Friday, 25 March 2011

The budget...... Ouchy

Let me make it clear that I have not read the entire budget, it is 104 pages of drivel (I worked this out on page 4) so I have concentrated on the sections entitled 'growth' and 'fairness' and obviously the increase in duty on beer.

I'll start with the chancellor, who is in no way qualified to do his job, he has a degree in Modern History. He has no economic background and is employed on the basis that he's quite good at speaking in public. On the basis of that arguement, I should be the new Minister for Health.I can talk out loud and know nothing about the subject.

Mr Osbourne's plan (and when I say 'his plan' I mean the plan laid out by his economic advisors, none of whom live in the real world, all of whom will get paid large sums of money and who base all strategy on the rationality of the consumer and basic assumptions) for the long term sustainability of the UK economy is growth through microeconomics. I don't want to patronise anyone, but for those who don't know the difference between micro and macroeconomics, microeconomics is how individual households and companies make decisions about how to allocate resources, whereas macroecnomics is the study of the effects of microeconomics on inflation, unemployment which in turn affect national economic policies. Saying that the best plan for growth lies in microeconomics is flannel, pretty much all macroeconomic planning is based on analysis of microeconomic behaviour, the basic assumptions of rational choice.

Annnyway, the basic duty on beer has increased by 7.5% all told, so clearly this 'growth through microeconomics' the chancellor is talking about doesn't relate to exisiting business. Is the plan is to hammer existing industry in order to fund new business? Or fund pointless wars with shepards. Brilliant.

Anyone involved in the brewing industry knows that there has been a significant up turn in the fortunes of UK brewing, a relative rennaisance and a sustained period of growth. I won't go in to all the reasons for this, its been talked to death lately. Now, an increase in brewery numbers has not necessarily coincided with a rise in beer quality, there is LOTS of bad beer out there and its not all being produced by InBev or Molson Coors either.

So realistically what will this increase in beer duty actually achieve? Simple, it will close many small breweries and lots of pubs. However, which breweries and pubs will it close? Well, it will close the least profitable, least well run and poorer quality breweries and pubs (pub co's like Punch will suffer very badly I suspect). We are also about to see a canabilsation of the microbrew market.

What it won't do is have any relative effect on the multi-national brewing co's, none. Worst case scenario for those huge companies is they have to shorten their maturation times and user poorer quality ingredients to mitigate the rise in duty. It will not stop beer being sold at irresponsibly low prices and nor will it help close the gap between the cost of say a bottle of Stella and a bottle of microbrew. The big brewers will retain their market share, they might even gain some back because microbrewed beer will be prohibitively expensive for some people as a result of a price rise, it will break the WTP (willingness to pay) ceiling for some people. Alternatively, those people will simply buy less craft beer. Either way, many craft brewers will lose.

The beer duty rise is a cynical exploitation of the British beer drinker.

The BrewDog blog has extolled the virtues of the duty rise, which is in contrast with the general consensus it seems. I can see the point James is making, but it is an all things being equal arguement, an example of holistic pricing if you like (hedonic pricing is a method of valuation which takes in to account 'non quantifiable' preferences. A good example is house pricing. Take two identical houses and put them in different locations, one in Cheddar Gorge, one on an estate on the outskirts of a city. Which is worth more, they are identical? Holistic pricing values the environment, the fresh air, and estmates the WTP of people who want to hear bird song in the morning, not gunshots) Yes, most people would pick a fresh organic locally made loaf over a white and sliced IF they were a few pence more, but only up to a certain point.I would prefer to buy better quality everything, but as with most people every choice I make has an opportunity cost. I would prefer to spend a bit more on beer than bread, some people will be the other way around. Few people have the luxury of being able to make decisions which are free of opportunity cost. (Opportunity cost is where you make the rational choice of purchasing one item over another, the 'opportunity' of buying item B is lost when you choose to buy item A)

Every beer buyer has their own WTP ceiling, which will be based on opportunity costs, but willingness to pay is about preferences and not an indicator of percieved quality. Some people already pay £5 a pint for Peroni and would not even consider buying a pint of artisinal microbrewed beer for £4.50.

So, will a hike in duty change the way people drink and change preferences? No. Will it change the amount people drink? Yes.

A hike in duty is not educational and non craft beer drinkers will not interpret a rise in price across the board as a suggestion to move from their pint of Carling or John Smiths to something more esoteric, artisanal and  in all likelyhood, more expensive. Minimum pricing 'could' do that, by closing the gap between mass produced lagers and microbrewed products. Minimum pricing won't happen because the supermarkets weild too much power.

The duty rise will remove some average beers from the market and the breweries producing really interesting and exciting beers will continue to do well. The assumption that this will batter the big breweries and be to the benefit of the entire microbrew scene is misguided, a bit too altruistic. The beers we lose will be brewed by very small breweries and consumers of mass produced lagers will still have no incentive to try something different.

This budget has basically targetted a burgeoning industry by treating it like a cash cow, relying on the UK's drinking culture to keep revenue up. Its a counter productive strategy that will ultimately reduce tax revenue, increase unemployment and have zero positive socio-economic externalities.

I'd rather have a few casks of boring beer floating about than see the industry suffer in the way that is becoming increasingly more inevitable.

I'm probably wrong though.


  1. An excellent post, really clearly written and it highlights a lot of important points.

    I also liked the way you referenced the official BrewDog line as it gives some contrast to the PressDog approach.

    Although there is a lot of bad ale around, at least there is a lot of ale around - why would any government think that trying to wring out a bit more cash from this fragile section is a good idea?

  2. Predominantly because they have no idea what they are doing and simply hoping, like they have discovered with fuel, that WTP is significantly higher than rationally assumed.

    We have a driving culture, which is aspirational, and a drinking culture which is a reflection of our socio-economic profile. The government knows this and can see the industry is doing well, hence the exploitation. I suspect it will backfire.

    As for referencing the BrewDog blog, James is the only person who has suggested it might work in his company's favour. In that respect he is probably right, BrewDog will be relatively unaffected by this rise (remember, around 80% of BD beer goes overseas, so this duty hike makes no difference to 4 5ths of the business) because they continue to produce exciting beers and the demand is growing. BrewDog are in the minority of microbrewers who will see any kind of benefit though, and in fairness that benefit is primarily because BrewDog is all those things that other brewers complain about. Self promotional, derisory to others sections of the industry etc. Its aggressive marketing, and its working. Why shouldn't a company who believes in what they do say what they think and promote themselves? We're so conservative in the country, if you believe in yourselves, say so and shout as loud as you can. Don't sit about complaining no one can hear you.

    Sure, James is pretty blunt and can offend other brewers, consumers and industry bods. So far as I am aware, there is no law against 'upsetting people'..... Oh 'I find that offensive'.... So? Find it offensive, grow up and get on with it.

    James has a responsibility to BrewDog and is the most outspoken and openly passionate lobbyist of UK craft beer. Nobody else is better placed than he is to say whether he thinks this duty rise will be a benefit to his company. The part I disagree with it that it will benefit craft brewing, because I don't think it can. It might not harm some of the bigger and better micro's such as DarkStar and BrewDog, but I don't see how it can benefit the entire microbrew industry.