Tax increases: “There’s a lot at stake” – Interview
BWI: PriceWaterhouseCoopers (PWC), in its recent 2010 study, paints a bleak outlook for Europe’s beer supply chain if excise taxes on beer were raised by 20 percent. How realistic is this scenario?
Da Ponte: Governments, especially in times of crisis, are always looking at ways of increasing revenues. Since 2007 we have seen increases in several countries in the European Economic Area, with tax increases of up to 30 percent in the Netherlands, the Czech Republic and Estonia. In Norway, the United Kingdom and Portugal an increase has taken place every year. The tax burden increase for the brewers has been heavy, in particular in Greece, where the rate today is 2.5 times higher than it was in 2008. Other countries like Finland, Poland, Lithuania or even Turkey and Serbia were also confronted recently by beer tax increases. And for 2011, the further raising of excise rates for beer have been announced in Cyprus, Malta, Slovakia and Turkey.
The 20 percent scenario for excise increase, but also excise decrease, was an outcome of recent developments, including a tax decrease in Ireland in 2009 which helped to maintain the consumption and revenues to the national budget.
What’s important though is that governments don’t just look at the short term, but that they have a longer term outlook. That’s why we commissioned PWC to carry out this study. It’s about fuelling the debate, and making sure that policy makers know the consequences of actions such as excise duty increases. There’s a lot at stake; jobs, livelihoods – not simply revenue from beer production and selling.
BWI: Beer consumption in western Europe has been going down for years. Do you think that consumption in CCE will pick up again once these countries come out of the current recession, or will the EU beer industry have to face the prospect of a general consumption decline in the long-term?
Da Ponte: Overall, we believe that the market for beer consumption will level out and find its equilibrium in the years ahead. People enjoy a good beer, and we don’t see that changing too much. European history gave brewers many lessons, some of them very severe, but the brewers always managed to get through problems of shortages of raw materials or workforce and adverse economic circumstances. There will be adjustments, but the beer sector will see them through and will survive. It’s a similar story for other industries too, I should add.
BWI: Rising off-premise sales of beer have taken business away from the on-premise. Europe’s highly fragmented and underfinanced on-premise sector is made up to a large proportion of single operators selling small volumes. How severe do you think the shakeout will be if the channel shift continues?
Da Ponte: The shift from on- to off-trade is a trend where the biggest impact is in those markets which traditionally had a high share of on-trade sales, like Spain, Belgium or United Kingdom. In other countries the economic circumstances have stopped or attenuated this development but potential still exists, as people will like to enjoy a beer in a bar, restaurant, club or at a music event. Brewpubs and similar premises have also been recently helping in raising interest in beer consumption across Europe, so in long term we would see a recovery.
Nevertheless, in view of the current economic situation we can’t foresee with precision how much time it will take. All entrepreneurship incentives are backed not only by the brewers but also by the EU2020 agenda. However, consumer support would be essential, and for the time being they are the ones shifting the sales to the off-trade channel as a result in a change of their purchasing behaviour. Changes could also be influenced by regulatory measures which could impact one channel against the other.
BWI: What kind of future lies ahead for Europe’s 3700 or so small- and medium-sized brewers, if retailers push ahead with their category optimisation programmes?
Da Ponte: The future will also depend on the evolution within the wholesale and retail sector itself. For years, category optimisation programmes have been developed and tweaked by analysts and now they are finding the time for application in a more intense way, due to the restructuring of the whole supply and delivery chain for food and drinks. For example, the reduction of stock keeping units delivers certain efficiency in terms of costs, but in parallel, increases the management needs, and requires more harmonious relations with suppliers.
When it comes to the brewing sector per se, the category optimisation programmes will for sure have an impact on the contracts that are signed with retailers and wholesalers. A lot will depend on the market size, brewers’ presence in a specific market or product category and additionally on the development of pan-European relations with determined brewers and retailers. The discussions on commercial relations of the food sector are dealt with at EU level and they might also provide additional elements affecting the future.
We can’t see the future as black or white in this matter. It will be rather a fierce commercial environment, where each producer and retailer will try to find its place and address specific consumer needs with products under the corresponding brand.
Questions: Ina Verstl
