In the Drink: Tax Overhaul Led to Double-digit Price Rises for Alcohol

Policy shakeup boosted the cost of the cheapest tipple while lowering prices for super-premium labels.

Ofer Vaknin

About 15 months ago, Finance Minister Yair Lapid accepted a plan to overhaul tax policy on alcoholic drinks. But whatever his intentions, the 200 million shekels ($53 million) in extra taxes that the reform has netted has been at the expense of Israel’s drinkers, who ended up paying higher prices for their favorite tipple.

Ironically, the one group of beneficiaries from the revised tax structure are drinkers who can afford the higher-priced labels, whose prices have fallen since the reform went into place. But the savings at the top of the market by no means offset the higher prices further down.

That has brought a change in Israeli drinking habits, said Ronit Avner-Epstein, deputy CEO and co-owner of Hacarem, an importer of wines and spirits.

“The difference between premium and cheap has narrowed, so we’ve seen, for example, big growth in sales of expensive, relatively low-alcohol liqueurs because their prices have fallen,” she said.

An executive at one of the big beverage companies, who asked not to be named, called the reform “really anti-social.”

“For the wealthy it doesn’t make a lot of difference whether they are paying less for expensive drinks, but for middle class people, who used to buy beer at 30 shekels and now are paying 45 shekels, or who are paying 70 shekels for vodka instead of 45 shekels, that’s a big difference,” he said.

Vodka, the best-selling alcoholic drink in Israel, saw some of the biggest prices rise after the reform went into effect in July 2013.

In the mid-range, the price of Absolut, for instance, jumped 31% to 115 shekels a liter from 88 shekels, according to data collected by StoreNext, which aggregates sales data from the country’s supermarkets. Stolichnaya’s price climbed 26% to 109 shekels. Smirnoff also rose 31%, although Finlandia’s price rose just 18%.

The cheapest vodkas saw even larger price hikes. At 77 shekels, a liter of Imperia now cost 80% more than before the reform. The locally distilled Perfect brand now costs about 80% more, while Keglevich is up 55%.

But at the super-premium end of the market, vodka prices have fallen. Grey Goose’s price has declined 22% to 193 shekels a liter from 237 shekels before the tax reform. Van Gogh’s price dropped more than 10% to 210 shekels from 230 shekels.

The pain of higher prices isn’t over: Prices are expected to climb another 20% over the next year, as the full impact of the tax reforms are gradually passed on to the consumer, said Avner-Epstein.

In many cases, importers and distillers are still selling off inventories of pre-reform products, but that stock will gradually run out. Hacerem’s policy is to raise prices slightly once every two months, rather than confront buyers with sticker shock.

Moreover, the prices of super-premium liquors aren’t going to continue dropping, Avner-Epstein said.

“Companies opted not to pass on their higher costs entirely, even if it came at the expense of profits. Consumers haven’t internalized the reforms and there’s been a drop in vodka consumption in favor of whiskey, cognac and liqueurs,” she said. “The price of ordinary premium vodkas like Stolichnaya, Absolut and Finlandia haven’t reached their expected ceiling.”

Alcohol sales have fallen in response to the price increase, according to StoreNext data. In the year following the tax reform, sales of vodka slumped about 40% and the trend has continued, albeit at a slower pace, with sales down 17% since July compared with the same period in 2013.

Israel’s tax on alcohol is among the highest in the developed world, according to a Knesset study. Israel imposes a 107 shekel tax on a liter of pure alcohol, compared to the equivalent of 35.10 shekels in the United States, 58.50 in Germany and 69.80 in France.

The same price and buying trends are also apparent in the whisky segment. Low-cost labels like King Robert, King James, Highland and Cooley have increased in price, while premium brands have dropped. A liter of Chivas Regal Black Label now sells for 176 shekels, down from 271 shekels. Jameson fell less sharply, but is now 173 shekels instead of more than 185 shekels.

For mid-range labels like Johnnie Walker Red and Ballantine, prices are unchanged. As it is, demand for whisky was on the rise even before the reform, but sales of top labels have soared more than 300%.

For beer, the tax hikes started even earlier – in the middle of 2012 when the rate went up to 4.19 shekels a liter from 2.18. The higher rate makes Israeli suds one of the most heavily taxed in the developed world.

Beer prices have risen 33% since then, according to StoreNext data, to 17.80 shekels a liter as of September. Carlsberg, which is brewed locally by the Central Bottling Company (Coca Cola), saw the biggest price increase – 54% to 18.60 shekels a liter. The price of Israel’s best-selling beer, Goldstar, rose by a third to 18 shekels while Maccabee’s rose 46% to 14.90 shekels.

That has led to a decline in beer sales at a rate of 6.5% to 7% annually since 2012. Low-alcohol beers like Nesher, have seen consumption rise since they weren’t slapped with higher taxes.