Below cost debate lacks definition

Anything that curbs binge drinking and promotes sensible, moderate consumption will be welcomed by drinks producers, importers and retailers.

The debate about what to do is becoming lengthy and has reached no conclusions, but Terry Leahy, Tesco’s chief executive, has given it new impetus by welcoming the new coalition government’s intention to ban “below cost” sales of alcohol. But what does that mean in practice and who will police it?

Supermarkets will not admit to using alcohol as loss leaders, but on the very day that Leahy issued his statement, Tesco was offering a 15-pack of 440ml cans of Stella Artois for £4.

The excise duty and VAT combined on such an item is more than £5, even if InBev had supplied the beer to Tesco for nothing.

Of course, supermarkets argue that they have enormous bulk purchasing power and it is an undeniable fact that Britain has excess brewing capacity.

That means that brewers can offer exceptionally cheap “end of run” lots while keeping margins up on their standard products. This helps to explain some of the giveaway prices on own label products. But Tesco was offering Stella Artois, one of InBev’s premium brands. Someone was making a loss.

And that’s the problem; how do you define and calculate selling at “below cost”? It is too facile to say that “cost” is the price a retailer pays a supplier for a product.

For a start, has the supplier made a loss on a product (sold it below the cost of production and transportation) because of massive purchasing power? Should a “no loss” production price then be calculated before the retail price is arrived at?

Further, are there drinks suppliers who have never faced the option of having to cut an agreed price (sometimes retrospectively) or losing a listing because the price on shelf was not keen enough and the stockist was not reducing their margin?

And what about pricing for premium shelf positions and promotional discounts demanded of the supplier? They are not part of the retailers’ “costs” but charges borne by the producer or importer, so arriving at an agreed figure for the wholesale price is already a can of worms.

Then there are the costs the retailer himself cannot avoid. For a start, there is an additional tier of VAT above the purchase price. But what about apportioning the expenses (costs) of running the store – wages, heat and light, business rates, distribution etc?

Proportionally on a 15-pack of lager they are minuscule, but they are costs nonetheless. If they do not feature in the retail price, is the stockist selling “below cost”?

Already Don Shenker, the chief executive of Alcohol Concern, has said that the complications in calculating just what constitutes a “cost” makes the banning of loss leaders “unworkable”.

Do we really want to go back to the bureaucratic nightmare of a 1970s-style Price Commission at a time when the Con-Lib government is trying to do away with quangos and red tape? All that would do is increase the cost price, however it is calculated.

Mr Shenker believes minimum pricing per unit of alcohol should be introduced. That is easy to account for and police, but it raises even more questions.

Is it permissible under European competition legislation? If so, who will set and monitor the price levels?

Would legislation cover the whole of the UK? The Scottish Parliament has been debating the idea of minimum pricing for a year, but there is no agreement yet on a proposed charge per unit of alcohol.

But Holyrood believes it has the power to impose its own price level. Would there be different minima for off-licences and on-premise consumption?

What would happen if England, Scotland, Wales and Northern Ireland set their own, differing rates? Cross-border shopping could become a new phenomenon and cross-Channel booze cruising could get a new lease of life.

So is Leahy being disingenuous when he says he supports ending below cost-selling and that he would co-operate in the consideration of minimum unit pricing? It all depends on how you define your terms.  

None of which is to say that efforts to curb anti-social drinking are not laudable. But those leading the debate must be careful about speaking glibly and promising something that could be almost impossible to deliver.

Finance on Friday, 28.05.2010