Budget 2015: what does the cut on alcoholic drinks mean for manufacturers and retailers?

25 March 2015

Peter Wardle

Peter Wardle

Consultant

Last week George Osborne delivered his final Budget before May’s general election and the nation’s beer drinkers have been raising a pint to the Chancellor after he announced a 1p per pint reduction in beer duty for the third year running. The cut also extends to cider, Scotch whisky and other spirits, whilst wine duty remains frozen.

This is great news for the trade. The British Beer & Pub Association forecasts that the cuts will boost employment in the hospitality sector by 3,800 jobs in 2015, and industry leaders have rushed to congratulate their new “hat-trick hero”.

For manufacturers and retailers however, the announcement is met with a number of challenges. Planning for, and implementing, the associated pricing changes can be a major headache for manufacturers and retailers who play the annual Higher/Lower game to second-guess the Chancellor’s intentions. For many organisations, the changes will occur three months into the new financial year, requiring in-flight adjustment to price, promotion plans and volume forecasts. This can also be a stressful and challenging time for National Account Managers, and there are no prizes for the most accurate guesses in this game.

Challenge one: ensuring that changes to the price file are applied accurately on the effective date, and communicating those changes to customers

This is an unenviable task when you consider the typical size of the customer and sku portfolio for large manufacturers. The task becomes even more daunting if individual customer price files are held in MS Excel and require manual adjustment. This is when the ability of an organisations pricing system to separate and adjust the portion of the invoice price attributable to duty, and then automate the execution of the change, becomes essential.Of course, when price files are not adjusted in a timely and accurate manner, it can lead to a huge problem in processing customer claims caused by incorrect invoices.

Challenge two: negotiating and adjusting promotional plans for the remainder of the year

When duty goes up, NAMs will come under pressure from buyers to delay, or even absorb, the increase in order to protect retailer margin within the Joint Business Plan. A duty increase is particularly problematic when it affects skus being promoted at the same time, due to all the practical constraints of having gone to print with consumer-facing point-of-sale. Of course retailers won’t be quite so keen to delay the implementation when there is a saving to be had!

After an increase in duty, retail selling prices will need to be adjusted to maintain margin, and retailers will need to consider what that means for those ‘round pound’ (e.g. 2 for £7) pricing mechanics that consumers find so appealing.2 for £7.04 doesn’t have quite the same ring to it does it? In such cases, NAMs need the ability to model the effect of pricing changes on forecasted volumes in the annual plan, and to make any necessary adjustments to customer annual spend targets in a timely manner. The consequence of not getting the latter right is that retailers can achieve spend targets whilst delivering less volume to the supplier due to the higher duty rate.

Challenge three: the law of unintended consequence

An interesting and unintended consequence of the Chancellor’s Budget is the phenomenon of the pre-duty buy-in, whereby Retailers and Wholesalers anticipate an increase in duty and chose to fill their supply chain with product purchased from the manufacturer at the lower pre-budget price. By selling pre-Budget stock at a higher retail selling price after the effective date, retailers are able to temporarily increase their margins whilst stocks last. Such practises can severely disrupt the supply chain unless accurate forecasts and contingency measures are in place, and can also give the manufacturer an unnatural spike in demand which will be ‘lapped’ the following year with no guarantee that similar purchase patterns will be repeated.

So...

Most manufacturers and retailers are well accustomed to the annual round of duty changes that accompany the Chancellor’s Budget. However, the successful execution of the associated price, promotion, and forecast adjustments depends upon robust and integrated systems supporting the commercial team to ensure that ‘the price is right’. Is that the case in your organisation?

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