E-Malt. E-Malt.com News article: Thailand: Advertising bans would have little effect on alcohol consumptionís deterring

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E-Malt.com News article: Thailand: Advertising bans would have little effect on alcohol consumptionís deterring
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Alcohol producers have gained some breathing space over the past several weeks after the government's legal body questioned the Public Health Ministry's legal authority to clamp down on marketing activities, Bangkok Post reported February 13.

But producers reluctantly concede that greater regulations are inevitable, as policymakers have put under-age drinking, alcoholism and drunk driving at the top of the national agenda.

Yet it remains far from certain whether a wholesale ban on alcohol advertising and marketing activities will address Thailand's social problems. Producers argue that the bans will have little effect since white spirits, produced across the nation by small-scale community distillers, are largely unaffected by an ad ban. They claim tax strategies would do more to deter consumption.

Thailand's tax regime for alcoholic drinks remains rife with distortions and rates that seem almost arbitrary in nature, with little regard for alcoholic content or actual production costs, critics say.

This should come as little surprise, since the production of alcoholic beverages has long been tightly controlled by some of Thailand's wealthiest business families. The onerous regulations and tax structure have been designed in part to impede competition.

Beer taxes, for instance, are currently based on a three-rate structure for economy, standard and premium beers. Economy beers, which include market leader Chang, have an excise tax of 28 baht per bottle, compared to 36 baht for standard beers, such as rival Singha, and 37 baht for premium beers like Heineken.

The logic used by the Excise Department to categorize different brands remains a mystery, as production costs for all three beers are virtually the same. It's also unclear why the premium and standard categories differ by only one baht per bottle, while the gap between the standard and economy classes is a gaping eight baht per bottle.

In fact, the classifications were first designed years ago to protect the position of then market leader Singha, produced by Boon Rawd Brewery, from imported competitors. Retail prices of each brand were used as a baseline to set ex-factory prices for tax calculations. Unsurprisingly, all imported brands were placed in the premium category by tax authorities, regardless of the actual market positioning of the brand itself.

The structure helped Boon Rawd and Singha maintain dominance in the market. This changed a decade ago, when liquor tycoon Charoen Sirivadhanabhakdi decided to diversify into the beer market with the launch of Chang beer.

Chang was positioned squarely in the economy segment, with brewer Beer Thai using its distribution leverage in the liquor market to convince retailers to help promote the new beer. By 2001, Chang had come to dominate the market, with 640 million liters bottled, compared with only 141 million for Singha and 112 million for Boon Rawd's own low-cost Leo brand.

The heavy competition also helped spark rapid growth in the market, which was worth 89 billion baht last year.

Alcohol taxes have become one of the largest money earners for the Excise Department. In 2005, it collected revenue of 27.2 billion baht from liquor sales and another 50.2 billion from beer.

The tax structure that protected Singha from foreign competition for decades has now become one of the largest obstacles to its effort to compete with Chang.

For example, when Boon Rawd launched Singha 70 as a low-cost competitor to Chang, it quickly failed when the Excise Department put the beer in the standard tax category, despite the brewer's insistence that it should be ranked together with Chang as an economy beer. The Tax Court later upheld the decision in favour of the Excise Department.

Boon Rawd did succeed in launching an economy beer with Leo, however, which helped the company stem its losses to Chang. In the first 10 months of 2006, Singha produced only 139 million liters, compared with 631 million for Chang. But if Leo's 545 million liters in sales are also included, Boon Rawd's total for its two brands exceeded total sales for Chang.

The heavy competition in the beer market has led producers from all camps to call for reforms in spirit taxes, which are also collected based on ex-factory prices. Beer producers argue that rather than price, alcohol content should be used as the main determining factor, a concept that would naturally result in much higher taxes for whiskeys and white spirits than for beer.

In percentage terms, beer is taxed as high as 55% of the retail price, compared with 45% for whiskey, 45% for blended rum and 28% for white spirits.

The comparatively lower rate for white spirits stems in part to policies during the Thaksin Shinawatra administration to assist small-scale producers under rural community development programs. Applying a uniform rate would certainly disadvantage domestic producers in competing with imported brands.

Tax officials and policymakers also pointed out that other jurisdictions had also adopted policies aimed at helping local firms. Singapore, China and Japan all use tax structures that are not based on alcohol content, even though it would seem the most logical approach to adopt from a public-health perspective, as more damaging beverages should carry a higher cost.

But not everyone agrees. One Excise Department official noted that while higher taxes based on alcoholic content would seem reasonable on the surface, the relationship between consumption, price and tax was more complicated.

Efforts to stem foreign competition through taxes have shown little success. Pernod Ricard Thailand's 100 Pipers brand of blended scotch, for example, has recorded sharp growth in its sales over the past several years at the low end of the market despite heavy import and excise taxes.

For now, policymakers at the Finance Ministry have yet to decide whether tax rates will be overhauled to complement the Public Health Ministry's anti-alcohol campaign.

What is clear is that the current system remains distorted and does not sufficiently allow prices to serve as a deterrent for consumers, beer and spirt drinkers alike.

14 February, 2007

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