Duty not the only concern in Budget

Many importers and distributors wait for the spring Budget before publishing an annual price list. This year they will face a more-than-tricky dilemma as to how far they can increase prices (and how much retailers will accept) to maintain their margins.

With the Budget itself just over two weeks away we already know that George Osborne is committed to continuing with the inflation-plus excise duty escalator introduced by Alastair Darling.

He is also due to announce his findings on the results of a widespread review of various duties and exemptions. It would be surprising if there were no changes affecting drinks companies.

Importers and wholesalers are already being squeezed at both ends by retailers fearful of increasing prices to the consumer as incomes come under pressure and input costs going up as part of the austerity measures and global price pressures.

The evidence of the latest Purchasing Managers Index published this week is that producers are finding it very difficult to pass on cost increases to customers.

Recently Britvic said that as recently as January it had budgeted for cost price inflation of about 6% this year , but the recent surge in commodity prices meant that it was now looking at double-digit rises in input costs.

For instance, the Middle East uncertainty escalated the cost of plastic for containers by about 20% in the first month of this year and the position has since worsened. Steel prices for cans jumped by a third between November and January and some commentators believe they could rise by a further 30% this year.

Climatic disasters, notably in Australia and Russia, have sent grain prices higher, and although most brewers and distillers have long-term contracts with maltsters, costs are increasing.

Recently Christian Porta, the chairman of Chivas Brothers, declined to comment on how much he hedged against rising costs and whether input prices were becoming a headache, but all the evidence is that for distillers they are rising uncomfortably.

However, the cost causing the greatest pain is fuel. Unless Osborne changes his mind, excise duty on petrol and diesel is set to rise by a further 1p above inflation in April. That could put an extra 5p on a litre and push the price of a litre of diesel close to £1.40. For some hauliers, fuel accounts for more than a third of their operating costs and they will find it difficult to absorb such increases. Indeed, January’s rises have already proved harmful.

None of which suggests that trading conditions are going to get any easier. The drinks sector has a stronger case than most for considerate treatment on 24 March, but the Treasury has a long and undistinguished habit of treating it as a milch cow. There is scant evidence that it understands the Law of Diminishing returns.

Finance on Friday, 04.03.2011