Micros hit by tax backlash

When Chancellor Gordon Brown delivers his budget next week, it is unlikely that tax breaks for small brewers will be at the front of his mind. But for many of the nation's oldest brewers, there could scarcely be a more pressing issue.

Since it was introduced four years ago, progressive beer duty (PBD), which gives a 50% tax break for brewers producing less than 60,000 hectolitres a year (around 36,000 barrels), has caused serious concern for some established real-ale brewers.

The tax break, which can deliver as much as £140,000 a year to the recipients, was introduced to encourage the growth of small breweries. Companies that have gained from PBD say it produced a revolution in brewing, with scores of new microbrewers starting up each year. This has created massive interest in local beer and rejuvenated the declining ale category, they argue.

In contrast, larger regional brewers - particularly those that sit just above the PBD threshold - have grown increasingly uneasy about the effect of PBD on their own sales. Opposition has been the most fierce among medium-sized brewers located in areas where the microbreweries are really thriving, particularly East Anglia, Yorkshire and Oxfordshire, represented by the likes of Adnams, Timothy Taylor and Refresh.

The issue came to a head at a meeting of the Independent Family Brewers of Britain (IFBB) last week. Suffolk-based Adnams led a group of family brewers in a call for other regionals to support its proposal to reform the PBD system.Adnams suggests fixing a time limit on PBD or reducing the level of duty relief.

Consequences for cask ale

Supporters of PBD reform say they all welcome the fact that Britain's small brewers are flourishing. But, keen to show they are not just looking at their own bank balances, the group point to the wider consequences for cask ale as a whole.

The argument goes that the category needs "brand champions" with the resources to invest to push up the standards of the whole sector and halt the decline. Only major regionals like Fuller's and Adnams have the resources to do this, they argue.

Some family brewers also claim PBD allows "rogue" microbrewers to exploit their tax break by offering pubs cut-price beer, rather than ploughing the savings into long-term investment in the business, as was the Chancellor's original intention.

Rumours abound of millionaire farmers, already receiving hefty subsidies from Europe, starting microbreweries solely to exploit the tax break offered by PBD to fund their new 4x4. DEFRA, the Government Department for Environment, Food & Rural Affairs, encouraged this trend by offering grants to convert farm buildings into breweries.

Serious detrimental effect

Some brewers that don't qualify for the tax break say PBD is having a serious detrimental effect on their business. Chris Hellin, head brewer at Cheshire-based Frederic Robinson, estimated that PBD has cost it between 5% and 10% of sales in the free trade as microbrewers use the tax break to undercut their prices. Another brewer, which preferred not to be named, says PBD has cost it £150,000 in pure profit. As a result, it's had to lay off staff and withdraw a number of seasonal ales.

"We are losing sales to micros through the distorted competition of subsidies," says Adnams chair-

man Simon Loftus. "If we can't operate in a straight-

forward way, it is unhelpful for everybody, including micros, because we all need brand champions."

Loftus argues that in a high-duty country like Britain, the PBD produces a saving close to £45 a barrel. This is more than it costs for Adnams to produce a barrel of beer, Loftus explains.

Rupert Thompson, chief executive of Brakspear brewer Refresh, is also a vocal opponent of PBD. Oxfordshire-based Refresh produces 70,000hl a year - 10,000hl too much to qualify for PBD. Thompson favours a review of PBD, a stance taken by trade bodies such as the IFBB and the British Beer & Pub Association. He says: "I think there's very significant evidence that the scheme has led to a sort of market distortion."

Mark Woodhouse, vice chairman of Dorset family brewer Hall & Woodhouse, says microbrewers have been selling firkins for £10 less than H&W. "There are examples where pubs can buy three firkins for £99," he says. "That is cheapening a quality product like cask ale. If there's no incentive to remain in brewing then all the regional brewers will become pub companies. We need some kind of level playing field or our national drink will be lost."

The view that some microbrewers are under-cutting regionals is supported by Roy Silsby, cask beer manager at wholesalers Waverley TBS, which supplies beers from more than 300 brewers of all sizes to pubs across the UK.

Cheapening a quality product

Silsby says in the last few years, microbrewers and small regionals have experienced double-digit growth, partly thanks to PBD. He says a "fair number" of small brewers have been charging around £40 for a firkin, while regionals typically charge £50 to £60. He explains: "Some microbrewers have used [PBD] in the right way, by investing, whereas some have gone crazy in the prices they offer.

"The likes of Greene King and Fuller's are flying the flag for cask beer. They are the only ones with the capability to compete [with national brewers] and they are feeling the pinch at the moment. They are trying to up the value of cask beer by investing in training, improving P-o-S etc. This is slightly undermined by brewers charging incredibly cheap prices."

Family brewers argue that long-established microbrewers also resent the rise of the new breed who are out to "make a quick buck" by discounting rather than investing for the long term.

This idea is supported by Brian Field, who has seen the situation from all sides as former MD of Greene King Brewing Company, then MD of Essex brewer Ridley's and now chairman of respected Kent microbrewer Westerham Brewery. Field points to the rise of "rogue microbrewers" offering cheap beer and under-cutting regional brewers and other micros on price. "If those maverick micros don't start mending their ways there will be problems."

Ushering in a beer revolution

All of these accusations are emphatically rejected by Keith Bott, chairman of the Society of Indepen-dent Brewers (SIBA), which represents a number of brewers that have benefited from PBD. Bott says PBD has created 11,000 jobs in brewing and ushered in a "revolution" in beer in this country.

SIBA's latest report says that thanks to small brewers, the ale category is expected to return to growth within 18 months, a full year earlier than expected. SIBA reported a slowing in the decline of the cask-ale market, down 2% last year. However, some say this figure is too optimistic. AC Nielsen puts the decline at around 7%.

Bott argues that: "The whole reason that PBD was brought in was because there was an uneven playing field. We have genuinely done something to improve the lot of beer and I find their negativity quite appalling."

Stuart Bateman, MD of Lincolnshire-based brewer Batemans, which qualifies for duty relief, calls for medium-sized brewers to "stop whingeing". "Some of the small brewers, probably micros, have been able to invest in their brands thanks to PBD and have been brewing some cracking beer," he says. "That has made the cask-ale market a lot more exciting and vibrant."

Bateman says PBD has saved the company a "significant" amount of money, which it has re-invested in the company. He also rejects accusations that the company would halt expansion in order to stay within the PBD threshold.

He adds: "I do believe some of the middle-sized brewers are whingeing when they say it is bad for the industry. Maybe if there was a bit more innovation on their behalf they would have a case."