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SBDRC, Yet Again – The Holistic Approach

Buckle up kiddies, this is going to be a long one…

…and there’s no charts this time.

I’ve said quite a lot about the Small Brewers Duty Reform Coalition (SBDRC) over the last year and a bit, since a small group of medium to large breweries got together with what becomes more and more transparently an idea to increase their profits at the cost of smaller brewery competition and drinker’s choice.

But it seems that since my last piece in February this year, they haven’t gone away but rather have been quietly working away behind the scenes, pulling favours from the Old Boy Network, pretending to be a larger group than they are and meeting government ministers to put forward their views backed up with skewed, biased and out of date data. So let’s start with a catch up of how we got here, and what it means for the drinker.

When SBDRC first formed, they happily shouted out in press releases who their members were. But they didn’t actually have a plan. They just wanted change, and they wanted someone else to do all the work. Sounds a bit like another political mess going on at the moment.

They were soon forced to come up with a proposal themselves, something more concrete than a vague idea, and as such they got the help of the British Beer and Pub Association (BBPA) who shared many of the same members, as well as some moneyed Big Beer, to commission a report for them to prove why their idea for a tax break was a Good Idea. To be able to fulfil this brief, Europe Economics who they commissioned to write this report had to use data that was 13 years out of date. They had access to newer, more accurate data, but it seems that wouldn’t have fitted the brief because it contradicted their ideas.

13 years ago, in 2006 a lot of the craft breweries we know now didn’t even exist. Beavertown (2011), The Kernel (2009), Camden Town (2010), BrewDog (2007), Wild Beer Co (2012), Tiny Rebel (2012), Siren 2013, Magic Rock (2011), Northern Monk (2013), Cloudwater (2015) and even ourselves (2014). Only the likes of Marble (1997) were around when this data was collected, and even that was based on responses from just 26 breweries. So while it gave an idea, it was far from accurate even when it was released.

In response to the SBDRC proposal, the Society of Independent Brewers (SIBA) put forward their own proposal of how any changes should be made, using the newer, more accurate data that reflected the modern brewing scene; which has seen a lot of changes in the last 6 years, let alone the last 13.

The focus of the SBDRC proposal was a change in who got a tax break. As it currently stands, breweries below 5khl (khl is a thousand hectolitres, or 100,000 litres, or 175,975 pints) get a 50% tax relief on the General Beer Duty rate. Between 5khl and 30khl there’s a sharp increase, and from 30khl there’s a more gentle increase up to no tax relief at 60khl.

SBDRC wanted to reduce the lower limit for getting relief to 1khl, meaning any brewery between 1khl and 5khl would suddenly start paying more tax on the beer they produced. They also wanted the upper limit for tax relief raised from 60khl to 200khl, meaning any brewery producing more than 60khl would benefit by not paying as much tax as they currently do. In short, smaller breweries pay more, medium to larger breweries pay less.

SIBAs proposal wanted to keep the 5khl lower limit for the smaller breweries but agreed with the increase at the upper limit to 200khl. Not all SIBA members however are happy with the idea of raising the upper limit, wanting it kept as it is with no extra tax breaks for the larger breweries.

The arguments for raising the upper limit for relief to 200khl is that that is the maximum size allowed by the European Union for Duty relief for smaller brewers. What’s really worth bearing in mind though, is that a “small” brewer in the UK is not the same as a “small” brewer elsewhere in the EU. Our beer and brewing culture is different, and as such the upper limit of 60khl is more reflective of this.

Both wanted to smooth out the “cliff” between 5khl and 30khl (although SBDRC wanted that to start at 1khl, not 5khl) so that growth for breweries was easier.

These 5khl, 30khl, 60khl and 200khl limits seem a little weird and random, but some light as to why they were chosen can be found in the Hansard Report from May 2002 when the original proposal for SBR was discussed: when Mr Christopher Chope put forward that he was advised that for a brewery growing from 30khl would have to expand to 60khl to not lose the benefit of the then proposed SBR.

The proposal to increase the original upper limit of 30khl to 200khl was eventually dropped, and the 60khl was introduced.

It’s worth noting in that report which breweries are mentioned as having campaigned for the increase from the originally proposed 30khl limit. Ringwood, Hopback, Brakspear, St.Austell, Harveys and Hook Norton. With Brakspear getting a rounding endorsement advert by none other than Boris Johnson.

So where are these breweries now?

Hopback is still an independent brewery with 10 tied pubs in their estate and a production capacity of 26khl, just below the 30khl limit they campaigned to get raised to allow for further growth 17 years ago. St. Austell are also still independent, although have increased their production level of just under 30khl in 2002 to 245.5khl  in June this year (https://www.staustellbrewery.co.uk/article/150K-Barrels), way beyond the 60khl limit that is said to stifle growth, and even beyond the proposed new 200khl limit. Harveys has also remained independent, with a tied estate of 48 pubs and a production capacity of 81.8khl, again beyond the current 60khl upper limit.

Brakspear was sold in 2002 (the same year as SBR came in) to Refresh UK who also owned Wychwood, and then later sold itself to Marston’s. Ringwood sold up in 2007 for £19m, also to Marston’s.

So Hopback, St.Austell and Harveys haven’t done too badly. Hopback seem content to stay below the 30khl level, Harvey’s have grown beyond the 60khl upper limit to over 80khl, and St. Austell who were worried about having to stay under 30khl are now well above the EU 200khl limit. So it’s pretty fair to say that SBDR has worked, and that it’s current levels haven’t prevented growth for those breweries originally worried enough to talk to their MPs about it.

One further thing to note though is that one of the directors of Refresh UK and therefore Wychwood at the time of the introduction of SBR, and then shortly after also of the Boris Johnson-loved Brakspear due to the Refresh UK buy-out, was a gentleman called Rupert Thompson, who is now the Director of Hogs Back Brewery and one of the two co-Chairs of the SBDRC. The other co-Chair of the coalition is Colin Wood, a director of Theakston’s, and the Independent Family Brewers of Britain, previously of Heineken, Newcastle Breweries and Scottish and Newcastle, so he has some Big Beer background and Theakston’s themselves continue to have a “strategic alignment” with Heineken who “continued to be the exclusive distributor for Theakston’s branded cask, keg and bottled beer in the UK during 2018 and therefore accounted for the company’s entire UK trade turnover (excluding exports) other than the Visitor Centre in Masham” as stated in the company’s latest filed accounts.

Also worth noting that whilst the 12khl Hogs Back saw a profit increase from £270,927 in 2017 to £349,567 in 2018, 115khl Theakston’s saw their 2017 profits (before tax) fall from £715,000 to £486,000. Which in itself would suggest that the current SBR is working for the medium sized breweries. Without going further into the accounts, most of which aren’t published publicly it’s hard to see why Theakston’s profits were down so much. It could well be a bad trading year, or it could easily be reinvestment of profits into new brewery equipment, or purchasing of more pubs for their tied estate or even just renovating the current pubs.

Given that however, again from their own accounts: “The directors are satisfied with the results for the period which show further growth in cash and shareholders’ fund in 2018 compared to 2017” and that their balance sheet has increased from £775,000 to £824,000 after payment of dividends. Which themselves were £250,000. So it seems that Theakston’s aren’t doing badly. Which makes it surprising in a way that they chose their company accounts to state in the Principal Risks and Uncertainties statement that SBR “has led to the creation of significant unintended market distortions.” And that “executive director WJC Wood is the co-chairman of the Small Brewers Duty Reform Coalition, a group of small and medium sized brewers who have come together with the sole purpose of persuading government to review and improve the Small Brewers Relief (SBR) Scheme.” And they shall “continue to argue strongly that future revisions to the scheme need to ensure that any unintended market distortions are not further exacerbated by future changes in the overall level of beer excise duty”.

So the main reason behind SBDRC forming is that there were “unintended market distortions” when SBR was brought in?

The introduction of SBR meant that the smallest breweries got the largest relief, 50% of the General Rate Beer Duty. I’ve gone into these figures several times in more depth, but it costs a small brewery £36.53 to produce a firkin (9 gallons, 40 litres) of a general 4.2% beer. That’s including ingredients, wages, overheads, etc. with an additional £16.03 Duty added to that, making the total production cost £52.56 For a small to medium brewery, say 10khl with a 25% relief, the cost of producing a firkin is down to £26.23 with Duty up to £24.05, giving an overall cost of £50.28.

We can see from this that it costs a 1khl brewery an extra £2.28 to produce a cask of beer than it does a 10khl brewery due to purchasing power and economies of scale, etc. And those economies of scale grow. The SBDRC’s own biased and out of date report states that production costs for a 100khl brewery are £21 per hectolitre, or about £9 per cask. They would of course have to pay the full Duty rate of £32.06 per cask, so the total cost per cask for a brewery suck as Theakston’s would be around £41.06.

Putting that into context:
1khl – £52.56
10khl – £50.28
100khl – £41.06

Meaning that when you take production costs into consideration along with the SBR, a medium sized brewery such as Theakston’s who are pushing for a change in SBR are able to produce a cask of beer £11 cheaper than a small brewery. That’s not quite the “unintended market distortions” that they seem to be pushing but rather the economies of scale working heavily in their favour. Add to that the extent of tied estates and access to national and global markets, and if anything the relief for smaller breweries should be increased, not scrapped for the benefit of those larger breweries.

But it’s far easier to get things across your way if you frame it right. If you focus on one thing at a time and not see the interconnectedness of the alcohol industry. When we are only looking at SBR then yes, it seems that the smaller breweries are getting an unfair advantage. But when we look at SBR together with economies of scale, that advantage soon swings the other way. When we then bring in the tied estates, any benefit of SBR that might have existed goes right out the window.

And it doesn’t end there. I’ve pointed out in previous blogs that the money behind SBDRC is that of the British Beer and Pub Association (BBPA), an organisation made up of some of the biggest names in beer in the UK, including Marstons, Heineken, Ei Group (formerly known as Enterprise Inns), Fullers, Greene King, Punch Taverns, Trust Inns, Theakston’s and Hogs Back amongst many others.

The BBPA are also the money behind the Long Live the Local campaign, which is calling for a cut in overall Beer Duty. On the face of it this seems admirable indeed. However, once again we have to look at the wider picture, especially relating to SBR.

As said earlier, SBR grants the smallest brewers up to 50% off General Beer Duty. Meaning that a small brewery pays £16.03 Duty on a firkin of 4.2% bitter, whereas a larger brewery pays £32.06. This works out at about 48p per pint is Duty, with smaller brewers paying 50% of that, 24p.

A reduction in Duty by 1p per pint would bring the amount that a large brewer pays down to 47p, and a small brewer on the 50% relief down to 23.5p per pint. Putting that back into scale, for a 5khl brewery the reduction would work out at a saving of £8,798.77 a year, whereas for a 100khl brewery it would work out as a saving of £175,975.40. The larger breweries would benefit both from the full 1p Duty cut per pint, and from the larger scale of production.

It’s often quoted when promoting a large scale reduction in beer Duty that we pay one of the highest rates in the EU and 12 times that of Germany. Meaning that whilst the UK pays 18p per pint, German brewers pay 1.5p. If that rate was introduced to the UK it would mean that SBR would be reduced to 0.75p per pint for a smaller brewery. Scaling that up, a small 5khl brewery would go from paying £79,188 to £6,599 a saving of £72,589. A larger 100khl brewery would go from paying £3,167,557 to paying £263,963 a saving of £2,903,594 a year.

So while the saving of almost £80k a year to a small brewery sounds brilliant and could pay back a lot of investment debts and employ staff, the bigger brewery’s saving of almost £3m would allow them to undercut the market to the point of forcing the smaller breweries out of business.

But remember, we have to keep looking at the wider picture, because it’s the BBPA’s money behind both the campaign for reduction in beer Duty, and for a reduction in SBR. Under SBDRC’s proposals, small breweries at 5khl wouldn’t get that 50% relief, but rather only 42% relief. So a 1p reduction in Duty would mean that instead of going from paying 24p per pint (50% of 48p) to 23.5p (50% of 47p), they would go to 27.26p (58% of 47p). This double whammy of reduction in the percentage of relief, and a reduction in the overall amount the relief is on would see the gap in Duty between small and large breweries decrease even quicker. And if Duty was reduced drastically, the gap between what small independent and larger breweries pay would be almost wiped out.

The last time Duty was cut by 1p per pint was in 2013 when the average cost of a pint was £2.87. In 2014 the average price had gone up to £2.94. It’s fair to say that the 1p Duty cut didn’t get passed on to the drinker, and it’s unlikely it will get passed on if it happens again. If the Duty cut was higher, a proportion would likely get passed on, but only so that bigger breweries could try and force smaller breweries out of business. And with the same people behind both these campaigns, it’s very unlikely to be coincidence.

Now here’s the thing, even now after a couple of years campaigning for a tax cut for larger breweries at the expense of smaller ones, SBDRC still won’t publish their members list. This group have had meetings with government ministers (remember some of these breweries have been mentioned in the Commons by their local MPs, so there’s obviously political connections) and nobody knows who they are. They refuse time and again to name their members, relying instead on the implication that they have many, and on the originally published list to give some credence to this implication.

So I’m going to publicly call on the breweries originally listed to either acknowledge that they are aware of the wider implications of the proposals, and that they either are, or aren’t for it. It may well be a case, as it was for a lot of the original members that they’re unaware of what is actually involved. Pressure groups like the SBDRC shouldn’t hide in the shadows.

We know that Hogs Back and Theakston’s are the two co-Chairs of the group, and the other originally named breweries are:

Adnams
Bathams
Batemans
Bath Ales
Battlefield
Black Sheep
Brewhouse & Kitchen
Butcombe
Castle Rock
Charles Wells
Cotleigh
Daleside
Dartmoor
Edinburgh Beer Factory
Everards
Exmoor Ales
Fullers
Hall & Woodhouse
Harveys
Hepworth
Holts
Hop Back
Hook Norton
Inveralmond
Jennings
JW Lees
Kirkstall
Lancaster
Moorhouses
Nethergate
Oakham
Otter
Pilgrim
Portabello
Ridgeway
Robinsons
St. Austell
St. Peter’s
S.A. Brains
Shepherd & Neame
Thwaites
Timothy Taylors
Tring
Trumans’
Wadworth
Wickwar
West Berkshire
Wychwood
Wye Valley

Ones we know have pulled out once they were aware of the details:
Harbor
Magic Rock