Mikko Kiesiläinen Column: Finland subsidises fine wines for the rich

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File picture of Alko's online store

Mikko Kiesiläinen is the head of Libera think tank, and a parliamentary election candidate for the Green Alliance. Follow him on Twitter at @MKiesilainen.

Finland is one of the few countries in the world where the government operates an alcohol monopoly. If you want to buy a drink with an alcohol content over 5.5%, you will have to become a customer of state monopoly company Alko. This is the reality in the country now, where alcohol laws have been relaxed very slowly since prohibition ended in 1932.

One of the main arguments used by the supporters of Alko is its good selection of drinks and professional customer service. The typical argument states that the good selection Alko provides would not be available all over the country, if the retail of all alcohol was opened up for competition. The secret to Alko’s good selection and customer service is that customers that enjoy these benefits do not pay the full price, but have them subsidized by others. In other countries without governmental alcohol monopolies, the selection of wines in supermarkets is often smaller than in a big Alko. It is expensive to maintain a wide range of wines in a competitive market. This cost should not be subsidised by other consumers, as it is in Finland.

Cross Subsidization is used to Support Wine Connoisseurs

Alko prices all white, red and sparkling wines with the same price multiplier. The wholesale price is multiplied by 1.54 to get the retail price. Therefore, the pricing is entirely mechanical and does not take into consideration any price determining factors, other than the purchase price. Normally, a retail business prices its products so that products that sell in greater volume are priced with a lower margin. This is possible, since products that sell quickly cause less inventory expenses and bind working capital for a shorter period.

In 2017, Alko’s most sold products, per litre, were Hartwall long drink, Leijona vodka, Koskenkorva vodka, Suomi vodka and Olvi extra strong beer. The buyers of these drinks were on the paying side of the cross subsidy. On the receiving end, you find the people who generally buy rarer wines from smaller producers. It can be assumed that the buyers of the greater volume products less wealthy, in general. If this is the case, the Alko cross subsidy acts like a regressive redistribution of income. If Alko operated in the free market, it would have to price its products in a more transparent manner, according to its actual expenses. This would mean a price decrease in the products that sell a lot, and an increase in the products that do not. If a company operating in the free market priced it products like Alko does with its fixed multiplier, the company would lose a large part of its business to a smarter entrepreneur, who sells large volume products at a smaller price.

Duty free alcohol on ferry to Estonia / Credit: News Now Finland

Alko Provides Too Much Quality

The customer service of Alko is excellent, actually too excellent. Alko employees spend around four days a year in training. For comparison, the employees of one of Finland’s largest healthcare providers Health Care District Eksote spend around 1.7 days in training per year. One can contemplate whether it is a good use of our tax revenue to have Alko staff trained twice as much as health care staff.

This extensive training is driven by the fact that the standard for customer service is set by the needs of the most demanding customers. Alko describes the development of priorities of their training in the following way: “the number of individual products that have to be studied was decreased and training was focused more on seasons, product groups, wine regions, as well as the specialities of different food and beverage cultures”.

It is difficult to see how the buyer of ciders, long drinks or hard liquor would benefit from this type of training as much as the, typically more wealthy, buyer of fine wines. Still, all customers contribute to the upkeep of this training. Therefore, the excessively good customer service at Alko acts as a regressive tax in the same way as their good selection.

Competition Would End the Hidden Taxes

The way Alko subsidizes the hobbies of wine connoisseurs increases income inequality and cannot be considered just. Even if the alcohol monopoly was ended, online stores would maintain the ability for Finns to access a good selection of wines. It is estimated that just France has over 100,000 wine producers, so Alko can never provide the same kind of selection that you can get on the internet.

The fact that Alko’s monopoly is defended using the “good selection”-argument shows just how far away the company has drifted from its primary purpose of reducing the harm done by alcohol consumption. This is understandable, since an alcohol monopoly is a very impractical way to reduce the harms of alcohol use.

The best thing to do would be to let the free market handle all alcohol retail. Alcohol causes addiction and negative health consequences, so it is justifiable to regulate it. Taxation, education and the regulation of advertising and retail are much better ways to control the negative aspects of alcohol than a government-run liquor store.

Wine in duty free shop on Estonia ferry / Credit: News Now Finland