Are we getting a good deal?

It’s a fairly popular sentiment that we don’t mind paying a little bit extra or driving down the road to buy our booze because at least the money goes back to the community.

It’s a nice sentiment and there is at least an element of truth to it. The Trusts have certainly increased their giving back in recent times.

But it is not too hard to quantify some of the costs and benefits so let’s have a look at how things stack up.

Costs

Paying a little bit extra

It’s generally accepted that The Trusts charge a bit more for the same products compared to the supermarkets. How much? We don’t have access to Nielsen data but we can do a quick and dirty comparison of products in the current mailer from The Trusts.

NB – Trusts prices from their mailer valid 4/12/18 to 10/12/18 and Countdown prices from their online store as at 5/12/18. Only those products that were on special at both retailers are compared.

So the difference varies from nothing all the way up to 22%, with an average difference of 10%. That sounds about right from my personal experience.

We can estimate from the Trusts financials that the average household in West Auckland spends $1,235 at The Trusts liquor stores [1]. We can also estimate from the nationwide data that, if supermarkets were allowed to sell alcohol, they would take approximately 43% of the market share (by value) [2]. Put all that together and it means that the average West Auckland household gets charged $54 more each year than the rest of NZ because of the Trusts’ monopoly.

The cost of convenience

Using the same estimates for average spend and the supermarkets’ market share, we can estimate that the average household in West Auckland would spend $537 on beer/wine at the supermarket if given the chance.

If we guesstimate the average spend on alcohol in a shopping trip as $50, the average household would save themselves 11 trips a year to the bottle store. Assuming the additional stop takes about 5 minutes, that’s 55 minutes a year (on average).

Valuing our time at the minimum wage ($16.50), the Trusts’ monopoly imposes a cost of convenience to the average household of $15 per year.

Opportunity cost

The Trusts are owned by the community and the net current value of the assets is around $100m. We could just as easily use that $100m to invest in other things (unrelated to alcohol). The opportunity cost is the income we are not receiving because we have tied up that $100m in a liquor business instead of investing it elsewhere.

We can estimate the opportunity cost using the long-term expected return of the managed fund The Trusts currently use – which is 6.5%. Our opportunity cost is therefore $6.5m and each household’s share of that is $76.

Benefits

Giving back

These are the figures provided by The Trusts valuing their giving back over the last 5 years.

Building their empire

Giving back isn’t all of the story of course. The Trusts have also been holding back much of their profits for the last few years to build an investment portfolio. The community also own this and so (although we don’t see any immediate benefit) the value of our assets increases. Here are the net profits (after tax and giving back) for the last 5 years.

How’s that stack up?

Using the most recent results for The Trusts, the comparison looks like this:

Higher prices $54

Cost of convenience $15

Opportunity cost $76

Total costs per household = $145

Giving back $13

Empire growth $53

Total benefits per household = $66

Other considerations

Obviously this isn’t the whole picture. There are a range of other impacts of the monopoly rights which can be seen as benefits or disbenefits depending on your perspective. Most of these are difficult or impossible to quantify. I’ve listed the main ones here for completeness (lists are not exhaustive!).

Other potential benefits of competition

• A greater range of products and shopping experiences for consumers
• More opportunities for new bars and eateries to open (and succeed!) improving local amenity
• More local investment and employment opportunities as fewer residents leave the district to shop / eat / drink
• More vibrant town centres with fewer empty shops / $2 shops
• Social / wellbeing benefits of community meeting places

Other potential benefits of the monopoly

• Fewer bottle stores leading to reduced price competition (i.e. higher prices) and less promotion (which may reduce alcohol related harm)
• Reduced accessibility of alcohol through having fewer bottle stores and no alcohol in supermarkets (which may reduce alcohol related harm)
• No cheap/nasty bottle stores that detract from the amenity of the neighbourhood

What about capital gains?

There is also an argument that the analysis should include the capital gains enjoyed by The Trusts over recent years as a result of their property ownership. However, if those were included then to ensure the analysis remains balanced, the opportunity cost figure should be based on actual investment rates of return (which have been much higher than 6.5% in recent years). Given the capital gains on property are entirely unrelated to the monopoly rights, it is simplest and most appropriate to exclude these from the analysis.

Are we arguing for cheaper booze?

Finally, I have no doubt that some of our detractors will take the opportunity to interpret this post as us making an argument for cheaper booze.

We’re not advocating for access to cheaper alcohol. The West Auckland Licensing Trusts Action Group does not have any position on alcohol pricing. Within the group (and among our supporters) there will be a range of views on whether alcohol prices should be higher or lower, whether taxation should be increased / decreased and if excise should be aligned across beer/wine/spirits etc.

The point of this blog post is that the majority of the costs imposed by the monopoly through increased prices and reduced convenience do not flow through to the community in any form – they are simply lost to inefficiencies enforced by the monopoly. This is in contrast to price increases resulting from raising excise tax – which would flow directly/efficiently to central government and all of it would be available to provide additional funding to our schools / hospitals etc.

[1] – Total revenues in 2017/18 was $114m (ex GST). The Trusts have stated approximately 80% of revenues are from their bottle stores. The Trusts’ districts has approximately 85,000 households.

[2] – Nationwide figures from HPA – value market shares in 2014 were: bottle stores = 26% supermarkets = 20%