Dubai’s alcohol tax cut met with some cheers but more booze

Unsplash

• MMI liquor retail stores have passed on tax discount to customers
• Alcohol price reduction unlikely to be universal across hospitality
• Consumer price sensitivity differs across restaurants and bars 

Dubai’s move to suspend the 30 percent tax on alcohol has triggered differing views about its impact on retail and hospitality businesses and their customers.

Some experts say it will result in a short term boost in sales and will deter residents from travelling to other emirates to buy cheap liquor.

But industry insiders disagree on whether the full saving will be passed on to customers in bars and restaurants, and whether it will result in a rise in consumption – at least after the traditional post-Christmas “dry January” month of abstinence.

The move to scrap the municipal tax on alcohol was introduced from January 1 and it is believed it will remain in place on a trial period for a year.

As part of the new policy residents will also no longer have to pay a fee to obtain a licence to legally consume alcohol at home.

• Dubai hospitality: poolside luxe versus Gen Z entertainments
• UAE’s hotel pipeline hits $32bn as tourism recovery continues

Maritime and Mercantile International (MMI), one of the main alcohol distributors in Dubai, has passed on the 30 percent tax discount at its retail stores.

“With the licence fee removal, we see both short and long term benefits, enabling more customers to register free of charge and legally shop in the MMI stores where we have passed on the 30 percent tax discount,” Tyrone Reid, group CEO of MMI, told AGBI.

“Retail prices have been reduced in line with the Northern Emirates and Ghantoot stores. This has reduced the need for people to travel over an hour to buy their alcohol in other emirates.”

The suspension of the tax is part of a wider liberalisation of alcohol rules in recent years in Dubai, such as allowing sales during Ramadan and operating online orders and home deliveries during the pandemic.

“A significant proportion is now delivered online through Legal Home Delivery, (the only home delivery solution in Dubai) and we anticipate this to accelerate with the licence cost removal and municipality tax changes lowering pricing to consumers,” Reid said.

However, a slightly greater proportion of MMI’s revenue comes from direct sales to hotels, bars, restaurants and other licenced venues rather than from residents buying alcohol for home consumption, according to Reid.

The response of hospitality businesses to the tax suspension is nuanced.

Naim Maadad, chief executive and founder of Gates Hospitality and a board member of UAE Restaurant Group said, “authorities have made the right decision to align Dubai with other emirates and nullify the tax”.

He added that “any wise business operator would reduce the price as soon as the same is received from both suppliers”.

Hari Kaimal, CEO of Goldmead Hospitality, an independent food and beverage consultancy firm, agreed that the move “will no doubt provide a boost to the hospitality industry” at a time when operating costs were rising.

“We expect the majority of operators to pass on most of the savings, if not all to their customers,” Kaimal said. 

“We certainly plan to do so, and our menus across our different venues will reflect this change shortly.

“It should be an obvious choice for most operators at least in certain product categories such as draught beer and spirits which are more price elastic here than the rest of the world.” 

Yet Ramya Sivaprasad, managing partner at Mogao by Socialicious, said the reduction in prices is unlikely to be universal across all venues.

“Different operators target different market segments and the decision to pass on cost savings will depend on the price sensitivity of the particular market segment and the proportion of alcohol sales in the total revenue,” Sivaprasad said. 

“High end restaurants have a consumer base that is less price sensitive and thus are less likely to pass on savings.

“Bars and pubs that generate a higher proportion of their revenue from alcohol sales will find it easier to pass on savings since the impact of cost saving is going to be higher.” 

There has also been much debate on whether the move will lead to increased consumption.

“We strongly believe this will spur a boost in consumption, especially coming off the back of a strong Q4 and major events such as the football World Cup,” Goldmead Hospitality’s Kaimal said.

Maadad disagreed, as he believed prices were still “way over the top”, even with the 30 percent discount applied.

British sober lifestyle coach, David Golding, who last year launched a 13-week recovery plan aimed at Dubai residents who need help addressing an alcohol habit, said drinkers were likely to consume more if the price drops.

“The relationship between price and consumption is known as the price elasticity of demand,” Golding said.

“In general, the price elasticity of demand for alcohol tends to be relatively high, meaning that people are sensitive to changes in the price of alcohol and are likely to drink more when the price decreases.

“The party scene, the boozy brunch goers and regular drinkers will no doubt celebrate the reduction in price by raising a toast to the Dubai Government.”

Erika Blazeviciute Doyle, managing director at Drink Dry, a Dubai-based online platform selling non-alcoholic drink brands since 2020 said the first month of the year is a busy period for the company and it has plenty of marketing plans for the weeks ahead.

“Dry January is the biggest month of the year for us, bigger than December and festive trading, in regards to revenue generated but also new customers onboarded,” Doyle said.

She also believed the reduction in the price of alcohol would not put a dent in her market share.

“We were never competing with alcohol, and you cannot sell alcohol to someone who was not intending to consume it,” she said.

“When it comes to beverages, Drink Dry products are very much competing with the soft drinks category – juices, teas, coffees, water and sugary mocktails – and the sugar tax on those is still the same.”

Sivaprasad said the trial period was likely to have an overall positive impact on the emirate.

“A change in tax laws will definitely bring in more local and international tourism and thereby impact the F&B [food and beverage] sector,” he said.