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Lifestyle
Peter A Walker

Drinks industry 'in crisis mode' over DRS implementation and alcohol promotion ban plan

The confluence of three legislative threats to Scotland's drinks industry has raised alarm from various stakeholders, from producers to retailers, hospitality venues and distributors.

In order of potential magnitude these are the implementation of the Deposit Return Scheme (DRS) on 16 August, the consultation on a potential ban on alcohol promotion, and the possibility of the Treasury un-freezing alcohol duties.

Those Insider has spoken to for this piece have suggested that taken together, these changes could put many companies out of business, as Scotland becomes a significantly more difficult place to operate.

Deposit Return Scheme

Starting with the one that's - at time of writing - definitely coming soon, the much delayed and debated drinks container recycling reward scheme is still taking shape with just over six months to the go-live date.

Just this week, scheme administrator Circularity Scotland announced an increase of up to 19% in the return handling fees, following consultation with industry and analysis by PwC.

When the scheme is introduced, a 20p deposit will be applied on all single use drinks containers sold in Scotland, which people will then get back when they take their bottles and cans to any return point. Retailers and hospitality venues will act as these return points and the handling fee is the amount that they will be paid per container to cover operational costs.

This change follows another in December, which saw producer fees reduced by as much as 40% in some cases, along with the timing of cashflows from producers to Circularity Scotland for deposits being "extensively reviewed", meaning a reduction in cash paid by certain producers at the point the scheme goes live - particularly those retaining the use of UK-wide products.

This followed an open letter - signed by more than 500 industry leaders - to Circular Economy Minister Lorna Slater calling for a pause to the introduction schedule of the scheme.

Blair Bowman, the whisky consultant and broker behind the letter, stated at the time that many producers will simply stop selling in Scotland because of the amount of extra paperwork involved, while consumers may be put off by product price rises to cover the costs involved.

"Most of the producers think there is going to be 30p or more on to the actual cost because there’s going to be extra labelling and distribution involved - and those costs have to be put on to someone, which will be the customer."

Other recent changes by Circularity Scotland mean it will be able to assist retailers in applying for exemptions and help to establish shared return points for used containers, all while working to ensure there are no “black spots” for consumers returning their empties.

Despite its efforts, a recent survey revealed that 38% of businesses were not aware of the scheme, while 40% of those who were, believed it will have a negative impact their business.

Further research among 2,000 UK adults which found that only 43% of Scots had heard of the scheme and understood how it works, while 26% had no idea.

Bowman told Insider that even for those businesses that have signed up, it's still not clear how the finer details will work, with confusion about whether some count as a retailer or a producer.

"While we welcome adjustments on the online take-back and the fees, it’s still going to be disastrous because it’s just so complicated," he stated, pointing out that delays in launching the producers agreement mean they only have until the middle of February to sign up.

"And technically you won’t be able to sell from April - many won’t be aware of these very delayed clauses that have been published."

Ewan MacDonald Russell, deputy head of the Scottish Retail Consortium (SRC), explained that the Scottish Government originally planned to review the scheme's viability in 2017, but then was announced as part of the Plan for Government.

"Because of that the scheme has been pushed back, but even now it’s going to be difficult to roll-out in August - our members need 12 months since guidance - and we still don’t have it.

"It’s also very expensive - about £250m to get it off the ground in year one - and the handling fee doesn’t cover it."

One of the key issues is how ambitious the it is. While the government has compared its implementation to similar schemes in parts of Europe, MacDonald Russell pointed out that no country has ever retrofitted a DRS onto existing household recycling.

"Adding glass makes things more expensive, as safety rules are clear about mixing that with food to go premises.

"It also enforces everyone who sells drinks containers to become return points - that's around 35,000 of them - so this is just going to be too difficult for many smaller businesses, which need to be able to opt out," he continued, adding: "DRS will create a separate Scottish drinks market, so I’d be surprised if we don’t see a reduction in choice."

Retailers across Scotland are in the process of retrofitting stores and installing reverse vending machines, with billions spent according to the SRC, with only a small amount of stores given exemption from the take-back policy.

"We must let smaller shops decide - this is just Kafka-eque bureaucracy and Circularity Scotland need far better resources in order to cope."

Colin Wilkinson, managing director of the Scottish Licensed Trade Association (SLTA), said he's been pressuring Circularity Scotland to tweak regulations around those in the ‘closed loop’ – the on-trade, which encompasses pubs, bars, clubs, restaurants and hotels.

Biffa will be collecting cans, plastic bottles and glass bottles from licensed premises, but while businesses will have paid deposits to suppliers, it could take about a month for them to be reimbursed by Circularity Scotland, taking into account the time the product is on the shelf, collected and counted.

"This will have a big impact, particularly on smaller businesses, where right now every penny counts," said Wilkinson.

Storage is another issue, because containers will now have a cash value, which means they must be stored in a way to minimise damage or theft.

Leon Thompson, executive director in Scotland for industry group UKHospitality, also pointed out that glass bottles have to remain whole so they can be counted into the system - another change for how bars operate recycling at the moment.

Biffa is looking into whether it can weigh the bins and reconcile this against till receipts, but it's yet another issue that demonstrates the complexity of implementation.

"It feels like we’re running out of time and the focus appears to be on producers ahead of their deadline - registration doesn't even open for return point operators until March," said Thompson.

"SEPA [the Scottish Environment Protection Agency] is working with businesses to help with compliance after 16 August, but there must be certainty that they won’t be penalised for not being ready."

One thing the industry has successfully pushed back is the online take-back proposal, where delivery service providers would have been obliged to collect empty drinks containers from customers. This has now been delayed until 2025 and presumably rethought, given the contamination, health and safety and business model problems it would have presented for operators, noted Thompson.

The exemptions - ability to apply for these extended - more businesses can opt out of being return points, good for fast food restaurants, click and collect, etc, don’t have to take back any empty containers - becomes massively disruptive.

As for the producers, Innis & Gunn founder Dougal Sharp told Insider that there could not be a worse time to implement the DRS - warning that many in the sector will be pushed to breaking point.

"There's been much made about the 20p deposit, but it's not the only cost associated with the scheme - there's also 20p of associated costs with its delivery - so 40p per can, that's a 35% to 40% consumer price increase; it's creating internal market barriers.

"Beer will be twice the price in Scotland than it is England, so producers with big Scottish businesses will rethink things - alcohol is the second biggest motivator of consumer behaviour - problem drinkers didn’t drink less, they eat or heat less.

"Pricing disparity means they’ll buy their beer there," he continued, pointing out that in Sweden, following the implementation of its DRS, the big brewers reckon around half of the beer they sell in Denmark and Germany is actually consumed in Sweden.

On 20 January, a long-awaited consultation from the UK Government revealed the DRS planned for England, Wales and Northern Ireland will not start until at least October 2025, and even then only if talks with industry prove it is feasible.

Sharp argued that this will create several years of "unbelievable price shock" between the countries.

"We’re clear that we want to see both governments align their schemes, creating no internal market barriers, a simple, compatible scheme for consumers around the UK."

James Porteous, founder and director at the Leith-based Electric Spirit Company, said even though the cost per unit can be accounted for easier per bottle of gin than can of beer, for a small distillery there are still serious concerns.

"There are additional cost in terms of producer fees in advance, as well as given we’ll have to over-label stock for Scotland, as opposed to overseas.

"At its heart, the concept is admirable, but we already have incredibly high glass recycling rates - of course the value of the glass is why it’s included - but the problem is that's a major source of revenue for local government.

"The best thing to do is to exempt smaller producers, or remove glass entirely," he added.

The Scottish Government stated that it has committed to a pragmatic approach to implementation and to make the scheme more efficient and reduce costs.

Responding directly, a spokesperson stated: "We are working with partners to ensure the public is aware of the scheme and how it works before the go live date."

David Harris, chief executive of Circularity Scotland, responded: "While we don’t underestimate the scale of the challenges in introducing a scheme of this scale, we can’t lose sight of the opportunity DRS provides.

"We have been actively working with industry, government and all stakeholders to deliver a scheme that will work for businesses - in particular small producers and retailers - which has resulted in a streamlined exemption process for those retailers who don’t want to operate as return points, and confirmation that only the largest supermarkets will be required to provide online take-back of cans and bottles, with all other businesses being exempt.

"This pragmatic approach has significantly reduced the cost base of the scheme, allowing us to reduce the forecast producer fees by up to 40%," he continued, adding: "We’ve also been able to bring about a significant reduction in day one cash requirements, from 2.4 months of fees to three weeks of fees, which will significantly ease the cashflow pressures on producers."

Harris reiterated the fact that drinks producers and importers must be registered with the DRS scheme regulator, SEPA, by 28 February if they want to continue selling drinks in glass and plastic bottles, or in cans, in Scotland after 16 August.

Circularity Scotland has offered to do this on their behalf and is also running 14 registration workshops at locations across Scotland in February, as well as an online webinar.

Restricting alcohol advertising and promotion

In November, the Scottish Government published a consultation paper on plans to restrict advertising and promotions relating to alcohol.

The document details proposals to potentially ban drinks ads from sports and music events, billboards and buses, pubs and retailers, arguing that it is seen by large numbers of children and is linked to problematic drinking later in life.

The government acknowledged that a prohibition on alcohol sponsorship for events would be a “significant undertaking” and sought views - with a deadline of 9 March - on how long a lead-in time would be needed.

There is a code of practice for alcohol advertising already in place, but the report said current regulation and monitoring is largely complaints-led.

Bowman urged people to make their views clear, although he admitted that the consultation paper is long and "onerous" to fill out.

"There needs to be a significant pushback on some of the more bizarre points.

"The football angle has been prominent already, but making it a blanket rule means it will also be a serious risk for Scotland's big art shows and cultural festivals, which often rely on drinks brands for lead sponsorship.

"The whole thing really seems like an overreaction given the low level of problem drinking - its only around 3% of the population are at the 'dangerous' level - so I think resources would be better focused on the root causes," he added.

Industry leaders fear it could harm distilleries across Scotland, dismissing a claim in the consultation that, without marketing and branding, all alcohol products are "essentially variations of the same thing".

Graeme Littlejohn, director of strategy at the Scotch Whisky Association, said his members have "deep concerns regarding the sweeping proposals" set out in the paper.

"The Scotch whisky industry has a robust marketing code in place, which regulates how brands are advertised globally - we want to share the lessons of regulations already in place so that there are no unintended consequences, including a reduction in the vital support the industry provides to communities across Scotland."

James Watt, chief executive of BrewDog (The Diary Of A CEO via YouTube)

BrewDog chief executive James Watt took to social media recently to rail against the fact that the plans could see alcohol being treated the same way as tobacco.

"That would be a terrible outcome, alcohol can be consumed safely and, according to the Scottish Health Survey, problem drinking has been declining steadily for the last 20 years.

He claimed that the Ellon-based brewery has "always been on the side of reform", noting that in 2012 it was among the first to publicly back the Scottish Government’s proposals for a minimum unit pricing.

"Scotland is home to some of the world’s finest spirits and the planet’s number one craft beer brand - a source of jobs, prosperity, and pride - so a blanket ban would be a massive and totally unjustified kick in the teeth for our nation."

Likewise, Innis & Gunn's Sharp called the proposals "deeply concerning" and stated that they raise more questions about the government's attitude to alcohol more generally.

"This would seem to be a sticking plaster on the wrong part, in the science of unpopular choices bans just don't make a meaningful difference - certainly the evidence of minimum unit pricing would suggest not."

The Electric Spirit Company's Porteous said that it seems like a "very temperance-based approach", which falls down on the practicality of the proposals.

"Smaller retailers will struggle with segregation of alcohol, while for smaller producers, how will this affect our ability to communicate - for less well-known brands, how do we let people know we exist - if you take away social media and advertising, how do we compete?"

The SLTA's Wilkinson commented: "All of us involved in the industry are stunned by just how far these proposals go and how one-sided the whole consultation exercise has been drafted."

Pointing to the potential impact of just one proposal, he noted that alcohol should not be seen from outside a shop, which among many retailers - not to mention bars and pubs - could mean that the flagship Johnnie Walker Experience on Princes Street would need to black out its windows and remove its branding from the building.

"Of course, there are people who have problematic issues with alcohol abuse and this needs to be addressed – but is this really the way forward? Where is the evidence base that a ban on alcohol advertising/promotion for the whole population is required."

The SRC's MacDonald Russell agreed that the consultation appears problematic, with much of the text seeming to be written by proponents of the ban, rather than with industry stakeholders.

"As for the proposals, they vary from difficult to unworkable to the ridiculous: the fact your free beer bucket hat or t-shirt would be outlawed seems disproportionate for instance.

"We already have an incredibly onerous licensing system, minimum unit pricing too - which out members don’t oppose - as at least there was a genuine effort to produce evidence, while this seems like a list of things they don’t like the industry doing; it’s just not good policy."

The proposals could ban branded beer glasses (Getty Images)

Thompson from UKHospitality Scotland added his members have of course raised concerns about plans that would prohibit any branded tables, chairs or parasols outside bars, or even things like branded glasses and anything relevant that could be seen through venue windows.

"This could go in a number of directions, so it’s important that as many businesses concerned with bringing some sanity to this do get involved in the consultation.

"We’ve done a few roundtable discussions already, with a few more coming up featuring Public Health Minister Maree Todd, but the difficulty with this policy plan is that it clearly has an agenda, with no sense of balance in the wording or tone.

"Ultimately these draconian proposals will put businesses and jobs at risk, while reducing consumer choice."

A Scottish Government spokesperson said: "Alcohol-related harm is one of the most pressing public health challenges that we face in Scotland - an average of 700 people are hospitalised and 24 people die each week from illnesses caused by drinking alcohol.

"The Public Health Minister will be meeting key stakeholders, including the alcohol and advertising industries during the consultation period, to hear directly from them.

"This is a first wide ranging consultation on this issue and any proposals we take forward into legislation are subject to the consultation responses; we are not introducing legislation at this stage."

Alcohol duty freeze

Chancellor Jeremy Hunt had said in his Autumn Statement that prices would go up in February, reversing a decision made by his predecessor Kwasi Kwarteng, but on 19 December the Treasury stated alcohol duty would remain frozen until August 2023, when a new system for calculating taxes on alcohol is also due to come into force.

Lifting the freeze would have added 7 pence on a pint of beer and 38p on a bottle of wine.

After Hunt said the duty would rise in line with Retail Prices Index inflation from February, there was industry outcry, with the six-month extension not filling many with confidence.

Littlejohn from the Scotch Whisky Association called the duty freeze a win-win, boosting both industry investment and government revenue – something which remains the case ahead of the next Budget on 15 March.

"Inflation is still running into double-digits, and any increase to duty on alcohol will unnecessarily further fuel inflation, so we want the Chancellor to instead fuel investment in the industry and across our supply chain by extending the duty freeze into 2024 and beyond."

Wilkinson from the SLTA agreed that any thawing of the current freeze would add more costs for businesses at a time when they really don’t need it.

"Again, the information isn’t clear and that only leads to confusion and concerns for businesses – first, we had Kwasi Kwarteng last September announcing a freeze on alcohol duty for six months, then the current chancellor Jeremy Hunt reversed that decision in his Autumn Statement and said that prices would go up in February, only for the Treasury to refreeze until August, when a new system will come in that is said to remove ‘arbitrary’ thresholds and cut red tape.

"New reliefs for pubs and small producers will be made available - confused? - we certainly are and it does nothing for the morale of the industry during this challenging trading environment."

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