Brewing Sector Crisis: Taxes and Declining Demand
The brewing industry in Australia is facing a perilous future as onerous taxes and a significant drop in demand push breweries to the brink of collapse. Industry consultant Nick Boots, from The Business of Beer Consulting and Advisory and former general manager of the popular Byron Bay brewery Stone & Wood, has issued a stark warning: the recent collapse of Melbourne-based Deeds Brewery may be just the beginning of a wider crisis.
Earlier this month, the “proudly independent” and award-winning Deeds Brewing announced it was going into liquidation and shutting down permanently. This decision followed an earlier attempt to trade out of financial troubles by entering administration. The closure of Deeds Brewing will leave 50 staff members unemployed and highlights the dire situation facing many craft breweries across the country.
Financial Struggles and Inefficient Production
Deeds Brewing’s financial woes were compounded by several factors. According to Mr Boots, the brewery was burdened with “huge rent that was unsustainable,” amounting to more than $700,000 annually. Additionally, the brewery specialised in “limited release” beers, which are notoriously inefficient to produce. This inefficiency further strained the brewery’s finances.
Moreover, the costs of essential resources like electricity and malt have surged more than 20% over the past two years. Despite these rising costs, brewers like Deeds struggled to pass on the increased expenses to consumers.
One of the most significant challenges facing the industry is the government-imposed excise tax, which is the largest cost for every brewer. During the Covid-19 pandemic, the Australian Tax Office (ATO) allowed breweries to defer their excise tax payments to help them preserve cash flow. However, many breweries used these funds for capital expenditure, such as new brewing equipment and venue expansions. Now, the ATO is demanding repayment, further squeezing the already tight finances of small brewers.
To compound the issue, the excise tax rises twice a year in line with inflation, which has been at its highest in decades. The most recent increase, in February, saw the tax on one litre of pure alcohol rise to $101.85 from $100.05, an increase of 1.8%. This makes Australia the country with the third-highest beer tax in the world, following Norway and Finland.
Market Shifts and Consumer Behavior
The economic downturn has also led to a shift in consumer behaviour. Mr Boots noted that there has been a move back to more industrial mainstream beers, which are often cheaper than craft options. This shift is driven by price rather than flavour or brand loyalty. Additionally, supermarkets have begun selling generic brands of beer that appear to be boutique craft beers but are mass-produced and priced significantly lower than true independent craft brews.
Some independent brewers, in an attempt to claw back some profit, have resorted to charging as much as $17 for a pint of beer. Unfortunately, this high price point has caused consumers to baulk, leading to further declines in sales. Mr Boots observed that for some brewers, their taproom has become the sole source of reasonable income and margin as consumers reduce their frequency of going out.
Dominance of Major Players
The brewing landscape in Australia is heavily dominated by two major players: Carlton & United Breweries (CUB), which produces brands like VB and Carlton Draught, and Lion, which makes XXXX and Tooheys. These companies command as much as 90% of the beer market, leaving little room for small, independent brewers to compete.
Despite the troubling trends, Mr Boots remains optimistic about the future of craft beer, albeit acknowledging its current struggles. “Craft beer is here to stay but it is flat,” he said, suggesting that while the industry is enduring a rough period, there remains a dedicated consumer base for high-quality, artisanal brews.
