The economics of the great British booze market – do we pay to play?

By Nick Gillett

Published: 03 June, 2024

The UK spirits market, to many global producers, is one they want to be part of. It’s not the biggest by any means, nor is it the most fruitful – but there is an air of prestige about it. And yet many independent producers trying to break into the UK market, will struggle or worse, fail miserably. It’s a tough nut to crack but by understanding the nuances of the market, you’ll be better equipped to tackle the challenge – and hopefully reap a bit of great British success.

Get to know the competition

The first vital thing to understand about the UK spirits market (particularly in the current climate) is that it’s dominated by conglomerates. The top four spirits companies in the UK generate more than 70% of the revenue.

To understand why this matters, we need to look at the structure of UK retail. The largest off-trade channels for spirits are four or five national supermarket chains, in addition to one national specialist retailer of wine and spirits. As it stands, we’ve seen a prolonged and steady increase in the cost of goods over the past few years, which means tight margins for grocery. This in turn means that supermarkets are pickier about their supplier lists – and the result for spirits producers is that the hoops you must jump through to reach the elusive shelf are numerous and costly.

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And once you hit the shelf, the pressure’s on you to support sales. You’re not just competing with other booze bottles – you’re competing with every other category in that supermarket. And that’s where price promotion and the strength of your marketing come to the fore to shift that bottle into the customer’s basket.

Now let’s take it back to the conglomerates. Those supplier relationships already exist with the supermarkets. They’ve proven time and time again that they can shift bottles, they have the economies of scale to stock at a national level, and they have the money to throw at marketing campaigns and access the very best spots and listings.

On an international level, these can shift lines of budget from one national market to another, in line with changing priorities – and that’s something most independent brands can’t do.

It’s absolutely possible to compete with them – but all of the above just means you need to be on your A-Game to do so.

The degree of ‘pay to play’

So, we’ve touched upon the economics of selling through supermarkets, but what other parts of the UK spirits market are requiring more ‘pay to play’?

Looking at the on-trade – hospitality has been hit hard. Many venues are trying to recoup some of these losses by increasing prices, and that also stands for the charges associated with branded cocktail listings and other ways you can promote your spirit in the on-trade.

When it comes to promotion, advertising and marketing are costly here – because it’s so competitive. Employee costs are higher so when you bring in expertise to help you grow and scale – it’s another bill to add to your list.

On top of that, there’s the complex and resource-draining legislative and duty systems that exist here in the UK. Without boring you with too much detail, you have four nations in one ‘country’, each with its own rules around spirits sales. We have a physical border to the EU, in Ireland, and therefore more protocol and bureaucracy to be followed when exporting to Northern Ireland (although this has been made marginally easier through the Windsor Framework). Producers currently need a UK duty stamp (which is thankfully being wound down at some point in the near future), and to adhere to rules around labelling – all of which cost money, and that cost is high if you’re not selling a significant number of bottles.

In other countries around the world, the system is a lot easier and far more ‘pro-business’. But beyond the complex system for selling in the UK, by far the biggest restriction on cash is the duty system.

We all know the phrase cash is king – meaning businesses need to keep a close eye on cash flow. Here in the UK, you pay your duty upfront. And for every litre of alcohol sold in a spirit of 22% ABV or above, that’s £31.642. If you’re selling lots of bottles, that’s a lot of cash to pay upfront before your invoices are paid, however many months later. And that leads us nicely to…

The staggering sum behind the bottle

So, what do these producers who are pouring their creativity and soul into litres of liquid make from each bottle they so carefully crafted?

Let’s take an average, premium bottle of whisky at 40% ABV. Let’s say it sells at a price point of £36.99 - who makes what off of that bottle?

We’ll start from the top. The government, between VAT and alcohol duty, will take somewhere around £17 of that. Of the remaining £20, the retailer selling it will take around £10, leaving £10 to cover everyone else in the distribution channel. The actual producer takes their production costs off the remaining £7 or £8 to leave a small profit per bottle of £3 or £4. That scenario might vary wildly from brand to brand, but it’s not an unrealistic picture. But it does mean that to generate a return on your investment in the UK spirits market – you have to sell a lot of bottles.

It's not all doom and gloom

Yes – the numbers might seem to stack up against the independents, but there are some remarkable brands out there bucking the trends, securing prime supermarket slots, or even carving their path outside of grocery.

To achieve the same success, I say keep your finger on the pulse of the consumer. See what they want, give them quality, invest in your marketing and driving awareness, but also stay hot on your commercial awareness. If you can, get yourself a quality distributor; many of them will pay your duty and recoup the costs from you – which eases cash flow, and the great ones will also support you on customs, and warehousing through their resources or partners. This will be a huge help.

If you’re bottling here in the UK, to sell in the UK – you’ve got great options too as there’s some really good suppliers out there and it’s good for the old sustainability creds.

There are lots of positives but the biggest thing about the UK spirits market are the consumers. They’re discerning, they respect quality and right now they’re on a journey of discovery so there’s plenty of opportunity for challenger brands. Yes, it might be a difficult market to master – but once you’ve put the effort in, I doubt you’ll find any as rewarding, anywhere else in the world.

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