Minimum unit pricing of alcohol : final business and regulatory impact assessment

9. Scottish Firms Impact Test

9.1. This section sets out, in general terms, the impact of a minimum price per unit on specific sectors of the alcohol industry. The alcohol industry is defined as the combination of alcohol manufacturing, the wholesale of alcohol, retail sale of alcohol and the sale of alcohol in beverage service establishments. In 2015, there were 11,100 jobs in the manufacture of beverages (both alcoholic and non-alcoholic) in Scotland ^[319] , of which 8,100 were in the manufacture of spirits ^[320] . In 2015, the largest industry for exports in Scotland was the manufacture of food and beverages, worth £4.8 billion, 16.8% of all international exports. The majority of this sector continues to be whisky exports which accounted for 80% (£3.8 billion) in 2015 ^[321] . The industry also relies on Scottish agricultural commodities as inputs.

Production supply chain

9.2. Both spring and winter barley are grown in Scotland and the UK. Spring barley is the dominant barley crop grown in Scotland, and production is hugely reliant on the strength and long-term confidence of the Scotch Whisky industry. In 2015/16, it is estimated that Scottish grown barley supplied 80-90% of the demand from the Scotch Whisky industry and Scottish produced malt supplied around 60% of the needs of the Scotch Whisky sector ^[322] . If the reduction in domestic sales as a result of any minimum unit pricing were large enough, there is the possibility of a reduction in demand for grain from Scottish farmers. However, over 90% of Scotch Whisky is exported, so any decline in Scottish sales is anticipated to have a minimal impact on grain producers.

9.3. In the UK, the retail sector (off-trade) consists of a small number of large supermarkets who dominate alcohol sales, a number of smaller supermarkets, a decreasing number of specialist retailers and a large number of smaller grocers and convenience stores. The hospitality sector (on-trade) consists of a small number of national chains and a large number of small pubs, clubs and restaurants. In Scotland in 2015, there were 140,000 people employed in food and beverage service activities ^[323] . Independent pubs are increasingly being taken over by large beer producers ^[324] . In Scotland in 2016, there were 16,704 premises licences in force: 11,593 for the off-trade and 5,110 for the on-trade ^[325] .

9.4. Those areas of business most likely to be affected by a minimum price per unit in terms of costs are the off-trade sector and producers. Details of the costs and benefits for each of the sectors in the alcohol industry is set out in section 8. As mentioned in section 6 on consultation, businesses responded to the public consultation and the Scottish Government has held various meetings and discussions with both business organisations and individual businesses.

9.5. Specifically, the Scottish Grocers Federation ( SGF), the Scottish Retail Consortium ( SRC) and the National Federation of Regional Newsagents ( NFRN) represent a significant element of small businesses that could potentially be impacted by minimum pricing. The SGF is the trade association for the Scottish convenience store sector, representing most of the Scottish Co-operatives, SPAR and local independent retailers. The SRC, whilst representing the larger retailers and supermarkets, also includes trade associations representing smaller retailers. The NFRN represents independent retail newsagents, which tend to be small, family newsagent businesses.

9.6. The 2012 BRIA reflected convenience stores representatives’ view that they needed to try to maintain low prices to compete with supermarkets, particularly as supermarkets continue to develop their “convenience store” format (such as Tesco Metro and Sainsbury’s Central). They suggested a minimum price would reduce the ability of large supermarkets to undercut prices in smaller shops and allow the smaller shops to compete on non-price elements such as convenience. Minimum pricing would create a level playing field.

9.7. The University of Sheffield modelling study gives an insight into how categories of drinkers may switch between different types of products. However, the Scottish Government is not able to predict how individual companies and retailers will react to the introduction of a minimum price per unit. Amongst industry, there is no consensus on where any additional revenue arising from minimum pricing might accrue. A number of respondents consider it will end up with retailers, some consider producers might be able to gain a share and some consider there will be no additional revenue. The introduction of minimum pricing is likely to be of benefit to smaller retailers and independent stores, as they will be more able to compete on price with the larger retailers such as supermarkets. The on-trade is unlikely to be adversely affected by minimum pricing, as its prices are already likely to be above 50p per unit. As regards the effect on producers, again, there is no consistent view among industry representatives. Some respondents consider the price of own/ private label products are likely to increase due to minimum pricing; producers may raise the prices of their premium brands in order to maintain a differential between the two types of products; or supermarkets may de-list the own/ private label products; or the range of products may be reduced and this would depend on those products with most sales.

Benefits to industry

9.8. Minimum pricing is estimated to result in increased revenue to the alcohol industry as a whole. A 50p per unit minimum price is estimated to generate a net increase (excluding VAT and duty) of £34 million per annum, with an increase in the off-trade and a decrease in the on-trade sectors. This is a high-level estimate of revenue changes and does not directly equate to increased profit. It is difficult to predict how this increase might be distributed across the supply chain. It was beyond the remit of the modelling to consider where the change in revenue may accrue, i.e. whether the estimated increase benefits retailers, wholesalers or producers, or all of them to some extent. The alcohol market is highly segmented and this makes identifying potential effects difficult. For different products, where the additional revenue accrues will depend, to some extent, on the relative market power of different parts of the supply chain.

Costs to retailers – off-trade

9.9. A minimum price per unit is likely to affect the off-trade sector more than the on-trade sector due to the average price of a unit of alcohol in the on-trade in 2016 being £1.79, whilst for the off-trade it was 53p ^[326] . The off-trade is dominated by the large supermarket chains (Asda, Tesco, Morrisons, Sainsbury’s and Waitrose) who compete aggressively on price across a range of products, including alcohol. They have been joined in the market by low cost retailers Aldi and Lidl, who are becoming increasingly important in terms of market share.

Sales

9.10. Identifying which part of the retail market will be most affected – supermarkets or small shops – is problematic. Large and small retailers are likely to be affected differently. Larger retailers sell large volumes of popular brands (often priced very competitively) and also a greater range of products. Nielsen states that at least 80% of off-sales are retailed through the large supermarket chains ^[327] . The Scottish Government is currently not aware of any retailers who specialise in selling only those low cost products likely to be below the proposed 50p per unit minimum price.

Pricing

9.11. There will be costs to retailers associated with the implementation of a minimum pricing scheme such as re-pricing products, altering bar codes and shelf tickets. Those retailers that operate on a UK-wide basis may incur costs associated with a different pricing and promotion regime operating in Scotland. These retailers are predominantly large supermarket chains.

9.12. In meetings with retailers and their representative bodies regarding implementation, the main issue raised was the short timescale for implementing, particularly for smaller, independent retailers. This was less of a concern for some of the larger retailers. In order to assist with readiness for implementation, the Scottish Government is in the process of producing guidance for those involved in the implementation of, and compliance with, minimum pricing in consultation with relevant parties. In addition, the Scottish Government has contributed funding to the SGF and the Scottish Wholesale Association for the production of marketing material and tailored guidance in order to raise awareness of minimum pricing prior to, and following, implementation.

Costs to wholesalers

9.13. Minimum pricing is a mandatory condition of a premises and occasional licence. Therefore, where a wholesale business has a licence, it will need to ensure it complies with minimum pricing. Wholesalers only selling alcohol trade-to-trade do not require a licence, so minimum pricing will not apply.

Costs to producers

9.14. Producers that will be most affected by a minimum price are those whose production consists of a significant volume of products which currently sell below the proposed minimum price of 50p per unit. As noted in section 8, these producers are likely to be the ones whose main production focuses on own/ private label products. In the case of ciders, some of the cheaper brands are produced by global companies such as Constellation Brands and Heineken, which are major drinks companies producing a whole range of alcohol products. These companies are likely to be affected to a minimal extent, due to the relatively small proportion of total sales that will come from the Scottish market

9.15. In the 2012 BRIA, for own/ private label spirits, two companies were identified as being significantly involved in own/ private label whisky production in Scotland: Whyte & Mackay and Glen Catrine. Both of these companies produce branded products, as well as own/ private label, and both supply the UK market. Both Whyte & Mackay and Glen Catrine produce spirit products which are very popular in Scotland, as shown in Table 12. Glen’s vodka (produced by Glen Catrine) has a successful UK market base, being the 2nd most popular spirit product in the UK.

Jobs

9.16. Given the uncertainty in assessing the impact of minimum pricing on the market, it is not possible to estimate the impact on jobs in the alcohol industry. In the 2012 BRIA, producers considered there would be job losses for companies heavily involved in own/ private label production. Whilst it is not yet clear what will happen to own/ private label products, it is likely that value products (i.e. products currently priced at or below the minimum price) will still be sold although in reduced quantities, and likely at the minimum price.

Small retailers

9.17. The overall impact for small retailers is likely to be limited, as the proportion of their turnover made up of alcohol sales likely to be directly affected by minimum pricing is small in comparison to turnover from alcohol products not affected by minimum pricing and all other product lines. The University of Sheffield modelling, based on the responsiveness of consumers to changes in price, suggests that, although the volume of sales in off-sales premises will reduce, the value of sales will increase. Minimum pricing effectively sets a price floor and will reduce the ability of multiple retailers, such as the larger supermarkets, to use alcohol as a ‘loss leader’. This may be advantageous to smaller retailers, as it will create a level playing field for alcohol and allow them to be more competitive on price compared to the larger supermarkets.

Small specialist retailers

9.18. Minimum pricing, by creating a price floor, may make small specialist retailers more able to compete on cheaper priced products. In addition, they may be better able to compete on non-price attributes, such as better product information and individual customer service.

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

Small producers

9.20. Scotland has a thriving craft brewery sector producing a variety of beers, supplying beers of varying styles and alcoholic strength ^[328] . The Campaign for Real Ale ( CAMRA) now lists 80 craft breweries in Scotland ^[329] . These are generally premium products sold at relatively high prices compared to ‘mainstream’ high volume brands, and are therefore unlikely to be affected by a minimum price of 50p per unit.

9.21. There is also growth in independent distillers with 14 whisky distilleries starting production since 2013, and a further eight were planned to open in 2017. There were also up to 40 new distilleries at various stages of planning and development across Scotland ^[330] . However, these represent a very small proportion of the overall Scotch Whisky market. In addition, Scotland is also part of the growth in the market for gin, with UK gin brands more than doubling between 2010 and 2014. Scotland is now responsible for 70% of the UK’s gin production. This follows a growing international trend in the spirits industry which is, in part, a reaction to the domination of the market by large companies and mainstream brands. The output from this activity tends to be premium products retailing at premium prices.

Small on-sales premises

9.22. On-sales premises, in general, are likely to be affected less than off-sales premises by the proposed 50p per unit minimum price, as the price of alcohol in on-sales premises is generally higher than in off-sales premises. In 2016, Nielsen data estimated that the average price per unit of alcohol in on-trade premises was £1.79, as compared to 53p for off-trade ^[331] .

Competition Assessment

9.23. The Competition Assessment is provided at Annex A.

Test run of business forms

9.24. No new business forms will be introduced in the implementation of the proposed legislation.

Legal Aid Impact Test

9.25. We have consulted with the Scottish Government Legal Aid Policy Team. They have confirmed that they do not foresee any impact on the legal aid fund.

Enforcement, sanctions and monitoring

9.26. Minimum pricing will be enforced through legislation. It will become a mandatory condition of a premises and occasional licence – it does not create any new enforcement or monitoring mechanisms. As with the other conditions of licences issued under the 2005 Act, it will be monitored by Licensing Standards Officers who are able to report infringements to the Licensing Board. The Licensing Board is then able to apply a number of sanctions to the licence holder which are available through the 2005 Act, ranging from a warning to the revocation of the licence.

9.27. The Alcohol (Minimum Pricing) (Scotland) Act 2012 includes a provision under which the minimum pricing provisions cease to have effect after six years from when those provisions are fully in force (a “sunset clause”). However, the minimum pricing provisions can continue to have effect if, before that date, the Scottish Ministers make an Order using powers contained in the 2012 Act providing that these provisions should continue in force (before it can be made, that Order must first have been laid before and approved by the Scottish Parliament).

9.28. Complementary to this provision, the Act includes a provision requiring the Scottish Ministers to evaluate the operation and effect of minimum pricing five years after it comes into force and to report this to the Scottish Parliament. The report must include information on the effect of the operation of minimum pricing on the licensing objectives set out in the Licensing (Scotland) Act 2005. For example, protecting and improving public health and reducing crime and disorder. The report must also contain information about the effect the operation of minimum pricing has on premises licences holders such as the pub trade, retail sector and wider licensed trade and the impact on alcohol producers. In preparing the report, Ministers will also be required to consult persons having functions relating to health, crime prevention, children and young people, education and social work, and those representing premises licence holders and alcohol producers.

9.29. An evaluation report after five years is considered a suitable timeframe against which to measure the policy’s effectiveness. While for acute conditions (such as alcohol-related injuries, drink driving and acute intoxication), an increase in price would be expected to have an immediate impact on prevalence rates, the relationship between changes in price, consumption levels and the incidence of chronic alcohol conditions is much more difficult to quantify. There is likely to be a ‘time lag’ between a reduction in consumption, due to the introduction of minimum pricing, and the full benefits in terms of reduced chronic health harms. The expected time lag is also assumed to vary across conditions and by individual.

9.30. In 2010, NHS Health Scotland was tasked by the Scottish Government with evaluating Scotland’s alcohol strategy. This was carried out through the programme Monitoring and Evaluating Scotland’s Alcohol Strategy ( MESAS) ^[332] . The final report was published in March 2016 ^[333] . In order to continue to monitor key alcohol statistics, the MESAS work programme is continuing, and the 2017 report was published in June 2017 ^[334] .

9.31. As regards minimum pricing, NHS Health Scotland, under the MESAS programme, has been tasked with leading the evaluation of minimum pricing ^[335] and producing the review report required by the Scottish Parliament. A proposed portfolio of studies has been developed with which to assess the impact of minimum pricing. There are two overarching evaluation questions:

• To what extent has implementing minimum unit pricing in Scotland contributed to reducing alcohol-related health and social harms?
• Are some (people and businesses) more affected (positively or negatively) than others?

9.32. The portfolio of studies to address these questions covers a breadth of areas including implementation and compliance; price and product range; alcohol sales and consumption; alcohol-related harm; economic impact on the alcohol industry and attitudes to minimum price ^[336] . Full details are available on the NHS Health Scotland website ^[337] .

9.33. The report will be a key source of information for the Scottish Parliament when it decides whether to approve an Order, if laid by Scottish Ministers, to renew the minimum pricing provisions, and therefore the evaluation must be both comprehensive and robust.