Wednesday, November 14, 2012

The Price of Beer

Following a trip to the US earlier this year, I wrote the following piece as a possible contribution to a publication that never made it to print. So I might as well put it here...


It’s common to grumble about the price of beer. But increasingly travellers returning from certain countries have a little more reason to question what we pay for a good tap beer here. In particular in the US a (US) pint of high quality craft beer typically costs between $3 and $5. Even if the New Zealand dollar were to fall to a more traditional price that still represents a big price difference.

As importers, distributors and retailers of craft beer from a number of countries we’re privy to a little more detail regarding pricing than a lot of people so we’d like to shed a little light on the real costs of the beer coming out of the tap. 

Let’s start with the cost of a keg of beer from a brewery. It seems that US breweries are able to get beer out their door at a lower price than New Zealand or Australian producers. As far as we can tell, the prices below are indicative of what a 50L keg of a 7% IPA might cost in each country, excluding excise tax. 

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:
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.

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.




7 comments:

  1. From Rob Singers...

    Under the US farm bills (http://en.wikipedia.org/wiki/U.S._farm_bill) there are massive amounts of subsidies paid to grain producers. Basically they are paid to over produce, and the resulting surplus is used for aid programs or to make things like high fructose corn syrup. Leaing to rampent supersizing and HFC in everything from hamburger buns to baby formula.

    I'd suspect that this is the cause of price difference between the US and NZ and AU. The fact that you have AU having a greater basic cost than NZ, when most gain used in NZ is imported from AU is probably a reflect of the higher labour and compliance cost in AU.

    The back story to the US subsidies goes back to the 50s when the Russian harvest failed; it may have been several in a row but I don't have any sources on Russian agriculture to check :-) The US producers made a fortune selling rain to the USSR which lead to a massive political backlash. The right wing paranoids decided that the Russians were trying to deplete the US food stocks so they could invade and conduct a war of attrition. The solution was to pay the farmers to grow two-three time as much food as the US needed every year to make sure there was never a threat to the food supply.

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  2. The cost of quality beer in New Zealand has very little to do with the cost of production. As with of many things here, the price is mostly a consequence of there not being a functioning market. In larger countries prices are driven down by competition until they reach a level below which brewers will go out of business. In New Zealand the price norm for quality beer is dictated by the very limited distribution channels, and because of New Zealand’s isolation many consumers don’t recognise they are getting a poor deal.

    Brewers might argue that their costs are much higher than their American counterparts, but that is not necessarily the cause of the high retail cost beer. It is more likely an effect of artificially high retail prices. This allows inefficient brewers to stay in business and pushes up the price norm for raw material and equipment.

    The price of grain, in particular, has only a marginal effect on the cost of production. I don’t know what the commercial cost of grain in the US is, but the cost to the home brewer is very similar to that in NZ. In the UK the cost of a 500ml bottle of quality beer in a supermarket is approximately UKP1.50 = NZ$3 – about one third of the cost of a comparable NZ product. There is no grain subsidy in the UK and duty is approximately 50% higher than NZ.

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  3. And a pint of good ale in an Edinburgh pub is about £3.50. $7-8. The markup between supermarket and pub prices is drastically less.

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  4. Since I moved to Melbourne here in Oz 3 years ago I have seen the price of the same beer go from $8.50-$9/pint to $11-$12 ($13.80-$15NZ) in most places. Some bars I have been (dragged) to are now charging $15 for a pint of James Squires. I put this substantially down to the increasing popularity of craft beers (not james squires...) and that bars know that now they can chuck another $2/pint on top of their previous prices and that people will still pay it because the only other option is to drink Carlton Draught.

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  5. And the home-brewing revolution marches forward...

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  6. The massively over-inflated cost base in NZ/Aus (wages, utility, rent, etc) is the real killer here. That 150-200% markup hides a lot of sin.

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  7. Wages as sin. Brilliant. An anonymous, biblical troll.

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