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Alberta Shifts the Beer Playing Field

liquor store coolerMost of the coverage of yesterday’s Alberta provincial budget, the first by the new NDP government, focused on the deficit, the pledge to create jobs and protect services, and their infrastructure spending. However, hidden in the details was a decision that will have huge ramifications for the beer industry in the province.

The Notley government announced sweeping changes to the beer mark-up policy. This issue has been burning for quite a while now (read about past developments here and here), sparked in large part by Minhas Brewing’s practice of shipping low cost beer made in Wisconsin and claiming it to be Alberta beer.

In short the new policy does three key things. First, it restricts the small brewer’s mark-up to breweries based in Alberta, B.C. and Saskatchewan. All other breweries must pay the full rate, regardless of size. Second, the small brewer rate will now be graduated, meaning increased rates will apply only to production above the threshold, not to all production as was previously the case. Third the full rate went up by 5 cents to $1.25 per litre.

I want to do two things in this post. First, I will break down the meaning and possible rationale behind the new policy. Second, I want to discuss how it will affect the various players. And then I may weigh in with my own view.

The third component of the policy is the easiest to explain. The province needs more money and alcohol is an easy target. The 5 cent increase is fairly minor, but we do need to remember it is on top of a 22 cent increase by the previous Conservative government in the spring, meaning the beer mark up has increased 27% in the last 8 months. To keep that in perspective, it is an increase of 55 cents per six pack.

aglc-logoThe new small brewer rate starts at 10 cents per litre for the first 10,000 HL, climbs to 30 cents for 10,000 to 50,000 HL, 55 cents for 50,000 to 200,000 HL and the full rate after that. Graduation has the effect of meaning the effective mark up moves up gradually. By the time a brewery is producing 400,000 HL it is still only paying 86 cents (averaged) per litre.

There is no question this is a huge advantage for small brewers based in those three provinces. The broad purpose is clear – to promote local production of beer by providing a cost advantage for local beer. The government is making a clear decision to side with local(ish) producers instead of imported beer. Plus the decision puts an additional $17 million or so in the government coffers at a time when likely every penny counts.

The whole B.C. and Saskatchewan thing is understandably confusing. Why just those two provinces? The rationale is this: Alberta, B.C. and Saskatchewan are signatories to the New Western Partnership, a free trade deal reducing barriers. My understanding is that the government is worried about ramifications of shutting out those provinces, fearing negative ramifications. Of course, this doesn’t speak to the fact that B.C. and Saskatchewan do not have policies giving Alberta breweries a level playing field, but so be it. That is what they are thinking.

Some have noted the policy may also contravene NAFTA, WTO and AIT provisions. That is possible. But when we examine beer policy across the continent, Alberta’s continues to be more open than most, so it seems a far stretch to suggest that somehow partners are going to retaliate against Alberta for this policy.

As for the second purpose of this post, the reaction has been swift, polarized and fascinating. As I have said before, there are at least three different perspectives on the matter. Alberta breweries (now joined by Saskatchewan and B.C. breweries) are clear winners in this shift. They now get a $2 per six pack cost advantage over imports (all other things being equal). The policy is a clear statement that local beer production is a priority for the new government (tempered by the odd inclusion of the other two provinces). The Alberta Small Brewers Association is pleased.

The second group is importers and craft breweries in other jurisdictions (those interests are not entirely synonymous, but I group them together for simplicity). They are very unhappy campers today. In particular the import agents are apoplectic as they see their livelihood undermined. I have had numerous emails over the past 24 hours from agents expressing extreme displeasure at the decision. I get their concern – the new policy immediately makes many of their products more expensive, making them harder to sell. I am finding their predictions of utter calamity a bit hard to swallow (some have claimed this will lead to the demise of every small Canadian brewer and even, inexplicably, the destruction of Alberta brewers). That said, I can see how their business will be negatively affected. A greater advantage for local brewers means a less one for imports.

A hint of the future?

A hint of the future?

A sub-set of the second group are small brewers like Yukon Brewing, Half Pints and others for whom the Alberta market was an important outlet for their product. For them, this is bad news but not devastating. Unlike importers, craft breweries in other jurisdictions can find alternative markets to sell their beer. I imagine they are unhappy but already planning contingencies if their sales in Alberta drop.

The third group is beer consumers, a notoriously heterogeneous crowd. Consumers like selection and choice, but they also like a vibrant local beer scene. The results for them are mixed and, mostly, yet to be determined. The only thing that is clear is that cost of many (but not all – let’s be clear about that) imports will go up. Some importers are arguing that the new policy will lead to breweries pulling out of the province, leading to reduced selection. That is an unproven claim at the moment, but one that is possible. Some imports may decide the extra $2-ish cost makes it untenable to sell in Alberta. Personally I want to wait and see. A relatively small increase of 10% or so may not affect sales as much as the critics are concerned about.

In turn, however, the logic of the policy should make B.C., Alberta and Saskatchewan beer more accessible to consumers, meaning, over time, a greater penetration by small brewers from those provinces. Stronger local breweries feeds into a stronger beer culture overall, which is good for consumers.

After all that, what is my take? I have three general thoughts on the matter.

First, I continue to believe that providing a lower mark-up for Alberta breweries is good public policy. Alberta breweries create jobs and economic activity and the money stays (mostly) in the province. Local beer is a crucial anchor to building a craft beer culture. Ultimately, the path forward in terms of making Alberta a vibrant beer location is to build stronger local breweries. The new mark-up regime looks remarkably similar to B.C.’s system, which has worked well for them.

That the new policy applies to B.C. and Saskatchewan is perplexing and waters down the effectiveness of a local brewery advantage. I don’t share the government’s apparent fears about the NWP and actually think an Alberta-only policy could have been used as leverage to gain greater access to those provinces for Alberta brewers.

Second, graduating the mark-up should have been a no-brainer years ago and so is a long overdue reform. Hard caps just discourage breweries from growing. Now a small brewery can become a medium-sized brewery over time without taking a massive financial hit in the process.

Third, I recognize the policy will lead to higher prices for imports and could result in somewhat reduced selection. I sincerely empathize with the agents – I know many of them and they are hard-working,  good people who are passionate about beer. But policy is about trade-offs. Over the past decade, import craft beer has had an advantage over local beer due to the mark-up policy. The previous government decided it did not want to interfere in the market, at the expense of local producers. The new government clearly feels it has a role in developing a local craft beer industry. That shift comes at the expense of imports.

Overall, I think it is important to keep the change in perspective. Its effects will not be as great as either side thinks. All it does is affect the relative price point of Alberta/BC/Saskatchewan beer compared to other breweries. Craft beer drinkers are less price sensitive than mainstream drinkers. Will an extra dollar or so on that six-pack really dissuade them from drinking their favourite import? I don’t know. In turn, a small price advantage won’t suddenly turn Alberta into Portland. Any advantage to local producers will be slow to take shape. Likely the biggest loser is Minhas and other imports competing in the discount beer segment. For all others, the effect will likely be gradual and moderate.

Regardless of one’s position on the policy, there can be no question it is a significant change in the Alberta government’s approach to beer. It signals a different approach to promoting local beer. I suspect this is not the last change we will witness in the coming years.

Looking forward to the debate in the comments section!

 

 

 

34 comments to Alberta Shifts the Beer Playing Field

  • Owen

    I think the only problem is the inclusion of BC and Saskatchewan brewers without a guarantee of reciprocal treatment. Don’t get me wrong, I have a lot of goodwill for Brewers in sk and bc, but maybe having a sunset date on equal treatment and giving the other jurisdictions a couple of years to equalize markup rules as well as market access issues would have created some incentive to modify regimes in our neighbouring provinces.

  • What great news! FINALLY some real support for small Alberta brewers. The Sask/BC inclusion is odd but it means beer drinkers can still have relatively cheap access to dozens of great BC and Sask beers while Alberta brewers get the support they need. I hope eventually it will grow to include all the other provinces and territories. US and international beers were already expensive ($26 for a six pack of Ballast Point Sculpin IPA!) so you had to really want to buy those beers – I doubt the extra tax will change this much.

  • […] short the new policy does three key things,” writes Jason Foster in a blog post. “First, it restricts the small brewer’s mark-up to breweries based in Alberta, B.C. and […]

  • Ryan

    Another misstep by the NDP. As a consumer, I’m really disappointed they chose to raise the prices on imports. Protectionism is a joke, and will only encourage other jurisdictions to respond in kind to Alberta brewed beer. If the only way to foster local beer culture is arbitrarily increase the price of ‘non local’ beer, is that really something to be proud of? Shouldn’t local beer be good enough to sell itself. Local brews are already likely less expensive, anyway. We are fortunate to have the widest selection of beer in Canada. These new taxes are going to discourage agents from bringing in new product, but hey, at least we’ll have local, phenolic, English Pale ales and overly sweet saisons to drink.

    -Disgruntled consumer

  • Unfortunately the price increase is more than a dollar or so a six pack for Yukon , the wholesale jumped $9.04 per flat or $2.26 per six pack . That will more than likely translate to a $3 raise per unit on the shelf and that is not good for our friends up north.

  • David Rudge

    No biggie, we stopped shipping to Alberta when keeping up with growlers at home became too difficult.

    If ever there was a time for small brewers in Alberta to step up their game and prove they can produce better than world class beer, this is it.

  • Keb

    One other consideration might be whether/how this will alter the selection offered by the agents. I agree that the average craft consumer is somewhat immune to minor price increases on an import from the US/Europe, however this is likely only true insofar as the consumer trusts and knows the product.

    At $18 to $22 per six pack even a person with craft tastes and a ready wallet will likely pause before making purchase of an unknown beer. However if they have an established favourite from the US, they will likely proceed even if the price is in that $18 range. Hopefully this will put pressure on the importers to identify the beers worthy of being imported (i.e. not every beer with a “craft label” is worthy of a $12 price tag, much less $18).

    Lastly and to echo David’s comment: the time is now for craft brewers in Alberta to step up…and I would add push the boundaries beyond “red ales” and simple lagers.

  • So… you still think that our July op-ed was “punching at ghosts?” http://www.onbeer.org/2015/07/ctf-weighs-in-on-beer-mark-ups/

  • Paul

    Disappointed with this change, as I believe it will impact our selection of imports. We’ve been spoiled for a few years, but with the depreciation of the Canadian dollar and now this mark-up increase I can see some brands becoming too expensive to stick around. I know I’ve been buying less US beer and more from BC since the dollar dropped, so I guess I’ll continue doing that.

    The issue for me with Alberta brewers is the quality just isn’t there compared to our other options. Maybe less competition will help new breweries mature a bit and raise the standard, but really I just don’t think throwing up barriers will help. It helps the brewer’s bottom line, supports local jobs and that’s great, but I think it will be a loss for consumers quality-wise.

    I’d have preferred they cut the existing mark-up for Alberta brewers only, and left the current rates in place for everyone else.

    • Keb

      Just to be clear when I echoed David’s comments and stated “the time is now for craft brewers in Alberta to step up…and I would add push the boundaries beyond “red ales” and simple lagers” is an aspiration but not much of an expectation.

      The more likely outcome will be less selection in Alberta and the opportunity for Alberta brewers to step in and take risks (by making better more adventuresome product) will be ignored due, in part, to the fact there is less competition on the shelves.

  • Owen

    I have little doubt that with a wave of new breweries, an assortment of trained and ambitious young brewmasters out of Olds and a small price advantage, there will be some risks taken and some special beers made. Our distribution system will remain the most open in Canada and great craft beer from other jurisdictions will continue to be imported. If a $0.73 Canadian dollar doesn’t kill imports, this tax won’t. If anyone is worried about retaliation from other jurisdictions, just consider that it is nearly impossible to market Alberta beer anywhere but Alberta not because of quality but because of limited access to markets elsewhere

    • Keb

      I too would love to see an Alberta brewer and a brewery take the type of risks and adventure and still create a consistently well-received and diverse offering such as you see at places such as Four Winds or Le Trou Du Diable.

      I would agree that a 73 cent exchange rate won’t completely kill US imports, however as I stated earlier, a unknown high-cost import will likely be negatively impacted when you see the price rise to the upper end of spectrum which is currently that $18-22 range per 6 pack). Whether the high cost is the result of taxes or exchange rate the result is probably the same.

      Where we may differ is that I don’t think the way you create or encourage excellence in local brewing is by increasing the taxes on the competition. I think the way we push Alberta breweries to create great product is give consumers a choice to buy import beer from around the world and pay the same low progressive tax.

      Consequentailly i am in favour of the progressive tax changes which lowers the burden on small breweries however I would prefer that these changes apply equally across the board.

      Essentially I am not confident that creating a lower cost of production for smaller breweries from western Canada (versus other regions) will either result or correlate with the hope (at least my hope) of seeing an Alberta brewer creating a diverse range of beers which would compete with the brewers highlighted above.

  • Mark

    I don’t think production rates/taxation ever influenced the quality of beer.

    While I find the inclusion of BC and SK somewhat odd, this is purely sound economic policy, and follows what most other jurisdictions in North America are doing.

    This type of progressive policy allows small AB breweries to grow, thrive and prosper until they are big enough to compete with other major breweries and imports. While this growth is happening, these breweries are making significant contributions to the local economy, which offset any supposed “tax break” they are receiving.

    Previous AB policy was always an anomaly. When was the last time you heard, “hey let’s go to Colorado to buy some imported Belgian beer?”

  • Mark

    Guess there won’t be anymore seminars like there was at last year’s Craft Brewers Conference in Portland, OR on the benefits of importing your beer into Alberta…

    AB was clearly the anomaly throughout North America in terms of tax rates on imported beer.

  • Ben

    This is definitely a mistake and is an illegal maneuver by the NDP. What it really does promote is people buying more terrible Moslon and Labatt products and the money ending up in foreign pockets. If the government really wanted to promote Alberta beer it should have instead hiked taxes on imports and foreign owned conglomerates… Those who truly suffer are the small east coast and Ontario based breweries but most of all, the consumer. In my opinion Canadian owned breweries should band together because we are a premier beer making nation and this is a step backwards.

  • […] short the new policy does three key things,” writes Jason Foster in a blog post. “First, it restricts the small brewer’s mark-up to breweries based in Alberta, B.C. and […]

  • Why does the Alberta government want to build barriers between craft beer brethren across the country in an industry segment characterized by camaraderie and collaboration? Why would the Alberta government now treat legitimate, Canadian entrepreneurial companies as though they were import aggressors,meanwhile providing minimal tax impact to the big domestic brewers who channel profits out of Alberta to foreign-owned parent companies?

    read more about our position here: http://www.steamwhistle.ca/blog/2015/10/29/alberta-government-divides-east-vs-west-in-the-biggest-beer-tax-hike-yet/

  • Owen

    Mark: here is an article about the heavy protectionist measures in Ontario that have allowed Ontario Craft brewers to thrive in a tightly regulated market. Unlike Alberta, there is very heavy regulation on the import and marketing of beer from other Canadian provinces.

    http://beerfestival.ca/navigating-the-maze-importing-beer-in-ontario/

    Obviously, if every jurisdiction allowed free access to other provinces the way Alberta used to (and still does for BC and SK) it would be very good for craft beer in Canada generally. Unfortunately, Alberta’s experiment in providing subsidies to craft brewers all over the world did not result in any reciprocal treatment from other jurisdictions and the experiment seem now to be rightly at an end.

    • Martin

      Again, I have to agree with Owen. I have sold Craft brewed beer since 1989 – even sold Alberta beer in Ontario. This levelled the playing field and I think it is great. No one in Ontario cares about this except the few who were exploiting our tax system.
      Perhaps, this start a real discussion. Alberta was THE only province to support the cause.

  • Owen

    Also, Alberta beer imported to Ontario is taxed at a rate of $1.70 per litre, much higher than Ontario beer is taxed in Alberta at $1.25 per litre. As well, small breweries in Ontario pay a basic beer tax of 23 cents per litre, meaning that Ontario beer sold in Alberta until this week was taxed less than if it had been sold in Ontario. Any wonder the situation changed? Brewers who want preferred tax treatment in Alberta should be talking to their own governments about giving Alberta beer exactly equal treatment as their own domestic product. When that is done, we can talk about who is or is not being treated unfairly.

    • Keb

      Owen

      If I understand your logic it is that a more protectionist system has allowed or enabled Ontario craft beer to thrive and grow. And that because our treatment of Ontario beers has not been reciprocated by Ontario toward Alberta beers we should become more protectionist.

      On my read the article you posted offers little evidence that there is a causal or corresponding relationship between the measures limiting importation and the development of craft beer on Ontario.

      Further whilst cheerleading the development of craft beer from Ontario the article offers no real comment as to how consumers view Ontario beer from a quality standpoint when compared to craft beer from other regions nor does it reference whether Ontario based consumers are paying a fair price for the beer they drink when compared to other jurisdictions.

      This would be helpful information in when analyzing the ultimate effects of protectionist measures. As you can probably tell I am all for little or no protection when it comes to the idea where a beer is made. This type of protection seems outdated and unlikely to ultimately help the consumer in the long run.

      I would like to see a comparison between Ontario and other jurisdictions (be they Canadian, US states or elsewhere) in order to see what actually works best for both craft brewers and craft consumers.

      I would voice my support of craft beer through the following measures, which I think could be applied to all Brewers regardless of where they’re located: sensible and straightforward regulations which don’t require too many lawyers and other professionals to navigate, lower taxation for the first xx litres of beer sold in the province (ie along the lines already implemented in Alberta) and removing the Byzantine liquor Alberta import and distribution system.

      I look forward to hearing your thoughts.

      • Mark

        I find it interesting that some take the view of tax breaks for local businesses as protectionist, as opposed to being an economic stimulant. Not saying one view is right or wrong, just very interesting.

        As I said elsewhere today, should the ON govt offer tax breaks to AB oil producers? Sounds pretty unreasonable doesn’t it? Maybe the AB govt can give me a break on my car insurance in SK because I have a clean driving record.

        In a perfect world I absolutely agree that the playing field would be level for all, there would be no taxes, no levies, no laywers, and no borders.

        However, given that we don’t live in a fantasy world, liquor in Canada is a provincial responsibility, AND every other province has taken the exact same approach, so I don’t see why AB doing the same should be much of an issue for anyone.

        The numbers don’t lie; a thriving local beer industry makes a significant contribution to the local economy. Alberta has seen the results in BC, and now ON, and they want to see the same in their own province. The policy has nothing to do with protectionsim and trade barriers in my opinion, it is all about economic stimulus and creating jobs for the people this govt represents. Why wouldn’t the AB govt want to have thriving local breweries instead of importing a bunch of beer from somewhere else? Beer isn’t like oil where you either have it or you don’t, it can be made anywhere, so might as well have it made in your own backyard and reap the benefits.

  • Mark

    Owen is the MAN!

    Which I already knew… but just had to say it.

  • Owen

    Keb- don’t get me wrong, I favour rational beer policy, but not at the expense of giving unreciprocated tax breaks to Brewers in any jurisdiction. Ideally I would like to see every province of Canada taxing and marketing Canadian beer in identical ways. That is not the case today and is unlikely to be he case in the foreseeable future.

    I am not sure how you can consider Albertas liquor import and marketing regulations Byzantine, particularly when compared with those throughout the rest of Canada. Ontario stands out as particularly bad at beer policy, what with the Beer Store monopoly being granted to a small group of foreign multinational corporations

    For clarity- no taxation policy will make beer better or worse. Only Brewers can do that.

    He provincial government does not have a mandate to help beer needs like us save two bucks on a twenty dollar six pack of imported beer. They have a mandate to diversify the Alberta economy and create jobs, Giving a small price advantage to local beer may accomplish that. There is definitely no down side for the government in restricting what has been the most open beer market in Canada.

    Free trade is all well and good, but it does not work when it is only in one direction. Every beer that was being imported on Monday can still be imported on Friday, it will just cost an extra Thirty Five cents per bottle. It will still be impossible next week to import Akkey Kat for sale in Ontario without begging for access to a severely restricted product listing.

    • Keb

      Appreciate the response. We probably disagree on the role of the government when it comes to using these types of tax strategies for creating jobs and whether free trade can work in one direction. In any event despite my deregulation bias I will agree that Byzantine Is an overstatement when compared to Ontario. Probably a better conversation to have over actual pints.

  • Bob

    First off, thanks to those who have reached out to us in the Yukon. It is hugely appreciated.

    We have no real right to have an opinion on how the government acted. We do not live there so we had no role in voting them in and we have no role in voting them out.

    But, the column characterizes the effect on us a minimal. Nothing could be further from the truth. This sets our company back, we just don’t know how far back yet. Only time will tell that. But rest assured, it is likely years, not months.

    Sports teams talk about not getting to wound up in the highs nor too wound up in the lows, and this is the approach we try to take. So, we won’t panic.

    But all businesses are very strategic. The lay of the land changed in Alberta overnight for all beers not made in one of the favoured provinces and businesses will react to that. Will there be a fallout – without doubt. Will it benefit the Alberta beer drinker? It will change the landscape, and only time will tell positively or negatively.

    Careful what you wish for…….

    • Vern

      Since August 2014, our Alberta firm has sold Beer into Washington, Illinois, Wisconsin, New York, Ohio, Iowa, Nevada, Florida – all with similar mark-up regimes as Alberta. There is no preferential tax treatment. Beer imported from UK, Canada & Germany is taxed the same as Beer brewed locally.

      Since 2003 our firm has sold Beer in all provinces, except Quebec.

      Please fill me in. I don’t get how local producers need handouts. They already had a $6-8 Logistics advantage over Beer shipped in from the Yukon or Manitoba. They also self distribute meaning they can be more responsive to customer needs.

      The Yukon Territory population is 34,000. The Yukon Liquor corp has 6 stores and purchases its products from BC and Alberta.

      The population of Lloydminster, is identical to Yukons total population.

      Most if not all packaging, Barley and hops need to be shipped 2400 km from Alberta or BC to Whitehorse. Cost of 1 truckload into Whitehorse is over $4000 – as long as you can offer a backhaul. Alberta brewers Landed costs are signicantly lower as they are closer to raw material suppliers.

      Alberta is a bully to pick on Manitoba and the Yukon.

      Over the past decade, the Manitoba Liquor board expanded its Craft beer portfolio.

      Overnight, Craft Beer from Nova Scotia and other affected jurisdictions is lower priced in both SK & MB.

      Is this the Alberta Advantage? As Bob points out – only time will tell. I suggest followers of this post from Lloydminster AB pop over to Lloydminster SK on December 1st to see first hand how the playing field has changed.

      Over thnexspokethth, there will be press releases from family owned brewers announcing they will pull from the province. I spoke today to one of the most respected retail buyers in the industry. He recognises that the majority of his Craft beer lovers regulary buy 6 packs between $15 & $18. Once a 6 pack in his stores crosses the $20 threshold, velocity of sales decreases by 50-75%.

      I suspect the exit will be rather swift if the NDP doesn’t reconsider the timing of the policy change on small businesses like ours.

      As anyone in the restaurant and bar industry will confirm, last month saw a significant drop the in revenue and profits. The economy is week, and if I were a betting man, this will benefit Sleeman, Molson, & Labatt’s market share.

      So where do we go from here? I will continue to ask for a local brew on Tap. There will be fewer tables at Calgary & Edmonton Beer Festivals in 2016.

      Next year I suggest to take a trip to Willow Park and Sobeys in Regina, and Co-op in Saskatoon to reflect on the good old days in Alberta.

      We will be able to thank Gerard Comeau in NB, and the Federal Government who removed the barriers of inter-provincial trade of Beer. When you drive home, stock up, as you will be saving $2 / 6 pk.

      Thanks again for your support, its a shame there was no notice and no period of transition for the stakeholders affected.

  • […] Foster examines what the provincial budget means for the local beer business (and adds a little more in a […]

  • […] beer writer Jason Foster, whose blog, On Beer, is the most authoritative in the province. Posts here and here really break it […]

  • […] new tax rules (see Adam Seguin’s post on the Western Suds blog and Jason Foster’s post on the On Beer blog) so we won’t reignite that […]

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