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.

25 thoughts on “PBD, the issue that splits British brewing

  1. Surely what they lose through the PBD, the larger breweries gain back through economies of scale with their purchasing power of raw materials??

    Also, now that Black Sheep are moving into the keg market will the CAMRA investment club dump their shares in them?!

  2. CMIC already owns shares in plenty of brewers of keg like Greene King and Marston’s.

    Might the distorting effect of PBD be diminished if all breweries, regardless of size, were allowed to claim the relief on the first 5,000hl of annual production, rather than clawing the relief back at higher production rates? Probably illegal under EU law, though.

    Any economies of scale enjoyed by Black Sheep over Fred’s Shed Brewery will only amount to a couple of pence per pint. Duty makes up far more than production cost in the retail price of a pint.

  3. Anyone who thinks that a 5000 barrel brewery is making beer for the same price as a 60000 barrel brewery is crazy. I don’t know how much 24p is in relation to the price of a pint but my guess is that it is small. And economies of scale also include manhours, floorspace and system efficiency.
    Perhaps the amount of the tax difference needs to be adjusted, but I doubt that the small brewers come close to the price offered by the bigger brewers, even after a tax break.

  4. Very interesting article! Duty has always been the Brewer’s ghost!
    What I think is even more interesting is the photograph in your article as it shows the flow of the pipes underneath the brewing vessels. I shall never forget a conversation with the then Brewing director , Leo Swinkels of Bavaria brewery in the Netherlands. He had been educated at Weihenstephan in Germany as most Dutch brewery owners had in the past. It was not until his daughter married an Englishman that he had a look at the British brewing industry and found to his astonishment that the pipes underneath the brewing vessels gradually were designed and not with 90 degrees bents as in German designed brewhouse equipment. He felt that the U.K. brewing equipment was much better for the malt and going back to Bavaria he had all pipes altered to the British design! There is a new topic for you !


    Gerard Lemmens

  5. Hardknott Dave wrote a blog post with some detailed analysis in which he concluded: “[although 5000hl is a sweet-spot] as the company gets bigger the increases of beer duty will become less significant therefore I would expect further economies of scale to cut in and help to counter the effects of the duty. From a business point of view, having broken the 5000hl barrier it makes sense to carry on growing.”

  6. I just don’t see much evidence locally that pubcos are turning to smaller brewers for their beers. Wetherspoons have always dealt with them but I still see the big/medium sized brewers on the bars of Punch and Enterprise. Black Sheep may have lost some business, but do they know exactly who to? Perhaps people have just gone off Black Sheep!

  7. This is a good article that points out the unintended consequence of many tax laws. Gordon Brown most likely had the best of intentions when he introduced PBD, (unless he is like many US politicians and responds only to the promise of money), but he failed to see the complex nature of the beer market. A small benefit for fledgling breweries created inequities that he did not foresee. Might not the PBD benefit be lowered enough to be roughly equal to the savings derived from the economies of scale? (see comment by curmudgeon)
    Arran might benefit from reduced production although this is contrary to any businessman’s thinking. If the beer were harder to get, true lovers would go to any lengths and pay just about any price to get some. Drinking Arran beer would become a status symbol. (Think of Westvelerian? beer in Belguim, an abbey beer that is available only at the abbey and must be ordered ahead. Or many years ago of Coors in the US. It was not pasteurized and hence not shipped east of the Mississippi River- I knew several beer drinkers who drove 2,000 miles to bring back a few cases.) Coors eventually expanded it’s market and see what happened. You can get it anywhere, but not many people I know really want it.
    The situation with pubco’s is reminiscent of the old practice of the large breweries owning pubs, only now it is not breweries but suppliers. This is interesting to me. As an American, it is something of which I was not aware, although I am not surprised since the retail beer industry has been cut-throat for decades.
    Also, I do not know the distinction between cask beer and keg beer. I thought cask beer is that which is carbonated through fermentation as opposed to force carbonated with CO2. If that is case then cask beer can be packaged in kegs. I fail to see the objection to Black Sheep going over to keg beer if it is naturally carbonated. If beer cannot be served using CO2 to be considered cask beer I wonder if it makes that great a difference in the taste. Would it then eliminate CAMRA from considering this a real ale?
    This article brought many questions to my little American mind. Could I be educated?

    1. Yes, if CO2 is added to force out the beer it is not real ale aka cask beer as CAMRA defines it. However, recent advances in brewing technology and brewery practice (rather) have ensured that a high quality beer can be packaged as a keg. This needs a high degree of malt and hops and a light hand on the amount of top pressure added to ensure the keg will push out the beer. In fact, many of the new breweries are starting to focus on just this kind of draft beer, often using New World hops to give an American taste. I hope the strategy o Black Sheep, an admirable concern, to move further into keg will work for the company. I wonder though if many of its competitors may be planning something similar for its existing or future keg brands.

      I think the progressive duty essentially is wrong, i.e., all things being equal and should be changed. It had a justification at a time when arguably small-scale brewing needed a boost. But that has occurred. So now the progressive system should arguably be rescinded.


      1. Thanks for the clarification Gary. As a home brewer, I many times treat my kegs as 5 gallon bottles. The beer is naturally carbonated in the keg. I can usually dispense the first several glasses without using gas-just the pressure from carbonation. Later I can dispense using 5-7 p.s.i. although the beer gets more carbonated if it is kept at that pressure for long.
        I agree with you about the PBD. It has served its purpose and can be rescinded.


        1. Richard,

          It sounds like you are putting a light pressure into a keg of naturally conditioned beer (some residual yeast in the beer added the natural carbonation) to assist the dispense. Technically this is not real ale but I am sure the result is very good. Even fully carbonated “keg beer” (your typical American filtered but fizzy craft draft) can be very good. But the English have, at least up to now, always considered that naturally conditioned beer pulled out of the cask by suction handpump – or dispensed straight from the thumb-taps – offers the best flavour and I agree with them.


      2. I think the type of keg beer that Black Sheep are proposing will be anything but ‘craft’. It’ll be mixed gas with a long shelf-life to cope with lower outlet sales volumes and the main competition in their stated market will be John Smiths and Worthingtons

  8. Oh golly, where to start… And how not to go on and on…

    “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”

    Here you’re mistaking “most efficient” for “best”. When, in fact, the issue was always one of size and access to market. Small producers (incidentally less efficient – and I’ll come back to that) have been so handicapped by poor economies of scale and restricted access to market that their ability to compete was impaired – to the consumers detriment.

    You may have been happy with the increasing concentration of beer production and concomitant loss of consumer choice. I suspect that many of the rest of us weren’t. It was this unhappy trend that PBD was intended to counter. We can see clearly that there has been some significant success. While most beer production remains in the hands of a few large operations, there has been a large growth in the number of small producers. Consumer choice has most definitely widened. Choice, of course, needn’t convert to sales, and volumes acheived by these small producers are still a small fraction of the total market.

    Because it’s a small fraction, even if all the small producers were using PBD to fund aggressive discounts, their effect on the prices that larger operations could command is likely to be small. To see why this should be, we need to remember that only substitutable goods compete in the same market. A brewer doesn’t just sell barrels-o-beer. Our customers are buying a product with a level (and volumes) of service attached. I’m tiny, so I can offer an indie, free-trade, customer up to, say, 12 firkins per week (I don’t want to piss off all my other customers). A much larger brewery might struggle to get down to this level, but assuming they could, and assuming their beer is as good as mine, the customer would be able to sub my beer with theirs, so we’d genuinely be competing in the same market. If we’re talking about supplying a pubco with 000’s of outlets and a lean, mean central purchasing department, they’ll be wanting service that I can’t possibly provide, particularly as regards volumes (and credit terms?). I can’t suggest that big pubco subsitutes my beer for, say, Doom Bar. It’s a non-starter. I’m not a player in this market. My prices should have no effect on Sharp’s here. I’m not an economist, merely a small businessman, but I hope I’ve made my point clearly enough.

    I’m leaving SIBA’s DDS out of the argument here.

    Where I (and my colleagues) do see genuine evidence of small (and not so small) brewers discounting aggressively is in that market were we are competing. i.e. the indie free trade (and to a lesser extent the smallest pubcos). Here our products are broadly substitutable, and a keen price (sometimes suicidally so) will indeed depress the prices the rest of us can command.

    On a more cheerful note, and coming back to efficiency (I remembered!) – One thing the smaller producer does well is employ people. Small brewers generate about one job per 500hl production compared to maybe one per 3,000hl in the industry overall. This is the kind of inefficiency that looks rather like a good thing.

    It’s tiresome, but from time to time we get the “down with PBD” thang. It’s usually spouted by chairmen of regional brewers explaining a downward sales trend to their shareholders / bankers. Rather than admit to being outcompeted by other regionals with better products / sharper sales and marketing, they point to something that can’t possibly be their fault.

    1. “You may have been happy with the increasing concentration of beer production and concomitant loss of consumer choice”

      Don’t you dare put words into my mouth. I never said anything of the sort..

      What we need here are some actual facts and figures. Sadly, what we appear to have is much heat and no light. Can anybody say exactly what the big pubcos pay different suppliers for their beer? I fear not: that’s “commercially sensitive”. But the DDS scheme, it seems to me, if I’m understanding it properly, is exactly the way a large public could achieve buying beer cheaply from large numbers of small producers.

      Rather than admit to being outcompeted by other regionals with better products / sharper sales and marketing, they point to something that can’t possibly be their fault.

      And your proof for this assertion is?

      1. Black Sheep are pointing at PBD – which surely isn’t their fault.

        Sharps Doom Bar 30% volume increases pa, 133,000 barrels last year. GK IPA -7.4% London Pride -11.3%

        Even Jennings are up.

        I don’t know if you could call that proof, but it is *facts*. Rather than opinion.

  9. Having just finished writing a paper for an upcoming history conference on the Beer Act of 1830, I find this discussion on beer duty interesting. Much of the debate in 1829-30 was whether to scrap the malt duty or the beer duty (or both) as a way to help the agricultural distress gripping the country. Generally, the land-owning aristocracy and gentry and tenant farmers wanted the malt duty scrapped, arguing that all consumers of malt products would benefit, especially those wealthy enough to brew their own beer–themselves basically. Wellington’s government went with the Beer duty only, since the provision was meant to help the laboring poor pay less for their favorite beverage, and to steer them away from gin (and other malt-based spirits), and it was generally acknowledged the poor could not homebrew. The main part of the Act, once passed in June of that year, was to open up the retailing of beer to allow for the creation of beer houses which would not be under the control of the magistrates, but rather got their license by paying a two guinea fee to the excise. More competition, no beer duty = higher sales of beer and ultimately malt, which was hoped would relieve the agricultural distress. The agricultural laboring poor’s response to this tax cut for them was the Swing Riots which rocked the rural south and southeast in autumn 1830. The price of beer was lowered and the new beer houses proliferated but the big brewers came out in stronger form since they now could supply the new retail outlets and the old. Their economies of scale made better beer than the smaller brewers. All this fuss and the main result was that the Beer Act helped stimulate further the nascent temperance movement.

    Perhaps the best question today is why so much tax much be placed on beer in the first place, since it acts as a regressive tax? In the US, it runs up to 40%. What is it in the UK?

    1. My dad (not that he was there at the time) always told me that the rural unrest of ca. 1830 was down to the wet summers and hard winters (and the consequent terrible harvests) of ’28 & ’29 – it’s supposedly the period that gave birth to the dickensian “white christmas” and all those xmas cards of the stagecoach in the snow.

  10. The problem here seems to be the decision to taper PBD on size of brewing operation (so the rebate goes to zero when production crosses a certain threshold) rather than on the actual volumes produced (so that the rebate *on volumes higher than X* would go to zero). I guess the latter approach would be significantly harder to measure and easier to circumvent, but it would level the playing-field, to the extent that PBD unlevels it.

    As for Black Sheep, I’m afraid they may have been letting the grass grow under their feet. A (pubco) pub I go to has a core range of fairly undemanding guests: Hobgoblin (sweet and malty), Summer Lightning (pale’n’oppy), Landlord (tawny’n’oppy) and Black Sheep (er… reliably quite pleasant). It’s just not distinctive any more, even in a mainstream ‘brown bitter’ setting. (This wouldn’t explain it being outsold by Doom Bar or Jennings Cumberland, admittedly.)

    1. The other half and I would rather drink Doom Bar than Black Sheep bitter, and that’s saying something given that we walk out of pubs if we find they’re only serving Doom Bar.

      So my gut reaction is that PBD is not the problem for Black Sheep and that they’re in denial.

  11. The brewers whom I know use the PBD to stay in business , it enables them to charge competitive market prices profitably .Economies of scale don’t just refer to the brewing and cost of materials ; there has to be provision for sales, accounts and delivery as well.

  12. Very interesting article! Duty has always been the Brewer’s gost! What I think is even more interesting is the photograph in your article as it shows the flow of the pipes underneath the brewing vessels. I shall never forget a conversation with the then Brewing director , Leo Swinkels of Bavaria brewery in the Netherlands. He had been educated at Weihenstephan in Germany as most Dutch brewery owners had in the past. It was not until his daughter married an Englishman that he had a look at the British brewing industry and found to his astonishment that the pipes underneath the brewing vessels gradually were designed and not with 90 degrees bents as in German designed brewhouse equipment. He felt that the U.K. brewing equipment was much better for the malt and going back to Bavaria he had all pipes altered to the British design!


    Gerard Lemmens


  13. Mr. Tenbus,
    Although slightly tangent, can you provide more information on your work and the conference mentioned, so that I may look it up? As a follower of Mr. Cornell’s and Mr. Pattinson’s work, I’m a little interested in related history.

    As a U.S. citizen this is a very interesting discussion, partly because we don’t have the differences in “draught” systems. I was excited that my favorite bar in Newport, RI finally put one in. (a work in progress) It is interesting to compare with how the U.S. “craft beer” designation was changed to keep brewers like the Boston Beer Company designated such. Our economy of scale is a bit different with our mega-brewers, I think, but I’m not at all versed in the business, so it is mere speculation.

  14. I’m certainly not an expert on the economics of UK brewing but I live in rural Yorkshire and bump into Black Sheep ales in pubs all the time. I have them from time to time (usually if there’s no better alternative) and I would describe them as “alright” at best. Certainly not “excellent”. I realise I might be more demanding than the average drinker but I still can’t think of a reason – other than habit maybe – why anyone would go back to Black Sheep Bitter after they’ve had a pint of Wold Top Bitter or Great Newsome Sleck Dust, to give two examples from East Yorkshire where I live. These beers are the same price and just as local, just as traditional and just as “Yorkshire” as Black Sheep, only they taste noticeably better. I imagine that in pubcos like Wetherspoon where the choice is bigger than in rural pubs this is even more true.
    So as far as I’m concerned, if Black Sheep don’t want to lose market share to smaller breweries, they need to up their game, either in the marketing or the taste department, or both. When Black Sheep tastes better than the bitter on the pump next to it, I’ll be happy to have it, even if it’s 24p more – which shouldn’t be the case anyway; as others have pointed out, economies of scale should make up for the increase in duty.

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