European wine and spirit exporters to the UK are only beginning to become used to the increased paperwork that has come with the full implementation of Brexit. Now they – and their competitors in other countries - are confronted by another reason to think twice about focusing on the UK market.
In the latest budget, on March 15th, the British Chancellor of the Exchequer announced that on August 1st, a new duty regime would be introduced, along with a 20% increase rise in the tax on all wine except sparkling and a 10% hike on spirits. The only sector to benefit and draught beer in a move described by the chancellor as a ‘Brexit benefit’.
The New Tax Rates (from Wine & Spirit Trade Association)
So, the tax on a bottle of wine has risen from £2.67 (£2.23 plus 20% VAT sales tax) to £3.24 (£2.67 plus VAT). Still and sparkling wine now carry the same duty rate – a clear effort to assist the British sparkling wine industry.
“Heaping misery on consumers”
Miles Beale, Chief Executive of the Wine and Spirit Trade Association, responded “The Government’s decision to punish wine and spirit businesses and consumers [with these tax increases] is staggering. It is the largest increase in wine duty since 1975… It will heap more misery on consumers. And it will damage British business, especially those in the hospitality supply chain, who are still trying to recover from the pandemic. [It] is a particularly bitter blow for the UK… wine businesses. It begs the question – yet again – what does Government have against people who choose to produce and drink wine?”
The charts below reveal the likely retail impact of the new duty rates on an exporter pricing their wine in euros or dollars. Any such charts are approximate, by their very nature, and margins will vary and costs may be cut by bulk shipping and UK bottling. Even so, they should be pretty indicative and can be used as a model when creating a similar calculator.
Chart data: Meininger’s
When looking at these numbers, it should be noted that, before the tax rise, the average retail price in supermarkets, where approximately 80% of wine is sold, is still under £6.50 ($7.91). (Nielsen 2022 scans show it at £6.37 - $7.75). Likewise, according to Nielsen September 2022 data, only 4% of wine is retailed at over £10 ($12.17) per bottle.
The respective figures for the 1,000 or so specialist independent retailers not tracked by Nielsen would be higher, but these businesses collectively have a small market share, higher margins and – usually - lower volume sales per SKU. This means that prospects for producers looking to sell containers of a new wine into the UK at four or more euros or dollars per bottle ex-cellars aren’t looking very good.
Hopes that British consumers will absorb the higher prices also have to be set against the poor state of a UK economy which has been underperforming for over a decade and a half - a situation that helps to explain the current need to raise taxes.
As an independent thinktank, the Resolution Foundation, reported, in September 2022, the average UK salary before tax and excluding overtime and bonuses, was around £30,000 ($36,500). This compares to the over £41,000 ($49,900) it would have been if wages had continued to grow at the rate before the 2008-9 crash. According to OECD figures, since 1995, UK real household disposable income adjusted for inflation and purchasing power has increasingly fallen behind the US, Germany, France and Denmark.
The Brexit effect
Brexit has made this situation worse. The UK is the only G7 nation whose economy has failed to regain its pre-Covid value.
Things aren’t getting better. Quite the reverse. British citizens are now facing high inflation and taxes that will soon the highest share of GDP in 70 years. These have risen by nearly five percentage points since 2019-20. So UK households are now paying £4,200 ($5,110) per household more than before the pandemic.
Living standards are inevitably dropping. According to March 2023 forecasts by the highly respected independent Office for Budget Responsibility (OBR) UK household disposable income is set to fall by 5.7% between 2022-24 - the biggest two-year drop since 1956-57 when records began. In November 2022, the Resolution Foundation reported, “27% of adults report[ed] using their savings for daily living expenses in the previous four weeks”.
Giving up wine?
Three-quarters of UK adults also reported at that time that they were trying to cut back on overall spending. One logical conclusion to draw from these figures is that significant numbers of Britons may simply give up drinking wine. This is what happened during the recession when over a million people were estimated to have – possibly temporarily - ceased to be wine consumers.
Given the growing range of alternatives now on offer and the general trends away from wine, it is reasonable to wonder if, this time, they will revert to their previous behaviour. In any case, the latest budget is not good news for producers at the lowest end of the price scale.
School fees or Sauvignon Blanc?
Britain’s better-off middle classes may retain their wine habit but they are feeling squeezed too, especially the ones whose children – 7% of the school-age population – go to private schools with an average annual cost of between £15,000 ($18,250) to £36,000 ($43,780) for boarders.
Those making and selling small volumes of super-premium wine, will not be too concerned by these issues. According to another thinktank, the Institute of Fiscal Studies, the 50,000 or so people who make up Britain’s top 0.1%, have incomes of over £500,000 ($608,000) per year and account for 6% of all UK earnings. These people will not worry about having to pay an extra £0.67 ($0.81) for a bottle of Grand Cru Burgundy.
To find them and those who fall into the next highest-income segments, is geographically simple. Where many other countries have a number of wealthy cities, financially, the UK as a country is hugely focused on London and its immediately surrounding region. Over half of the top 1% live there, many of them being among the 2.3m who work in Britain’s financial services.
For wine producers and distributors selling wine to lesser mortals with shallower pockets, however, the UK has just become an even tougher and less attractive place to do business.