Harro Leusink, Corporate Finance Manager and a member of the Brewing & Distilling sector team at Campbell Dallas looks ahead in the wake of last week’s lankmark judgement

This week the UK Supreme Court has backed the Scottish legislation to implement minimum unit pricing (“MUP”) for alcohol after a five year legal battle.

The Health Secretary, Shona Robison, is now expected to confirm the timescales and the Scottish Government’s next steps. Before the new legislation can be put into place, a Business and Regulatory Impact Assessment is required by Parliament and a consultation on the proposed level of 50p for the MUP is expected.

But how will this new legislation affect a drinks sector business?

To assess this we need to understand why the Government chose to use MUP and what Scotland’s position is in relation to the rest of the UK.

What’s behind Minimum Unit Pricing?

The Government’s aim of introducing MUP and thereby increasing the cost of alcohol is to reduce excessive alcohol consumption and ultimately reduce alcohol-related health and social issues. A study by the University of Sheffield indicated that increasing the price of alcohol would significantly reduce the number of alcohol-related hospital admissions, and that MUP in particular would target the price of cheap alcohol sold in large volumes, commonly consumed by those with excessive drinking problems. Whilst an increase in VAT or duty on alcohol would also increase the total price; VAT increases would have a greater effect on more expensive alcohol (as opposed to large cheap quantities).

Alcohol duty has not been devolved to the Scottish Government and the creation of MUP could be an effective method to increase the costs of alcohol in an effort to reduce consumption. It should be noted that MUP is not a tax and therefore the benefit of any increase in price is retained within the drinks industry supply chain and/or retailers.

What’s the likely impact on a drinks sector business?

MUP could have a positive impact on the margin across the drinks industry supply chain for sales in Scotland, which is under significant pressure at the lower price point due to increasing duty and VAT charges. The increased price of drinks imposed by MUP will solely benefit the retailer/supply chain, and will not be returned to Government as VAT or duty charges. There will, however, be increased pressure on volumes and bottle sizes sold in Scotland and other countries that follow suit, as consumers are likely to favour smaller sizes in response to the price increase caused by MUP.

The impact of MUP is likely to vary significantly across businesses in the drinks industry depending on the distribution of potentially increased margins across the supply chain and the price point of products. The effects of the new legislation looks to be significant for products where prices are either directly affected by MUP or where prices are in excess of, but close to MUP for the product type. The introduction of MUP may have a fundamental impact on the positioning of those products, potentially resulting in a significant change in market share.

What’s the position of Scotland relative to the UK?

Scotland now stands as the first country in the UK to introduce MUP. England had previously considered MUP, however, in 2013 decided not to implement it but to keep it under review. Scotland, however, may have set a precedent for changes to come as MUP is also being considered in Wales and Northern Ireland, as well as in the Republic of Ireland. Following the UK Supreme Court ruling it will be interesting to see whether the UK Government will propose MUP for England and/or an increase on alcohol duty for the UK as a whole.

If there is a significant difference in pricing between the various UK regions there may be an element of cross border alcohol tourism – which would impact vendors closer to the English/Scottish border.

Campbell Dallas has a dedicated Brewing & Distilling team with extensive experience of business planning and operational/financial modelling in the drinks sector. We can assist you in providing key summaries across a range of scenarios to facilitate decision making and establish alternative plans.