- Their proximity to deposit return points
- Their DRS-applicable consumption patterns
238. Consistent with the analysis that a Scottish DRS is likely to raise recycling rates across the country to around 90%, it is expected that the costs placed upon the consumer in Scotland as a result of having to pay an increased price on DRS-applicable products would be largely offset, and that the majority of consumers would be able to obtain their deposit refund at minimal additional cost or inconvenience.
239. This is further supported by research and modelling undertaken to assess the impacts of introducing other similar DRS in Spain and Slovakia. For instance, in Slovakia it was estimated that the annual cost of the inconvenience to the consumer would be approximately £2.24 - £3.46 (2.55 - 3.94 EUR).[63] This estimate included the value of the time it would take to return the containers along with the cost of potentially storing the containers. In the case of Spain.[64] it was estimated that the inconvenience to consumers would be minimal. The primary cost applied to those who did not return their container and thus forfeited their deposit.
240. For the purposes of the analysis in this Competition Impact Assessment, a sensitivity analysis is applied, and a range based on the evidence discussed above for the average real cost that a Scottish DRS system is likely to place on a consumer per product bought is modelled (Table 13).
| Low | Medium | High | |
|---|---|---|---|
| Real cost to the consumer (per container) | 0.5p | 1p | 1.5p |
241. Volume of containers: no significant impacts are anticipated. The Scottish DRS would apply a 20p deposit on all containers within scope, regardless of the size of the product in question. This means that a 330ml can of soft drink would have the same deposit as a 500ml or 2,000ml equivalent product, which would increase the price per ml of smaller products relatively to larger products (Figures 5[65] and 6[66]). In turn, this could have an impact on consumer demand and consumption decisions.
242. This increase in the real average price per ml of DRS-applicable products is mirrored across all different product types that have been analysed, in both the soft and alcoholic sectors, using the Kantar data. This suggests that DRS could impact consumer choice, incentivising a shift, to some extent, towards purchasing larger products compared to what they were purchasing before, although the magnitude of this change is likely to be small, and would not be expected to cause consumers to change their choice or preference for a certain brand. On-the-go drinks purchases are largely driven by consumer convenience and switching to large containers in this segment of the market is unlikely. The decision to pursue a scheme design which maximises consumer convenience and targets a high capture rate should also help to mitigate impacts.
243. Quality of products: the competition effect is not expected to be significant. The DRS will introduce a flat per-container deposit on all types of in-scope products and the price impact is also expected to be uniform across products. To investigate whether this would have any impact on consumer demand, these effects have been modelled for different types of products using price elasticity data.[67] This shows a very small change in the relative demand of different-quality products of the same size (Table 14) and that the impacts are greatest on lower-priced drinks.
244. Impact on choice of materials used in drinks packaging: competition impacts are likely to be small. DRS will only apply to particular material types of single-use drinks containers (glass, PET plastic, and steel and aluminium cans). Other containers (including reusable containers, cartons, pouches and those made from HDPE plastic) fall outside the scope of the scheme. There are potentially competition impacts where producers could be incentivised by the scheme to change from containers within the scheme to those outside, or where they compete in markets where there are both DRS and non-DRS containers.
| Non-Alcohol Products | Budget Price | 0.5p | 1p | 1.5p | Premium Price | 0.5p | 1p | 1.5p |
|---|---|---|---|---|---|---|---|---|
| Juice Drinks (1L) | £0.65 | -0.58% | -1.17% | -1.75% | £1.50 | -0.25% | -0.51% | -0.76% |
| Sports Drinks (1L) | £1.00 | -0.41% | -0.81% | -1.22% | £1.75 | -0.23% | -0.46% | -0.69% |
| Cola (1L) | £0.50 | -0.81% | -1.62% | -2.43% | £1.45 | -0.28% | -0.56% | -0.84% |
| Pure Juices (1L) | £0.89 | -0.54% | -1.09% | -1.63% | £2.50 | -0.19% | -0.39% | -0.58% |
| Beer (50cl) | £1.00 | -0.30% | -0.60% | -0.90% | £3.00 | -0.10% | -0.20% | -0.30% |
| Wine (75cl) | £3.65 | -0.12% | -0.24% | -0.35% | £15.00 | -0.03% | -0.06% | -0.09% |
| Cider (50cl) | £0.85 | -0.36% | -0.72% | -1.09% | £2.20 | -0.14% | -0.28% | -0.42% |
| Spirits (70cl) | £11.00 | -0.03% | -0.07% | -0.10% | £28.00 | -0.01% | -0.03% | -0.04% |
245. Scotland's DRS is not expected to incentivise a significant shift to reusable containers, which would be outside the scope of the scheme, in part because of the significant upfront costs to replace machines and introduce bottle- washing or cleaning facilities. Additionally, there is evidence to suggest that the level of reusable containers is declining across Europe even after the introduction of DRS.[69] Producers are also constrained in switching to containers outside of the scope of the scheme. For instance, cartons and HDPE plastic cannot be used to contain carbonated drinks due to their material qualities. However, some products are sold in containers both inside and outside of the scope of the DRS (Figure 7) although each accounts for a relatively small part of the total non-alcoholic drinks market.[70]
246. Using the price effects already discussed, potential changes in demand for DRS-eligible pure juices have been modelled (where 75% of the market falls outside of scope of the scheme). These effects are small (Table 17).
247. Sales channels: no competition impact is expected. The introduction of a DRS in Scotland is not expected to limit the sales channels available to a supplier, whether a producer or retailer.
248. Geographical areas of supply: no significant competition impacts are expected. The introduction of a Scottish DRS would not directly limit the geographic area in which suppliers (producers or retailers) could operate. Therefore, no direct competition impact is expected as a result of its introduction. Potential indirect effects on both producers and retailers are discussed in Q1b. As concluded, there is the potential for some competition impacts on smaller producers for the Scottish market, which could limit their ability to operate in that market, although these are likely to be minor. For retailers, the potential competition impacts on the area of supply created by the distinction between Scottish and non-Scottish containers could have some competition impacts, but these will be relatively minor taking into account the low level of the population affected.
| DRS vs Non- DRS Products | Average Price | Own price Elasticity of Demand | 0.5p Quantity demanded Change | 1p Quantity demanded Change | 1.5p Quantity demanded Change |
|---|---|---|---|---|---|
| Pure Juices (1L) | 1.41 | -0.76 | -0.27% | -0.54% | -0.81% |
249. Advertising of products: no competition impact is anticipated in this respect. There would be no restrictions on product advertising by suppliers as a result of the introduction of the DRS.
250. Restrictions on production processes and governance of suppliers: impacts are not expected to be significant. As described in Q1b, new requirements would be introduced both for producers and retailers as a result of the introduction of a Scottish DRS. These will require some governance changes, with a scheme administrator expected to be responsible for ensuring that producers meet their responsibilities. At this stage, the governance arrangements for retailers are still being developed. In line with the conclusions of Q1b, while there may be some competition impacts as a result of these changes, the overall impacts are not expected to be significant.
Question 3: Will the measure limit suppliers' incentives to compete vigorously?
251. No competition impact is anticipated. The introduction of DRS should not incentivise suppliers to coordinate activities over which they would ordinarily compete. The Scottish drinks market is a competitive one, where products are sufficiently differentiated and there is a significant number of competitors both in terms of producers and retailers.
Question 4: Will the measure limit the choices and information available to consumers?
252. Limit on consumers ability to decide from whom they purchase: no competition impact is expected. There is no evidence that the introduction of the DRS would limit the ability of consumers to decide from whom they purchase. The scheme would not require containers to be purchased from a set number, list or type of retailers. Under the scheme, consumers would not be required to return containers to the outlet from which they were purchased, therefore placing no restrictions on the ability of consumers to choose where they purchase their deposit-bearing containers from.
253. Limit on information available to consumers: no significant competition impacts are anticipated. New information would be available to consumers explaining the operation of the scheme and, for example, identifying the containers within the scheme. It is anticipated that consumers would be provided with sufficient information prior to the introduction of the scheme and once it is in place to allow them to make informed choices.
254. Costs of changing supplier: no significant competition impacts are anticipated. The introduction of the scheme is not expected to increase the cost of changing supplier and while there is the potential for some impacts if consumers close to the border can access retailers in both Scotland and England at similar convenience, as is shown above the share of the population is small and a significant impact is not anticipated.
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