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How fair are government taxes on wine around the world?

Screen Shot 2014-11-12 at 00.19.37Government tax rates on wine differ significantly between countries and it is difficult and complex to accurately compare them. Different considerations and challenges such as economic, cultural, political and legal determine how taxes are applied. Whether they are fair or unfair depends on your point of view. The wine industry constantly fights to avoid increases in excise duty in order to protect their sales and profits. Producers that rely on local demand call for higher import tariffs in order to protect their domestic wine industry. Alternatively, those relying on exports call for free trade or tax rebates in order to sustain and grow their business. Consumers are principally against any type of tax. Whereas governments rely heavily on tax revenue, yet never seem to be satisfied.

There are huge differences in government taxes. For instance excise duty rates vary from €6 per bottle of wine in Norway to zero in Hong Kong. On the first glance, this significant rate difference seems unfair. Why should consumers pay so much for their favourite tipple in one country while others enjoy much lower pricing? However, comparison of taxes is complicated as the value of rates is based on different cultural, political and economic philosophies of countries. Following a period of alcohol prohibition, Norway’s high taxes are linked with strict restrictions by the government alcohol monopoly Vinmonopolet. Whereas Hong Kong, thanks to its global connectivity has had zero tax since February 2008 with a view to economic dynamism and liberalism.

However, even within the European Union where the majority of members share the same currency and similar economic goals, the excise duties vary so remarkably it can hardly be considered fair. The United Kingdom is one of the highest tax paying countries at £2.05 per bottle in comparison to traditional wine producing country such as France which only charges €0.03 per bottle. So if you buy £5 bottle of wine in the UK (being the average price), 57% is tax and about 28% is retail margin and the liquid is barely 25%, making it poor value for money for consumers. No wonder then that thousands of Brits travel across the channel every year to take advantage of the bargains in Calais.

Governments can receive a significant amount of funding through wine taxes. Some of this revenue is used to offset the cost of crimes and health damage that are related to alcohol abuse. The wine industry in the UK paid over £15 billion in duty and VAT to the government in 2010 yet the Institute of Alcohol Studies claims that alcohol related harm was estimated to cost society (England) £21 billion in the same year. This includes £3.5 billion of NHS cost, £11 billion of alcohol-related crime and £7 billion of lost productivity due to alcohol. This estimate suggests that alcohol consumption brings more financial losses then benefits to the government. However an accurate estimate of the economic cost of alcohol consumption is difficult to calculate due to the number of variables involved.

From the wine industry’s point of view, there is a danger that taxes reach a level where reduced consumption materially impacts sales and profits. In order to avoid this, the UK duty increase was postponed in 2014 (as a result of the Call Time on Duty initiative). It was estimated that action will save the industry £175 – 230 million and protect over 6,000 jobs. On the other hand, the French government (starting from a much lower base) is keen to drastically increase the tax from €0.03 to somewhere between €0.30-0.60 per bottle, estimated to bring an extra €2 billion to the state government.

Taxes vary depending on whether wine is imported or locally produced. For example in Shanghai, tax for imported wines adds 48% to the cost of a bottle compared to domestic wine which only adds 30% to its cost. This protects the local industry. However, in India, the import tax is so high (a whopping 150% of the value of the wine), that a bottle of Jacob’s Creek costs US$40. Imported wines are therefore incredibly expensive and difficult to access for an average consumers. In order to make imported wine more available and pricing more affordable, discussions about reducing the duty to 40% are underway.

In Australia the tax is the same for wines regardless whether they are imported or locally produced. Thanks to the WET rebates, New Zealand wine exports to Australia have increased by 139% since 2005 when it was introduced. This is currently causing a lot of issues for local producers despite its fairness in free trade terms. In order to protect the Australian wine industry and control overseas competition, the Winemakers’ Federation of Australia is calling for Wine Equalisation Tax reform to address this issue. It is believed that the reform could earn the Australian government AU$25 million a year.

The notorious complexity of US taxes have been known to discourage wineries from trading directly to consumers. The original idea to lift restraints of the three-tier system in 37 states (including California) was to help the availability of wines produced by small and less known wineries and to promote selling wine directly to consumers. Whereas federal excise duty tax is fixed according to alcohol level, and for still wine up to 14% abv is charged at $0.21 per bottle of wine, state tax is much more complicated. Each state has its own rules and regulations, each requires different record keeping and payments. This challenging tax regime limits the number of states that wineries are prepared to work with and limits consumers’ choice of wine from other states.

Keeping tax systems simple and consistent may seem to be a good idea from administrative point of view. But when it comes to the link between taxes and the alcohol level of wine, there are some who call for more versatile tax bands. It is no coincidence that the majority of red wines do not reach an alcohol level over 15.5%. For example, in the UK still wines with alcohol between 5.5% and 15.5% are taxed the same. The result is that nearly all wines end up being taxed by the same amount which may be considered unfair. In order to encourage responsible drinking, promote lower alcohol wines and introduce fairer trading, many producers together with the Wine and Spirit Trade Association are therefore proposing a different alcohol tax band between 9% and 12% abv.

Government taxes on wine are so sensitive and impactful that their fairness and subsequent challenges or benefits are being reviewed constantly. Arguably, many governments struggle to balance fairness when applying their taxes. What some producers may view as fair trade others view as a threat to their profits and a limit to their growth. What some view as a restriction of free choice others view as beneficial control of alcohol consumption. However, what is certain is that hardly anyone believes that taxes on wines are fair to them and there will always be groups who lobby for change.

 
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Posted by on November 12, 2014 in Uncategorized

 

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The Big Picture – Marlborough wines in the UK

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Despite all the challenges, the UK is still a very important market for New Zealand and especially Marlborough wines. It holds a reputation as one of the most sophisticated and attractive wine markets in the world and is a hub where many wine trends are pioneered and where both small and large producers can be commercially successful. Despite export market share dropping from first to third place (after Australia and USA), the UK is still worth NZ$318.6 million so it is important not to lose sight of this market.

On one hand, New Zealand proudly shares the premium category with France with average price per bottle growing by 11% in the past year to £7.26. However, the record 2014 harvest (even higher than the oversupplied 2008 vintage) will undoubtedly bring many challenges in order to remain this quality driven growth. The biggest challenge being the enormous volume of low end bulk Sauvignon Blanc flooding the UK market, labelled under mysterious own labels and potentially devaluing the brand Marlborough SB.

The good news is that there is currently a real interest and enthusiasm in wine (and food) in the UK concentrated particularly in London. The explosion of wine bars such as Vinoteca, 28-50, The Remedy, Sager & Wilde is visible proof. On-trade offers customers an opportunity to indulge in a better choice of fine wines while creating a deeper bond with consumers and building their loyalty, lacking in other sectors.   The New Zealand Cellar set up by Melanie Brown encourages wine and food enthusiasts to experience the wide varieties and styles that New Zealand offers by promoting focussed wine talks and dinners.

The wine scene has evolved a lot since my first taste of wine in 2006 while working as an Assistant Manager at Oddbins’ fine wine branch in London. Shops like The Sampler, Bottle Apostle, Vagabond Wines and Hedonism Wines created shopping spaces where people want to be. Using Enomatic machines people can now sample wines before their purchase. By creating relaxing areas with beautiful displays, customers can socialise and be inspired to drink better wines. The most successful retailers don’t just sell wine but offer an experience.

E-commerce has now also become a profitable new route to market. The UK online wine market is worth £800 million and accounts for 11% of total sales with 25% of UK wine drinkers now shopping online. Swig Wines, Naked Wines, Virgin Wines and Direct Wines are just some of the most successful online businesses that offer convenience, personal customer service and an extensive and exciting wine choice.

However, selling wine profitably in the UK is still very much a challenge. Fluctuating exchange rates and the rise of wine duty have pushed prices up and put a strain on consumers’ spending. More than 70% of all wines are sold through supermarkets thanks to on-going promotional activities. Shelves are filled with low priced wine driven by vast competitions amongst the key brands offering miniscule margins for producers and agents and dire selection and no service to consumers.

Directly engaging with consumers through social media has become a fantastic marketing tool especially for wineries that are based many miles from their target market. Being a keen blogger, Facebook and Twitter user myself, I have appreciated the ease with which I can interact instantly with producers from around the world. New World producers such as those from New Zealand and Australia have proved to be natural communicators reflecting their understanding of social media and its value in engaging with consumers and wine trade.

New Zealand wines have successfully penetrated all sectors of the UK market making it accessible to a wide audience, with Marlborough’s Sauvignon Blanc reputation leading the way. Despite its small yet still growing production (producing less than 1% of the world’s crop) it has grown in importance by focusing on value rather than volume. The World Atlas of Wine dedicated just one page to New Zealand in 1985 for its third edition, but by the time of its latest edition, eight full pages were devoted to the country.

Despite its relatively short history in winegrowing and winemaking, and possibly as a result, many producers are in touch with today’s consumer and offer easy to understand wines with great potential. Most recently, Pernod Ricard has cleverly tapped into the latest UK trend in low alcohol wines. Based on their consumer research they launched Brancott Estate Flight style, premium low alcohol wine (RRP £10.49).

Observing UK supermarket shelves, one may jump to the conclusion that the pungent Sauvignon Blanc is Marlborough’s one trick pony. Pony that may be sniffed at by some but the fact that its demand is growing shows its continued importance. Tesco offers 50 New Zealand wines, out of which 40 are from Marlborough and 37 are Sauvignon Blancs. But look further and you will discover pockets of diversity. From rising potential of Marlborough Pinot Noir to aromatic Pinot Gris and Riesling from Awatere Valley. UK consumers can now choose from a number of single vineyard SBs (Ara, Villa Maria), premium oak aged SBs (Cloudy Bay, Dog Point, Jackson Estate), sparkling SBs and organic/biodynamic wines (Seresin Estate, Walnut Block).

All in all, the future for New Zealand wines in the UK is bright. Marlborough, in particular, offers distinctively bright fruit flavours and trademark zestiness which is sought after by the modern UK consumer. But it also manages to attract more discerning wine enthusiasts with its diversity, innovation and premium lead exports and its producers’ willingness to listen to their consumers.

 
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Posted by on November 4, 2014 in New Zealand

 

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