Inflation and excise increase pressure on brewers

The rising price of goods and another excise hike is putting pressure on brewers of all sizes across the country.

The Australian Tax Office announced on Monday [1st August] that it would increase excise on beer by 4 per cent, which the Brewers Association called the biggest hike in three decades, and led to sensational headlines decrying the potential for $10 schooners.

While major brewers are inevitably most impacted by the excise increase, smaller brewers are also feeling the pressure of price increases for raw materials such as aluminium.

Traditionally at higher price points than many of the offerings by major breweries, smaller craft breweries such as Bodriggy Brewing Co. in Melbourne have raised some of their draught and packaged prices to reflect these pressures, after absorbing cost increases as much as possible in the last 12 months.

Bodriggy co-founder Pete Walsh said it had reached breaking point with the acceleration of cost rises across the board, from raw ingredients to packaging and fuel that were causing issues.

“One of the biggest challenges at the moment is keeping up with the speed in that prices are rising. Some of our suppliers have rolled out three prices rises in a matter of months,” he explained.

This hasn’t just been an isolated issue for one brewer either, as Brick Lane Brewing Co. managing director Paul Bowker attested.

“With raw materials, we are seeing price increases in the order of 5 to 15 per cent. Currently we are relatively well-positioned to maintain consistent pricing for malt and hops, however this is a clear watch out for the coming seasons.”

In a transparent move back in June, Bodriggy alerted its customers to and explained its price rises.

“All our customers have been really understanding but I think it’s important to outline what materials have gone up in price to help explain why it’s happening,” Walsh said.

“It also doesn’t hurt to explain your current position and simply apologise for the price rise. I know a lot of our customers work on tight margins so working together with them on the hike was critical.”

Thankfully, with the cost of living going up generally, customers seem sympathetic to the pressures being faced by industry.

“The response so far has been really understanding just off the back of this situation being so prolific at the moment.

“It’s nearly like people are expecting it and if you lay out for them to see why it’s happened they get it.”

However, what the impact might be long-term on sales is uncertain, with the Australian Bureau of Statistics’ latest Consumer Price Index figures suggesting that alcohol (which is conventionally tied to tabacco) has risen 2.2 per cent in 12 months in the most recent quarter. Overall in the twelve months to the June 2022 quarter, the CPI rose 6.1 per cent.

“There has to be a breaking point but I think this will happen gradually,” Walsh explained.

“People are not going to stop drinking beer but maybe they will be less indulgent or potentially gravitate occasionally to more affordable products.”

Compounded issues

Paul Bowker at Brick Lane said that the compounding of multiple issues had created a perfect storm for the industry.

“The real challenge is not just excise, but the interaction of an excise increase with supply chain pressures, energy pricing and availability, a still recovering on-premise sector, as well as the number of options consumers now have in categories adjacent to beer that have a different taxing regime,” he explained.

Some of the key issues breweries such as Brick Lane have seen are an increase in the price of cans as industries globally look to move away from plastics and beer continues to shift out of glass into cans. This is also a major concern in the US following the announcement that Ball Corp would be closing can manufacturing plants “to address localized [sic] supply-demand imbalances”.

“This has placed pressure on the can manufacturing facilities in Australia leading to demand exceeding supply and therefore to price increases,” explained Bowker.

Interruptions in natural gas and CO2 supplies have also been an issue, even with storage capabilities. Potential for ongoing shortages like these have previously led brewers to look at in-house CO2 recovery systems, but with the continued potential for supply issues, existing problems could be compounded.

“In the current environment, any interruption to production through supply constraints comes at a significant expense given the inflationary pressures on fixed overheads, wages and other inputs,” Bowker said.

“The continual increase in excise however is a blunt instrument that acts as a targeted impost on the beer industry, an industry that has been severely impacted over the last couple of years.

“This is particularly the case for many independent breweries that have effectively lost two years of trading through their most valuable income stream of their own tap rooms as well as local pubs and restaurants.

“The automatic ratcheting effect of beer excise needs to be reviewed and have some relationship to the needs of the industry and a view to supporting future growth in the sector rather than acting as a brake on investment.”

Excise and the big brewers

Like Brick Lane, the major brewers are somewhat protected from price rises in that they can absorb increased costs for a certain time, and economies of scale allow them to manage such price increases.

However, they are not unaffected, particularly following the excise hike by the ATO this week.

John Preston, chief executive officer of the Brewers Association which has lobbied for many years to have the excise hikes revisited, said that the pressures on the industry – particularly on the venue side – should prompt the Government to reconsider.

“Australians are taxed on beer more than almost any other nation. We have seen almost 20 increases in Australia’s beer tax over the past decade alone,” he commented.

“Brewers and pub and club operators were extremely disappointed that the former Government did not deliver on a proposed reduction in beer tax at this year’s March Budget.

“For a small pub, club or other venue the latest tax hike will mean an increase of more than $2,700 a year in their tax bill – at a time when they are still struggling to deal with the on-going impacts of the pandemic.

“This is a problem that the new Treasurer has inherited from his predecessors and there are many competing demands on the Budget. Nonetheless, we believe there is a strong case for beer tax relief to be provided by the new Federal Government – with the hidden beer tax to go up again in February 2023.”

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