Four price options to curb below cost sales

The Government has put forward four options to ban below-cost selling of alcohol and is planning to take the proposals to a public consultation within weeks, Morning Advertiser's sister publication The Grocer​ has learned.

When the coalition pledged to ban below-cost alcohol sales in June, it failed to define what it meant by cost. But it has since held talks with the industry to take its proposals forward.

The Home Office, which is leading the talks, has told industry lobbyists it has hit upon four possible options.

The first, and easiest, option would be to define cost as simply duty and VAT. This is the definition used by leading supermarket chains, including Morrisons, which last month called on the government to ban the sale of alcohol below this "cost".

However, many in the industry have objected to the definition, as it will only affect the deepest discounts and attributes no cost to the product itself.

The second option is to add some form of cost for the production, distribution and marketing of the product, ­although critics believe that this is fraught with difficulty.

A third option is to ban a sale below the cost of the invoice, a practice adopted in some EU countries, including Spain and France.

The fourth option is to allow retailers to work together on fair pricing, without fear of prosecution under competition law.

A minimum cost per unit has been ruled out, although this is still expected to get the green light in Scotland.

The four options will be presented in a consultation document in early August, as part of the Police Reform and Social Responsibility Bill. The consultation period will last six weeks because the government wants the Bill introduced in the autumn, The Grocer​ understands.

"All the options are problematic," said one industry source. "I don't think the government realised how difficult this would be."

A decision will also prove difficult for the government because the industry is not in agreement. The WSTA and Carlsberg are both in favour of classifying cost as duty and VAT because they believe other options are unworkable.

"If you go only on duty and VAT, it's easier to control because this is a number nobody can mess with," said Carlsberg UK CEO Isaac Sheps.

But Mark Hunter, CEO of Molson Coors, said the cost of production needed to be included if the law were to have any impact.

Calculating the government's four options on alcohol pricing​

1. Cost = duty + VAT​

Many in the industry have objected to this because it will only affect the deepest of discounts and attributes no real cost to the product. Morrisons and Sainsbury's claim not to sell alcohol below this point.

2. Cost = duty + VAT + the cost of production, distribution and marketing​

Molson Coors has suggested this could be achieved by trade bodies working with manufacturers to hit upon an average price for each sector.

3. Cost = the invoice price + tax​

Exponents, such as the FWD, claim this would be the fairest method but critics say it would be extremely complicated to enforce. The government would need to audit accounts, which would be time consuming.

4. Cost = agreed by retailers​

Retailers would be allowed to discuss pricing and to decide between them what is fair. However, reaching an agreement would be arduous. Laws forbidding retailers to talk about price would need to be waived.