Reduce beer duty or defend PBD?

Hundreds of small breweries in the UK benefit from Progressive Beer Duty (PBD). The discount we enjoy has helped to see a huge increase in the number of small breweries in the UK. It is aimed at helping, to some extent, offset the economies of scale that larger breweries achieve.

The smaller a brewery the more manpower is needed to brew each pint of beer. For example, it takes around 6 hours minimum to brew a batch of beer¹. There isn't much can be done to make this a lot faster, and in some cases it might take a lot longer with inefficient brew kit. To a large extent, irrespective of brew-length², it takes perhaps one person to do a brew with little other help³.

For this reason production costs are generally higher per unit of volume the smaller the brewery. In fact one study I am looking at⁴ indicates an exponential fall of costs as the brewery gets bigger. PBD is there to help small breweries with the diseconomies of scale suffered by small craft brewers.

As beer duty has risen over the years, and so many more new breweries have sprung up, bigger breweries have started to complain about the increasing perceived cash "discount". It is certainly true that as beer duty becomes a bigger part of the overall costs of brewing beer so we see PBD working better for us smaller breweries. Perhaps we shouldn't object quite so much when beer duty increases? It hurts, but it hurts the bigger breweries more.

It is also seen as unfair that the maximum amount of PBD in cash terms is limited to about £200,000⁵ Once a brewery hits production of 5,000 there is no benefit to produce more in terms of beer duty savings. Arguably every drop of beer produced above 5,000hl is charged at full duty rate. However, economies of scale do really make a difference.

There are moves to change the structure of PBD. The thing that scares me is that SIBA is looking to engage with various organisation in a bid to create unity in the beer industry. It is likely that there will be increasing moves to change the shape of PBD so much larger breweries gain some significant benefits. The reasons for wanting to engage with the wider beer industry, it is argued, is that we should have a common lobbying voice to put to Government to reduce beer duty.

Number of breweries by size in the UK

Personally I would much rather SIBA fight to keep PBD as it is. There might be a little bit of a painful step at the 5,000hl level, but frankly there are a small number of breweries that will get close to this.

Looking at the chart above, there are a huge number of breweries below the 1,000hl level. Many of them cannot, or do not want to grow towards 5,000hl, and if they do, their barriers are generally the stiff competition that exists.

Although SIBA are saying that the 5,000hl limit is sacrosanct and the 50% discount below that cannot be touched, and frankly there are scary noises around to fiddle even with that, there will be unintended consequences of giving breweries in the 5,000 - 200,000hl range added benefits. Any duty benefit given to breweries larger than 5,000hl will inevitably give them a competitive edge that will directly impact on those breweries less than 5000hl, who will receive no added help.

Looking at the spread of brewery size it is quite clear that there are very few breweries above 5000hl. Indeed, more than 50% of the breweries in the UK are in fact under 1,000hl and stand no chance of ever achieving 5,000hl.

Total share of volume by brewery size

The reasons for considering a dialogue that might change PBD is to help have a unified voice to lobby for an overall reduction in beer duty. I fail to see how that might help me, and hundreds of other breweries like ours. Indeed, I am of the view that lobbying for major changes to the now fairly established policy of increasing all alcohol duties in line with RPI is a somewhat futile activity.

The vast majority of beer brewed in the UK is made by huge companies. Over 90% is brewed by only 25 massive breweries. An increase in beer duty hurts them much more than it hurts me. A decrease benefits them much, much more than it benefits me. The vast majority of the electorate is now convinced that these big companies are evil and deserve to be punished.

A change in PBD will give me no benefits, and likely make a very small number of larger breweries more competitive, so hurting my sales. Indeed, this is the reason there is a driver for change anyway.

It is this, more than anything else, that has made me fairly convinced that we need to look more carefully at how SIBA view it's members. If you are a SIBA member and have yet to vote in the membership ballot, I would urge you to do so as soon as possible.

I do hope the reader is impressed with my pie charts. This is a beer blog after all, and we all know that beer and pies are an ideal combination.


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1</sup>The brewing process from point of mash in to having the fermentable liquid, called wort, in a tank ready to pitch the yeast.

²The brew-length is the volume of wort produced in a single brew-day.

³I am of course generalising here. However, the bigger a brewery installation the more likely labour saving features have been introduced. For us we still have small mash tuns which necessitate digging out the grain from the top. A brewery with a brew length of say 25hl will almost certainly have side access door enabling spent gains to be raked out with comparative ease. A 100hl brewery might well have a self-digging mash tun and be operating a whirlpool type copper which generally only uses pellets. Cleaning such brew-houses

There are variations on this with smaller brew-houses where automation allows more brewing per shift by use of parallel vessels and mash-in possible for a second brew while the first is still in the copper.

⁴Unfortunately, because of the nature of the data it is unlikely that I'll be able to publish the exact details of this study.

⁵This assumes an average beer strength of 4.2%. The current full duty rate is £19.08 per hectolitre percent (HL%). Full PBD discount gives a reduction of £9.54/HL%. So for a brewery producing 5,000hl of 4.2% beer their total savings on beer duty is 4.2 x 5,000 x £9.54 = £200,340.

Before the duty rate increase in March it was £192,990. So a brewery between 5,000hl and 30,000hl annual production saw an increase in this benefit over the very biggest breweries of £7,350.

Small Brewer's Duty Reform Coalition

I've oft raised concerns regarding SIBA, the trade organisation of independent brewers. Over the past two years or so I have moved towards a position of working closely inside SIBA to achieve change through engagement rather than shouting from the sidelines. Arguably this is a more responsible and constructive activity¹.

I am a member of the Policy Committee, which is currently looking at various issue that are becoming more public, notably progressive beer duty(PBD)², and access to market³. These two issues are extricably linked in many ways.

SIBA originally started out life as the Small Independent Brewers' Association. It was decided some time ago to change the name to Society of Independent Brewers, but for the sake of simplicity retain the original acronym. One can have a view on the appropriateness of the change, and the subsequent closer working relationship with the likes of BBPA, regional brewers and even major multinationals.

Things are coming a little bit to a head. There is the recent formation of a coalition of brewers named "Small Brewers Duty Reform Coalition" (SBDRC) who are now looking to change the duty scheme to favour what is called "The Squeezed Middle". See the details here. I believe this to be a threatening and aggressive move, especially as many of the protagonists are SIBA members. It does not help us to work sensibly to produce a fair and cohesive strategy for the future of PBD.

If you have been following this blog so far this year you will note that I am greatly concerned about overall saturation of the beer market; great for beer drinkers, but not so for brewers large and small. The whole market is being squeezed significantly. Indeed, we feel like we are the squeezed bottom⁴.

The basic premise for the perceived need to change PBD is that there is a barrier to growth and there may be some merit in looking at that. Without going into detail, it is difficult to grow beyond 5,000hl due to the structure of relief as the increase of duty at 5000hl is very sharp. There is another much less convincing argument that it is unfair that brewers over 60,000hl get no relief at all, as they still fail to have economies of scale. Frankly, it is complete nonsense to imagine a muti-muillion pound businesses see similar diseconomies of scale compared to micro-brewers and to conflate the two issues is dishonest.

SIBA have nicely and robustly countered the SBDRC announcement with its own press release.

I want to voice here my own Hardknott centric view on all of this. Micro-breweries are going out of business. I hear of one gone into receivership just this week. Other micro-brewers are either activating or considering significant retraction of activities. Much of the reason for this is because the "squeezed middle" are driving down prices, and significant to all of this is recent huge mandated  price drop for SIBA members into Enterprise Inns.

If we change the nature of PBD significantly we will see the "squeezed middle" using any duty benefit to further drive down the price in the market increasing damage to an already struggling micro-brewery industry. The only true benefactors will be PubCos and brewers with significant pub estates. There is already significant evidence to suggest that the vast majority of duty decreases of any sort are simply demanded by retail chains to improve their bottom line.

The work done behind the scenes to deal with these issues is complex, sensitive and contains significant alternative perspectives. I simply put my point of view across here, but it is one that I would expect most brewers of our size (1200hl/yr) to agree with. It is also worth noting that I represent around the average size for SIBA members, and therefore would expect SIBA to take as much notice of me as they would of any brewer bigger than me.

Further more, very few SIBA members are above 5000hl, over 90% of SIBA members are below 5000hl and benefit from full duty relief, essential for their very existence. The remaining 10% or so appear to be significantly more powerful in shaping SIBA policies and certainly carry more weight and have more resources to help influence policy.

One would expect SIBA to defend PBD completely and utterly. Up until recently this is exactly what has been happening, and I am hopeful that this will continue to be the case. I am significantly scared that this may change if we do not fight very strongly against SBDRC and some of the noises being made by larger organisations.

Part of the problem is that SIBA has grown now to include some fairly big brewers. Brewers can now be a member of SIBA even if they brew a colossal 200,000hl per year. This represents businesses that turn over tens of millions of pounds per year. They are huge. It is inconceivable that they can relate to the difficulties faced by 90% of SIBA members.

Now, SIBA is a democratic organisation, which in itself begs the question as to why we have allowed ourselves a position where we have such giants in our camp. I believe there is a core reason behind this, and my main reason for writing this post. Change is made via regional meetings, representation is sent via trusties to the board. Additionally, there is a route for major changes to be made via motions to the AGM. If I understand correctly, these motions have to first be approved at regional level for onward consideration by the board before finally being presented at national AGM (BeerX) for a vote.

I see there being some significant flaws in this process. Firstly, many of the brewers below 5000hl are working their butts off just to stay afloat and cannot afford the time or fuel to travel and engage with this process. I believe the direction SIBA would take would be significantly different if many more members engaged.

This is the key message behind this post. I am considering two motions to the AGM. One that ties any change to PBD to a significant, meaningful and proactive change to access to market for brewers below 5000hl. The second motion would question the rationale behind having membership over 60,000hl and the associate membership category, perhaps demanding a referendum on the policy to determine if the membership is happy with the status quo. My reason for this second motion is that I believe members over 60,000hl significantly compromise SIBAs ability to act for the majority of the membership.

For these, and other motions from other breweries to be successful we require as many sub 5000hl brewery representatives to attend both regional AGMs and the National AGM at BeerX in March.

If any micro-brewery cannot attend then there is an option for proxi-voting, which I would strongly urge members to activate.

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¹Although sometimes frustrating from the point of view of this blog, as to write publicly regarding some issues would be unprofessional. Equally, there are comments I'd like to make from a Hardknott perspective that would be in disagreement with a broader view of SIBA in general. This part is hugely frustrating. Hardknott has a unique ethos towards beer and it is important to get that message out.

²Progressive beer duty is the scheme whereby small brewer's diseconomies of scale are partly helped by a reduction on the amount of tax we pay. Without this duty us small brewers would have an incredibly difficult time competing in the market and there would certainly be much less choice in the beer world. If we lose this relief many brewers will find it difficult to continue and we would see significant shrinkage in the micro-brewery market.

³A significant proportion of the pub market is tied to particular brewers. This might be through ownership of the freehold of the pub, or it might be through less obvious barriers through ownership of dispense equipment.

⁴With apologies, we know who to blame for this phrase, and suitable admonishment has already been administered.