Friday, 21 May 2010

Stop loss

Another proposal from the new government is to ban below-cost selling of alcohol, another favourite bête noire of the Daily Mail. But I suspect once you looked into it, you would find a lot less of it going on than you might suppose. The big supermarkets are not stupid, and most of those “two packs for £16” offers probably involve them using their market power to extract eye-wateringly low prices from their suppliers rather than actually selling it for less than they paid for it.

There’s no way you can ban manufacturers selling goods at below cost, as if you could you would have found the Holy Grail of economics. So what will happen is simply that the supermarkets will push the burden of price cutting back up the supply chain to the drinks producers. It could be that they will be less willing to take a risk by stocking lesser-known brands, and require small brewers to supply beer on a sale or return basis, so the measure will affect choice as well as price.

It would also limit the flexibility of shops and pubs to sell off surplus or short-dated stock at a low price, and could end up with perfectly drinkable beer being poured down the drain rather than sold at a pound a pint. Depending on how it was worded, it could even prevent licensees from giving the occasional customer a free pint.

Sir Terry Leahy of Tesco has also been sounding off that he would be prepared to talk to the government about minimum alcohol pricing. Well, business people are always keen on anything that protects them from price competition, and this gives the major supermarkets the chance to set up a price-fixing cartel while at the same time giving the appearance of being socially responsible. No doubt Tesco’s economists could work out the minimum price that would maximise their revenue from drinks sales, and present that as doing us all a favour.

Edit: This last point is dealt with very effectively by IanB on Counting Cats in Zanzibar.

3 comments:

  1. Cost is quite a hard thing to define. Yes the government could introduce minimum pricing (if that doesn’t go against EU law) but you just can’t define cost. Most of the cheap stuff is from multinationals – what would stop them from understating intercompany transfer pricing to manipulate ‘cost’ or the use of wholesalers to lose costs along the supply chain? Loopholes will be found whilst supermarket hand will appear clean. Clearly the price would have to be above that of the duty and taxes but that would be as far as the government could dictate. Hopefully it will be unworkable.

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  2. They are truly mental, and as IanB at Counting Cats says, in some respects - i.e. alcohol - the Tories will be worse than Labour.

    Surely the 'minimum price' is set by the level of alcohol duty? Each EU member can set this at any rate it likes to suit itself - provided it is not set at a rate that protects domestic producers - which is why the UK once got a deserved kicking for having beer duty so much lower than wine duty.

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  3. Pete Brown has pointed out that, over the past 30 years, beer duty has increased by considerably more than that on wine or spirits.

    But surely, if you want to reduce alcohol problems in society, you should be encouraging people to consume the weakest drink going.

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