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A New Player in the Mark-Up Sweepstakes

aglc-logoFurther to a recent post updating matters around the Alberta government’s review of beer mark-up policy (found here), yesterday I received a press release from a new interlocutor. This increases the number of distinct positions being advocated to four, which really is something when you think about it. How any political issues have FOUR different sets of interests?

It comes from a group calling themselves the Alberta Craft Beer Alliance and includes, at least, five of the more noted beer importers in the province and one beer-oriented liquor store (at least this is who attached their name to the release, which states there are other signers on a letter to the Minister).

You can read the full release here (I pdfed it as is, except for deleting the email address lines and the contact information for the six signed names, for reasons I trust you understand). It puts out the position of craft beer importers, which  I have summarized here in the past and a number of comments have articulated.

The core of the argument is straightforward. They argue increased mark-ups on beer produced out of province to the full rate will cripple the beer import business, reducing consumers’ access to a diversity of craft beer. Behind their argument is price-point: “A regular 6-pack of craft beer could cost you soon up to $2.50 more. If you think about going for an after work drink with some colleagues or friends, the price for a standard 16-oz. pint in your friendly neighbourhood pub would increase by up to $1.50 per pint.”

I fully admit that I don’t know the economic models for selling beer in Alberta. However, by my, admittedly simplistic, math, I calculate that moving imported beer from 40 cents to 98 cents per litre (as proposed) would lead to an increase of about $1.20 per six-pack and about 30 cents per pint. There may be add-on effects I am unaware of (some of which might be retailers who tend to mark-up based on percentage of cost price), but I wouldn’t mind seeing some details behind this figure.

They also take aim (gently) at Alberta’s brewers who have been advocating the change, arguing that while some reduced rate for Alberta beer is justified the proposal goes too far:

The changes have been proposed by Alberta beer producers that feel that they are at a great disadvantage on the free Alberta beer market and that they do not benefit by producing in Alberta. Certainly, everyone would agree that Alberta producers should have some kind of home advantage. But not to the disadvantage of the consumers ability to make choices and certainly not to the extent where the consumer has to pay excessively more for his choices.

They state “the great selection of hundreds of craft beer might disappear very soon” if they are subject to the full mark-up rate. They also claim the changes “would leave several thousand Albertans at a great risk of losing their jobs, from a truck driver that delivers the beer to and from the warehouse to the waitress that serves you the delicious cold pint at the pub”.

The latter claim, clearly aimed at countering the arguments of the other sides, seems somewhat dubious. Even if many dozens of beer disappeared from Alberta shelves, it is hard to see how that would lead to significant job loss. Yes, consumers might lose variety and range (and that is a real issue) but the downstream staff would deliver and sell other brands that gain from the market hole. The agents would find other product to represent, although I appreciate they would take a big hit in their income in the short term. Most of the breweries would find other markets for their beer. That said, I can see how it might be a big hit to smaller western Canadian brewers for whom Alberta is a large portion of their sales. It seems their argument is more nuanced than they put forward.

I have written enough about my take on this issue, so will refrain from repeating myself. I will just remind that I recognize how complicated this issue is. The entry of the fourth legitimate viewpoint on this issue makes it even more complicated. I will leave it to you, the reader, to consider which side makes the best case.

12 comments to A New Player in the Mark-Up Sweepstakes

  • Paul

    Glad to see these guys put out a release and do some lobbying. The importers, retailers, and bar owners are the people who have pushed the beer scene in Alberta so far forward these past few years so they definitely deserve to have their opinions heard.. They want to keep bringing in great beers and expanding my choices as a beer consumer, the Alberta Brewers want to limit my choices so they don’t have to compete. Personally, I support the importers 100%.

  • dave t

    Thanks for keeping us up to date on the political stuff Jason.

  • Mark

    It is great to get feedback from all the stakeholders.

    However, it would be interesting what the overall government vision is, and how that relates to policy/action items.

    In SK, the vision is to provide oppourtunity for private business, continual growth in terms of population and economy, and for SK to be the best place to live and prosper. As for how this relates to our liquor industry, the only policy change is to allow 4 new private stores.

    When I spoke to the policy makers about growing the craft beer market (imported or local), about creating an environment to encourage more local breweries, and how this promotes a strong interconnected local economy, enhances enjoyment of life, and promotes responsible/mature drinking habits, they have the viewpoint that the benefits would be marginal. They flat out told me that provincial Budweiser sales are in the multiples of millions, and craft beer is in the 10s of thousands, so while craft beer may be seeing tremendous growth and may be a wonderful thing, the dollar value is still low, so it isn’t a priority.

    I am very curious to see how the AB govt views their own situation, as they consider the various viewpoints.

  • Neil Herbst

    Hi Jason. I was a bit hesitant to comment on this letter, but finally decided that I should at least clear up a couple of misconceptions. Then I would like to explain the Alberta Small Brewers’ position.

    First, the Alberta Craft Brewers Association didn’t “secretly put out [a] lobbying campaign and signed letter” to the Deputy Premier. We were very open about it. In fact I have been interviewed numerous times: in print in the Edmonton Journal, on air on the CBC and Radio Canada, on TV on Global Alberta Prime Time (twice), and on CTV news. In addition both Jim Pettinger of Hogs Head and Kevin Wood of Drummond have been interviewed by various media outlets. So if we were trying to be secretive we certainly did a poor job of it.

    The other misconception is that our proposal would result in 1000s of lost jobs in the beverage industry. Your skepticism is well placed. Imported beer accounts for about 20% of the market in Alberta. That 20% includes both craft beer and industrial beer like Rolling Rock and Guiness, both of which are already taxed at the big brewery rate. Currently about 15% of the beer sold in Alberta is sold at the small or mid-sized brewery rate. Adjusting for beer produced in Alberta, about 7.5% of the beer sold in the province would be affected by our proposal, and of that 7.5% only about 2.5% (or about 0.18% of all beer sold) would be imported at the small brewer rate. So, we’re not talking about a large part of the market.

    Before continuing, some background is probably useful. The Alberta Small Brewers have asked the province to consider three things. First, to end the imbalance between Alberta and other provincial jurisdictions by putting into place a made-in-Alberta application of the Small Brewers Markup. In other words, only beer produced in Alberta would be eligible for the reduced mark-up rather than the current situation where breweries world-wide are eligible for the reduced mark-up. Second, we’ve asked the province to change the way it implements the Small Brewer Mark-up. Currently when a small brewer surpasses production of 20,000 hectolitres the mark-up moves from 20 cents per litre to 40 cents per litre on all production, not just that production in excess of 20,000 hectolitres. Third, we’ve asked for a reduced mark-up rate on production levels below 50,000 hectolitres in order to encourage more Alberta start-ups.

    The importers’ letter also raised the issue of price. As noted above, the majority of beer that would be affected by our proposal of a made in Alberta mark-up is currently marked up at the mid-sized brewery rate. I can’t get specific information from the AGLC on the breakdown of the mark-up at the mid-sized brewery rate because I could also use that information to identify the production levels of specific breweries. But let me be kind and assume that the majority of affected beer is taxed at the lowest mid-sized brewery rate of 40 cents per litre. That means that the provincial mark-up on a six pack of 341 ml bottles would increase by $1.19 from $.82 to $2.01. When I add in GST and an average liquor store mark-up, I would expect to see the price increase by about $1.65 per six pack. This assumes that the brewery and agent don’t do anything to mitigate that price increase. As for draught beer, the tax would go from 40 cents per litre to 98 cents per litre, or jump of 58 cents per litre. That works out to 33 cents per imperial pint, or 27 cents on a US pint. By the time that is marked up by your local pub that could mean an increase of up to $1.20 per imperial pint. Given that the price of a pint is often set on an average cost rather than on the price of specific beers, I’m guessing that the average pub goer would see either no price increase or a small price increase across all brands.

    Those points aside, lets have some fun with numbers. First, if the importers think that they’ve got it hard if there was a Made in Alberta application of the small brewers mark-up, look at what Alberta brewers are up against. In 1997, or three years after Alley Kat started brewing beer, there were about 489 stock keeping units (SKUs) there are now slightly over 3,000 including all of the SKUs at Connect Logistics as well as at the other beer warehouses in Alberta. That is an increase of 513% over 16 years. I’ll let that speak for itself.

    Now lets break the number of SKUs down on a per capita basis, using the number of SKUs identified in the Importers’ letter along with the 3,000 SKUs available in Alberta. The population of Ontario is 12.8 million, or one SKU per 13,168 people. Manitoba, with a population of 1.2 million has one SKU per 1,831 people, Alberta with a population of 3.6 million has one SKU per 1,207 people, and BC with a population of 4.4 million has one SKU per 8,059 people.

    Here’s some more fun facts. In Ontario there are 47 small breweries or one small brewery per 273,000 people. In B.C. there are 65 small breweries, or one per 68,000 people. In Manitoba there are two small breweries, or one per 604,000 people. And finally, in Alberta there are 11 small breweries, or one per 331,000 people. Granted, its a small sample size, but does anyone but me see a correlation between the number of SKUs and the number of small breweries? SKU proliferation on the scale happening in Alberta and Manitoba is not conducive to more local producers.

    But the real issue is one of competition. All that the Alberta Small Brewers are asking for is a level playing field. The real issue is that we can’t compete in other provinces (or countries), because other jurisdictions give their local breweries some form of preferential treatment. So essentially Alberta small brewers are trapped in Alberta. We can’t sell outside of Alberta on an even footing with other brewers and we see ever increasing competition for shelf space coming from outside of Alberta. Ideally, if we Alberta brewers had the same open access to other jurisdictions that breweries in other jurisdictions have to Alberta, we would be happy. We could then compete on a level playing field. Unfortunately, Alberta cannot dictate what other jurisdictions do, and indeed when Alberta, BC, and Saskatchewan recently signed a free trade agreement, liquor was left out. So, it seems to us that the only recourse that Alberta has is to apply the small brewery mark-up to beer brewed in Alberta. It is a bit of a crude public policy tool, but it is the only one available.

    I understand the position of the importers who signed the letter. They have based their business models on Alberta’s poorly implemented beer mark-up policy. However, I think that they overstate the damage they would incur from a made in Alberta beer mark-up policy. They assume that the breweries they represent would be unwilling to adjust their margins to remain competitive in the Alberta market. They also assume that Alberta beer consumers would be unwilling to pay any more for their products.

    As the numbers above prove, Alberta is severely under-served by small breweries. In the end, Albertans must decide if we want to be an importer of beer or a brewer of beer. If local beer is important, then a poorly implemented beer mark-up must be adjusted.

    • beerguy

      Thanks for commenting, Neil. I think it is very helpful when people actually involved in the industry offer their viewpoint here. Most of us are just theorizing and guessing at what it is like. You (and the agents and the importing brewers) actually live it. Cheers.

    • First, let me suggest that we all sit together and have a discussion of what we could do all together, rather than going against each other.

      Alberta now has a level playing field for all, no matter where they come from. It has to be, otherwise NAFTA and other free trade agreements are useless, and could be challenged in a court of law.
      Breweries all over Canada, no matter of where they come from, Canadian or imported, are treated the same way, in each and every province there are no preferential treatments for in-province-produced beer – this is simply a myth.

      So do all other provinces. Neil – you state that “The real issue is that we can’t compete in other provinces (or countries)…”. Well, I can tell you that we (and so do other importers) have listings with our producers in all these other provinces. It’s a matter of applying for them – when was the last time you have applied for a listing in BC or Ontario, or even looked into exporting other countries? Someone has to apply to get listings granted – we do that – we get listings, and I’m sure if you apply, and your application criteria meet the expectations of the liquor boards, you’ll get listings as well. It’s just that simple. I remember you and me chatting about taking your beer to BC – well, that went nowhere, as I’m still waiting for an answer on pricing. Other markets are way more competitive than Alberta, in terms of price and product quality.

      95% of our suppliers are falling under the “small Brewers Markup” and are taxed with $0.20/L – the calculation is simple and easy – see below

      content in L 2.130
      aglc markup now $0.200
      markup now per 6-pk $0.426
      aglc markup then $0.980
      markup then per 6-pk $2.087
      markup difference $1.661
      Wholesale now $12.75
      Markup Stores 35%
      Retail now $17.21
      wholesale then $14.41
      markup stores 35%
      retail then 19.45539
      retail difference $2.24

      Neil – you state “This assumes that the brewery and agent don’t do anything to mitigate that price increase.” Why should we and why should the breweries? It’s the same as if we were asking you to reduce your price – but we don’t. So in general you are asking us to work for zero profit?

      You are asking for a “level playing field” – OK, no problem – but then we propose that you also mandatory have to store and distribute your products through Connect Logistics and that Alberta based breweries are not any more allowed to sell their beer off the brewery directly to consumers and retailers. Right now, Alberta based breweries have great advantages compared to out-of-province beer as well as imported foreign beer. Alberta based Breweries are allowed to self-distribute their beer throughout Alberta while out-of-province and foreign produced beer needs to be distributed by the only appointed warehouse in Alberta. This put’s all non-Alberta produced beer at a costly disadvantage. Not only does out-of-province and imported craft beer carry the freight charges to the only warehouse, there are also other cost factors from the warehouse itself that have to be calculated into the price. These are costs the Alberta producers not necessarily have to face.

      When talking about creating jobs, the markup structure has nothing to do with potential new start-ups, the minimum 5,000 HL production capacity is the biggest hurdle for start-ups, as the initial funding increases dramatically, eliminating the founding Nano breweries.
      The eleven Alberta based breweries compare Alberta to the state of Oregon, which has a similar population and size. They state that Oregon has 131 breweries, with a combined production of 1.2 million HL/year. This would be a production average of ~9,000 HL/year per brewery. Based on your letter, the Alberta based breweries have a production average of ~18,000 HL/year – so already double the production of Oregon producers. So what’s there to complain about? Oregon is a completely free market, and their average local brewery production is only half of the average of an Alberta brewery.

      And we don’t “overstate” – we are realists that know the complete industry, not just one province. We are not proposing something that would ruin other’s people’ business and livelihoods. We try to be fair to the market as a whole, not just to our business.

  • Paul

    “They assume that the breweries they represent would be unwilling to adjust their margins to remain competitive in the Alberta market. They also assume that Alberta beer consumers would be unwilling to pay any more for their products.”

    I think you’ve contradicted yourself here. If you believe that an increase in the mark-up rate won’t reduce the number of breweries who want to enter the province, or change consumers’ buying habits, then why advocate for that increase in the first place? If nobody’s behaviour changes, then you’re in the exact same situation as before.

    Your second two recommendations I’m all for. And you’re certainly entitled to lobby the province for the best deal you think you can get. But when you start to say that beer consumers in Alberta have too much choice and you want to reduce it, in my opinion you’ve gone too far. I won’t support a company that advocates the type of anti-consumer regulatory change you’re proposing.

    • beerguy

      Hi Paul. It makes me happy to see debate and discussion occur on this site. That is part of the goal. Your perspective is a clear pro-consumer one, and that is important.

      What I am a bit concerned about is your last sentence: “I won’t support a company that advocates the type of anti-consumer regulatory change you’re proposing.”

      Alley Kat and the rest of the Alberta brewers are just advocating for their self-interest. That is their job. It is not Neil’s job to expand consumer choice. His job is to sell as much beer as he can. It seems harsh to punish Alberta breweries for advocating for themselves.

      You are, of course, free to buy whatever beer you wish. I just hope that most consumers realize, regardless of their personal position on this complex issue, that we want ALL good craft breweries to succeed. I believe purchase choice should be based on quality, not their position on this issue.

      Just my two cents. Thanks for commenting.

  • Mark

    Liquor is a provincial jurisdiction. Seems absolutely bizarre to me why a province would offer a lower markup to breweries outside of their jurisdiction.

    Is there examples of this in any other jurisdiction/industry?

    In terms of politics, I can’t think of a single ideology that would support such a policy.

  • Steve

    Mark, I think the issue is not giving preferential treatment to breweries outside the province. The current format treats everyone the same way based on volumes. What is being proposed is to start treating breweries outside the province differently than those within. If a province sets a production volume for a specific tax rate, then the tax should be applied to all breweries of that class, regardless of point of origin, in the name of free trade. The solution would be to tax all beer at the same rate, but give tax incentives or rebates on a per litre basis back to provincial breweries as they do in Ontario.

  • Graham

    Is Alberta experiencing a bitu…I mean…beer bubble?

  • Jason – you state “Even if many dozens of beer disappeared from Alberta shelves, it is hard to see how that would lead to significant job loss.” We’re not talking just about dozens – we’re talking about hundreds of beers disappearing from the now diverse Alberta Market.

    Think about it that way: What would businesses do that have specialized on Craft beer? Craft Beer Market, Underground, Beer Revolution and dozens of specialized stores – would they serve 10 taps of Alley Kat, Drummond or Hogs Head at a time, or fill their cooler just with Alberta produced beer? Surely not, they would either find another business model (unlikely) or close the doors. That again would lead to job losses. And with every closed down businesses there’s 5 others that depend directly or indirectly from them.

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