Deposit return scheme for Scotland: BRIA

7.0 Competition Assessment

7.1 Summary of Competition Impact Assessment Findings

139. This section assesses the potential impacts of the preferred scheme design on competition among producers and retailers in the Scottish market. The 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.

140. 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.

141. Another area of potential impact is the Scottish border with England. Other DRS implemented internationally have seen some impact on cross-border trade as consumers modify 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 that deposits might be fraudulently obtained. A degree of fraud is common in most international schemes although it has been highlighted that this is likely to be amplified in Scotland due to the integrated nature of the UK drinks market. The scheme design outlined through the Full Business Case Stage 1 affords producers the necessary flexibility to adopt the most effective and efficient combination of fraud prevention measures for the purposes of the scheme.

142. 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

143. 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.

144. A DRS requires that a deposit is charged on single-use drinks containers, which is refunded upon return of the container. As set out in the Scottish Government’s A Nation with Ambition: The Government’s programme for Scotland 2017-2018^[23], a DRS is being introduced in Scotland to increase the quantity and quality of materials captured for recycling, encourage positive behaviour change and deliver economic and societal benefits for Scotland.

7.3 Competition and Markets Authority Guidelines

145. 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 is dependent 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

146. 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?

147. These questions have been applied to the Scottish DRS with the assessment being primarily based on data provided by Kantar Worldpanel on the Scottish drinks market 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

148. Listed below are the markets and sectors which have the potential to be affected directly (downstream) and indirectly (upstream) by the introduction of the DRS.

149. 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

150. Markets indirectly affected:

• Bottling
• Labelling and packing
• Packaging
• Glass production
• Plastic production
• Aluminium production
• Steel production

7.6 Overview of the Scottish Drinks Market

151. 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 drinks manufacture 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].

152. In total around 1.7 billion drinks^[30] containers are expected to be in scope of the DRS. A breakdown of the percentage of containers by type can be found in Figure 1 below.

Figure 1. Drinks containers distributed in Scotland in 2017 by container type

153. 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).

Figure 2. Drinks containers distributed by outlet type in Scotland in 2017^[33]

154. 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 250m, excluding storage space (Figure 3).

Figure 3. Scottish retailers (excluding hospitality) by sales area^[34]

7.7 Detailed Competition Assessment

Question 1a: Will the measure directly limit the number or range of suppliers?

155. No competition impact is anticipated. The Scottish drinks market is competitive (research by Zero Waste Scotland suggests the availability of more than 5,000 brands on the market) and the DRS will not involve awarding limited exclusive rights to supply 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?

156. As set out in the Full Business Case, 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

157. 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.

158. Producer fee: no significant competition impacts are expected although the extent of the impact will depend on the design of the scheme and level of fee charged. 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 will likely be applied on a per container basis, with the level of the fee determined 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, will likely be subject to a lower fee. Materials which have a lower sale value, such as glass, will be subject to a higher fee reflecting the higher net cost to the Scheme Administrator. Additionally, the final scheme design may also incorporate incentives to encourage producers to use materials which generate high-quality recyclable material along the lines of those seen, for instance, in Norway^[35]. The fee levels have not been set for Scotland, however, if they are in line with international examples^[36] they are likely to be less than 5p per container with higher fees typically charged on harder-to-recycle materials.

159. It is not anticipated that the fee will disproportionately affect particular types of producer. The variation in fee charged will be offset to some degree 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 7 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’.

Table 7. Prices for recycled materials and containers sold per material type

Material type	Price per tonne (Jan 2019 average)[37]	Number of containers sold[38]
Aluminium Steel	£880 £114	639,431,088
Clear glass Brown glass Green glass Mixed glass	£20 £17 £8 £15	111,258,258
Clear PET Plastic Coloured PET Plastic	£110 £30	697,758,557

160. 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 estimates set-up costs in the region of approximately £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.

161. 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^[39], 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 was seen in the Scottish market, this would yield additional tens of millions of pounds in year one of the scheme, based on current estimates of the number and value of returns.

162. 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. Similarly 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.

163. Labelling changes are not mandatory and a series of options will exist to mitigate any potential competition impact. These options 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) make no amendment to current labelling 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. It is anticipated that it would make financial sense for the 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.

164. 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.

165. Domestic and foreign producers would be treated equally for the purposes of DRS and there would be no direct or indirect advantage created for either. Any familiarisation costs affecting foreign producers are unlikely to be significant in addition to the general familiarisation requirements associated with selling onto the Scottish market. Therefore, significant competition impacts falling specifically on domestic or international producers are not anticipated as a result of the introduction of the DRS.

166. The DRS will only apply to relevant containers that are sold in Scotland. Therefore, the labelling requirements associated with the DRS could create additional costs for producers who supply to Scotland and the rest of the UK, compared to those who just supply the Scottish market. It is common that UK-wide producers operate in markets where competitors also serve the whole UK market and therefore there are no expected significant competition impacts on producers associated with the English/Scottish borders.

167. Administrative costs of the scheme: no significant competition impacts 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

168. The Scottish DRS will oblige all retailers of products within the scope of the scheme to offer a return service, which would allow consumers to recover the deposit paid on the products in exchange for returning the used containers. Retailers will be required to check the containers received are within the scheme using a barcode and/or symbol discussed above^[40]. They will receive 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 would have the option of refusing returns where the quantity of returned material grossly exceeds what the retailer might consider reasonable.

169. Retailers will be able to choose whether they operate the return service through the installation of an 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, high-volume retailers will choose to introduce RVMs as they will be able to process returns with greater efficiency, while low-volume retailers would choose to operate manual collection and return, as the costs and space requirements of an RVM may be prohibitive.

170. 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^[41]).

171. For the purposes of this analysis, any potential positive 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.

172. 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 retailers. 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.

173. 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 8 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.

Table 8. Upfront cost of an RVM as a share of average annual revenue by retailer type^[42]

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%

174. 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^[43], which would equate to between 0.45% and 0.15% of the average floor space of a smaller or medium sized retailer (Table 9). 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 also offset the loss in revenues.

Table 9. Example RVM floor space as a share of total floor space by retailer type^[44]

Retailer type	Symbols and independents		Multiples		Co-ops	Supermarkets[45]
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%

175. Retailers using manual collection and return: unlikely to be significant competition impacts. While retailers receiving high volumes of returns would be expected to install an 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^[46].

176. Retailers using manual collection and return will need 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 10). 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.

Table 10. Estimates of annual impacts by store type of refunding deposits^[47]

Retailer type	Average annual revenues per store (£)	Estimated number of containers returned[48]	Estimated value of deposits per store (£)	Value of deposits as share of revenues
Independents	342,789	38,269,865	3,184	0.93%
Symbols	962,357	16,659,920	3,511	0.36%
Multiples	1,997,596	94,559,765	22,731	1.13%

Figure 4. Expected value of deposits on bottles returned to different store types per week as a share of average weekly revenues

177. 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.

178. Level of handling fee: no competition impact is expected. The amount of the handling fee has not been decided, but in other DRS the amount varies significantly due to differing scheme designs and structures. For example, in Denmark it ranges between 1-5% of the deposit amount, whereas in New York it is around 70%. In Scotland, the elements determining the handling fee (staff time, lost floor space, etc.) would depend on the collection system employed by the retailer. However, the fee would be based on full cost recovery.

179. 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.

180. Under the proposed DRS, consumers will be able to return their containers to any place of purchase, which includes online retailers. Around 5% of sales of containers within the scope of the DRS are made by online retailers^[49]. Under the proposed DRS, online retailers of single-use containers would be responsible for providing a method of container collection and deposit return.

181. The principle impact is likely to be felt by supermarket retailers. However, it is anticipated that they would be able to accommodate the requirements relatively simply 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.

182. 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. The level of cross-border shopping in other countries that have implemented DRS varies. Between Germany and Denmark, there have been substantial volumes of cross-border shopping. In Denmark, it was estimated that almost 500 million cans were imported in 2011 from Germany^[50]. However, levels were substantially lower between other jurisdictions^[51]. 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^[52].

183. 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^[53]. 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^[54] are mostly or entirely located within thirty driving miles from one of these two towns^[55]. 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.

184. Scottish Government statistics from 2017 show that the population of these six wards was approximately 65,100^[56]. 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%^[57]. 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^[58] (Table 11).

Table 11. Scottish electoral wards within driving distance of supermarkets in Carlisle and Berwick-upon-Tweed

Electoral ward	Catchment town within England	Population[59]	Estimated population with access to a car or van[60]
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

185. 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^[61]. 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 190).

186. 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.

187. Communication costs: no significant impacts anticipated. Retailers would 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 positive 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.

188. 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.

189. 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.

190. 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 one per cent of turnover (Table 12) and assuming relatively frequent refunds are received from the Scheme Administrator, the cash flow impact will not be significant.

Table 12. Value of deposit as a share of annual turnover for pubs/bars

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[62]	45,448,535
Annual value of deposits on containers sold in pubs/bars in Scotland[63]	£9,897,070
Number of pubs/bars in Scotland[64]	2,840
Estimated annual value of deposits per pub/bar in Scotland	£3,200
Annual turnover of pubs/bars in the UK[65]	£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/bar in Scotland	0.6%

191. 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 13).

Table 13. Potential average financial loss for closed loop establishments

Rate of non-return	Estimated annual value of deposits per pub/bar in Scotland	Estimated financial loss
1%	£3,200	£32
5%	£3,200	£160
10%	£3,200	£320

Question 2: Will the measure limit the ability of suppliers to compete?

192. 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 the 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.

193. 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

194. 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.

195. 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)^[66]. 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^[67], 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.

196. For the purposes of the analysis in this Competition Impact Assessment, 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 14).

Table 14. Estimates of real cost to consumer (per container)

	Low	Medium	High
Real cost to the consumer (per container)	0.5p	1p	1.5p

197. 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 and 6). In turn, this could have an impact on consumer demand and consumption decisions.

Figure 5. Impact of price changes on different sized containers of cola products^[68]

Figure 6. Impact of price changes on different sized containers of beer products^[69]

198. 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 sized 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. The decision to pursue a scheme design which maximises consumer convenience and targets a high capture rate should also help to mitigate this impact.

199. 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^[70]. This shows a very small change in the relative demand of different quality products of the same size (Table 15) and that the impacts are greatest on lower priced drinks.

Table 15. Percentage change in demand for different products under low, medium and high price change assumptions^[71]

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%

200. 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.

201. Scotland’s DRS is not expected to incentivise a significant shift to reusable containers, which would be outside of 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^[72].

202. 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^[73].

Figure 7. Use of DRS and non-DRS containers in selected segments of the drinks market^[74]

203. 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 16).

Table 16. Percentage change in demand for pure juice products under low, medium and high price change assumptions^[75]

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%

204. Sales channels: no competition impact is expected. The introduction of a DRS in Scotland is not expected to limit the sales channels a supplier, whether a producer or retailer, can use.

205. 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. Potentially 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.

206. 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.

207. 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?

208. No competition impact is anticipated. The introduction of the 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?

209. 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.

210. 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.

211. Costs of changing supplier: no significant competition impacts are anticipated. In addition, 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.