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The Devolution of Brewing (or the Evolution of Can?)

The pandemic has undoubtedly dealt a blow to the brewing industry - the forced closure of pubs, bars and restaurants had a significant impact on beer volumes throughout 2020 and early 2021 as the lock downs continued to contain the spread of the virus.

But it's also fair to say that coronavirus simply exacerbated trends that were already there - here's a graph showing the total beer production over the last 40 years, taken from the Alcohol Duty Review call for evidence in April 2021:

Beer production has fallen by a third in the last 40 years - changing tastes play a part in the decline; wine has risen in popularity over the same period, as have spirits.

Three other significant events will also have contributed:

  • The Supply of Beer (Tied Estate) Order 1989 and The Supply of Beer (Loan Ties, Licensed Premises and Wholesale Prices) Order 1989, commonly known as the Beer Orders, gave rise to the ‘Pubcos’ with the unintended consequences of restricted access to market for small producers and high tied pricing structures for tenants.

  • The 2007 smoking ban, made it illegal to smoke in all enclosed places, which appears to have contributed to pub closures in the UK with some 9,300 permanently calling last orders in the 10 years since the ban.

  • The continuing rise in the tax applied to drinks - and beer in particular. The beer duty escalator meant that between 2008 and 2013 the duty increased by 42% - it seems no coincidence that this significant rise appears to have led to the most significant decline in the decade between 2000 and 2010.

Each of these events had an effect on the on-trade - prices on the bar steadily rose and, whilst the smoking ban was absolutely the right thing to do in the interests of public health, it drove some customers away from pubs.

The graph below shows the impact of this - the black line with beer mugs represents the number of pubs steadily declining. The blue line shows the reducing levels of beer being sold in the on-trade. The red line shows the rising volume of beer being sold in the off-trade, or supermarkets:

So more beer has been sold in supermarkets than in pubs since 2015. This steady rise isn't just about pubs closing, it's also about price - this graph shows the average price of a pint sold in the on-trade compared to the off-trade since 2008:

Pretty startling isn't it? As you'd expect, prices have risen in both pubs and supermarkets as inflation rises - but supermarkets are holding prices lower than pubs can.

Supermarkets have two key strengths when it comes to pricing:

1. Buying power - Four supermarket chains dominate UK food retailing, accounting for 70 percent of the market. Tesco is the market leader, with 27.3 percent market share, followed by Sainsbury’s and Asda with 15.2 percent each and Morrison’s with 10.4 percent. In total, there are in excess of 87,000 groceries outlets in the UK.

The dominance of a small number of retailers in a huge market leads to buying power of such significance that prices can remain low to attract shoppers.

2. VAT benefit on zero-rated groceries - The zero rate of VAT applies to the supply of most foodstuffs, such as bread, butter, cheese, cereals, condiments, flour, fruit, herbs, meat, milk, pasta, pastes, sauces, soup, spices, sugar, and fresh or frozen vegetables (This list is by no means exhaustive.)

Most consumers are unaware of which items in their basket will attract VAT and which do not, making it possible for supermarkets to artificially increase the selling price of zero-rated products (thereby making more margin) and offer discounts on standard-rated items; often, these discounts are applied to luxury items (such as alcohol) to attract shoppers.

Lower prices are good news for consumers, but margins are slim and access to the largest of supermarkets is restrictive to all but the largest of brewers.

So volumes of beer are reducing - what used to be sold in big containers is increasingly being sold in bottles and cans:

It's not all bad news - bottles and cans offer choice to consumers; we now see a significantly wider range of beer styles more readily available than 40 years ago. Independent Craft beer has really led the way on that front.

But let's think about the Great British pub. The place where life happens. People meet, socialise, celebrate and commemorate in them. They're socially responsible places to enjoy an alcoholic drink. And we're at risk of losing them.

So what do we need to do?

There's a proposal being considered by Government to offer a differential rate of beer duty on beer sold to the on-trade - so less tax on beer sold into pubs and bars. This would definitely help the recovery post-Covid.

Business rates for pubs are currently based on an illogical method based on 'fair maintainable trade'; how this can ever be fairly assessed, I've never understood - the success of a pub is based on so many factors making each circumstance very different. Far fairer to apply a similar method to that used in retail, where business rates are set based on square footage.

Last, but by no means least, we need to lift restrictions on hospitality. Whilst pubs are trading, they currently can't trade to capacity which hurts most in smaller venues at peak weekend periods.

Oh, and one more thing - let's all drink more beer! Because that will definitely help!

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