Tuesday, 24 March 2015

The down side of duty reduction

There are many costs that affect a brewery. We've found this year, for instance, that some of the major hop varieties we rely on have been scarce. This inevitably means increasing costs, or alternatively a compromise on recipes. As the economy improves we see, quite rightly, wage rises. This ripples through to increased costs of labour. Fuel may well be low at this present time, but that won't last long, you can bet on that and it's already showing signs of increases again.

RPI falls to zero - but for how long?
(Image curtesy ONS)
Out of all the costs we have to manage, beer duty is the one that is published widely. When it goes down, and the government promise a penny off a pint1, it leaves us brewers wondering what we should do about all the other costs that are rising.

Traditionally a duty increase signalled the time when we could all look at our costings, across the board, and make appropriate price increases. Yes, a penny or two on a pint, by the time it got to your glass, often looked more like 10-15p. The reason for this is that the brewery, and the pubs and shops that stock the beer, rolled their annual price review together into one event, and that was all shrouded by the duty increase.

Now, considering with the recession and all, beer prices at the brewery gate haven't seen much of an increase over the past few years. However, costs, as I've said, are going up. Overall, this is having a detrimental effect on the ability to earn an honest living out of beer.

The reader could be excused for questioning my arguments, based on today's announcement by the ONS of zero inflation. This is making interesting news, but one thing is certain, economic growth is not possible without inflation. As we move from deep and difficult economic times we will see increased economic activity, increased wages and fuller employment and increased inflationary pressures. Many would argue this is essential for economic recovery, but either way, we will see prices increasing for everything, and that includes beer.

In the past I've had pubs we supply ask me how they are going to explain to their customers that they probably can't pass on the duty reduction through to their pint prices. Indeed, some have even said that they should really be looking to put up prices, despite duty reductions.2

Some customers this time around have been asking us if we are going to reduce our prices in response to the budget. I'm quite clear on this. No.

As we are still below the duty threshold, and enjoy a 50% discount, the reduction in duty is only a half of the published amount. This results in the reduction in duty on a bottle of Azimuth to be only a shade over 0.3p. Meanwhile, a cost of living increase for our staff, hop price increases, transport cost increases and heating and power cost increases will put that, plus more, back on the cost of manufacture.

The duty cut will help us keep a level keel, help us to continue to develop our business, to invest in the future and to build a solid and competent team. It will not help us to reduce our prices, overall efficiency elsewhere might, but not a relatively minor duty reduction.

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1Actually, the real shocker is that even at full duty rate it is not even a penny off a pint until you get to 5% beer. Yes, Stella might enjoy that duty cut, but not your pint of 4% session ale, that works out at only 0.85p per pint. Micro-brewed beer will enjoy only be 0.4p on a pint of 4%. A bottle of Azimuth will only see 0.34p off its beer duty. It isn't very much really, is it?

Now, before my friend Keith Bott, or any of any of the other great people who have worked tirelessly to stop the beer duty escalator, and at least reverse the trend a little shout at me, I do appreciate it. We are in a much better situation now than we might have been had the escalator still been in place - except, if I remember correctly, it was linked to inflation.......

{Edit} It has been pointed out in the comments that in fact the duty escalator was 2% above the rate of inflation. So, even with zero inflation, we'd have seen an increase.

2I've known pubs put out a jar with 1p pieces in it with a sign saying "Here's you beer duty reduction, if you can be bothered to take it" - really, a penny? Why are those little copper plated steel things still circulating? they are more bother than they are worth banking, which is why many pubs are happy to give them away.



36 comments:

Cooking Lager said...

With fuel costs tumbling, general inflation is zero and we are heading to deflation.

Beer as a processed product of commodity ingredients should be falling in price.

Nowt special about beer. The price should fall with other processed goods.

Dave Bailey said...

Sorry Cookie, did you actually read my post in detail? It seems you missed the point.

Inflation is zero, it won't last long, and can't if we expect an economic recovery. Any brewery that decreases prices now will have to increase them again in a few months. Same with bread, petrol (which is already on the up) eggs, milk and everything else.

StringersBeer said...

Good points Dave. Of course, some (bigger) producers have always done separate "cost of living" and Duty-based price adjustments. We (like you) always rolled ours in together. And like you, we've had some customers expecting a price reduction. The important thing about the duty rates is that the escalator has been stopped. That was good. This tiny cut is pure PR.

Cooking Lager said...

Eye, I read it and thought most of it bollocks. I thought it a fair to middling attempt, but mainly bollocks.

The whole of Europe will be in deflation for years. Wage growth will come from productivity gains rather than output price rises. But, you know, try and kid us all your prices need to go up when every other price is going down, some will accept it.

In actual fact, your retail prices are falling, from your last few posts. 4 for £6 and all that.

What do want? Cheaper beer! When do we want it! Now!

StringersBeer said...

@Cookie - ingredient costs haven't simply fallen (for small brewers, this last year, at least) some have, some stayed the same, some rose. While fuel costs fell recently, for much of the year they were rising and are rising again. Wages and power costs rise consistently. Any brewer who manages to even hold their prices is doing a remarkable job.

StringersBeer said...
This comment has been removed by the author.
Ed Davies said...

The biggest issue we used to have at the pub was: Regulars would expect 1 price adjustment a year. Yet costs could change throughout the year. We'd always hold off until the budget, despite brewers increases coming through early Feb.

As well as reacting to the last year, you have to predict the next 6 months and make sure your business is priced correctly.

Dave Bailey said...

Cookie, I will accept that there will also be economic improvements due to efficiencies. Our price reductions at retail are due to the stupendous agreement we have negotiated with Morrisons, and their very helpful reciprocation in behind-the-scenes discussions about logistics.

The saving here is in the logistics of mass route-to-market solutions afforded by Morrisons. Actual cost of production is on the up, make no bones about it.

Of course some consumers will want beer at a lower price. We started our journey many years ago with a tiny brew house. We've expanded and we can recoup some of those economies of scale for further investment, but some we pass on when and if it is prudent. Hence our prices in bottle look significantly better than when we were hand-bottling for a much small audience.

Hopefully we are bringing our form of craft beer to the masses at some reduction in price. Other breweries who are smaller, and making smaller batches cannot afford those economies of scale.

As Stringers is pointing out, however, any brewery that can hold their prices currently are doing a very good job indeed.

py said...

We're all talking as if brewers actually work out their prices based on their costs; they don't, they flog their beer at the highest price they can negotiate with their buyers and still sell the majority of their output.

Of course a big part of that negotiation is to insist your costs are going up, even when they're not.

Dave Bailey said...

"We're all talking as if brewers actually work out their prices based on their costs; they don't..."

Oh, really? So, all those hours I spent studying complicated financial models on Excel so that I could see if I could bring down my prices for Morrisons or Booths deals were wasted then? Because I wasn't, actually, looking at my costs but simply enjoying myself (It wasn't fun BTW)

I know that you, PY, don't believe beer costs very much to make. Believe that if you like, but actually most of the costs are in various things the consumer generally doesn't think about.

If you want low priced beer, head off to Aldi, with Cookie, and get a slab of something.

Cooking Lager said...

Well Aldi is good for a 6 pack of Steinhauser for £4. For bottled ales, Home Bargains is the gaff.

Dave Bailey said...

And that's the point, isn't it Cookie? Pricing for beer, or anything else, is variable, dependant upon route to market, retail outlet margins and pricing structure, manufacturing process, materials used, location and provenance, and yes, to weald a little to py, something to do with the marketing and PR success of the brewery.

But then again, I think there are a lot of brewers out there feeling the pinch. I know 2014 was fairly poor for us, 2015 will be OK, but only if we do keep looking at our costs and pricing.

But, onwards and upwards. Gotta keep positive.

Dave Bailey said...

"yield to py" is what that should have said.

Neil Walker said...

"We are in a much better situation now than we might have been had the escalator still been in place - except, if I remember correctly, it was linked to inflation......."

The 'except' doesn't really work here Dave. The beer duty escalator added 2% above inflation to the duty paid on beer. In real terms, thanks to a few boom years, this meant that beer duty increased by a whopping 42% between 2008 and 2013.

So yeah, a penny off the pint (three year's in a row) is better than the alternative!

Dave Bailey said...

Fair shout Neil, yes. I remember now, it was an increase above inflation.

Jeffrey Bell said...

When brewers mention hop prices as a major contributing factor toward prices I can't help but sigh. Hops are a tiny part of the overall cost of running a brewery, so fluctuations there shouldn't be the first thing you mention when justifying keeping your prices high. But of course it's a good line to use on beer geeks who might then believe craft beer is pricier principally because it's hoppier.

Curmudgeon said...

A couple of small points:

(1) Inflation is NOT a necessary condition for economic growth. Throughout the Victorian age we enjoyed rapid growth and a fairly stable price level. Arguably the ideal situation is where wages remain steady but the gradual decline of prices makes them worth more each year. Inflation is rather like a drug - a moderate amount gives you a quick fix, but you have to keep increasing the dose, and eventually you become addicted and have to go through a period of economic cold turkey.

(2) I haven't done the maths on the new duty rates, but do you need to add the VAT on duty on to the duty itself, so that 0.85p becomes 1.02p ?

Dave Bailey said...

Jeffry,

It would seem you have gained your information about the cost of hops as a proportion of the cost of brewing from some family brewer, who no doubt uses fairly generic hops in low qualities.

But then, your obvious anti-craft persona is bound to have the bias it does. We all have to decide on our positioning.

Mudgie,

"Sustained growth caused by rising aggregate demand can lead to acceleration in inflation as the economy uses up scarce resources and short run aggregate supply becomes inelastic." - Just one quote, I found a few more.

I'm sure you might be right that it is possible to get economic growth without rampant inflation, but I doubt this will happen any time soon.

However, you are correct about the VAT element. You see, as a business owner I do all my pricing and costings exclusive of VAT. I simply add on the VAT to give retail price, in the small section of my business that is retail.None-the-less, the impact for micro-brewers is half that of bigger brewers.

Jeffrey Bell said...

Dave, that's patronising nonsense. I'm not "anti-craft" - if so why am I constantly buying and selling undeniably "craft" beer* in my pub?

I don't have any connections with "family brewers", so heaven knows why it "would seem" that way to you. All my experience on this subject comes from small breweries using expensive New World hop varieties in large quantities (small breweries that include the one I'm a significant investor in and have full access to the financials of).

Try and address the point honestly: are you seriously contending that a rise in hop prices is really the most important factor in the overall rise in overheads at your brewery? If not, then why did you mention that first and foremost? Because it sounds good and emphasises how hoppy your beers are?

If hop prices really are first among your worries, you're going to have a very good 2015 indeed as clearly you've got all the important things locked down and tight. I offer you nothing but congratulations.

Dave Bailey said...

Jeffry, I perhaps was a little naughty in my response to you, I apologise, but I'd prefer bullish, jocular and reaction provoking. Not dissimilar to your own MO at times.

Our own hop supply is a little worrying at this time. To some extent because we had messed up somewhat with our own commitments to the hop suppliers. Is this my biggest worry? No, and I'm sorry if I gave the impression it was. I do think it is much bigger than the effect of the current beer duty change, and you can believe that or not, but that's the way things are.

Never-the-less, the main point is that no-one can look from the outside of a business and be sure of the exact cost-concerns within. I might have an idea what your energy bill, insurance, rent or mortgage, rates and staffing costs are as a proportion of your business, but I wouldn't use that to try to leverage the price of a pint you served me.

But back to the question of craft beer and the impression I have gained of your views, again, apologies, I have obviously misinterpreted some of your writings.

Anonymous said...

If you want to drink cheap beer, drink cheap beer, it's not like its hard to locate in this Sceptred Isle.

Wonder what Cooking Lager does for a living, and how the gobshite twat would feel about everyone lining up to tell him about his job

Dave Bailey said...

Well Annon, what you have to remember is that Cookie is a parody. It's best not to get too worked up about him really.

But you are right, there is plenty of cut-price beer around. That's not what micro-breweries do, and so we should all concentrate on making good beer. Yes, be carful of our costs, don't lie in expensive hops for the sake of it, and make the best beer you can for the best price you can, but not be afraid of charging a little more if you really believe in your product.

StringersBeer said...

I now have a mental image of you as you "lie in expensive hops".

Yvan said...

That scene in American Beauty with the rose petals... but with Dave instead of Mena Suvari.

And this is why we pay more for our beer...

Jeffrey Bell said...

"I might have an idea what your energy bill, insurance, rent or mortgage, rates and staffing costs are as a proportion of your business, but I wouldn't use that to try to leverage the price of a pint you served me."

Absolutely right! Which is exactly why, on the flipside, it's daft a brewer to suggest his prices are set on the basis of cost of production as opposed to what the market will bear and how he wants to position his product.

I was drinking with a friend of mine who owns pubs in summer. We were approached by a London craft brewer who told us he'd decided to do some cask beer (previously it was all key keg and bottled), but that he'd be charging £90 a firkin for session strength stuff. We told him what we'd be willing to pay based on the market and he retorted that we weren't taking into account his higher costs due to the scale of his production.

I did make the point that if he's able to sell to other pubs at his extremely high price then good luck to him - forget us - but I do think it won't be long before the market is corrected in that regard. Those who are outliers on price will have to get real or get out of the business. The craft beer peak will pass. Pubs and drinkers will still want great beer but they'll become aware of what's good value and what isn't.

If a business can only break even by selling its goods at a price that's way above market then that business simply doesn't work. Justifications based on cost of production are only arguments for a higher price if their is a qualitative difference (tangible or intangible) in the final product.

You clearly don't have that problem as you're able to sell bottled beer to supermarkets at a sufficiently keen price for them to be able sell it on at a profit for £1.25+VAT a unit, so you've clearly got your cost of production under control. On that basis I confidently expect you to survive any market correction. Others will not.

py said...

"he retorted that we weren't taking into account his higher costs due to the scale of his production"

which is ridiculous, but sadly not at all atypical.

Its his problem to worry about his inefficient brewing methods meaning his costs are higher than the market value of his product, not the pubs or the customers. We're not a charity. If you can't match the price of a competitor who produces beer of the same style and quality, then perhaps you should go and do something else with your time.

StringersBeer said...

Chaps, it really doesn't matter what the brewer is asking for their beer. If the publican can whack on their markup and get the punters to buy it - it's a good price. If not, not. By definition, if brewers are finding a market for their products, the price is OK.

But that's not what we're talking about here - rather, should a tiny reduction in duty lead to a reduction in the price of a pint? Now unless a brewer was building in high margins (which they could afford to shave a little), the argument is that they probably can't sensibly cut their prices.

The corollary is that anyone you see knocking a bit off now has probably been having you off for the last few years. And you fell for it.

Rob said...

Where do you come up with increased cost of transport, heating and power? All of those costs are coming down if anything. Last year should have been quite good as the reduction in those costs was relatively unexpected.

Dave Bailey said...

Of course, I could continue to point out that it isn't short-term cost considerations, but the longer term issues that are important. I could point out that although the cost of fuel is lower at the moment, that isn't the only cost associated with transport. I could point out that most of our beer goes out on pallets, the price of fuel only indirectly affects that, and the pallet delivery rate is going up. We are tied into commercial energy price contracts for several years. The base-line costs are going up over a period of years, even if short-term things are seeing a low-point.

But Stringers and others are correct. We run a business. It is up to us to control our costs. All of them. And any business concerns itself with efficiency all the time. It is quite offensive to any hardworking business person when accused of being inefficient.

But of course, it is all about market forces. Big breweries make bland and unexciting beer in an extremely efficient way. Very small breweries do tend to be less efficient it is true.

I will repeat, if you want low-price beer, go follow Cookie and buy a slab of lager. It's actually very competently brewed, this efficiently brewed beer. Nothing offensive, it's quite probably get you just as satisfactorily drunk, if that is what you want.

But the whole point of my original post was not particularly to defend my own pricing, but more that fact that one single cost, which has changed by a tiny amount, makes the world think the price of beer should now go down. One single cost that has been widely publicised. I don't think this single cost changes the overall costs of brewing significantly. I don't think the price of beer should go down, and generally I don't think it will.

Chris Routledge said...

Inflation free economic growth was possible in the nineteenth century because Britain was taking resources from the Empire for practically nothing beyond the cost of transport, and the cost of transport was falling. See also, child labour and widespread destitution. But I think we need to ask whether constant economic growth is possible, and if so, whether it is a good thing.

Dave I do think you're being disingenuous to suggest that the cost of production alone determines your prices. You don't need to be coy on this point or use sales jargon like 'pricing structures': sensible buyers know that producers are trying to maximise profit, but if they feel like they are getting a good deal they don't worry about it. The retail price of beer is a sensitive issue because in many ways beer is 'ordinary' like bread or eggs. By making itself special, 'craft' beer has been able to command quite high prices, but if people are complaining and still buying in sufficient quantities then the price is right ;-)

Anonymous said...

Surely all of you writing long comments, are missing one very important point, Hardknott Brewery HAS dropped it's price, because the ale is soon to be in a supermarket for £1.50, a bargain, I for one will never pay more than £1.50 again, why should I?

Dave Bailey said...

Anon,

Well, of course this is an issue that every brewery has to question.

However, it is important to note that every route to the beer drinker is different. We can sell into Morrisons at a significantly lower price because of the significantly higher volumes they are taking. Sending out product as single beer per pallet and in full pallet quantities is something that only much bigger retailers can facilitate. It saves us a huge amount on the costs of getting those products to the beer drinker.

Equally, they are only taking three beers and don't take any draught products. There will be many other beers from our range that they will not be providing and these will find other routes to the fans of Hardknott.

But consider this; you can go to any supermarket and buy cans of soft drinks, or huge big bottles even, at low prices. The very same drink is available in motorway service stations for much greatly inflated prices. But it is there, and cold, and just in the package you want.

Soft drinks in pubs, even the post-mix types, where the margin made by the pub is huge (and for many reasons, not unreasonable) are significantly higher than in supermarkets. But you get a glean glass, and hopefully a war5m welcome, a comfortable environment, and many other great added services. Of course you'll pay more, in a different situation.

If your choice is to go to Morrisons and buy our beer, then great. If you then snub our beers in the pub, then that's a shame, and I'm sorry about that, but I'd like to think you wouldn't, not for me, or Hardknott, but for the sake of the pub.

But all of this ignores the main point. I'm not talking about the difference in price between different routes beer takes to get to the beer drinker. They are always going to vary. I'm talking about the fact that we have to decide how we do our deals with the various routes we use to get beer to the drinker. It is up to us to control our costs, and to negotiate our deals based on market forces. It has nothing to do with a fairly small change in one cost that is fixed by the government.

Rob said...

I can understand your frustration, and agree on the main point that the 1p/pint off isn't the only consideration. It must piss you off when people start asking for a discount as a result. But the other stuff does feel a bit like special pleading to me. We the consumer got told previously that tax increases were crippling and that's why prices were going up. Then it was energy costs. Now it's hops apparently.

But I don't really care what breweries say to explain their prices to be honest. You sell it at the best price you can and I'll buy what I like at the cheapest I can. I'll make up my mind how much extra it's worth paying for better quality (or if in the pub, for a well looked after pint, better ambience etc). And if there are different 'craft' breweries competing then great. After all, if someone else can do the same or better quality at a cheaper price that's where my money goes.

We shouldn't forget the retailers pricing strategy either. I bought a 500ml bottle of Kirkstall Dissolution (6% IPA) yesterday for £2.29 from a local off independent off license. Last week I spent 50p more at another local shop. The brewery delivers direct to both. Guess where I'll be shopping in future.

By the way, despite my questioning, I'm delighted you're going to be in Morrisons. I'll still be using the independents, but it's nice to be able to get decent stuff at the supermarket.

Dave Bailey said...

Thanks Rob,

And yes, I agree, at the end of the day we all have to make our choices.

The best argument, at the end of the day, of an increase in prices is that the beer is worth it. It is better, and worth the extra.

We are working hard to make our beer better, more constant and true to our core ethos.

ant4dx said...

Do you know how much hops are?? Or the amount needed. Idiot

ant4dx said...

You clearly have no idea about the extra expenses in London, but yet Taylor's can charge £120 per firk and people pay it