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The Grapevine

The WSTA's views, distilled.

A win for the industry and a win(dfall) for the Treasury: duty collections increased following duty freeze

Last November’s Budget was in many ways a strange affair. With the prospect of an RPI duty increase in the region of 4% and a need to sure up public finances, I think it’s fair to say we all expected the worst. As it turned out, all that worry was for nothing as the Chancellor stood at the dispatch box and announced a freeze on all alcohol products “recognising the pressure on household budgets. And backing our Great British pubs”. As a result of this decision, the wine and spirit industry is estimated to have saved £247m in tax liabilities and were also saved the burden of price changes at Christmas, a crucial trading period for our members. 

But it turns out the Treasury benefited anyway, as we predicted. The latest duty collection figures from HMRC show that from December 2017 and April 2018, duty collections increased by 2% on the same period last year, in real terms that is £86m. For the WSTA members specifically, the increase was 2% or £67m, meaning that the wine and spirit industry accounted for 78% of the increase. Wine collections have so far increased £33m (+2%) and spirit collections increased £34m (+2%). Overall, wine and spirit duty collections are at record levels, with a projected £7.7bn in revenue for the financial year 2017/18, up £140m from the previous year.

Historically, wine and spirit products tend to account for more than their fair share of increased duty payments, as shown above. That wine and spirit products account for nearly £4 in every £5 of added revenue from alcohol duty collected by HMRC probably points to increased wine and spirit sales for the festive period, particularly sparkling wine and the last market report shows that gin also had an excellent Christmas period, and an excellent first quarter of the 2018 for much of the industry.  

In the slightly longer term, wine and spirit duty collections continue to increase to record levels. The wine industry paid £4.3bn (+6% on 2016) in duty in 2017 whilst the spirit industry paid £3.5bn (+6% on 2016), with total alcohol duty payments totalling £11.6bn, up 6% on 2016. In real terms the increase amounts to £695m extra duty payment on 2016, 75% of this increase came from the wine and spirit industry, showing again that the two categories over-index in terms of shouldering the burden of duty collections.

There is more to consider when combining actual duty collections with the OBR projections (for 2017/18 they were £4.3bn for wine and £3.4bn for spirit drinks). Firstly, and most notably, their consumption projections are, at best, curious: they expect wine consumption in the UK to increase over the next five years which is in direct contradiction with what we have been for years seeing in the market. That said, the duty freeze in November was welcome for consumers, particularly at a time when it looks like wages are just starting to rise consistently for the first time since before the financial crisis in 2007/8.

Secondly, given the uncertainty surrounding Brexit, projections of inflation will likely change between now and the end of the transition period in 2020, so it is likely that the real picture will look very different when it comes to it, should the RPI-linked duty rate increases continue out of kilter with CPI inflation. This is surely no way to plan the public finances or calm an already uncertain business environment, especially one so heavily dependent on cross-border trade.

Finally, Scotland will implement MUP in May. This policy is without precedent and, though the Scottish Government have said duty collections will go down (offset slightly by VAT increases), this means that it is very difficult to know what distortive effects MUP will have on what the OBR will project for inflation, consumption volumes and, ultimately, duty collections for the public purse. What is clear is that MUP has yet to affect the projections, given that volumes continue to rise over the next five years.

In March, we met with the new Exchequer Secretary to the Treasury, Robert Jenrick, mainly by way of introduction but also to highlight the general concerns of the industry as part of the new year-round campaigning effort on the budget. He came across as well-briefed and understanding of the issues facing the industry, asking sensible questions and showing a particular interest in exports, distillery growth and the English wine industry. This is an encouraging start to our relationship with the new minister, one which should be fruitful as we look to educate him further on the prominence of our industry.

You can download and view the latest duty bulletin releases on the HMRC website here.

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@optawine – Market Report: A cracking start to the year thanks to spirits and what’s happening with RTDs?

The second market report of the year brings some surprises in that the first quarter was probably the best 3 month period for some time, a realisation that spirits is carrying increasing weight in the industry, and, something I definitely did not expect this time last year, the return of the RTD. See below for a little more detail to supplement the latest WSTA market report.

A good start to the year

It’s good to start on a positive note for overall sales with the welcome news is that the off trade has had a good start to the year. Particularly given the same period last year was littered with negative growth, rising prices and things generally looking gloomy, it is welcome that there is positive growth in both quarterly volume sales (+2%) and value sales (+5%).Though the volume growth isn’t reflected in the yearly sales (yet), it is also welcome that over a slightly longer term, value sales have also growth, adding more than £700m over the last 12 months to the end of March. Spirits were a key contributor to this, adding 38% of it, or £281m, and no prizes for guessing where much of that came from. More on this below.

But wine also got in on the action: all wines contributed £217m of growth (which would have been had Champagne not been going through a tough time), 30% of value added in the first quarter of 2018, with still wine alone contributing more than £160m. Sadly, volume is still a sore subject for all wines with the exception of sparkling. But there are areas of encouragement, including usual suspects New Zealand and Argentina, but also Spain, Chile and Italy. We may want to keep an eye on these newcomers. With a lot of trade press buzz around Spanish and Chilean imports, and Prosecco still flying high, there is a base on which to hope for stability in wine and maybe even some future growth.

The on trade hasn’t fared as well, particularly in volume terms, but value sales in the first quarter of the year are just about keeping pace with inflation, though this has yet to filter fully into longer term sales. With inflation still somewhere around 3%, it’s difficult to describe this as genuine growth.

Spirits is where it’s at

The spirit category can be pleased as punch (aha) about its work over the last few years. In the year to the end of March, total yearly alcohol sales grew by 3%, or £1.063bn and of that £1bn, £578m came from the spirit category, representing 54% of all growth, and is now worth £10.5bn in yearly sales. The trade in general is becoming increasingly dependent on gin for growth; in the 12 months to the end of March, the gin category across both trades grew by £369m, representing 64% of growth in spirits and, remarkably, 35% of all growth in alcohol sales in both the on and off trade. In the first quarter of this year, gin also grew by more than £100m.

It’s also a very bright spot for the on trade. For the foreseeable future, volume sales in the on trade will be largely dictated by how beer is performing (accounting for nearly 80% of sales) but in terms of value sales, spirits alone account for 25% and adding in all wines and RTDs, that number increases to 43%. In terms of growth, spirits added £297m over the last 12 months, accounting for 89% of all growth in the on trade. With the gin boom, an emphasis on exports in the coming years, growing concerns over the rate of pub closures and rum achieving £1bn a year sales (and by the way, I think there’s more to come from imported whiskies), even more attention needs to be paid to spirits – not just gin - as it becomes increasingly important to the UK alcohol industry and in particular to the on trade.

Return of the RTDs?

Last quarter, my esteemed Comms colleague Lucy rightly pointed out something that I had overlooked; RTDs appear to be enjoying something of a renaissance. In the last market report RTDs recorded very reasonable yearly growth of 3% by volume and 5% by value in off trade sales, recording the 2nd quarter in a row of volume growth and 7th in value. If current trends continue, yearly sales could reach 500,000hls for the first time since 2014 and £250m for the first time ever by the end of the year, particularly if you factor in the growth figures posted in the first quarter of 2018 (+7% for volume and +8% for value). All this leads me to wonder if the success of spirits over the last few years is filtering into RTDs as, for example, single measure spirit mixers in cans become more popular.

Unfortunately, RTDs is another category where the on trade can’t live up to the recent fortunes of the off trade, with declining growth across the board continuing a downward trend where sales in both volume and value are half what they were in 2012. It remains to be seen whether the success of spirits can filter through to RTDs as it may have in the off trade, or whether there are extra barriers (cocktails maybe?) in the on trade for such a knock effect.

Sources: Thanks as always to Nielsen (Scantrack WE 24.03.18) and CGA (WE 24.03.18).

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Celebrating Scotland’s hidden gem

Gin may not be the first spirit you consider when you think about Scotland, but the industry in is undergoing a quiet renaissance that is bringing jobs, investment and exports to the Scottish Economy.

The gin boom across the UK over the past 5 years has been phenomenal, with sales increasing at a rate of around 20% a year, leading to a doubling of the number of distilleries in all countries of the UK. The industry is now worth over £1bn in UK sales (over £150m of which is in Scotland) and a further £530m in exports. Its growth shows no signs of abating.

While gin has always had a special place in the Scottish economy, with around two thirds of UK gin produced there historically, the recent gin craze has given the industry a renewed vigour from the Shetlands to Strathearn. Recent calculations estimate that there are now more than 50 distilleries in Scotland producing gin - that’s over a third of the 149 Scottish Distilleries in total.

To celebrate the innovation, creativity and provenance of Scotland’s gin producers, the WSTA launched “Scotland’s Gin Trail” back in 2015. Such is the extent of the growth that just two years later we published a renewed version of the trail which now features summaries on 20 gin distilleries that hold tours and tastings, and provides details for another 30 or so that we have identified.

The updated Gin Trail was relaunched in the Scottish Parliament in June, where the WSTA hosted a reception and showcase of Scottish Gin producers, both modern and traditional, to Members of the Scottish Parliament and others.

The investment in new gin distilleries in Scotland is helping to provide jobs and skills to the workforce, support local supply chains, increase exports and encourage tourism. Not to mention creating some of the world’s best quality and most iconic gin brands. All of which provides a boost the Scottish economy and, with the right business environment, this is set to continue over the coming years.

While Scotland will always be synonymous with its eponymous spirit, the renaissance and growth in the Scottish gin industry - its hidden gem - is certainly something worth celebrating too.

You can download Scotland’s Gin Trail here: http://www.wsta.co.uk/images/Spirits/GinTrail/2018Scottish_GinTrail.pdf

 

 

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Gin, wine and whiskies all a key feature of the first market report of 2018

The new market report shows some old themes by now are so expected that it’s like light snow causing train services to be cancelled; you’d be a fool to expect otherwise. For example, we are now so accustomed to seeing growth in gin that the only surprise left how big the growth is. There are worse surprises out there. The price of wine in the last 18 months, for example, has much the same problem as gin growth, but it is far from a good thing. New themes can and do appear also, just to keep us on our toes and it is imported whiskies, as well as flavoured spirits we find something new to talk about and some possible indicators that point towards current consumers trends.

Gin (again!)

This time last year gin was plodding along very nicely; low double-digits, but double digits nonetheless. 12 months later that has all changed having added 9.5m bottles (+23%) sold in 2017 compared to the year before worth an extra £295m (+27%), enough to pay the entire civil service for a month (you’re welcome Sir Jeremy).

The equivalent of over 50m bottles were sold for the first time with a value of £1.4bn, add on 2017’s exports value and it’s £1.925bn, perilously close to £2bn. Three more quarters of similar value growth and gin may well be a £2bn industry based on domestic sales. Two more quarters of similar growth in the on trade and it’ll be worth £1bn to pubs, bars and restaurants alone.

Quarterly value sales over the Christmas period were the real star, with 29% growth in the on trade and an incredible 38% in the off trade, adding an extra £104m to the market overall. Polling conducted late last year also stated that 38% of people would consider giving and 33% would be happy to receive gin as a Christmas gift, surely proof that gin is the tonic for all seasons, not just the summer.

Wine prices: premiumisation or polarisation?

Wine prices continue to be a cause for concern, not just with the dramatic increase since the referendum, currency devaluation and ensuing inflation - all of which means it costs more to supply the market - but it also may have adverse effects on demand. The average yearly price of wine has again risen in the off trade to £5.64, up 8p on last quarter. Since 2014, the average price rose 28p from £5.36, 23p of that occurred from 2016 onwards. It’s an excellent example of inflation starting to bite but it also presents other issues when analysing market data. On the graph below I have overlaid average wine prices and CPI inflation because it shows neatly fits relationship with prices, particularly for imported products.

But it also forces us to recalibrate what we consider when looking at the data and discussing premiumisation. Inflation is disrupting the price points data (p.6) so much that it is increasingly difficult to point to premiumisation, at least as a general trend, rather than simply saying prices are going up which is pushing all products up the price brackets. Last year at the Research and Insights Group a valued member suggested that in fact premiumisation isn’t really happening to any large extent in the wine market, and that it’s more accurate to suggest that polarisation is occurring, where some consumers are opting for more expensive wines and others opting for cheaper ones, which wouldn’t necessarily affect the average price. It could also be suggested that, if CPI is 2.7% (for 2017), then any % increase above that could represent premiumisation. Maybe, but industry specific issues such as increased import costs and duty rates, as well as more industry wide issues such as changes in business models as Brexit looms over the horizon may be more applicable than inflation.

Tell me what’s your flavour

Imported whiskies is a category that is rarely talked about, and unjustly so. It’s the best-selling whisk(e)y in the on trade and is worth nearly £800m to the UK spirit market, about 7.5% market share. But it also represents an opportunity for consumers to do what they currently do best in the UK: experiment. This means new flavours and new experiences with products from offshore and imported whiskies gives them that opportunity as well as a new take on something familiar.

Imported whiskies

 

000hls

£m

2016

138

738

2017

150

787

% chg

9%

7%

 

Japanese whiskies have certainly made waves in the UK in the recent past, with volumes having more than doubled in the last 5 years or so. According to the IWSR, global sales of US whiskey increased by about 6% between 2010-15, 5.56% in Europe and in the UK it’s about 6% in the last year alone. All this could change, though, depending on what side of the bed Mr. President gets out of and chooses to continue with his trade war (also, one of the finest headlines you’ll see this year). Back on planet Earth, Irish whiskies are also faring well, backed up by a consistent stream of news about new distilleries opening up across the country. Global sales are up nearly 10% between 2010-15 and are projected to add another 7.16% to 2020. European volume sales of Irish whiskey are smaller at 3.7% and a projected 2.6% to 2020. UK volume sales increased 5.2% between 2014-15.

Other categories also suggest that (new) flavours are on the rise. Flavoured vodkas and flavour/spiced rums are all in growth in both the on and off trade, and CGA have consistently suggested that golden rum is the next big thing in the on trade. Also, the WSTA receive a lot of questions about this from the trade press who, keen to find the next big trend, are featuring ever more interesting flavours of spirits including vodkas and rums, but also flavoured gins. While flavoured gins in the UK currently account for less than 0.5% of the market, it’s likely that start-up distilleries are, rightly, trying to find their USP so any claim to the ‘next big thing’ for any new flavoured gin is probably premature. That said, gin can currently do no wrong, so it would come as no surprise if one of them rocked the boat with a revolutionary new gin flavour.

So a mix of good and bad news, and also food for thought.

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Yearly gin exports reach £500m

There are many (us) in the industry who have been predicting this point will come for some time now. There are also others (us again) who have been predicting gin in the UK will be a £2bn industry by the end of 2018 and, now that exports have reached such a landmark, this seems inevitable. And there are some (everyone, including us) who have seen the rise of UK sales grow and grow waiting for something to occur that will check the industry’s meteoric rise. Until now the UK gin industry has never much resembled a tidal wave crashing onto land but more of lapping shore line as it approaches full tide, with strong but consistent growth rather than an explosion. But with accelerating growth in the UK gin market and now in UK exports, more, not less, speculation will surely occur about the fate of the juniper spirit.

As always, the facts come first, courtesy of HMRC. The UK has achieved £500m in yearly gin exports for the first time - £532.4m to be exact – representing a 12% increase on 2016. Key markets for gin regionally are North America – which passed £200m for the first time - the EU – which grew by 16% and remains by a distance the largest import region – and, though a smaller market but one with lots of potential, Asia and Oceania (see below). This further strengthens our export strategy that this year is targeting Asia and the East Coast of North America in particular (ask Rob for more details on how to get involved).

 

Value £

Region

2016

2018

% chg

EU

218,105,915

253,776,937

16%

Asia and Oceania

28,185,392

31,721,496

13%

E. Europe

1,667,126

1,896,476

14%

Latin and C. America

9,097,221

11,451,908

26%

Middle East and N Africa

7,058,845

9,402,925

33%

North America

193,273,104

206,125,315

7%

Sub-Saharan Africa

5,682,507

7,014,024

23%

Western Europe exc EC

10,622,239

10,951,421

3%

Stores and Provisions

39,879

71,241

79%

Non-EU

255,626,313

278,634,806

9%

Total

473,732,228

532,411,743

12%

 

The USA remains the world’s bigliest importer of UK gin, importing £184m worth in a year to November 2017, up very nearly £12m on last year, #MAGA one G&T at a time. Signs are that gin sales by volume in the US is broadly flat but value sales have increased around 8%, indicating US consumers are enjoying more premium brands, which plays well with exporting UK’s growing number of available gins and the WSTA’s ambitious gin-producing members attending our trade missions. You’re welcome Mr. President.

Another landmark: £100m worth of exports in 12 months to Spain for the first time, up nearly £7m on 2016. Spain is by far UK gin’s top EU market, importing more than the five next biggest markets - Germany, Italy, France, Greece and Belgium - combined (£94.5m). The 7% increase in gin exports to Spain is encouraging and part of a clear trend in there that mirrors the UK domestic sales experience; by value sales have increased by 40% in the last five years, over a third by volume. This indicates that, whilst Spain has been and remains a key market for UK gin, there is still a lot of head room for exports as long as exporting to the EU remains as unhindered as possible after Brexit, something that was brought into question last week but is crucial for gin as well as other goods.

If it were @optawine’s job to predict things, it would say that there are more landmarks ahead (the £2bn mark (domestic sales + exports) is tantalising close at £1.8bn as it stands but next month’s market report will reveal more). Export trends tend to follow domestic ones so, following on from the accelerated growth in the UK market, we might expect faster export growth in the coming years, which makes the idea of gin exports a £1bn industry within the next decade a real possibility. A slowdown in gin sales and exports is inevitable, it seems glib to even suggest that given these export figures, but there are currently no signs of it so we can only expect further and fast growth in exports in the years to come.

 

So all is well in the gin industry which has casually brushed aside difficult domestic market conditions to continue increasing growth and is fast becoming a key driving force in UK food and drink exports. The tonic and lemon industry can thank us later.

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