Inside an industry: something's brewing

Finbarr Bermingham takes a look at the UK's beer industry and finds a sector in trouble

If brewing industry historians are to be believed, when the Bronze Age tribes behind Stonehenge's construction finished their work, they had a refreshing ale to celebrate. Fanciful, perhaps, but indicative of the age-old marriage British society and beer. For hundreds of years, beer fought off competition from Roman wine, Norman cider and exotic spirits to remain the nation's tipple of choice. An influx of hoppy, international lagers from the 1970s onwards forced the industry to integrate with foreign competitors and adapt. The "big four" brewers, Heineken, Anheuser-Busch InBev, Carlsberg and SABMiller (which, combined, produce over half of the world's beer), have hoovered up dozens of local firms. But British beer has survived.

The relationship, though, is going through a rocky patch. Britons are consuming less beer than at any time since the Great Depression of the 1930s. In the second quarter of 2011, pint sales were down almost 10 per cent from 2010. Ten thousand pubs - in which beer accounts for around 60 per cent of alcohol sales - have closed across the nation since 2000. In a recent poll by the Guardian, 66.2 per cent of readers said a pint was now a "luxury" rather than a "necessity", a sentiment that was endorsed by Rooney Anand, chief executive of Suffolk brewer and pub owner Greene King, which has, however, successfully navigated the downturn by cutting back on its premium products. Greene King recently announced the creation of 3,000 new jobs, breaking the spiral of cutbacks and redundancies plaguing the sector.

New lifestyle choices and consequential shifts in demand have played a part in the decline. Since 1960, wine sales in the UK have rocketed from around 100,000 tonnes per year to around 1,400,000 tonnes. Beer consumption, on the other hand, fell by 4 per cent between 2009 and 2010. The story from inside the industry, though, is that the real problem is not the competition, but rising costs, which brewers are powerless to arrest. The primary issue for UK companies is the high level of taxation placed on beer, which is substantially larger than the levy on wine. In 2008, the government bumped beer tax up by 10 per cent and also introduced a beer tax escalator, meaning beer tax will rise by 2 per cent above inflation for four years. With inflation currently sitting at 4.8 per cent, these moves mean the increase in beer tax next year would be 6.8 per cent in total. Since 2008, beer duty has risen by 35 per cent and is currently 11 times the German rate.

The automatic tax hikes have seen the price of a pint shoot up in recent years. Earlier this year, punters had to fork out an average of over £3 for a pint for the first time. BM Savings, an advisory arm of the bank Birmingham Midshires, warns that, if the trend continues, the average price could reach £8 by 2060. Big brewers say they're caught between a rock and a hard place, as in order to protect their profit margins, they need to increase the price of their product, which in turn alienates customers.

A micro-wave of hope

For a tiny portion of the UK brewing market, however, the situation is much rosier. Microbreweries - breweries which produce between 5,000 and 20,000 hectolitres of beer a year - have been popping up all over the country. Also known as "craft brewers", they compete on quality and diversity rather than price and volumes. While megabreweries have been shedding staff and profits, their smaller rivals have been capitalising on the rise in popularity in the UK of the tenets of the "Slow Movement" - a cultural shift towards reducing life's pace, which rails against fast food and advocates regional, organic and handmade produce. Almost 100 breweries produced their first beers in the year to June 2010, most of which were micros. Microbreweries also benefit from a progressive beer duty, introduced when Gordon Brown was chancellor, which offers a 50 per cent tax break to businesses manufacturing between 5,000 and 20,000 hectolitres per year.

Large brewers 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) has even threatened to pull out of the UK, claiming successive government policies have penalised large companies. But Michael Learmond of the Federation of Small Businesses in Wales says microbreweries deserve to be rewarded, and are often the "glue that holds small communities together". Along with the Campaign for Real Ale (CAMRA), these specialist brewers are helping to change public perceptions of beer. Real ale, once viewed as the tipple of old men and rugby players, is finding a new market among young, discerning drinkers who are willing to pay a premium price for a more distinguished, flavoursome pint. It's some welcome news in a sector that's rapidly declining, but it's an (admittedly delicious) drop in the ocean.

Duncan Sambrook: Owner and founder of Sambrook's Brewery, London

Why are microbreweries so successful?

We're capitalising on a change in consumer demand. Brewing is the last part of the manufacturing sector to come around to the slow movement, sourcing ingredients locally and providing a quality, handmade product. Not everybody likes every beer, but there's such a broad variety of flavours that there's usually something for everyone. One of the reasons we run brewery tours, for instance, is to try and beat down the preconception that an English ale is a bitter. It's not always brown or bitter, and that helps it appeal to markets like young people and women, who traditionally "don't like ale"!

What issues do microbreweries commonly face?

Luckily for us, London was quite late to embrace microbrewing. When we set up in 2008, we were the first to brew cask ale on our scale in the capital - there are now 22 such breweries. Elsewhere, though, the industry is facing saturation point. There are too many microbreweries and too few pubs. Despite the growth in numbers, I think we'll see a big consolidation over the next few years. It's like the property bubble: things have grown exponentially, and it will probably burst.

We're facing a dilemma over how and where to sell our beer. More people are drinking at home and we want to take advantage of that. But if you can buy our product in a supermarket, it will make it less attractive and exclusive when people go to the pub. Our solution will be to start selling a bottled range through independent retailers in the local community, which is more in keeping with our ethos than the big supermarkets.

A personal bugbear - which you may not associate with brewing - is parking fines. We've got delivery lorries on the streets of London which are easy targets for local authorities, but we manage to successfully dispute 50 per cent of all parking fines. For small breweries, these can be a big cost.

What impact has the tax break had on microbrewing?

It's had a huge benefit. Without it, we would have to quadruple the amount of investment we first made in the business to get to a sustainable level. 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. As a former accountant, I think it's one of the most successful selective tax breaks that any government has introduced. It's increased employment and hugely benefitted a mainly British supply chain, and the government should look into implementing breaks in other sectors.

Neil Williams: Communications Manager at British Beer & Pubs Association

What's the industry view on beer tax?

It's unnecessarily excessive. A third of the price of a pub pint goes on tax. Brewers, in particular, are spending approximately half their turnover on tax. Beer is used as a cash cow, but there's growing evidence that increasing taxes is having a damaging effect on employment: we're a sector that employs about a million people across pubs and the supply chain.

We've had a VAT rise, too. A huge number of European countries have looked to cut VAT in the hospitality sector because they recognise that it's essentially a tax on jobs, since it's a very labour intensive service.

How has regulation impacted the industry?

Over the past ten years, a huge amount of red tape has been introduced, which is affecting the pub sector in particular. For example, the government has proposed a late night levy which would tax pubs that have late openings.

Pubs have to increase prices to cover these costs, which means they're less competitive against retailers. 70 per cent of alcohol is now purchased in shops and supermarkets, and it's contributed to the fact that we're losing the pub as a community hub, where people enjoy a drink and a chat together.

Do fluctuations in commodity prices have a detrimental effect on brewing?

Certainly. At the moment, barley prices are very high, which is affecting the price of beer. Energy prices are rising too, which compounds the issue. Breweries are having to deal with huge outgoings. Pubs too, many of which are small, family-run businesses, are very sensitive to these sorts of issues and sole traders have been hit hardest in the decline.