Excise Tax Rates Are Changing, Is Your Business Ready?

Excise tax rates are set to change in both Australia and the UK. These changes will directly impact your pricing and profitability, making it crucial to adapt quickly and strategically.

By taking proactive steps now, you can protect your margins, maintain competitive pricing, and safeguard your business’s future.

Why Acting Now Matters

Failing to address these excise tax changes could leave your business vulnerable. Shrinking margins, uncompetitive pricing, and financial strain are real risks if you don’t take action. But with the right approach, you can turn these changes into an opportunity to review your costs, refine your pricing, and strengthen your profitability.

In this guide, we’ll break down a simple 5 step process to help you adapt with confidence.

What’s Next?

By the time you’ve completed these steps, you’ll have a clear path to protecting your margins and pricing strategy. If you’re ready to get started or need expert advice tailored to your business, reach out today.

Step 1: Calculate Your Existing Position

Start with a Solid Foundation
Before you can adjust for excise tax changes, you need to understand exactly where your business stands. This means calculating your current costs and margins for each product you sell.

How to Calculate Your Current Position

• Review your cost structure: Break down the cost of each product, ensuring all components are accounted for (ingredients, packaging, labour, overheads, etc.).
• Determine the current cost of excise tax on each product: Calculate how much excise tax contributes to the total cost of production.
• Calculate margins: Measure your gross margin for each product by subtracting costs, including excise taxes, from the selling price.

Why This Matters
Knowing your current position gives you clarity on how much room you have to absorb additional costs, or where you might need to adjust pricing. It also highlights any existing issues in your cost structure or pricing model.

Pro Tip: Use your sales data to identify your best and worst performing products. These insights can guide decisions on where to focus your efforts.

Need Help?

If you’re unsure how to calculate the true cost of your products, use the downloadable Profit Margin Tool, or reach out for tailored advice. A quick review can uncover valuable insights to protect your margins.

Step 2: Analyse the Impact of Excise Tax Changes

Understand the New Costs
Once you know your current position, the next step is to calculate how the upcoming excise tax changes will impact your costs. For businesses in Australia and the UK, these changes will have different impacts depending on the type of products you sell.

How to Analyse the Impact of Excise Tax Changes

• Identify the new excise rates: Refer to the updated excise rates, noting the differences between product types.
• Calculate the cost impact per product: Work out the additional excise tax (or savings, in the UK for some products) for each item in your range.
• Quantify the overall change: Multiply the impact per product by your average sales volume to see how your total costs will be affected.

What If You Do Nothing?
Ignoring these changes can have significant consequences.

• Margins may shrink as costs increase, leaving less room for reinvestment or profit.
• Your products could become less competitive if pricing adjustments are poorly timed or too aggressive.
• You risk being caught off guard, especially if competitors adjust their strategies more effectively.

Example:
For an Australian gin distiller, an increase in excise tax might mean an additional cost of around 60 cents per bottle. If you sell 40,000 bottles, that’s $24,000 in extra costs, directly impacting your bottom line if no changes are made.

Pro Tip: Use a spreadsheet or accounting software to model different scenarios and understand the best course of action for each product. Add a second tab to the Profit Margin Spreadsheet and adjust the Excise Tax amount to compare the margins.

Learn More: The importance of adapting to excise tax changes cannot be overstated. As highlighted in this article by The Spirits Business, excise duties have far reaching consequences not only for businesses but also for governments.

Step 3: Evaluate Your Existing Costs

Find Opportunities to Offset Rising Costs
With the impact of excise tax changes quantified, it’s time to examine your existing costs. Identifying areas for savings can help absorb the tax increases without placing the entire burden on your customers.

How to Evaluate Your Existing Costs

• Break down all costs: Review each component of your product costs, including raw materials, packaging, labour, and logistics.
• Spot inefficiencies: Look for areas where you’re overspending or where costs have crept up unnoticed, such as freight or supplier charges.
• Consider bulk purchasing: Assess whether buying materials in larger quantities can reduce per unit costs, especially for packaging and raw materials.
• Reduce waste: Investigate whether you can streamline production processes to minimise waste or lower bottling and transport frequency.

Why This Matters
Reducing costs wherever possible allows you to offset excise tax increases and maintain your margins without heavily increasing prices for consumers.

Example:
If your brewery is ordering packaging in small quantities, you can make significant savings by negotiating bulk purchases with your suppliers. Savings like this will cover part of your rising excise costs, easing the impact on your margins.

Pro Tip: Regularly revisit supplier contracts and production workflows to ensure you’re getting the best value and operating efficiently.

Learn More: Small changes in cost structure can make a significant difference to your margins. For actionable insights, check out my recent article on the impact of small changes on profit margins.

Step 4: Assess Consumer Pricing Elasticity and Competitor Reactions

Gauge Market Sensitivity
Once you have evaluated your costs, the next step is to understand how your customers and competitors might respond to pricing adjustments. Knowing how sensitive your market is to price changes helps you make informed decisions about when and how to pass on excise tax increases.

How to Assess Consumer Pricing Elasticity

• Analyse customer behaviours: Use past sales data to identify patterns in how customers respond to pricing changes. Are they price sensitive, or do they value quality over cost?
• Survey your audience: Direct feedback from your customers can provide valuable insights into how they perceive your pricing and where their thresholds might be.
• Test small increases: Implement minor price adjustments for select products and monitor their impact on sales volume and revenue.

Understand Competitor Reactions

• Monitor competitor pricing: Keep a close eye on your competitors, especially those operating in similar market segments, to track how they adjust their prices in response to excise tax changes.
• Identify differentiators: Consider what sets your products apart, such as premium quality, sustainability, or shared values, and use these points to justify pricing adjustments.

Why This Matters
If your pricing is out of sync with market expectations, you risk losing customers to competitors or eroding your margins unnecessarily. Balancing consumer expectations with profitability ensures you remain competitive and financially stable.

Example:
For a craft distillery, a small price increase on premium gin might be acceptable to loyal customers who value quality, while mainstream competitors may struggle with similar changes due to tighter pricing constraints.

Pro Tip: Position price increases as part of shared values, such as your commitment to quality, sustainability, or supporting local suppliers, to create a positive perception of your products.

Step 5: Develop Your Pricing Strategy and Cost Mitigation Plan

Create a Sustainable Approach
With all the key data in hand, the final step is to develop a pricing strategy that incorporates excise taxes while safeguarding your margins. This is also the time to explore cost mitigation strategies to reduce the impact on your customers and remain competitive.

How to Develop Your Pricing Strategy

• Incorporate excise taxes into your pricing: Ensure the cost of the new excise rate is built into your product pricing to maintain profitability.
• Segment your pricing adjustments: Apply price increases strategically based on product categories or customer segments.
• Balance price increases with value: Highlight the unique qualities of your product or shared values with your customers to justify any changes.

Cost Mitigation Strategies to Consider

• Streamline operations: Look for opportunities to cut production or operational costs, such as optimising processes or renegotiating supplier contracts.
• Plan your timing carefully: Introduce price changes gradually or during times of peak demand to minimise customer resistance.

Why This Matters
A well thought out pricing strategy allows you to maintain profitability while staying aligned with your customers’ expectations. Combining this with cost saving measures can help minimise the impact of excise tax changes on your business and your customers.

Example:
If you are a UK craft brewer, consider increasing the price of higher alcohol content beers, which are subject to higher excise taxes, while keeping the prices of session beers unchanged. This approach can protect your margins while maintaining affordability for cost sensitive customers.

Pro Tip: Focus on long term sustainability by aligning your pricing strategy with your overall business goals and customer values. This ensures your business remains profitable while strengthening customer loyalty.

Final Thoughts

Be Proactive, Not Reactive
Excise tax changes are an inevitable part of doing business in the alcohol industry. While they can feel like a challenge, they also present an opportunity to reassess your costs, refine your pricing, and strengthen your overall profitability. By following the steps outlined in this guide, you can make informed decisions to protect your margins and keep your business competitive.

Taking a proactive approach ensures that you’re prepared for changes, rather than scrambling to respond after they take effect. Even small adjustments to your costs and pricing strategy can make a significant difference to your bottom line.

Next Steps

Take Action Today
Now that you have a clear process to address excise tax changes, it’s time to put it into action. Download the Profit Margin Spreadsheet and start reviewing your current costs and calculating the impact of the upcoming changes. Use the steps in this guide to adjust your pricing strategy and explore cost saving opportunities.

If you’re feeling unsure about where to start, or you’d like expert guidance tailored to your business, I’m here to help. Whether it’s calculating costs, analysing margins, or developing a strategy, I can work with you to ensure your business stays profitable.

Let’s Talk
Contact me today to discuss how we can protect your margins and set your business up for long term success.