Most 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.
The 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 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!