Wednesday, 5 December 2012

Minimum windfall

One of the charges levelled against minimum alcohol pricing is that it would end up transferring money from the pockets of poor drinkers to wealthy corporations. Undoubtedly there is a certain amount of truth in that – if you were a consumer of cheap drinks, and wanted to maintain your alcohol intake, you would have to fork out more, and it would also take off a lot of the pressure of competitive discounting at the bottom end of the market. To some extent, it would be a legalised price-fixing ring by producers and retailers.

However, it’s important not to exaggerate this effect. For a start, rather than just having their prices increased, the bottom-end products would tend to disappear entirely from the market. As I’ve said before, why drink The Claymore when you can have Famous Grouse for the same price? Supermarket own-brand beers, ciders and spirits would be pretty much a thing of the past. So some of the extra spending would go on higher production costs.

Plus, if you were no longer allowed to use price as a marketing tool, then more money would be freed up to spend on other kinds of promotion. There would be increased advertising spend, competitions and maybe even – if still allowed – a rise in offers of the “buy three bottles and get a free glass” type. And it would still be entirely possible to discount higher-priced drinks, so the buyers of premium ales, malt whiskies and mid-market wines might find themselves getting a better deal at the expense of the poor.

A competitive market – which this still would be – always finds a way of eliminating windfall profits over time. And if it began to look as if alcohol producers and retailers were creaming it in from minimum pricing, then inevitably there would be a temptation for government to get more of the cake for itself by reducing the gap between the duty level and the minimum price.

4 comments:

  1. I wonder if they can sell glasses for say £12 and get a free bottle of spirit?

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  2. but I think in your example Famous Grouse would mysteriously find production costs had risen at the same time, and their price would go up as well maintaining the existing gaps and their position in the market.

    because theres alot of evidence in the retail market that companies & manufacturers exploit peoples insecurities on prices they are willing to or aspirationally want to pay for things, the reassuringly expensive model if you like, but it works.

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  3. It may or may not, but if they put it up too much it would open up an opportunity for a competitor to come in below it.

    I get the impression that the market for blended Scotch is rather like that for cooking lager - people may have a favourite, but will switch to other brands if the price differential is too great.

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  4. A competitive market will surely result in supermarkets reducing the price of other goods to compete with each other?

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