Is the Wine Industry Feeling Glass Half Empty?

In the Spring 2023 budget, the Chancellor of the Exchequer announced that alcohol duty in the UK would increase on August 1. Although the industry had been accustomed to regular increases, wine duty had been frozen since 2019. On average over the last decade, the duty uplift on still wine at 12.5% alcohol by volume (ABV) was around 6p per 75cl bottle. This is usually passed on to the consumer with little resistance.

This year, however, the duty has increased by 44p per bottle.

Here’s Why

Until now, duty was calculated on spirits and beer by “liter of pure alcohol,” meaning that the higher the ABV, the higher the duty charge. For wine and cider, however, duty was calculated “per hectoliter of wine/cider” across various bands depending on strength. Since 2019, still wine with an ABV over 5.5%, up to and including 15% (basically, most wines on UK shelves), attracted a duty charge of £297.57 per hectoliter.

For example, until August 1, alcohol duty on a bottle of still wine with an ABV of 12.5% was:

£297.57/(100 liters) x 75cl = £2.23

After August 1, duty is applied at £28.50 per liter of pure alcohol, so the same bottle has a duty charge of:

(£28.50 x 12.5%) x 75cl = £2.67

Adding further complexity, wine between 11.5% and 14.5% ABV will be treated as if it is 12.5% ABV for the purposes of calculating alcohol duty until February 1, 2025.

• This means that a bottle of 14% cabernet sauvignon will attract duty of £2.67 as above, where it could have been at £2.99.
• On the other hand, a bottle of 11.5% pinot grigio will also attract duty of £2.67 as above, instead of £2.46, had this final measure not been applied

The real losers are the high-strength wines. At 15%, for example, a bold Aussie shiraz now attracts a duty charge of £3.21, an increase of 97p per bottle.

This is all before the application of value-added tax, which of course adds another 20% to these increases. This means that the cost of 12.5% ABV wine is increasing by 53p per bottle, and while it may have sold for £6.50 in the supermarket previously, retail prices are already increasing by at least 50p.

Impact and Response

The wine industry is concerned about the impact of the duty increase at a time when it is already struggling with the after-effects of the pandemic. There was unprecedented demand during the UK’s periods of national lockdown, but consumers have since lowered their alcohol intake. More people are choosing alcohol-free alternatives, and the cost-of-living crisis has prompted consumers to reduce their alcohol spend. Inflationary increases are also putting pressure on production costs, raw materials, and staff wages, so the wine industry is experiencing the perfect storm of external factors to squeeze—or, rather, eradicate—its margin.

The government has defended the increase, arguing that it is necessary to raise revenue and discourage excessive drinking, especially in reference to higher ABV products. However, many companies that are affected are calling on the government to reconsider, or to provide some form of compensation to mitigate the effect on businesses and consumers.

In response, some wine producers are lowering the ABV of their wines, holding the strength at 10.5% so the impact of the duty rise is just 1p per bottle. Modern technology enables wineries to decrease the alcohol after the winemaking process is complete. However, the UK represents a comparatively minor market for many global wineries, and the cost associated with applying this technology over a small batch is prohibitive. There is also an argument that the quality of the wine could be compromised.

If producers resist, UK bottlers must find an alternative method, invest in their own technology at great cost, or accept the duty increase and raise their prices, leaving them uncompetitive on UK retailers’ shelves.

There is no doubt that the duty increase will put pressure on pricing, with the cost passed onto the consumer being the most likely scenario. This could lead to decline in demand, creating yet further challenges for the UK wine industry.

This change to the way in which duty is applied to wine in the UK could lead to additional margin pressures for bottling and distributing businesses, especially those producing entry-level products. Profitability and cash flow could be issues in the near term. While it may be a bumpy ride, businesses in the FMCG sector, and specifically the beer, wine and spirits industry, can address some of these challenges by exploring solutions with the right partners.