A new report by Rabobank's Food & Agribusiness Research and Advisory group predicts that newly enacted Initiative 1183, which privatises the sale and distribution of spirits in Washington State, will significantly impact spirits industry dynamics and consumption habits in Washington.
Given the impact that I-1183 is expected to have on pricing and margins, and the privatisation processes being considered in other control states, spirits suppliers may need to reevaluate their traditional neutral stance on privatisation.
The report, which says I-1183 will bring a 'seismic shift in the route to market', identifies new opportunities for the spirits industry value chain in Washington, but also an abundance of challenges related to pricing and margins, as consumers trade down to lower priced products and potentially trade out of the category.
Under the new system, wholesalers must pay a 10% fee and retailers must pay a 17% fee on all sales. These new fees are in addition to the 20.5% sales tax and the $3.77 per litre Spirits Liter Tax.
These new fees, along with existing taxes and wholesaler and retailer margins, are expected to drive spirits prices roughly 20% higher across most channels, by Rabobank estimates. The fees applied are necessary to maintain state revenues, but the impact on consumer pricing appears to be coming as a surprise to many voters.
New opportunities for retailers
For wholesalers and retailers, I-1183 opens up a series of opportunities to add new products to their offerings. The new fees, coupled with existing taxes and wholesaler and retailer markups, would normally have driven consumer pricing higher (even higher than estimated). However, the entire value chain will be pressured to keep prices as low as possible in order to minimise sticker shock. This will keep margins below optimal levels for all players, though it still represents a net incremental gain for wholesalers and retailers.
Retailers in particular will likely see strong gains in their private label brands, as consumers will be seeking relief at the cash register and private label will likely offer attractive pricing.
For suppliers, I-1183 will bring some attractive opportunities given the rapid expansion in retail outlets where spirits will be available, but Rabobank projections indicate that the degree of price increases will likely outweigh much of the upside of increased availability.
Rabobank projects the price increases will drive consumers to trade down to lower priced brands or potentially trade out of the category. Most suppliers will generally be forced to choose between sacrificing margins or sacrificing volumes.
Spirits suppliers have generally remained neutral on the issue of privatisation of control states, but the experience of Washington seems to provide insights to how future privatisations are likely to play out.
Suppliers may need to re-evaluate their neutral stance and provide more support to control states to improve their services and help communicate the potential negative aspects of privatisation to voters (eg price increases) to allow better informed decisions.
An improved control system that better meets the needs of consumers may prove to be a better alternative to suppliers and consumers than a privatisation process that increases retail prices and pressures supplier margins.
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