Memorandum by Constellation Europe (AL
54)
1. INTRODUCTION
1.1 Constellation is the largest wine company
in the world; the largest multi-category supplier of beverage
alcohol in the United States; a leading producer and exporter
of wine from Australia, South Africa, New Zealand and Canada;
and both a major producer and independent drinks wholesaler in
the United Kingdom.
1.2 Constellation Europe is pleased to submit
its response to the House of Commons Health Select Committee inquiry
into alcohol. We feel qualified to address the following areas
of inquiry:
— Central government policy;
— The role of the alcohol industry and
those responsible for the advertising and promotion of alcohol;
and
— Solutions, including whether the drinking
culture in England should change, and if so, how.
2. EXECUTIVE
SUMMARY
2.1 Constellation believes that the majority
of the public in England, who consume wine, do so on a responsible
and enjoyable basis.
2.2 Where there are issues with excessive
consumption among certain sections of the population suppliers
like Constellation believe that they can play a market based role
in encouraging a more responsible approach to alcohol consumption.
2.3 This requires investment in the wine
category through brand building and consumer education. At present,
wine suppliers like Constellation have no profit margins with
which to invest due to the continued increases in taxes levied
on the industry.
2.4 These margins have been eroded and now
destroyed with Constellation having to absorb successive UK duty
hikes. In calculating duty levels HMT makes the explicit assumption
that duty levels are passed through to the consumer. They are
often not in practice.
2.5 Consumers will not pay more for a product
just because the government increases taxes. Suppliers must continue
to build brands in order to achieve price premiumization. But,
annual duty increases prevent the industry from investing in branding
which encourages the industry to drive volume over value. Thus,
market pricing continues to stagnate because of duty increases,
not in spite of them. This is an unsustainable commercial position
which conflicts with achieving Government's health policy goals.
2.6 To help the Government achieve its health
policy goals Constellation have been calling on the Government
to consider the following:
— Ending the duty escalator and ensuring
that further duty increases are not announced in the Budget 2009.
Further duty increases must be suspended until profitability returns
to the wine sector and the economy has recovered.
— Offering the industry full transparency
on the model used to calculate duty levels. A key assumption that
duty rates are passed through to the consumer does not bear witness
in practice.
— Consideration of a mechanism by which
duty rates are passed onto the consumer. This could be done either
by enforcing duty levels at point of retail or through VAT.
2.7 Removing this tax burden from suppliers
would enable them to develop market based campaigns to help the
Government secure wider social and health policy goals.
3. CENTRAL GOVERNMENT
POLICY
3.1 Constellation believes that central
Government policy is currently in conflict with itself. On the
one hand HM Treasury wishes to maximise tax revenue from the alcohol
sector. This has encouraged suppliers to "pile it high, sell
it cheap" in order to survive commercially and deliver revenue
returns to the Government. On the other hand the Department of
Health is against the practice of aggressive discounting as this
is seen to foster excessive purchasing and consumption.
3.2 In calculating duty levels HMT makes
the explicit assumption that duty levels are passed through to
the consumer. This is not the case in practice. Duty increases
announced last year are estimated to amount to an additional tax
on our business of £52M, much of which has been absorbed
by us.
3.3 It is now crunch time for the wine sector,
Constellation included. Margins have disappeared to the extent
that losses are now being made and are expected to worsen in 2009.
Constellation has announced the elimination of 200 positions
and will dramatically reduce local investment in the UK as a result
of last year's duty increases.
3.4 At the same time, while bottle prices
have only gone up slightly, wine volumes and value have fallen
over the last six months. This is despite aggressive promotions
by retailers in an attempt to attract footfall.
3.5 Data for the final quarter of 2008 is
also expected to show an acceleration of negative growth.
3.6 Current policy, combined with the economic
downturn, is therefore both destabilising our business and delivering
reducing revenue for the government. At the same time, combined
with the dynamics of the market, it is undermining wider government
social policy objectives on alcohol consumption.
4. THE ROLE
OF THE
ALCOHOL INDUSTRY
AND THOSE
RESPONSIBLE FOR
THE ADVERTISING
AND PROMOTION
OF ALCOHOL
4.1 Wine suppliers like Constellation consider
that they can play a market based role in encouraging a more responsible
approach to alcohol consumption among the public, where this is
desired.
4.2 Such a strategy entails investing in
the category through brand building and consumer education in
order to encourage consumers to trade up to better wines and with
it drive a better drinking experience.
4.3 This move to adopt a different drinking
behaviour would also have a positive impact on consumption and
misuse. Similar strategies have been successful in the United
States.
4.4 Constellation does not support moves
to further ban advertising and promotion of wine, rather to use
marketing strategies to promote a more responsible approach to
alcohol consumption.
5. SOLUTIONS,
INCLUDING WHETHER
THE DRINKING
CULTURE IN
ENGLAND SHOULD
CHANGE AND
IF SO,
HOW?
5.1 Constellation believes that the majority
of the public in England, who consume wine, do so on a responsible
and enjoyable basis.
5.2 Constellation believes that the drinking
culture in England should and can change to one where consumers
value the experience of drinking wine rather than seeing it as
a cheap opportunity to consume excessive amounts of the product.
5.3 For Constellation and other suppliers
to play their part in helping bring about this behavioural change,
Constellation calls for the Government to suspend all further
duty increases which will allow renewed investment in the category
and with that better engaged consumers.
5.4 Removing this tax burden from suppliers
would enable them to develop market based campaigns to help the
Government secure wider social and health policy goals.
March 2009
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