A skyrocketing excise tax, legacy debt from the pandemic period, increased production costs, and decreased consumer demand have combined to create an incredibly difficult market for independent brewers to operate within.
While we have seen increasing numbers of independent breweries entering administration in recent months, for Hawkers Beer Founder Mazen Hajjar, this is nothing new.
“These are exactly the same as the challenges that we have been facing over the last 20 years, but what has changed is that the economic conditions have amplified what we’ve been facing for decades,” he said.
A major factor leading to the recent spate of independent breweries entering voluntary administration is the legacy debt acquired during Covid. During this period, the Australian Taxation Office (ATO) allowed breweries to defer their liquor excise payments, providing some taxation relief to struggling breweries. However, the ATO is now pursuing brewers to repay these debts, despite continuing economic difficulties. Kylie Lethbridge, CEO of the Independent Brewers Association, explained that difficulties in repaying this debt are compounded by poor operating conditions.
“We pay the third highest beer tax in the world, so they’re quite high taxes. Many breweries came out of the pandemic with little to no cash reserves, having fallen back on them to get through the pandemic, along with a significant tax debt,” she said.
This has driven some breweries to enter voluntary administration to dispense with this unsecured legacy debt.
The timing was especially poor for Melbourne-based Bad Shepherd Brewing Co., which entered administration in October last year, as Co-founder Dereck Hales explained.
“During Covid, obviously, we crashed and had to defer our debts, and then when we came out of Covid, we didn’t return the numbers we expected. While Covid was hard, the hardest part was actually the 12 months immediately after. For the first three months, we would have days where no one would come into our venue,” he said.
Thankfully, Bad Shepherd has since exited administration.
“We’re trading profitably now. We were actually trading profitably before administration, but the amount of free cash flow we can generate from our profitable trading is less than the amount that we were required to repay to the ATO,” Hales said.
Guy Greenstone, Co-founder of Stomping Ground Brewing Co., believes that the ATO made the wrong decision, and as a result is losing out on potential tax payments.
“Through its aggressive requirement to have these legacy debts paid quickly, the ATO has created this issue, rather than if it was a little bit more patient and allowed the breweries to pay the debts back over a longer period of time,” he said.
Hajjar said that even without the legacy debt, the excise tax disproportionately affects brewers.
“The exercise system is broken. It makes no rational sense and doesn’t protect anyone,” he said.
The government has attempted to reform the excise structure, providing an excise-free threshold for smaller breweries.
As Lethbridge says: “Breweries that have a hyper-local model are weathering the storm a little easier, where they are just servicing their town or region and not necessarily relying on wholesale or retail distribution.”
However, Hajjar feels that medium-sized brewers are still being unfairly taxed.
“The government has now allowed brewers to produce 150,000 litres of beer a year without paying any excise, which means the middle tier brewers over the years are now being squeezed out,” he said.
Hawkers Beer sells $12 million of beer per year, and Hajjar estimates that the brewery pays almost $3 million in tax.
“I don’t have much of a profit margin in my business. It’s like the government is your silent shareholder,” he said.
Rising production costs
The cost of producing beer has also increased, with price increases in ingredients, CO2, packaging, and freight. Peter Philip, Founder of Wayward Brewing Company, explained that these production costs do not affect multinational brewers in the same way that they affect independent brewers.
“Independent craft beer is a premium handcrafted product, so naturally we don’t have the low cost of production that the mega brewers do. Eighty-five per cent of the beer sold in this country is owned by two Japanese multinationals, Kirin and Asahi, so they have cost of production that we just can’t compete with. They’re able to flex their muscles, whether it’s on-premise with tap contracts, or shelf space and using the low cost of production to deliver a lower price for consumers,” he said.
The CO2 shortage was a major concern over 2023, with breweries struggling to reach production goals. For Hawkers Beer, the shortage meant that the brewery was out of action for a total of 20 days last year.
Lethbridge says: “We’ve even seen instances where breweries are swapping gas, saying ‘I’ve got to delivery this week, I’ll give you some and you can give it back when your delivery comes.’ It’s down to those measures.”
Hajjar explained that price increases are not the answer to the problems facing independent brewers, especially due to cost-of-living pressures affecting the consumer.
“You can’t keep going to market and raise your price every time there is a new production price increase. You can’t increase your prices when the consumer is under stress just trying to pay off their mortgage. We don’t have the mechanism to do it, either. With major national retailers, I can only raise my prices twice a year, so if I get slapped with a price increase two months before my price increase, when it’s finally been negotiated with the big retailers, then I have to wear that price increase for another eight months of production,” he said.
Cost-of-living pressures have driven many consumers to trade down to beers that are cheaper than independent brewers can offer.
According to Stomping Ground’s Greenstone: “Beer has been somewhat recession proof, because in economic downturns, people tend to drink more. Instead, what we’re finding is that people do want to drink, but they might trade down to value options. They might go for a $19 six-pack rather than a $25 six-pack. With a very competitive marketplace, and a lot of downward pressure on pricing, it’s not easy to pass on that production cost increase to the consumer.”
Greenstone believes this is compounded by the independent beer industry reaching its limit in terms of new market entrants.
“Craft beer was bucking the trend of overall beer consumption, which has generally been in decay. The craft beer industry could sustain new entrants, but now I think that it’s hit the ceiling. What’s happening is independent craft beer has moved into lockstep with the general beer category, and beer has been in long term steady decay for the better part of 30 years,” he said.
Greenstone attributes this decline to moderating alcohol consumption and a loss of market share to RTDs and spirits, especially among younger adult drinkers.
However, there are some brewers that are somewhat insulated from lowering consumption, such as those in Western Australia.
“Western Australia is in a unique situation. Their insular economy means that those cost-of-living pressures are not hitting Western Australians as badly,” Lethbridge said.
A path forward
Some independent brewers have diversified into other segments, which has had mixed success.
“What we’re seeing is a diversification to compete with RTDs. More breweries are making seltzers, more breweries are making ginger beers. We’re seeing a lot of hop water being released onto the market, which is a great byproduct. Breweries are trying to diversify by competing with the RTD trend, but all of those factors in terms of the cost increase and excise are still there, even if you’re making hop water or a seltzer,” Lethbridge said.
The Australian independent beer industry still has the potential to grow, providing it receives the necessary support.
“For once, Australian beer is being welcomed into the export market, but these excises are going to kill us before we’re able to even export. The government is smothering this baby in its crib before it’s really had the chance to shine,” Hajjar said.
Independent brewers and the IBA are calling for government support for the industry.
“We’re asking for some flexibility from the ATO in order for brewers to pay their debts back. We’re asking for some relief on taxes, as the third highest taxed beer industry in the world. We’re asking for the excise rebate to be indexed along with the tax. We’re asking for the tax hikes to be frozen for a couple of years to allow everybody to catch up and recover,” Lethbridge said.
Despite the difficult economic situation, some breweries are pulling through, as Hales experienced with Bad Shepherd.
“Our trade has improved since administration. We didn’t lose any distributors, all of our customers stood by us, and our brewpub has grown. We’re up about 4.5 per cent year on year right now,” he said.
Hales was also heartened by the support he received from the rest of the independent brewing industry.
“It was very humbling how much support we received and how we’re giving it back to other breweries going through administration. They’re not alone. When we’re all growing, we’re helping each other, and when times are tough, it’s still happening,” he said.
Greenstone is equally optimistic about the long-term future of the industry.
“For those breweries that do pull through administration, there’s a light at the end of the tunnel. I think there’s merit to becoming a bit leaner, a bit more focused. Those that navigate this difficult period now will end up with a better result in the long run, so there’s plenty to be optimistic about,” he said.