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The response to the announcement by the Scottish Government that a rise in the minimum unit price of alcohol to 65p was sadly predictable and disappointingly inaccurate. MSPs from three political parties lined up to call for a levy on retailers to ensure they wouldn’t profit from the announcement. 

Leaving aside the rather obvious point that businesses were literally following government policy and if they benefit from supporting a public health measure that wouldn’t be in itself a harm; the underlying assertion that a rise in MUP will automatically lead to bumper supermarket profits is almost certainly misplaced.

Let’s start with the facts.  According to the Scottish Government’s Business and Regulatory Impact Assessment modelling MUP is complicated. So, the various MSPs who confidently asserted this would lead to a significant profit rise for grocers are making at best a guess.  It would be unfair to suggest they didn’t consider the difference between a rise in revenue, which the Scottish Government estimates at £16.5 million in year one for the whole drinks industry (including manufacturers, distributors, and all retailers of alcohol (including the Scottish Parliament’s own shop), and profit. The BRIA notes: “These are high-level estimates of revenue changes, and it is important to note that this is revenue and not profit.”

There are two points worth considering.  Firstly, the primary reason for increasing the MUP is to account for the large inflationary spikes we have seen in recent years. Indeed CPI alone takes the MUP up to above 62 pence. All those costs retailers have had to manage in the last few years, including the enormous increases in labour and energy costs combined with the costs of the Covid pandemic, EU Exit, and input inflation, mean the change in MUP will not affect many product lines which have already increased in price. This isn’t a policy which changes every drink, only the least expensive. That means much of that revenue uplift has already been taken in costs before MUP is even introduced. Furthermore, many alcoholic products have seen increases in alcohol duty, meaning the increased price already goes back to the UK Government, and any further increase in price would still attract VAT further increasing government revenue. From a business perspective whether grocers pay more in tax to the Westminster or Holyrood government is a moot point.

The second reason the rise in revenue doesn’t translate into profit is the drinks market isn’t static.  Retailers won’t just take their current stock, increase the price, and pocket the difference because both their suppliers and customers will adapt to the new conditions.  That in turn changes which products are on the shelves, and where and how customers might shop.

The reality is customers change their alcoholic purchases when the price changes. We know from 2018 that introducing MUP meant sales volumes fell by 3.5 percent.  Grocery retail is a volume business, so a fall in volumes will lead in turn to a fall in profits. Since this is literally the intended outcome of the policy the fact retailers are expected to lose sales seems a poor justification to tax them as well.

A higher MUP makes it harder to sell large packs of drinks (Beer or Cider for example) at a lower price than can be bought in a smaller format store.  That’s why small convenience stores tended to see a small sales uplift against larger supermarkets; MUP helps smaller retailers compete because supermarkets can’t use their ability to sell higher volumes to provide a competitive advantage on alcohol sales (which are product consumers are price sensitive to). That has impacts across the whole store – which is good for convenience stores but less good for large stores.  It’s a bit ridiculous to also punitively tax larger stores in this circumstance where their sales are being reduced by both the price and the market shift.

However, even when customers are buying alcoholic drinks in a supermarket, that doesn’t mean the large retailer is making an enormous profit. A customer might currently buy an own-brand product because it’s cheaper than the branded alternative – a supermarket bottle of vodka rather than a bottle of Smirnoff.  However, if both items rise in price to £18.20 then the customer will probably choose the branded product which is seen as ‘premium’.

Now, both businesses might respond to this in different ways.  Brands could increase their own prices to above the MUP to make them more premium – albeit that comes at a risk of customers choosing other products.  However, that would lead to the profits going to the producer.  More likely the supermarket would discontinue their own-brand product and just stock the branded item.  Those products will be lower profit margin for retailers, so they wouldn’t realise the profit.

It’s worth noting that grocery profits are comparatively modest compared to other industries.  Last year the Competition & Markets Authority regulator investigated food retailers to determine if they were excessively profiting from the surge in inflation.  In fact, grocery retail profits were down, to just 1.8 percent of revenues – across tens of thousands of lines. Most firms of scale in other sectors of the economy such as financial services, manufacturing, or energy wouldn’t get out of bed for profit margins that puny.  Those food retailers are also dealing with a swathe of increased statutory costs; with supermarkets in Scotland already facing a 6.7 per cent rise in business rates this April, a 9.8 per cent hike in the national living wage, as well as proposed in-store restrictions on selling products high in salt and sugar and where alcohol can be promoted.

So, there are many imponderables in this announcement.  What we do know is the Scottish Government’s decision to increase the minimum unit price of alcohol will lead to a rise in shelf-edge prices for some products from the end of September 2024. We know retailers will face new costs to comply with the policy. We can hope the health benefits of the policy will be realised.  And perhaps even hope MSPs will pay a little more attention to the detail rather than their own unfounded assertions when they next debate this issue.