A Good Beer Blog

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Have you read The Unbearable Nonsense of Craft Beer - A Rant in Nine Acts by Alan and Max yet? It's out on Kindle as well as Lulu.

Maureen Ogle said this about the book: "... immensely readable, sometimes slightly surreal rumination on beer in general and craft beer in particular. Funny, witty, but most important: Smart. The beer geeks will likely get all cranky about it, but Alan and Max are the masters of cranky..."

Ron Pattinson said: "I'm in a rather odd situation. Because I appear in the book. A fictional version of me. It's a weird feeling."


Comments

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eddie gadd -

This is a slightly disengenuous take on the system - the tax break gradually reduces to nothing as production increases - it doesn't suddenly stop. Futhermore, the evidence is that there are no brewers who claim to be staying the same size, or even contracting, in order to benefit from better tax breaks.

Barm -

It's sad to see anyone from a medium-sized brewery pissing on brewers somewhat smaller than themselves.

Phil Mellows -

Can't quite see how progressive beer duty is 'overt leftist politics'. Would have thought it's more early Thatcherite really (the overt encouragement of small businesses).

Interesting to see Canada's version.

Alan -

My use of overtly leftist was not sprung from my own mind but seemed to be the channeling of Mr. Pugh's inner most beliefs. It was quite an extraordinary experience.

Alan -

But, to be fair, Mr. Pugh has made other observations through another recent letter to the editor about tax policy that has more global appeal.

Reluctant Scooper -

Adnams have been long-time critics of PBD, so it's no surprise to see Stephen Pugh making this point again. Their perception seems to be that PBD allows microbrewers to undercut smaller regional brewers on price.

Pugh's suggestion may not be to scrap PBD. A couple of months ago he was calling for a formal review; even the Society of Independent Breweries have called for an 'income-tax' style tax break that would extend to all brewers.

Alan -

Why should all brewers get a tax break regardless of some form of need? Isn't there a distinct benefit in encouraging start-ups, reducing entry barriers? There is nothing particularly singular about brewing generally from a economic point of view that needs tax subsidies thrown at it. What makes them different from bakers, car dealerships or shoe shops?

Andy -

I wonder if Mr Pugh feels the same way about the recent grant awarded to Adnams for the building of an anaerobic digester to be run by an Adnams subsidiary? (Adnams Bio Enery can be added to the kitchenware, gifts and hotels) http://www.building4change.com/page.jsp?id=311

Is this not also partly a subsidy from the taxpayer, which Adnams will benefit from and indeed would the project have gone ahead without the subsidy? I have no problem with them receiving this grant but I do resent the hypocrisy of Mr Pugh. If he is intelligent enough to understand why his company might deserve a subsidy for an energy project he should stretch himself to appreciate why in fact the PBD is highly tailored to small brewers.

Andy -

Oh and in the interests of disclosure I should point out my business does benefit from PBD

Stephen -

As the author of the FT letter I thought I’d add one or two comments. Adnams has consistently argued, over many years, for a restructuring (not a removal) of the UK PBD system. A system such as can be found in most EU Countries would be quite reasonable and we would be happy to support it. It was the government that was responsible for agreeing the structure of PBD in the UK, and our criticism is of that decision. We are not in any way criticising the small brewers who benefit, indeed we have an excellent relationship with many of these firms.

The arguments that we have advanced are set out much more fully at http://about.adnams.co.uk/business/progressive-beer-duty-pbd-%e2%80%93-time-for-a-review and any comments would be welcome.

Alan -

Thanks for writing Stephen. One thing I see is the eight years of the tax rebate been coincidental to the explosion of small craft brewing in the UK. Is it not part of that success? And if, as your well laid out linked argument states "between 30,000hl and 60,000hl the relief is phased out" how is the small brewer in the position seemingly stated in the letter that they have to choose scale over subsidy? Would a longer phasing out work better or create more dependency? I do like your suggestion of a sunset clause - except that it may mean that micro brewing is never profitable as a stand alone business. Is that also an necessary implication? It may be quite a reasonable observation but is that what one should take away?

Stephen -

Thanks Andy. You’re obviously right that the eight years since the UK implemented PBD has seen a very large growth in brewery numbers and I suspect that PBD has been the most important single reason for that growth. As I note in the article, it would be rather astonishing if relief that reaches £160,000 (now £170,000, as there has been another budget since I wrote that article) had not created many new businesses. This is indeed success, but you wonder what other success could have been bought with the same money. What if it had been given to pubs?

Sadly the chart has not come out very clearly in the linked article, but the best way to think about the UK’s PBD structure is that it has two types. Type 1 PBD is 50% duty relief, now worth £57/brl at 4% abv. Type 2 PBD is a flat sum, now about £170,000pa. The cut-off between these two types is 5,000hl. Type 1 relief is hugely more valuable than type 2 relief. I use the example of a 30,000hl brewer who will receive type 2 PBD at £170,000. Six competitors, who over a period of years might take his business, will, if they do not pass 5,000hl, receive type 1 PBD. This means that each of them will receive £170,000, a total subsidy of over £1 million. It’s not easy for someone receiving £170,000 to compete with competitors collectively receiving £1 million.

The point here is that the 30,000hl and 60,000hl thresholds are really distractions. The issue is whether you get type 1 PBD or type 2 PBD. Brewers are being hugely incentivised not to grow beyond 5,000hl. The arguments that CAMRA and others have advanced for a longer phasing-out are, whilst well intentioned, not getting to the crux of the problem.

A sunset clause is a possibility and an outsider might well feel that it is more justifiable to help businesses start up than it is to keep them in permanent incubation. My preferred solution is that the 50% rate of relief is gradually reduced so that no one is too hard hit in any one year. This is a particularly attractive option at a time when the Government is operating its most unwelcome duty escalator, which has been increasing the value of PBD year by year. There are some great microbreweries in this country and it is worth reflecting that 440 of them existed before PBD started. I don’t think that anyone need feel that microbreweries will never be profitable if PBD is restructured.

Alan -

That is very interesting stuff, Stephen, and I will chastise myself in the main post above soon. Interesting to see that in Canada the Federal excise relief starts at 90% and then sifts to only 15% based on volume. Compared to the UK 50%, it is much more aggressive at the low end. Combine that with a sunset based on average sales growth and you may have a very sensible solution.

Andy -

Thanks for addressing comments Stephen and I do appreciate Adnams are generally supportive of the smaller breweries and it certainly wouldn't be fair to portray you guys as "anti micros".
I do believe the tax breaks are there because there is value in creating small local businesses (although as Alan suggested this rational could apply across a range of industries) and therefore the policy should be highly geared in favour of smaller producers. Many of the best micros have grown well beyond the 5000 hl level so I don't think there is much evidence that the current policy prevents those who excel from growing although I conceed it may disuade some less committed breweries from stepping up, but perhaps that is no bad thing in that the breweries who do grow have to be very good. I think the point of the legislation is to help smaller breweries get off the ground but then as they grow and achieve economies of scale, the safety blanket can be removed. I don't have an issue with PBD being debated and indeed ongoing debate is probably crucial to ensure at the very least we maintain some form of PBD. However I do firmly believe the principle of providing support to the smallest producers should continue to be the core of any policy.

Sam -

The principle of the tax break is to allow microbreweries to grow but the problem lies with the small brewers under cutting their bigger brothers, I know of no micro brewery in the south east that sells its casks for more than £80 and weatherspoons can by casks for as little as £45. the bigger breweries need to sell their casks at £130 to £150 to turn a profit (just). Micro breweries that grow past the 5000hl threshold will have shot themselves in the foot as they loose the tax break they remove the incentive for pubs to stock their beer (having to put their prices up to cover the loses in tax breaks)
If micro breweries used the tax break as intended their staff would be paid a fairer wage and only those with great beer would grow rather than those who sell low. It's this undercutting that has aided the fast growth in the micro brewery sector but as they grow they find it is not sustainable. I recently read an article in which the Hogs back brewery claims to have turned a loss after exceeding the 5000hl threshold they invested in modern equipment and have to top class system but can no longer afford to sell their beer at the same prices as other micro breweries which don't invest in the equipment or quality controls and checks that reputable brewery do.
small breweries have every right to sell the beer at the price they dictate but I think if they greatly undercut other breweries then the grant should not be applied as they are not investing in their staff or equipment but mearly guaranteeing their beers remain in pubs (based on price rather than quality). There should be a survey done to show the price pubs pay for their casks and have it compared to the price the brewery needs to charge to break even, such a survey would show that the tax break is distorting the market and they should look at including other criteria to qualify for the break e.g. continued investment in staff and equipment, H&S and quality control. I know of a few breweries that would loose their tax breaks if this were to ever happen, but applying some other criteria would improve the standards within the microbrewery sector.

Andy -

Sam, where do you get the £130 to £150 figure per cask from? I think you would find even the bigger breweries would struggle to get much more than £80 a cask. It's not price competition that has driven the growth of the microbrewery sector, it is consumer demand looking for different, often local brands. I must admit, I have not come across many pubs who would suffer poor quality beer in exchange for a low purchasing price, as most good publicans understand in the long run that is likely to kill their business. I would suggest you visit the SIBA website and look at the Local beer report where you can get some information on how many of the small breweries have used the effective tax break to invest. I think you also need to appreciate the benefit of economies of scale - as breweries expand production their marginal cost of producing beer will fall and they will certainly factor in the impact of some loss of duty relief before they make that decision.

Sam -

Andy, I have work in both the small and medium sized breweries as a brewer and have visit many small breweries and tasted their products across the country. There are many that do have QC for their products and they are the ones that are growing, but I also know others that will not spend a penny on QC but will blame their staff if casks get returned... others have kept in business by selling further afield as they struggle to keep their beer regularly in pubs but will blame larger breweries for squeezing them out.... and fail to relies that their product is contaminated. I think it a good thing there are so many small breweries but I also think they should meet a minimum standard mainly for the public's safety. You are correct that economies of scale results in bigger savings for the brewery but not everyone is spending on training and QC and H&S at the workplace which larger companies all do as they have to meet certain standards(ISO etc) but there are very few microbreweries that have ISO cert some don't even have HACCP certs..... One calculation by a brewer in the south east suggested he would need to jump from just under the 5000HL to nearly 9000HL and at that just break even, which is why he has stayed under the 5000HL this year.

Sam -

Just to clarify the visits were for information/technique sharing with the other brewers and not a tour