Craft Brewers’ Financial Issues – From Costs, Taxes, Contracts, and More

(file image) Photo: RNZ/Samuel Rillstone

From Brothers Beer to Deep Creek, Epic Brewing to Boneface Brewing, there’s been no shortage of famous breweries facing financial troubles in recent years.

But what’s really ailing our brewers and what does the future hold for the craft beer sector?

Here are the main factors that cause headaches.

The cost of living crisis

Brewers are not immune to the downturn that has affected nearly every part of the economy. People who are paying more on their mortgages don’t have the money to buy as many luxuries, like beer, and they don’t tend to go out as often to the pubs and restaurants that can serve it.

Data from Stats NZ shows there were 281 million litres of beer available for consumption in the year to March, down from more than 294 million in each of the previous three years and almost 300 million in 2019.

As overall spending fell, so did the amount spent on going out – Stats NZ data for May showed a 2% drop in hospitality spending for the month.

Dylan Firth, chief executive of the Brewers Association, which represents Lion and DB Brewing, said the market was quiet as people tried to save money.

The fall in alcohol available for consumption in the year to March was the biggest in a “long time”, he said.

“The hospitality sector is a very important marketing channel for brewers. Compared to retail, it has a higher value proposition, there is more profit in it.

“And then people not going out to bars and restaurants as much because they’re obviously looking to save money or put it towards their mortgage or something, we’ve definitely seen that hurt a lot of people, especially the smaller guys who sell direct to the market at a higher percentage.”

He said everyone was expecting to get through the next six to 18 months until interest rates could come down and people had money to spend.

Luke Robertson of Shortjaw Brewing in Westport said it was noticeable that the last few months have been tougher.

“Even in quiet months you would expect a certain level, and it’s down 30% in the last two or three months.”

(file image) Photo: RNZ/ Nick Monro

Excise duty

Excise tax is applied based on the alcohol level of the beer and increases each year in line with inflation.

Since the start of this month, it has risen 4.1%, following a 6.92% increase in 2022 and 6.65% in 2023. In 2022/23, $443 million came from beer manufacturing.

Firth said the excise tax has increased 18 percent in the past three years. He said a mid-sized brewery might have to find an extra $200,000 for excise tax this year, and larger breweries would pay millions of dollars.

“This has to come from somewhere and cannot go directly to the price of the good… [Brewers] have to absorb it one way or another.”

Mr Robertson said excise duty had gone up by 6c or 7c a litre since he opened the brewery a few years ago. “That’s a jump in our overheads before we even get the beer into people’s hands. It’s just kept going up.”

Brian Watson, president of the Brewers Guild and co-founder of Good George Brewing, said the union wanted to cap excise tax increases at 2% a year to create certainty for businesses and their employees. “So we can make sure that we can be sustainable as an industry.”

He said some breweries would raise prices a bit if they could, but there would come a point where consumers would give up.

Production cost

Firth said the cost of production had increased substantially in recent years. There were problems with CO2 suppliesand the cost of transportation increased.

Supermarket margins

In March, the Commerce Commission received a complaint alleging that supermarkets’ push for higher margins risked driving craft brewers out of business. The commission chose not to investigate.

Firth said supermarkets would work hard to keep produce prices low for consumers.

“There is tension between retailers and producers about what the shelf price should be… there are definitely those pressures happening, margins are very tight at the checkout.”

Robertson said the profit margin he made on beer sold in supermarkets was very small.

“It needs to be competitive on the shelf – especially for smaller brands, if you’re not, no one is going to pick you up, essentially. We’re all looking at each other’s brands and seeing what everyone else is doing – we’d all like to charge more.”

(file image) Photo: Ziming Li

Woolworths said any supplier with any concerns should get in touch.

“We are always open to constructive discussion… When it comes to craft beer, we now have more brands and varieties of craft beer than ever before.

“As has been widely reported, price is a top concern for customers and we have seen some moving towards cheaper options and away from craft products. Beer is no exception to this trend.”

A Foodstuffs spokesperson said the company worked with more than 100 craft beer suppliers.

“Both cooperatives hold quarterly forums with suppliers and have monthly calls with them to share news and information.

“In the North Island, we hold quarterly connection meetings with craft beer suppliers, where our teams present data and trends on what customers are buying. These free events give suppliers the opportunity to understand where opportunities may exist.”

Scale economy

Robertson said smaller craft brewers faced challenges because they didn’t have the economies of scale that come with buying things like cans, labels and cases in bulk.

“All of these things escalate quickly. The price for us is much higher.”

Tap Contracts

Robertson said another challenge was the practice of tap contracts, in which large breweries provided support to local bars and restaurants in exchange for them primarily stocking their products.

“That’s a huge issue. Most pubs have a deal with the big brewery to have their beer on tap – they offer discounts on the amount of beer.

“What it means is we don’t have a look at our local pubs. I don’t blame the publicans, if someone offers you a cheaper product that customers will like, you’ll take it. But it restricts the quantity we can sell and keeps the duopoly in place.”

What is the outlook?

Marketing expert Bodo Lang from Massey University said it would be difficult to compete in this category until consumers began to spend more freely again.

“And that will only happen when consumers feel they have more disposable income. Until that happens, craft brewers will be under pressure, particularly small domestic brewers.”

Photo by Bodo Lang: University of Auckland

Firth said many people probably expected things to recover a little sooner than they did.

“I think everyone wants to be positive, things on the horizon look good, inflation is coming down, we’re heading in the right direction.”

Watson said that while several breweries have gone out of business, it is not as high a percentage of the industry as in other sectors, where a growing number of companies are also failing.

He said many small breweries were the heart of their local communities.

“As long as we continue to support our communities and the people who support us, that’s what matters.”

Beer was an affordable pleasure, he said.

“You’re not going to go out and buy a Maserati, even a bottle of wine might cost $60 or $70, but you can buy a really good six-pack of beer for $25. It’s an affordable treat and I don’t see that going away.”

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