On 1 August the UK government’s proposed increase in alcohol duty took effect. The new system operates under what the Treasury called “common-sense” principles and sees tax decided by abv, with increases to most wine and spirits and reductions on lower-abv products and most sparkling wine.

Across the sector, it represents the biggest single tax increase in half a century and no category has been impacted more than port. Under the new system, a 75cl bottle of 20% abv port will be subject to £1.30 more tax than under the previous rates. In the year that the UK and Portugal celebrate the 650th anniversary of their diplomatic alliance, the oldest in the world, it represents a cruel blow to the industry in the Douro.

The UK’s love affair with port has its roots in taxation. The signing of the Methuen Treaty of 1703 established that wines imported into England from Portugal would be subject to a third less duty than wines from France. Brandy and late neutral grape spirit were added to the wines to prevent spoilage during the long naval voyage to Britain.

By the latter half of the 19th century, as European vines were blighted by phylloxera, demand for wines from Portugal soared and the category’s key shippers began to invest in winemaking estates in the Douro. It was then that George Acheson Warre, producer of Dow’s, purchased Quinta da Senhora da Ribeira and Quinto do Bomfin, and the Graham family acquired Quinta dos Malvedos, all of which are owned by their respective brands to this day.

After falling in and out of fashion in the UK during the 20th century, the category, especially its premium lines, has enjoyed a renaissance since the turn of the millennium. Today the UK market remains as important as ever to the port houses of the Douro.

“The UK is the leading market for special category port,” explains Adrian Bridge, chief executive and chairman of Taylor’s Port. “It’s not the highest average price, but in terms of volume of quality port, it’s the biggest market in the world and, as such, has a huge impact in terms of the port business that you can’t easily make up in other markets.”

Between January and May 2023, the UK was the fifth largest market by total volume, according to data from the Instituto dos Vinhos do Douro e Porto (IVDP). The UK is the destination for 6.7% of all port produced and almost 20% of premium port, the largest volume for any country. The new duty system is bound to have an impact on those figures.

“There is now a big discrepancy between the rates of tax that are charged in the UK versus a number of European markets,” says Bridge. “Taxes are higher in Scandinavia, and consequently, while we still sell port in Scandinavia, it’s not in the sort of volume that you have in the UK.

“This increase of 40% in the duty is very meaningful. It’s more noticeable at the lower end of the market than it is at the top end because you’re looking at a duty increase that adds about £2 to retail. If the retail price of a bottle of port was £10, and it’s now £12, that’s a 20% increase. If it was on a Taylor’s LBV that was £17 and is now at £19, that’s only about a 13% increase. And if it was a bottle of Taylor’s Vintage, which normally sells at something like £100 and now has to sell at £102, it’s not really meaningful, but there’s a real impact here.

“It means [the £10 bottle of port] is a very marginal product at this stage. When you look at what it costs to produce in the Douro, and the fixed costs, there’s very little money available and port is a very expensive product to make. The Iberian Peninsula, where we grow our grapes, is one of the most expensive wine regions.”

Rising costs

It’s important not to view these increases in isolation. In the UK, food and drink prices are rising at the fastest annual rate since the late 1970s. The price of energy and basic essentials continue to soar across Europe, and the port houses aren’t exempt.

“The price of interest rates is hugely significant, particularly for a stockholding company where you have 10 years of stock in the cellar. There’s a big difference between paying 1% to the bank or 4-5%,” says Bridge. “The price of labour, glass, energy, logistics, all of these real costs have reduced our margins, on top of that we have a big duty increase, so from the consumer’s perspective the price has gone up by 15% or 20% and not a cent has come back to the producer, then the UK market becomes a much more difficult place to be able to sell in.

“Realistically, we might have had to increase our prices by 15% or 20% to cope with the change in the raw materials like most other goods have had to, and yet, if we had done that, we would have found that we were increasing the consumer level by 30% or 40%, which becomes untenable.

“We’re at an important crossroads of how the market could develop. This is happening at a time when people are seeing cost of living increases in many aspects of their budget, and when you have the economy slowing and impacted by political decisions taken back in 2016, it’s going to be very tough and difficult to predict. We’ve been through tough times before, let’s try to make sure that we come through this one.”

Historically, Christmas is when port shifts its biggest volumes. In preparation for the increase in duty, Bridge says that retailers have bought ahead and stockpiled for the seasonal rush, so while Christmas 2023 may largely be business as usual, the following year will be telling.

“I do believe that there will still be the demand for port around Christmas, the question is, will people trade down as a result of the price changes or not,” says Bridge. “There could be some real impacts, not purely at a consumer level, but when the consumer changes behaviour, it causes the retailers to adapt their behaviour. If they see that port is becoming a more seasonal item because of where the price has moved to, then inevitably, they will react to that by reducing the amount of shelf space they have for port throughout the rest of the year.”

But while the trading conditions for port are going to be difficult to navigate, the category isn’t about to throw its hands up and accept its fate. Taylor’s has been experimenting with how it can alleviate some of the duty pressures at the lower value end of its portfolio.

“Given the new duty environment in the UK where the amount of alcohol dictates the duty, we need to look at if we can make port that’s a little bit lighter,” says Bridge. “Instead of making it 20% alcohol, can we make it down at 18% or 19%, and still deliver the same promise to our consumers and attract a lower tax and therefore, allow for a better price positioning?

“We’ve done comparative tastings and reached a conclusion that there is a lower abv limit to port at about 18%. At that level, the drink is still very fine and from the point of view of how it delivers to the consumer, I don’t think that would be negative. It would be enjoyed just as much as a port at 20%. By dropping the abv by 2%, it’ll save around 30p in duty, so when it comes to shelf price, maybe 50p less per bottle. That’s not insubstantial and if it’s the difference between a bottle for £12 or £11.50, for many consumers that is a material difference.”

While these innovations will go some way to keeping the category competitive, port has become an unfortunate victim of a government that doesn’t appear to value the industry at large.

“Sin taxes are OK to a point, and then they can start to be counterproductive,” says Bridge.

“I think there is a requirement for the government to take a more rounded view of how they use taxation to influence consumer behaviour because now, the only person making a lot of money out of the wine industry in the UK is the chancellor of the exchequer.”