Health Committee - The Government's Alcohol StrategyWritten evidence from the Office of Fair Trading (GAS 09)

1. This short note responds to the Health Committee’s inquiry into the Government’s Alcohol Strategy, launched on 26 March 2012. The Office of Fair Trading (OFT) would like to provide evidence to the Committee on two elements of the Government’s policy:

proposals for a minimum price of alcohol; and

possible voluntary industry agreements under the Responsibility Deal.

2. We are aware of the evidence demonstrating the harmful effects of excessive alcohol consumption and fully support the Government’s desire to reduce that harm. The views expressed here are not in any way intended to challenge the Government’s wider policy objectives. The OFT has a remit to comment solely on the competition and consumer aspects of Government policies.1 We recognise that the Government must weigh any concerns relating to competition and consumers against its wider policy goals.

3. This document sets out:

The background to the OFT’s involvement in alcohol policy.

The competition and consumer concerns about the proposal to introduce a minimum price for alcohol.

A brief comment on the legal issues relating to minimum pricing.

Brief comments on voluntary agreements and the Responsibility Deal.

4. The OFT has made a number of recent submissions to other Parliamentary inquiries in relation to alcohol policy in the UK:

The OFT gave evidence to the 2009 Health Select Committee inquiry into alcohol policy.2 This included a written memorandum,3 and oral evidence to the Committee.4

The OFT gave written and oral evidence to the 2010 Health and Sport Committee of the Scottish Parliament on the Alcohol etc. (Scotland) Bill (SP Bill 34).5

In November 2011, the OFT made a short submission to the Scottish Select Committee inquiry into the Alcohol (Minimum Pricing) (Scotland) Bill.6

5. The comments below build on points we have raised publicly in these previous submissions.

Background

6. The OFT is an independent, non-ministerial government department, with lead responsibility for enforcing competition and consumer law in the UK. Our mission is to make markets work well for consumers. Markets work well when businesses are in open, fair and vigorous competition with each other for the consumer’s custom. We pursue our mission by:

encouraging businesses to comply with competition and consumer law and to improve their trading practices through self-regulation;

acting decisively to stop hardcore or flagrant offenders;

studying markets and recommending action where required; and

empowering consumers with the knowledge and skills to make informed choices and get the best value from markets.

7. The OFT has a range of enforcement powers under different statutes to address competition concerns in markets. Of these, the Competition Act 1998 (CA98) is most relevant to the current discussions of alcohol policy.

8. The CA98 is designed to secure the benefits of competition—for example a level playing field for firms, lower prices and greater choice for consumers and economic growth. It does so by prohibiting certain types of anti-competitive behaviour (the Chapter I and Chapter II prohibitions). The OFT has strong powers to investigate businesses suspected of breaching the CA98 and to impose penalties on those that do.

Policy Concerns About Minimum Pricing

9. We entirely appreciate and support the need for the Government to address alcohol misuse. However, we have reservations about the adoption of a minimum price as a way of achieving this. In particular, we are concerned about possible unintended consequences of setting a minimum price.

10. At its simplest, setting a minimum price would require retailers to charge more than they currently do for low cost alcohol. There is good evidence that this price increase would be likely to lead to some reduction in demand for alcohol, as the Government intends.

11. However the price increase is also likely to generate windfall gains for retailers, as predicted by recent independent modelling carried out by researchers at the University of Sheffield.7 Unlike an increase in tax, additional consumer spending on alcohol would go to private firms rather than to the Government.

12. The OFT is concerned that the unintended consequence of this increase in profit may be to give retailers an incentive to sell more, rather than less, low cost alcohol. Retailers would gain additional profit for every unit of low cost alcohol that they sold. At worst, such an incentive could dull the effectiveness of the minimum price in reducing alcohol sales.

13. More generally, the OFT is concerned about the long-term impact of minimum pricing restrictions on consumers and on productivity in the retail sector. International studies, including by the OECD, suggest that restrictions on retail prices, such as banning below cost selling, ultimately lead to lower productivity and worse outcomes for consumers.8 For example in France, between 1997 and 2002, food prices increased faster than general inflation—11.8% compared to 6%—in part because of retail price restrictions.9 In Ireland, it has been estimated that Irish families were paying €500 more per year for retail items in 2005 because of rules preventing below cost selling.10

14. Taken in isolation, a minimum price for alcohol may not have a significant negative effect on productivity. However, the OFT is concerned that, by legitimising intervention to control prices in a competitive market, it will be harder for the Government to resist calls for similar measures in other parts of the retail sector in future. This could have significant long-term costs.

15. For these reasons, the OFT considers that a change in taxation would be preferable to imposing a minimum price, with less risk of creating unintended consequences.11

Legal Issues Relating to Minimum Pricing

16. One of the points frequently raised in discussion around the Government’s alcohol policy is whether a minimum price would be compatible with competition law.

17. The OFT’s view is that UK competition law does not prevent legislation to set a statutory minimum price for alcohol. The relevant part of the Competition Act 1998 applies to agreements or concerted practices between firms. Statutory legislation imposed unilaterally by Government does not create such an agreement.

18. The main concern from a UK competition law perspective would be that, in the process of agreeing a minimum price, the Government does not inadvertently encourage discussion between firms of commercial issues which could be incompatible with CA98, such as expected future prices or competitive strategies.

19. In this context, it is also important to distinguish between the current proposal for a statutory minimum price unilaterally imposed by Government, and the alternative of a voluntary agreement between retailers to agree prices (with or without Government encouragement). A voluntary agreement on price would almost certainly infringe CA98 and European competition law.

20. There may be constraints on minimum pricing legislation arising from wider European law. For example, minimum pricing legislation may raise issues of compatibility with European free movement rules. The OFT does not have jurisdiction over these areas of law—enforcement takes place at the European level. The OFT understands that this is currently a live issue in relation to proposals for minimum alcohol in Scotland, and it is possible that there may be legal action which would clarify the position.

Responsibility Deal and Voluntary Industry Agreements

21. More widely, in order to try to reduce the harmful effects of excessive alcohol consumption there may be scope for retailers to make voluntary agreements on elements of their behaviour which do not relate to core parameters of competition such as prices or quantities. The Government’s “Responsibility Deal” is one such example, where retailers and producers are encouraged to sign up voluntarily to collective targets.

22. Voluntary industry agreements potentially fall within the scope of the Chapter 1 prohibition of the CA98. This prohibits agreements between undertakings which have as their object or effect the prevention, restriction or distortion of competition within the United Kingdom.

23. Whether any particular voluntary agreement is compatible with the CA98 depends on its specific details. However, the OFT is clear that retailers and producers should not use competition law as a blanket excuse for not engaging with Government on possible areas where agreements might be reached.

24. Some agreements may not restrict competition at all, or not do so in an appreciable manner. Even cooperation agreements that do have an appreciable impact on competition may benefit from an exemption. In broad terms, this will be the case where the agreement results in efficiencies and consumer benefits, the restrictions are indispensable to the obtaining of these benefits and competition is not eliminated.

25. There is a wealth of guidance material on the OFT and European Commission websites to help businesses assess whether collaboration would raise competition law problems. The Department of Business, Innovation and Skills has also published guidance that should be of assistance to businesses and policy makers.12

26. Although in general the law requires parties to “self-assess” whether any agreements they enter are consistent with CA98, if a collaboration proposal raises novel or unresolved issues the OFT can also issue a Short-form Opinion stating its view of the legal issues to assist parties’ self-assessment. The Short-form Opinion will be given on the basis of a statement of facts as to the nature and extent of the prospective agreement that has been agreed between the parties.13

27. There are also steps that the Government might sensibly take in approaching possible voluntary agreements. For example, engaging with firms on a bilateral basis will typically raise fewer competition concerns than having multi-lateral discussions.

Summary

28. We hope that this note provides helpful input to the Committee’s inquiry. The OFT would be pleased to provide further information should the Committee require it.

May 2012