Regulation in an alcohol nation

Posted on 7 Aug 2013 by The Manufacturer

In 2013, the alcohol industry remains big business for the UK economy. Currently worth £37.7bn annually to the country and employing two million people, the sector provides a crucial contribution to the national purse strings. But while its value is widely acknowledged, the way in which it is regulated is a divisive issue. James Pozzi explores the regulations both progressing and inhibiting the industry.

Managing the microbrewery boom

Alongside tobacco, alcohol is that most unique of commodities: both valued asset and public health concern in equal measure. While proving highly lucrative, it incurs heavy regulation in the way it is manufactured, sold and marketed to the public.

Given the often complicated workings of the regulations, any brewery or distiller asked about them is sure to provide an extensive response. It is a broad spectrum, with laws ranging from health and safety compliance, consumer marketing and tax issues such as duty.

But these regulations are not a deterrent for new blood entering the market, with the rise of microbreweries continuing to gather apace in recent years. Last year’s Good Beer Guide listed 840 operating. With beer sales in the UK falling by an estimated 50 million pints a day in the first quarter of this year, real ales have seen an equally dramatic upturn.

Sales jumped for the first time in 20 years last year and there are many success stories. Birmingham, a city rich in ale production history, has proven fertile territory for the little man taking on the big boys.

Two Towers Brewery, formed in the city in 2010, is testament to this. Having established itself as a leading name in the Midlands craft beer market, director and co-founder Mark Arnott-Job says regulatory issues such as matching ingredients to the label and maintaining consistency are vital given smaller resources in man power and machinery investment.

“Due to a lack of resources, we can’t mix our product like the bigger companies can,” says Arnott-Job, whose company was set up following a £250,000 investment with additional funding from a local business development fund.

He continues: “We’ve only began to established ourselves after three years, and despite the romantic notions of setting up on your own, there is little margin to be made in such a saturated industry.”

The emergence of companies like Two Towers may be a reflection of consumer demand for craft beers, yet brewers are still left faced with challenges unique to the industry.

Cask beer in numbers

  • Cask beer grew 5% against a 2% decline for all beer for the last year
  • Cask beer currently accounts for 15.2% of on trade beer sales
  • It is a £1.8bBn industry, employing 45,000 and with over 8.6m drinkers.
  • Last year cask beer sold 2.4m barrels

Cash flow shortages are all too common for many businesses, as regulations state beer duty must be paid up front monthly, regardless of whether customers have settled their invoices with suppliers. For a smaller company, this could amount to as much as 45% of its monthly turnover.

To get some perspective on costs incurred for a microbrewery, production output is measured in 1650-litre (2900-pint) brews. Depending on ingredients, each 1650-litre brew costs about £650 to make. Of this, £350 will be duty, which must be factored into cash flow budgets and financial forecasts. All challenging stuff.

But the lure of the microbrewery remains stronger than ever, with around 80 new breweries setting up annually.

Government intervention

It is fair to say the microbrewery phenomenon has been significantly aided by government assistance throughout the last decade, with regulation passed to get a cut of the market for the treasury.

Progressive Beer Duty was introduced to the UK by then-chancellor Gordon Brown to allow smaller breweries operating under a threshold of 5,000-20,000 hectolitres annually to pay less tax on their products than larger companies.

A graphic showing the rise of microbreweries since the Progressive Beer Duty regulation was introduced in 2002 up to 2010.

Andy Moffat, who turned his back on a career at Deutsche Bank to set up London-based Redemption Brewing Company three years ago, feels the beer duty reductions in place for small breweries significantly levels the playing field.

“It’s removed a lot of the barriers to entering the market and allowed people to come in, test the market, and be profitable in a short time,” he says.

“Larger companies can make beer cheaper than we can and the cost of beer duty will naturally effect smaller companies like us more, so this regulations helps offset this in a big way.”

The big boys have cried foul over the ruling, condemning what they see as an unfair advantage as, on a barrel, they may incur twice as much duty as microbreweries. Drinks giant Diageo, owners of Guinness, even threatened to pull out of the UK in 2010 as a result.

Andy Moffat of Redemption Brewing Company believes Progressive Alcohol Duty has significantly helped small breweries.

As alcohol is administered to the same standards as food production, there are numerous manufacturing practices that are strictly adhered to.

Maintaining a level of product traceability in the brewing process to meet guidelines is mandatory.

This means that any consumer problems can make product recalls easier if necessary. Health and safety regulations such as regular hygiene inspections and pest-control in factories are also pre-requisites.

Neil Walker of alcohol consumer action group The Campaign for Real Ale (CAMRA) believes the public’s demand to know the origin of the product is a reason behind not just the success of smaller companies but also the heavy levels of regulation which accompany it.

“People are more into it [microbrewing] because they want to know where food and drinks comes from. Everything from the production of cheese to olive oil has been given more providence, and alcohol is certainly no exception to this,” says Walker, whose organisation boasts an impressive 136,000 members.

Showing some spirit

And then there are spirits. While microbreweries are benefiting from attractive industry guidelines, its stronger proofed counterpart doesn’t enjoy the same benefits.

London gin and vodka distiller Sipsmith feels the government could be more flexible in its approach to non-beer brewing alcohol companies.

Sipsmith's West London distillery. Its head distiller Chris Garden believes spirit manufacturers should also share the tax benefits enjoyed by microbreweries.

Head distiller Chris Garden, working in an industry now producing 20% of the world’s gin export market, believes a reduction for smaller companies that produce products other than beer would benefit the UK market considerably.

Garden, who recently spoke to The Manufacturer about the challenges of exporting gin products abroad, says the government should consider changing its approach by treating small spirits companies the same as their beer counterparts.

“Microbrewers get 50% tax relief up to 100,000 barrels, so duty wise they pay half of what the big boys pay, whereas we pay the same as the likes of Gordon’s and Tanqueray despite being a much smaller company,” he says.

While Garden says some form of financial relief from the Treasury would be significantly help distillers like Sispsmith, he isn’t optimistic about the chances of this becoming a reality.

“£8 of each bottle sold goes straight to the government, and even the slightest of reductions would help, as the extra money would go into marketing and support to grow ourselves rather than using it for profit,” he explains. “But I don’t see this happening in a million years, which is a shame.”

The other guys: Wine and Spirits in the UK

  • Alcohol duty and VAT contributes £16.3bn a year to the public finances, the equivalent to £316 per UK adult or double the UK overseas aid budget
  • The UK spirits industry accounts for 18% of all employment in the EU spirits sector
  • UK gin exports amount to around 20% of the world’s gin export market
  • There are now over 400 vineyards in the UK producing around 2.5m bottles of wine each year

Courtesy of The Wine and Spirit Trade Association

The alcohol advertising conundrum

Perhaps the most contentious point of industry regulation is how alcohol is marketed and sold to consumers. Being among the most heavily regulated forms of marketing, it’s not just media adverts that are constantly scrutinised.

Last month, the government scrapped a proposed minimum unit price on alcoholic products, set at a 50p rate in Scotland and 45p for the rest of the UK.

Additionally, it announced it had no immediate plans to ban multi-buying of products and special offers commonly found in supermarkets.

The U-turn provoked a mixed reaction across the industry. Scottish-based brewers BrewDog were critical of the move, following the company’s co-founder James Watt being a vocal supporter of the proposal.

How the recently scrapped minimum pricing regulation would have impacted on alcoholic drinks.

Watt said he felt the move would benefit smaller companies, as it would have prevented larger companies from significantly discounting its products, and reflected the shift away from consumers buying alcohol in pubs to drinking at home.

But with £800m spent annually on alcohol advertising in the UK, the old adage that money talks has never rung more true.

With new forms of marketing such as social media and with a recent study finding 45% of young people are exposed to alcohol advertising on a daily basis, its dominance on wider culture is evident.

The Advertising Standards Authority, which self-regulates the industry, has been widely condemned as a failure by critics and any future tweaking to address these apparent failures will ultimately impact on the manufacturers.

Balancing the future

The consensus from the country’s alcohol sector is that existing regulations are lopsided. While laws are put in place to help businesses – exemplified in by the rise in microbreweries largely thanks to Progressive Beer Duty – this leaves Britain’s growing whiskey and spirit sectors facing a major handicap when up against industry giants.

While the rate of new companies entering the market shows no sign of slowing down, there is a danger of the house getting full.

It takes most breweries around three years to build up a strong customer reputation, and while the terms for entering the market are undoubtedly inviting, the rise of breweries combined with the continual decline of pubs could see the industry reaching a saturation point.

Such is the unique conundrum that is alcohol, the regulatory bodies are placed into something of a no-win position. When it passes regulation deemed unfavourable to smaller companies, it is accused of being anti-business and pricing the consumer out of buying products.

Conversely, when regulation is deemed as being lighter or relaxed in some form – particularly in its consumer marketing – critics condemn the move as being soft touch and aiding ongoing social problems with binge drinking and anti-social behaviour.