BrewDog couldn’t be more wrong in wanting an ‘official’ definition of craft beer

Ancient Order of Frothblowers“Never be afraid to be controversial” is less a statement of policy and more like a reason for living, as far as the BrewDog guys are concerned. Last week James Watt, the brewery’s co-founder, put up on his blog an impassioned argument putting the case for an “official” definition of craft beer to be adopted in the UK. Below is my response, published originally over at the day job, showing how he’s completely wrong.

I won’t yield to anybody in my admiration for James Watt’s abilities as a guerrilla marketeer. He and Martin Dickie, co-founders of Brewdog, have skillfully turned a small independent brewery in – with the greatest respect to the people of North Aberdeenshire – the rear end of nowhere into one of the leaders of the small independent brewery sector in the UK. They now have a reputation among many beer drinkers as perhaps the most iconoclastic, “edgy” brewers in the country, a growing empire of their own bars around the UK, and a presence on the shelves of leading supermarkets and in any “craft beer” bar worthy of that name. From last month the pair even have their own TV show, Brew Dogs, on the Esquire cable TV network in the United States, where they travel across America, visiting bars and breweries and creating “locally inspired” beers. Fantastic. And yet, Watt’s latest campaign, to try to get an “official”, “industry recognised” definition of “craft beer”, to “protect the fledgling craft beer movement in the UK and in Europe” and also to “protect and inform the customer”, suggests to me he doesn’t actually understand the business environment he is working in as well as he thinks he does. What is more, his arguments for the need for an “official” definition of craft beer are entirely nonsensical and totally evidence-free.

Watt says the reason a proper definition of “craft beer”, “to be recognised by both CAMRA and SIBA and also at a European level by the Brewers of Europe Association” is required is because of “three words – Blue Fucking Moon”. Just like many small brewers in the US, he is clearly annoyed that Molson Coors’ Belgian-style wheat beer comes in packaging that could pass as a product from a much smaller operator, and does not declare itself in huge type to be made by one of the giants of the American beer market. He quotes approvingly Greg Koch of Stone Brewing in California, who also wants to define “craft beer” as something in opposition to “the industrialised notion of beer” that has been “preying on the populace for decades”. Unfortunately it’s not clear if Koch, or Watt, are really interested in “saving” the drinking public from “industrialised” beer, or protecting their own sales from a much bigger rival.

Watt insists that the British craft beer movement is being held back because of the lack of an official definition of craft beer, and “the US craft beer movement has only been able to grow as it has because of the US Brewers’ Association’s official and accepted definition of craft beer.” Naturally, Watt fails to give any evidence for these assertions, because there isn’t any. They’re total nonsense. Good grief, the definition Watt points to only came into existence eight years ago, in 2005, when the Brewers’ Association was formed of a merger between two other industry organisations and the combined membership decided to rig the rules so that the “big guys” would be excluded from their club. Nobody ever said before 2005: “I’m thinking of trying Stone Brewing’s Arrogant Bastard Ale, but without an official and accepted definition of craft beer, I’m really not able to.” The boom in the US craft beer scene over the past 30 years has not been because anybody came up with a definition of “craft beer” and suddenly “craft beer” was able to take off: but because a wave of new producers dedicated to making small-batch, artisanal, flavourful beers met a wave of consumers happy to drink those sorts of beer.

This mistaken idea that consumer movements can only prosper when they have “official” guidelines to channel their enthusiasm leads Watt to assert that while “we want retail stores, bars, restaurants and hotels all to have a craft beer section in their offering,” it is “almost impossible to get them to commit to this without being able to offer them an official definition of what craft beer is.” More evidence-free nonsense. I don’t believe that any supermarket, any bar owner, any restaurant ever said to any small brewer: “I’d like to stock your beers, but without a definition of craft beer I’m just not able to do so.” Watt also declares: “What we don’t want, is for them to a create a craft beer section in their shop or menu only for this to be carpet-bombed by beers that are not craft.” What’s the matter, James – afraid that if a bar is selling Blue Moon alongside 5am Saint your beer will do badly?

The truth is not just that trying to define craft beer is impossible anyway. Watt suggests that the definition should be a completely circular one, that “craft beer is a beer brewed by a craft brewer at a craft brewery”, with the argument then devolving onto what a “craft brewer” and a “craft brewery” are – but his idea that the Campaign for Real Ale, an organisation Brewdog regularly chooses to battle with, would back any definition of “craft beer” Brewdog and SIBA might come up with is another nonsense.

The real point is that, despite Watt’s fantasy, any “official” definition of craft beer, will have little to no impact on the marketplace. Those operators who might be defined as “craft beer brewers” and “craft beer retailers” seem to be doing very well in the UK without any official definition of what they are making and selling – and in any case the UK’s small brewery movement seems to me to be well beyond the “fledgling” status Watt is trying to claim for it. If Brewdog is trying to trip up the likes of Sharp’s – now owned by Coors and thus, under the definition that Watt would like to see made “official”, not a maker of “craft beer” any more – Watt really needs to realise that getting craft beer “properly” defined will make no difference at all to the amount of Doom Bar being sold across British bar tops. Overwhelmingly the beer-drinking public, in Britain, in the US and elsewhere around the world, care nothing for “official” definitions of what they are drinking: that goes for the minority who are “craft beer” drinkers, and, of course, the vast majority who prefer those beers Watt and Koch define as “the industrialised notion of beer”, and wouldn’t drink a craft beer if you gave it do them free, no matter what category you said it was in.

Over to you …

PBD, the issue that splits British brewing

A model of a brewery constructed on a half of a barley seed made by Ukrainian miniaturist Nikolai Syadristy
Now THAT’S a microbrewery: a model of a brewery constructed on half of a barley seed, made by Ukrainian miniaturist Nikolai Syadristy

If you want to start a punch-up, gather together some brewers from small operations, producing less than 5,000 barrels a year, add some brewers from larger concerns, producing 60,000 barrels or more, clamp a steel helmet on your head and then ask them to discuss Progressive Beer Duty. Never mind about discussions over the exact definition of “craft beer”, or whether keg beer is a valid choice for an artisanal brewer, PBD is the issue that splits the British brewing industry. Smaller brewers eligible for the tax cuts that PBD gives them, which can be equal to as much as 24p a pint, insist these are essential to help them compete with larger firms, and that as a result the choice to the British beer drinker has been greatly widened since its introduction. Larger brewers insist that PBD distorts the market, and that it unfairly hampers them in competing for business from the pub companies, because the pubcos, naturally enough, go to where they can buy beer cheapest, which means from those brewers being taxed 24p a pint less.

After a couple of news stories last week featuring two brewers, Arran Brewery and Black Sheep, who talked about the adverse impact PBD had on their own businesses, I wrote a comment piece for the day job about the inevitable distortions PBD causes in the marketplace. All taxes cause distortions: that’s just how economics works, and tweaking or adjusting taxes so that some sections are treated more lightly than others creates more distortions. You may feel the distortions that PBD creates are worthwhile because of the boost it seems to give to very small brewers, or you may feel that PBD is unfair and needs either serious tweaking or scrapping. Views seem to pretty much fall either way depending on whether the person expressing an opinion is a large brewer or a small one.

After my opinion piece came out, there was a minor twitterstorm, with small brewers totally denying Paul Theakston of Black Sheep’s thesis that pubcos were turning to smaller, PBD-entitled breweries to, effectively, snaffle that 24p-a-pint tax rebate for themselves. I had the commercial buyer of one medium-sized pubco, with more than 1,000 pubs, contact me specifically to deny that his beer-buying was influenced by whether or not the brewer he was buying from was entitled to PBD and could therefore afford to sell to him more cheaply. I had one small brewer demand: “Is there really a significant volume of market-distortingly cheap beer coming from small brewers?” Well, Black Sheep lost 6,000 barrels of pubco beer sales in the last financial year, and Paul Theakston appears to blame PBD allowing smaller rivals to sell cheaper beer. Another small brewer declared that PBD “helps a less efficient brewery compete, which is the idea.” But I don’t think I’m alone in believing that business shouldn’t be a handicap race, with the best being forced to carry a greater burden so that those not so good can have a chance of crossing the finishing line first.

Anyway, here’s the original opinion piece in full: I look forward to reading everybody’s comments!

The unintended consequences of Progressive Beer Duty

It’s a bitter irony that Black Sheep Brewery, one of the most successful of the “new” small breweries, now finds itself badly hit by a tax regime specifically fought for, and brought in, to encourage new small breweries. The problem is that Black Sheep, which brews excellent beers at its home in a converted maltings in Masham, North Yorkshire, is, after 21 years, no longer small – or, at least, no longer small enough to qualify for Progressive Beer Duty.

PBD, brought in by Gordon Brown when he was Chancellor of the Exchequer in 2002, means any brewer making, currently, no more than 5,000 hectolitres of beer a year (a little over 3,000 barrels in old money) pays only half the normal excise duty, which, after VAT is taken into account, means an effective subsidy of 24p a pint. It gets complicated after that, as the tax relief slowly falls off with rises in production, but eventually full excise duty is payable on every pint once a brewer’s production goes over 60,000 hectolitres. The idea, as put forward by SIBA, the small brewers’ association (which had been campaigning for PBD since 1989) and the Campaign for Real Ale, was to enable small brewers to compete better, by removing some of the cost burden on them, and thus to encourage new entrants into the market and, as a result, improve consumer choice.

There is no doubt that new entrants have hit the market in a mighty tsunami: the number of breweries in the UK has boomed from around 450 in 2002 to some 1,150 today, a 155% increase. Gordon Brown has certainly had a lot to do with that explosion of new small breweries. But almost all those new entrants are competing in a minority segment of the British beer market, cask ale, and while cask ale may not be declining as fast as the overall UK beer market, it’s certainly not expanding. Those brewers under the PBD ceiling are, effectively able to sell their beer in a tight market up to 24p a pint cheaper than a brewer like Black Sheep, which finds itself having to pay full tax because it has been successful enough that it makes more than 60,000 hectolitres of beer a year. (It is not just Black Sheep that suffers from what many regard as an unfairly tilted playing field in this way, of course: so do almost all the old-established family brewers, from Fuller Smith & Turner to Adnam’s to Robinson’s.) The wholesale purchasers of beer (that is, the pubcos, mostly), naturally enough, go to where they can get it cheapest, and that is from those brewers who brew 60,000 hectolitres or less.

As a result, Black Sheep has found itself squeezed out, losing 6,000 barrels of pubco business in the 12 months to 31 March this year, and turning from profits of more than half a million pounds in 2011/12 to a loss of almost three quarters of a million pounds in 2012/13. Black Sheep’s founder, Paul Theakston, said: “Our Achilles heel has always been in our cask beer sales to the national pub companies, where … a policy of buying an increasing proportion of their cask beers from microbrewers, thus taking advantage of a significantly reduced buying-in cost through Progressive Beer Duty, has been the order of the day.”

What is happening, of course, is that the cost savings from PBD, instead of going to the small brewers, are going to the big pub companies, who can use the existence of a large number of alternative suppliers versus a comparatively small number of buyers (a condition known to economists as monopsony) to beat down the price of the beer they buy and pocket themselves a considerable slice of the 24p saved through PBD. This should not be a surprise to anybody. Indeed, it was specifically predicted in 2001, before Chancellor Gordon Brown even introduced PBD, in an article in the Journal of Small Business and Enterprise Development by three economists, Geoff Pugh, David Tyrrall and John Wyld, called “Will Progressive Beer Duty Really Help UK Small Breweries?”

It’s a firm rule in journalism that the answer to any headline with a question mark at the end of it is always “No”. That normally only applies to such tabloid-style headlines as “Did the SAS kill Diana?” and “Will your pet give you cancer?” But the answer to the question Pugh, Wyld and Tyrrall posed seems to be pretty much in the negative, too. After a great deal of economists’ algebra, they concluded that, in the short term, “The overall effect of PBD will increase the profits of individual breweries, increase distributors’ profit and increase the quantity sold on the final market [because of a lower price].” However, “Over time increased profit for small breweries will attract new entrants … for the distributor, the ability to spread or reassign orders among an increased number of suppliers enables the price to be renegotiated downwards … the distributor is able to transfer increased profits from small brewers to itself.”

In other words, PBD gives you lots of breweries all right, but all that does is increase competition, squeeze profits in the brewery sector back down to where they were before PBD came along, and boost profits for the pubcos. That’s great if you’re a pubco, but it’s pretty tough if you’re Black Sheep, because you are suffering all the pricing pressures PBD allows pub companies to put on brewers, without being able to take advantage of PBD yourself. It also discourages those really small brewers who find themselves becoming successful from growing too much: earlier this week Gerald Michaluk, the MD of the Arran brewery in Scotland, which produces that country’s best-selling bottled craft ale, admitted he was delaying expansion deliberately to try to stay below the PBD threshold: “We have modestly grown the business because of our not wishing to exceed the half-duty production threshold without first upgrading our brewery on Arran to make the savings necessary to be able to afford to pay the extra 24p per bottle in tax that an increase in production would bring.” Any tax regime that inhibits growth and investment is a bad tax regime.

Black Sheep’s answer to the problem of competition from those with a better tax deal is to shift over, in part, to a sector where very few of those 700 new small brewers since 2002 will compete – keg beer. Announcing the move, Robert Theakston, Black Sheep’s MD, said: “I am aware of the preconceptions surrounding keg, but the opportunity the keg market brings is not to be dismissed. It will allow us to reach into the types of venues that can’t justify cask beer. There are an awful lot of sports clubs, hotels and restaurants than can only take keg beer that we currently can’t trade in.” This cannot be the result Camra would have wished for when it campaigned alongside SIBA for Progressive Beer Duty: one of the best-known (and best) new cask ale brewers being forced into making keg beer because PBD has brought so much competition into the cask market.