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WRITER, CONSULTANT AND BROADCASTER SPECIALISING IN BEER, PUBS AND CIDER. BEER WRITER OF THE YEAR 2009 AND 2012

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Monday, 5 March 2012

Why beer duty numbers just don't add up - and what YOU can do about it

Soon he'll be the only person the country who can afford a pint

It's nearly budget time again.  On 23rd March, the Government will yet again add inflation plus two per cent to the tax on beer.  This will bring the total tax rise on beer since the duty escalator was introduced in 2008 to about 45%.  The Conservative government has committed to the duty escalator until 2014. Even if they don't add any other taxes - and we can't rule that out - what was already the second highest duty rate in Europe will almost double within a decade.

It makes no sense.  This is a Treasury measure to raise revenue, not a Department of Health measure to reduce drinking.  But word reaches me from one source that an MP very close to David Cameron has admitted that they are now into diminishing returns - each time the duty escalator goes on, the total amount of revenue goes down, because it's killing volume so much.

I've written a lot before now about how the duty escalator is hurting pubs.  But the other day I was with a family brewer who is seeing their business shafted by this relentless punishing of the industry.  I hadn't thought it through before, but it goes like this:

Say inflation is 4%.  Which it is.  So the duty on beer goes up by 4% + 2% = 6%.

But that's just the duty - inflation is still 4% on top of that.  Which means the cost to the brewer of making beer is also going up by 4%.

So if a brewer just wants to stay still, with no increase in profit at all, the duty escalator means the price of their beer must go up by 10%.

The public won't accept this.  The supermarket and the pub trade won't accept this.  So the brewer has to take a hit and see his profit margins sliced.  Every year this happens, those slices get thinner and thinner.  

To make matters worse, that 4% inflation figure is an average across everything.  Some of a mid-size brewer's biggest costs are transport, energy, packaging and barley - all of which are increasing much more rapidly than the headline rate of inflation.  With the above maths in place, there's absolutely no question of them being able to do anything other than take a hit on these costs.

If this carries on, there soon won't be a reason for many brewers to stay in business - some could make more money demolishing their breweries and turning the space into car parks, which is what's happening to Tetley's.  

This equation impacts different sized businesses in different ways.  Microbrewers aren't hit as hard because they get tax relief if they brew below a certain volume.  So that's good news for fans of eclectic, interesting beer.  But they still face the same business pressures, and many use this tax relief to sell their beer to pubs cheaper than bigger brewers can, further shrinking the profitability of beer overall.

Multinational brewers are hit hardest, with their profits reduced to an average now of around 1%.  They'll survive as businesses because they're big enough to invest in developing markets.  South America, Asia, Africa and Russia are the countries that interest these guys now.  You might say good riddance to them, but they're not going to abandon Europe and America - they're just going to relentlessly cut costs to remain competitive - lowering the strength of their beers, using cheaper ingredients and compromised processes, lowering the quality of mainstream beer even further.

And then in the middle you've got Greene King, Fullers, Wells & Young's and Marstons and so on, and the family brewers like Black Sheep, Batemans, Robinsons etc.  These brewers are too big to get duty relief, and too small to go anywhere else.  They're being squeezed to death, facing a situation where it's hard for them to actually make beer at a profit.

If you're a blinkered fan of micros, you might welcome this.  You might say you don't need boring brown beer and that pubs would be better places if they were only stocked by micros.  But I'm afraid you're wrong.  Who do you think installs cellar equipment and services it, guaranteeing the quality of all beers on the bar?  Who do you think puts most of the hand pumps on the bar that the micros use?  Who do you think offers staff training and quality management services?  Who do you think microbrewers phone up when they want to start bottling beers but don't have a bottling line of their own?  Who do you think funds brewing research and laboratory services?  There are many wonderful things about microbrewers, but the whole appeal of them is that they are small and nimble.  They don't have huge staff to support so they can take risks.  They don't have huge pub estates so they don't have to invest in lots of cellar management resource.  However much you love them, and I do, they couldn't survive on their own - as they'd be the first to admit.

This middle tier is getting shafted the hardest by the relentless duty escalator.  They are small to medium sized manufacturing businesses, a rarity in Britain these days, and yet they're the very businesses David Cameron believes will save the economy.  As he said last year:

"There's only one strategy for growth we can have now and that is rolling up our sleeves and doing everything possible to make it easier for businesses to grow, to invest, to take people on.  Back small firms. Boost enterprise. Be on the side of everyone in this country who wants to create jobs, and wealth and opportunity."

He said that.  We can't let him get away with doing the direct opposite to one of the best manufacturing industries we have.

I've hated the Tories with venom ever since I grew up during the miner's strike and watched them turn the apparatus of the state - including the army and secret service - on their own citizens and destroy communities including the one in which I grew up.  But this issue is not a party political one.  This cursed duty escalator was introduced by a Labour government, and last week Andrew Griffiths, the Tory MP for Burton-on-Trent and current chair of the Parliamentary Beer Group, introduced an Early Day Motion to debate the duty escalator in Parliament.

But we have it in our power to force another debate.  

Last week Hobgoblin beer launched a campaign to get 100,000 signatures on an e-petition which would force the issue to be debated in Parliament again.  The wording of the petition is as follows:

Stop the beer duty escalator

Responsible department: Her Majesty's Treasury

Every year, the beer tax escalator increases the tax on beer by 2% above the rate of inflation, thus adding considerably more pressure on the British pub, the cornerstone of many of our communities. Removing the beer duty escalator at the next budget will help keep beer more affordable and go a long way to supporting the institution that is – the great British pub.  Going to the pub is a core British tradition and so is enjoying great beer. If you want to continue enjoying your fresh pint in your local pub then it’s crucial that you support our campaign to grind the beer duty tax escalator to a halt.  If we don’t show our support for the great British pub, we risk losing more pubs and more jobs within our local communities.  Support great beer in the great British pub and sign our e-petition now..... British Pubs Need You.


There are 135,000 members of CAMRA.  And there are millions of people who are not CAMRA members who are passionate about great pubs and great beer.  If we can't get 100,000 signatures on this petition, we don't deserve an affordable pint.

Sign it. Now. 

And then make your friends sign it.

It's not as if it take any effort - it'll take you about a minute, and the link is here.  And while it probably won't do anything this year, it just might have an effect next year.  They're not making any money off this; they're killing the brewing industry; they're threatening thousands of jobs in pubs, and they're making our pints almost unaffordable.  

This is politics - Governments can't be seen to U-turn without good reason, but this is a chance to provide that reason, to allow them to scrap a misguided measure that benefits no one.  It makes sense whatever you drink, and whatever your politics.

40 comments:

Curmudgeon said...

"But that's just the duty - inflation is still 4% on top of that. Which means the cost to the brewer of making beer is also going up by 4%.

"So if a brewer just wants to stay still, with no increase in profit at all, the duty escalator means the price of their beer must go up by 10%."


I don't disagree with your general argument, but you've got your maths a bit wrong there. The other costs are of course net of duty, so the duty element goes up by 6%, but the remaining costs only go up (theoretically) by 4%.

Pete Brown said...

Sorry Mudgie, that's what I meant - 6% duty plus 4% other costs means theoretically total cost of a pint goes up by 10% - which the market won't accept, which means the brewer can't pass on his costs...

ted said...

The law of diminishing returns doesn't actually apply here. If you look at HMRC clearances you'll see that in 1995 beer and cider clearances were 60.5mhl yielding 2.5bn excise revenue or £41 per hl, whereas in 2010 clearances were 45.8mhl yielding £3.7bn or £80.7 per hl. There is a hypothetical argument that if duty hadn't gone up so much volumes would not have declined so dramatically and revenue would be the same or possibly higher. But that's hypothetical and is complicated by all sorts of variables. From the Treasury's point of view the hard fact is that duty increases yield more revenue regardless of declining volumes. The real villain that none of us beerheads take into account is that for years (I could look up how many years but I can't be arsed), duty on spirits has been frozen, reducing the differential between beer and spirits and encouraging preloading, which is an absolute evil. Campaigning for the restoration of the duty differential between beer and spirits so that a single scotch costs more than a pint of beer (as was the case when I were a lad) has a strong appeal both for the Treasury and for the health nazis. A fruitful area for a campaign?

Pete's Quiz said...

Great blog! I only drink lager (Carling usually), but I've signed the e-petition, because as you say, it doesn't matter what you drink, the whole pub industry suffers.

Let's hope somebody in power actually does something about it!

Thomas said...

Notice how supermarkets continue to sell cut-price alcoholic drinks and not be scrutinised by the government but in return receive free and forced labour? More profits and more money to risk and less higher contracted bids for breweries.

Breweries should stick their fingers up to practices whom cost-cut their products so much. It gives a false-market economy of how their brands are valued and means people are less reluctant to buy their products in pubs and bars which have to pay the costs.


The Government are insuring their friends receive cheap deals and killing off non privately-owned businesses whilst also calling themselves 'compassionate'. The joke is so bad I'm cringing.

Steve said...

Your overriding point is absolutely right, but I think Curmudgeon is right, your maths is a little out.

Say duty makes up 10% of the price you sell a pint for and ingredients and other costs about 30%, if you increase the first by 6% and the latter by 4%, then your cost per pint increases by 4.5% overall (6p per pint if a pint costs £3.50). Don't forget duty is charged on volume and %ABV, not ingredients costs.

So a 6p increase in the cost of a pint would cover your increase in costs and duty and give you the same margin. That's a 1.7% increase overall.

Still, petition very much signed!!

Cooking Lager said...

Death & taxes eh?

Booze has long been a cash cow. Beer geeks are by and large middle class toss pots and ought to be paying more tax.

Phil said...

The point is that 6% 'duty' plus 4% 'other' doesn't add up to 10%, it adds up to somewhere between 4% and 6%, depending how big a slice of overall costs is taken up by duty.

It costs me £100 to brew a barrel of beer. I pay £50 duty per barrel. My total bill is £150.

Brewing cost goes up 4%: it is now £104. Duty goes up 6%: it is now £53. My total bill is £157: it's gone up 4.67%.

Anonymous said...

A good article but the point would have been made just as well and the article shared much broader if you had omitted your personal political beliefs sentence. I know this is your personal blog and you should of course include your opinions. But in this article? Calling for a party neutral consensus? Unnecessary.

I would have shared this with friends, family and my local MP if had not been for that one off comment.

Birkonian said...

I'm sick of the attack on drinkers too but your family brewer's maths are way out.
Take the cost of a pint at £3.00 (still expensive here up north) and presume that the brewer just breaks even at that price.
The duty on a typical pint of beer is 41p I believe. So a 6% increase would add 2.5p to the duty.
The cost of producing the pint is £2.59 (£3.00 less the 41p duty). 4%inflation adds 10.4p to the costs.
So the total increase in costs is 2.5p + 10.4p = 12.9p. As a percentage of £3.00 that is 4.3%. Unwelcome but not 10%.

Curmudgeon said...

Glad others agree with my maths :-)

Spirit duties were frozen for a period, but are subject to the duty escalator in the same way as beer duties. They are actually higher than beer duties per unit of alcohol, but spirits cost considerably less to produce per unit than beer.

There has to come a point when the law of diminishing returns applies to the absolute revenue from alcohol duties (with reduction in consumption and increased smuggling and home-brewing) but we're probably still some way off that.

Pete Brown said...

OK, so my maths is even worse than the government's - I had to drop maths A-level at school after a year because it was like trying to teach Mandarin to a Martian.

The principle I was trying to make still stands, even if I expressed it appallingly. Two key facts:

One, because the duty escalator is inflation plus 2%, you can forget that there's then still inflation to go on there

Two, brewers are unable to pass on increasing costs so every year see their margins get thinner.

Anonymous, I put in the line about my personal politics precisely to emphasise the fact that this is not a party political issue. If a view you disagree with offends you so much (i.e. if you think it's OK for a government to use the army and secret service against its own population - sorry, couldn't resist!) and you feel it's impossible to link to my blog post, you could always urge people to go straight to the Hobgoblin page or the petition itself. You might even want to cut and paste some of my less offensive text to help your cause - I won't mind.

StringersBeer said...

Who do we think installs cellar equipment, handpumps etc & services it all? In many cases I suspect it's the freeholder. In other cases it's a micro-brewer using SIBAs (or some other) technical services. If it's a brewer (of whatever size) it's traditionally done alongside a supply agreement, not, as you imply, from a charitable inclination on the part of the "family" brewers.

I'm sure the "micros" could manage perfectly well on their own, thank you very much. Although I'm not sure most drinkers would wish for that.

Anonymous said...

Thanks for informing about this Pete!

Eddie said...

Ted is absolutely bang on the nail - it is the differential between beer & spitits that any campaign needs to focus on.

John H said...

I'm considering having this blog put on a T-shirt that I'll wear until it either a) the government wakes up or b) gets so smelly everyone avoids me, thus undermining its purpose.

What's particularly galling is that the thousands of jobs being lost in small (often family) businesses such as pubs are not reported in the same way as en masse manufacturing lay offs. This makes them an easy target.

Eddie said...

Ted - 1997.

broadfordbrewer said...

Aside from the nit picking, this is an important issue which we should support collectively. Little point in bickering about the details. Spread the word as Pete is doing and get everyone you know who cares about beer and brewing to sign up!

broadfordbrewer said...

Aside from the nit picking, this is an important issue which we should support collectively. Little point in bickering about the details. Spread the word as Pete is doing and get everyone you know who cares about beer and brewing to sign up!

Anonymous said...

I have to agree - getting a political dig in is irrelevant to this important topic. And it does nothing to highlight that this shouldn't be a party political issue - in fact it does the opposite for me too. Somehow I get the impression that you're trying to use the sentiment (along with the picture of Call Me Dave) to divert blame on the current incumbents rather than the previous Supreme Leader G Brown and his Chancellor Sam the Eagle who were responsible for it.

I wonder what the relative impacts on brewery business are between the beer duty escalator and fuel duty rises? Clearly it's not reached the law of diminishing returns - the treasury won't be quite so daft to introduce a loss making duty increase.

And yes - Mudgie has the maths right... so the article is actually even more misleading...

Pete Brown said...

I refer all anonymous posters to Broadfordbrewer's response.

FFS.

Publican Sam said...

"Despite falling beer consumption in the UK, we contribute 40% of the total beer excise revenue raised by 27 EU nations, whilst accounting for only 13% of total EU beer volumes" - this from SIBA's representation to the Chancellor.

and this ..."In the last five years the headline rate of beer duty has risen by more than 35%"

Whether the math is right or wrong about the effect on either brewers' or publicans' pricing after the budget, you can't argue with with this disproportionate level of taxation that along with other econimic factors is crippling the brewing and pub industries... and who knows maybe this next rise will be the tipping point and irreversible damage will be done to both sectors which employ so many people and contribute so much to the economy and the social infrastructure of this country.

122,000 licensed premises in the country and as of writing only some 8,200 people have signed the e-petition ... we really are a nation of chumps.

Cooking Lager said...

The country is bankrupt, and many worthy and unworthy causes are special pleading prior to the budget.

The whinging and special pleading of publicans and beer geeks is not going anywhere. It's about as futile as whinging about smoking bans.

Pay your taxes and think of a cause you can win. Read your Sun Tzu, wars are won before a sword is drawn and all that.

dave.ringo.bells said...

I have to agree that the anonymous nitpickers should keep out of this. The basis for the article/blog is that different governments have, between them put up beer prices by more than 35% in just a few years. In the same time, they seem to have backed large supermarkets with free staff and unrestricted pricing on their alcohol.
Once they have achieved their objective of closing Britain's pubs, I, for one, can see the supermarkets rubbing their hands in glee. Then, perhaps, the lager drinkers will see what they have achieved.

Eddie86 said...

I have to agree with Pete on the family brewers helping with equipment etc. Marstons provided and installed our 8 handpumps with no tie at all, just a gentleman's agreement that I have one of their beers on regularly. Wye Valley has sponsored our beer festivals by providing the cooling equipment (enough for over 50 ales). And that's for a Welsh beer festival, so their beers aren't even on!

Regardless of details (FFS) its worth signing whichever way you look at it

StringersBeer said...

@Eddie86 Well done Marstons, clearly they're not short of a bob or two. And of course Wye Valley is a SIBA "micro" - which was kindof my point - it's not just the big brewers who do this stuff. I think Wye also offer cellar training to all their customers.

Ignoring the iffy maths, I'm sure we all agree that high beer taxes and the duty escalator are bad for the industry, jobs and the beer drinker.

Wyreman said...

stop bickering, sign the fricken petition!!!! pass on the links to friends etc etc . It's about jobs and people and keeping people off the dole. Politicians have no sense of reality or longevity at all. People need to get more involved and change stuff as opposed to just moaning about it!

Ketsbaia said...

If this present government is going to ignore all the advice from almost every professional body that exists about the disastrous changes it's about to make in the NHS, what makes you think they're going to give a flying frig about the (perfectly well reasoned although mathematically questionable)arguments about beer duty here? Unless it hits them in the pocket, they don't care. No matter how well reasoned the arguments are here, they will wave the Special Brew factor against it and ignore whatever we have to say. There's only one way to prevent this beer tax from being short-lived (and it will come in) - vote anything but Tory or Lib Dem come the next available opportunity. Otherwise, forget it.

Ketsbaia said...

If this present government is going to ignore all the advice from almost every professional body that exists about the disastrous changes it's about to make in the NHS, what makes you think they're going to give a flying frig about the (perfectly well reasoned although mathematically questionable)arguments about beer duty here? Unless it hits them in the pocket, they don't care. No matter how well reasoned the arguments are here, they will wave the Special Brew factor against it and ignore whatever we have to say. There's only one way to prevent this beer tax from being short-lived (and it will come in) - vote anything but Tory or Lib Dem come the next available opportunity. Otherwise, forget it.

Curmudgeon said...

"There's only one way to prevent this beer tax from being short-lived (and it will come in) - vote anything but Tory or Lib Dem come the next available opportunity."

Do you honestly think that Labour would do anything different on beer tax? They started the duty escalator, after all.

And, of course, all the health professionals who are opposed to the NHS reforms are all in favour of alcohol duty hikes.

You can always vote for UKIP, of course :-)

Northcote Brewery said...

Excellent blog post. I wrote to my MP using the link provided, and got a very generic response. Very depressing. Basically saying, we need the money *blame last govt* and so we'll carry on. Or words to that effect. Oh, but if you live in a village that has a failed pub, you can all club together to buy it. Grrr.

146 Cider said...

Pete,

Great post (despite the maths). Signed the petition and even linked to it in my own blog.

As a small cidermaker we aren't yet hit as badly (despite SIBAs best efforts). Fully support our brewing cousins though.

Love those who think we should shut up and pay our taxes. Buffoons!

Jez

146 Cider said...

Pete,

Great post (despite the maths). Signed the petition and even linked to it in my own blog.

As a small cidermaker we aren't yet hit as badly (despite SIBAs best efforts). Fully support our brewing cousins though.

Love those who think we should shut up and pay our taxes. Buffoons!

Jez

The Red Lion Inn, Cricklade said...

Its good to see that the middle tier are being recognised in this struggle, as you say without them (specifically Wadworths) we for one would not be able to serve 10 hand pumps of micros beers as well as nationals from a newly refurbished cellar through a new set of pipes. I fully support the smaller breweries and in fact we are installing a brewery too as we speak, however relationships with larger breweries are just as important for us. Even though Wadworths are aware that our beers may bastardise their sales they are 100% supportive of us throughout

Anonymous said...

But what about cider?! Heineken UK pay less duty on a pint of Strongbow than the smallest microbrewer pays on a pint of their Beer and that is why we are seeing so many people switching out of Beer and in to Cider and why articles like this...

http://www.thegrocer.co.uk/topics/health/booze-prices-set-to-soar-if-prime-ministers-minimum-pricing-plans-go-ahead/227133.article

...are dominated by 2L bottles of dirt cheap "cider". What do you think people are 'pre-loading' on?

I'm not saying Beer duty should be less than Cider. Just make it a fair fight.

Pete Brown said...

Anon, I'm not disagreeing with you, but the beer world must get better at communicating single messages.

I agree, there should be greater parity between beer and cider duty. But some MP has already gone in saying we should achieve this by hiking up cider duty, and suddenly we lose the focus and momentum behind cutting beer duty, and no one benefits.

Anonymous said...

IMO all beers,ciders etc should be same price as what is paid in bar in House of Commons
and they even get to smoke there - pity we all can't be members

Eddie86 said...

How has this petition got less than 12000 signitures? CAMRA alone has 136000 members. Perhaps we don't deserve a freeze in duty if we can't pull together for the sake of entering your email address into a website

Josh said...

Is there an organisation similar to Camra that supports small to medium breweries and gives them a voice in these type of situations?

Because if not, I feel that it is way more important to start a consumer facing organisation that does exactly that, regardless of cask or keg. The government could have easily created taxations that would have only hurt binge drinking culture (such as creating minimum price of alcohol which would have not touched our beloved microbreweries).

I am happy to give my services of web and graphic design (and video editing) to anyone who wants to make this organisation or campaign. Pete... any chance you want to ? :)

Eddie86 said...

@Josh - SIBA?