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| Table 1. Indicative costs of a 50L keg of a 7% IPA. |
A detailed analysis of the relative costs of brewing in each
country is beyond the scope of this story. But it is assumed that better
infrastructure and denser populations mean that ingredients and, perhaps,
labour and other costs, are cheaper to US producers. Also their craft brewing
industry is better established with a bigger population of consumers and many
of their breweries are working on a much bigger scale. Even the smaller ones
probably have less trouble selling their beer than an equivalent in New Zealand
or Australia because bars and breweries aren’t allowed to enter into the kind
of exclusive supply agreements that are the norm here.
When a keg of beer leaves a New Zealand brewery a second
party need to be paid –the government. This is because excise tax is charged
the moment alcohol leaves the boundary of a customs controlled area, such as a
brewery.
Most of our trading partners have essentially the same
arrangement, but varying levels of tax. In New Zealand brewers pay $27.609 per
litre of alcohol. Australia has a similar system but a higher rate - $AU31.05
(although the tax is only on alcohol above 1.15% ABV). That’s around 20% more
than in New Zealand. But there’s actually worse news for Australian drinkers.
That rate only applies for beer packaged in a vessel 48 litres or greater in
volume. There aren’t many of those on the supermarket shelf, so drinkers of
bottled beer pay $AU44.11 per litre of alcohol. At that rate Australian beer
drinkers are paying between 20% and 50% more excise than New Zealand’s,
depending on a beer’s ABV.
But drinkers in both countries are being punished in
comparison to those in the US. Small brewers there (i.e. brewing less than 234
million litres a year!) pay $US18 per barrel, where a barrel is 117 litres.
(There’s an even lower rate for their first 60,000 barrels.) That’s roughly a
tenth of what we pay, although the rate isn’t proportionate to the volume of
alcohol so it’s impossible to compare directly.
So if a brewery were to sell a 50L keg of a 7% beer, here are
the excise charges in the three countries:
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| Table 2. Excise on 50L of a 7% beer in US, NZ and Aus. |
That beer then has to get from the brewery to the bar. We’re
going to assume a freight charge of 20 of whatever unit of currency applies in
the US, New Zealand or Australia. This is probably done via a distributor who
will add a markup of, say, 15%.
Now there’s an important point to make about the distributor’s
markup and the excise. The distributor will add a percentage markup and doesn’t
care that some of the price that they’re marking up is excise tax. Why should
they? A cost is a cost and a party buying and selling the product is risking
capital and incurring other costs to do so. So in New Zealand that $96.63
figure mentioned above as the excise on a keg of a 7% IPA is effectively
$111.12 by the time it gets to a bar.
The retailer then adds their markup. In New Zealand and
Australia it’s accepted practice to mark tap beer up around 200%. This sounds a
lot. But that markup is how these businesses pay all their costs, from rent to
wages and everything in between. It is expected that a bar spends little more
than 30% of their income on stock. We’re going to assume that in a market like
the US the markup they apply is slightly lower. For one thing their labour
costs will be lower because of the expectation that staff are paid in tips and
they also don’t have expenses like ACC levies, kiwisaver contributions and
other costs of our slightly less brutal economic system.
So for our model we’re assuming 200% markups in New Zealand
and Australia and 150% in the US.
Sales tax is then added. Like the markups mentioned before,
this is a percentage increase that doesn’t care what the costs it’s being added
to are. So yes, GST is charged on excise tax.
Then customers in the US are expected to tip. This
effectively adds a dollar to the price of a glass of beer.
Here
is our full table then. We’ve added a fourth column that represents the costs
for a US beer shipped to New Zealand. As you’ll see, it starts cheaper than an
equivalent local beer but the cost of bringing it here eliminates that difference and once it’s in the New Zealand
system all our local costs take effect.
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| Table 3. Full Comparison of beer costs. |
These are “back of the envelope” calculations but we think
they reflect reality. And they offer an explanation of how we come to pay the
prices we do.
So what can we learn? Clearly excise makes a big difference,
not just because we end up paying nearly a dollar a glass in absolute terms,
but because it then gets marked up by every party handling the beer. There is a
case for saying that if excise tax wasn’t applied a beer such as the one in our
example would be $3-4 cheaper in New Zealand.
In theory excise could be charged at the retail end instead
of when beer leaves the brewery. This would come as a relief for brewers and
would eliminate some of the extra marking up that goes on in the supply chain.
It would mean every New Zealand bar, bottle store and supermarket would
suddenly become a tax collector. But then they already are collecting GST, so
that isn’t as radical as it sounds. But excise is a more complex tax, and every
outlet would have to apply New Zealand’s arcane excise calculations on all the alcoholic
beverages on their shelves. And since bars in particular mark drinks up more
than any other party in the chain, this change would only produce a small
saving in “marked up excise”.
But in the current climate of paranoia about drinking habits
a reform of excise laws to give relief to brewers and beer drinkers has no realistic
chance of winning political support. And we probably need to accept that our
sin-tax regime, while punitive, is not as bad as it could be nor as bad as some
of our neighbours.
