blackboard with wrong maths equation on wooden table and chalk in hand

    The temperance movement’s latest study proves only one thing – it is economically illiterate

    23 August 2018

    It seems to be Economic Illiteracy Week in the temperance movement. On Monday, it was ‘revealed’ that places which have more alcohol outlets have higher rates of alcohol-related harm. Since alcohol-related harm is linked to alcohol consumption, this is a fairly basic illustration of supply and demand. Greater demand results in greater availability.

    The authors of the study, published in Addiction, found that there were 16 per cent more hospital admissions for ‘acute alcohol intoxication’ in areas where there is a high density of pubs and clubs. While this might be a ‘no shit, Sherlock’ moment for anyone familiar with the real world, the plot thickened when they found that restaurant density was associated with an even larger rise of 22 per cent. Since restaurants are not generally regarded as binge-drinking hotspots, it seems likely that the causal factor is the night-time economy in city centres rather than the number of alcohol licences per se.

    Nevertheless, the authors concluded their study by calling for ‘more intensive regulatory scrutiny’ of ‘licensing policy decisions’. Translation: restrict availability in the vain hope that making alcohol fractionally less easy to come by will stop people getting drunk.

    This economic ineptitude was merely the hors d’oeuvre for the hilarious main course served up in the same journal today. Written by some of the same authors from Sheffield University’s notorious Alcohol Research Group, in collaboration with the temperance-infused Institute of Alcohol Studies, today’s study claims that a pint of beer would have to go up by £2.64 if we all complied with the government’s drinking guidelines. Not only do the authors fail to distinguish between profit and revenue, they treat the Pareto Principle as something bizarre and sinister.

    The Pareto Principle, or 80/20 rule, is the observation that around 80 per cent of sales often come from around 20 per cent of customers. It is more a rule of thumb than an iron law, but a ratio close to 80/20 emerges across many industries with surprising regularity. It is therefore no great shock to find that 68 per cent of alcohol in Britain is consumed by 25 per cent of the population. But so what? Twenty per cent of the population do not drink anything at all and it stands to reason that light drinkers only consume a small proportion of the nation’s booze. If teetotallers started drinking and light drinkers consumed more, the ratio would change but what good would that do?

    The authors are not, of course, interested in getting non-drinkers to start drinking. Their argument is that the 25 per cent of us who consume 68 per cent of the alcohol are ‘heavy drinkers’ who are propping up the alcohol industry. By a tortured logic, they claim this is evidence that booze companies are ‘highly financially dependent upon heavy drinkers’ to such an extent that they have a huge conflict of interest when it comes to encouraging responsible drinking. That being so, the government should give them a wide berth and pay more attention to the likes of the Institute of Alcohol Studies (which was formed out of the ashes of the UK Temperance Alliance) when it comes to making policy. The authors even suggest that government should put an end to industry partnerships on such issues as drink-driving and underage sales.

    The claim that 25 per cent of Britons are ‘heavy drinkers’ is based on the observation that a quarter of us consume more than the Chief Medical Officer’s recommended limit of 14 units per week. Regular readers know that this figure has no basis in science and was conjured up by the Sheffield University Alcohol Research Group in a process so dodgy that it would have ended most academic’s careers. Consuming two bottles of wine a week would comfortably exceed the fiddled guidelines but few people outside of ‘public health’ would seriously claim it constitutes heavy drinking.

    Back in June 2015, six months before the guidelines were changed, I warned that the limit would be lowered in order to inflate the number of ‘hazardous drinkers’ and resurrect Britain’s moral panic about drinking. That is exactly what has happened and the authors of today’s study (most of whom were instrumental in getting the guidelines changed) have taken full advantage. Their research, such as it is, imagines what would happen if there was ‘full compliance [!] with the drinking guidelines’ and all drinkers consumed exactly 14 units a week.

    That’s not going to happen and there’s nothing the booze industry could do to make it happen, but never mind. This is where things get comical. Based on alcohol revenues of £35 billion in England, they conclude that:

    If all consumers reduced their drinking to within guideline levels, alcohol sales revenue could decline by 38% (£13 billion). To mitigate this loss, average prices paid would have to rise substantially—for example, by £2.64 for a pint of on-trade beer or £12.25 for a 70 cl bottle of off-trade spirits.

    The glaring problem here is that revenue is not profit. If alcohol companies lost £13 billion in revenue they would not need to ‘mitigate this loss’ by raising prices by £13 billion or anything close to it.

    The £35 billion is not the alcohol industry’s profit. It is not even its turnover. It is the total spent on alcohol, most of which the makers of alcohol never see.

    The industry would almost certainly lose money if consumption fell by 38 per cent, but the losses would be a fraction of £13 billion and the business would remain highly profitable. Don’t forget that a large portion of that £13 billion is taxation. Duty makes up around 70 per cent of the price of an average bottle of spirits, half the price of a typical bottle of wine and around a third of the price of a pint of beer. This all counts as ‘revenue’ but it goes straight to the exchequer.

    Then there are the costs of production, staffing, delivering and retailing, all of which would fall sharply if consumption dropped by more than a third. The Addiction study implicitly assumes that the industry would keep producing the same amount of alcohol as it does now (presumably before getting the staff who should have been made redundant to throw 38 per cent of it down the sink). Obviously this would not happen. Instead, the companies would reduce the amount they produced, thereby spending less on raw ingredients, electricity, rent, bottles, lorries, etc.

    Some of these costs are fixed but many of them are not. The companies might not spend exactly 38 per cent less but they would certainly spend a lot less. And if they spend less, they have less of a ‘loss’ to ‘mitigate’ with price hikes. Alcohol consumption has fallen by 18 per cent since 2004 and yet the booze companies have been doing fine.

    It is not all about volume. It is not even mostly about volume. It’s about margins, and in recent years Britons have been drinking less but spending more. That’s just the way the industry likes it. If the temperance lobby could stop seeing everything as a battle between good and evil, they could grow to like it too.

    By focusing on volume rather than profit, the authors produce meaningless estimates to reach a risible conclusion. Conflating revenue with profit and ignoring the marginal cost of production are not trivial oversights. It is the kind of thing that a naive observer might expect to be picked up in the peer review process, even in a ‘public health’ journal. The average corporation has a net profit margin of 7.5 per cent. All the rest goes on wages, running costs, debt repayment, capital investment, taxation and other such expenses. If the alcohol industry runs on a similar margin, the cost of losing 38 per cent of your sales would not be £13 billion, it would be closer to £1 billion and would be considerably lower if, as is likely, people switch to more expensive brands as their consumption falls.

    The government, meanwhile, would lose around £5 billion. Who has the biggest conflict of interest?