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Fri 4th Oct 2013 - Friday Opinion |
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Subjects: Progressive Beer Duty, the silly season, personal licences, machine income
Authors: Martyn Cornell, Paul Chase, John Gaunt and Kate Nicholls
The unintended consequences of Progressive Beer Duty by Martyn CornellIt's a bitter irony that Black Sheep Brewery, one of the most successful of the "new" small breweries, now finds itself badly hit by a tax regime specifically fought for, and brought in, to encourage new small breweries. The problem is that Black Sheep, which brews excellent beers at its home in a converted maltings in Masham, North Yorkshire, is, after 21 years, no longer small – or, at least, no longer small enough to qualify for Progressive Beer Duty.
PBD, brought in by Gordon Brown when he was Chancellor of the Exchequer in 2002, means any brewer making, currently, no more than 5,000 hectolitres of beer a year (a little over 3,000 barrels in old money) pays only half the normal excise duty, which, after VAT is taken into account, means an effective subsidy of 24p a pint. It gets complicated after that, as the tax relief slowly falls off with rises in production, but eventually full excise duty is payable on every pint once a brewer's production goes over 60,000 hectolitres. The idea, as put forward by SIBA, the small brewers' association (which had been campaigning for PBD since 1989) and the Campaign for Real Ale, was to enable small brewers to compete better, by removing some of the cost burden on them, and thus to encourage new entrants into the market and, as a result, improve consumer choice.
There is no doubt that new entrants have hit the market in a mighty tsunami: the number of breweries in the UK has boomed from around 450 in 2002 to some 1,150 today, a 155% increase. Gordon Brown has certainly had a lot to do with that explosion of new small breweries. But almost all those new entrants are competing in a minority segment of the British beer market, cask ale, and while cask ale may not be declining as fast as the overall UK beer market, it's certainly not expanding. Those brewers under the PBD ceiling are, effectively able to sell their beer in a tight market up to 24p a pint cheaper than a brewer like Black Sheep, which finds itself having to pay full tax because it has been successful enough that it makes more than 60,000 hectolitres of beer a year. (It is not just Black Sheep that suffers from what many regard as an unfairly tilted playing field in this way, of course: so do almost all the old-established family brewers, from Fuller Smith & Turner to Adnam's to Robinson's.) The wholesale purchasers of beer (that is, the pubcos, mostly), naturally enough, go to where they can get it cheapest, and that is from those brewers who brew 60,000 hectolitres or less.
As a result, Black Sheep has found itself squeezed out, losing 6,000 barrels of pubco business in the 12 months to 31 March this year, and turning from profits of more than half a million pounds in 2011/12 to a loss of almost three quarters of a million pounds in 2012/13. Black Sheep's founder, Paul Theakston, said: "Our Achilles heel has always been in our cask beer sales to the national pub companies, where … a policy of buying an increasing proportion of their cask beers from microbrewers, thus taking advantage of a significantly reduced buying-in cost through Progressive Beer Duty, has been the order of the day.”
What is happening, of course, is that the cost savings from PBD, instead of going to the small brewers, are going to the big pub companies, who can use the existence of a large number of alternative suppliers versus a comparatively small number of buyers (a condition known to economists as monopsody) to beat down the price of the beer they buy and pocket themselves a considerable slice of the 24p saved through PBD. This should not be a surprise to anybody. Indeed, it was specifically predicted in 2001, before Chancellor Gordon Brown even introduced PBD, in an article in the Journal of Small Business and Enterprise Development by three economists, Geoff Pugh, David Tyrrall and John Wyld, called Will Progressive Beer Duty Really Help UK Small Breweries?
It's a firm rule in journalism that the answer to any headline with a question mark at the end of it is always "No". That normally only applies to such tabloid-style headlines as "Did the SAS kill Diana?" and "Will your pet give you cancer?" But the answer to the question Pugh, Wyld and Tyrrall posed seems to be pretty much in the negative, too. After a great deal of economists' algebra, they concluded that, in the short term, "The overall effect of PBD will increase the profits of individual breweries, increase distributors' profit and increase the quantity sold on the final market [because of a lower price]." However, "Over time increased profit for small breweries will attract new entrants … for the distributor, the ability to spread or reassign orders among an increased number of suppliers enables the price to be renegotiated downwards … the distributor is able to transfer increased profits from small brewers to itself."
In other words, PBD gives you lots of breweries all right, but all that does is increase competition, squeeze profits in the brewery sector back down to where they were before PBD came along, and boost profits for the pubcos. That's great if you're a pubco, but it's pretty tough if you're Black Sheep, because you are suffering all the pricing pressures PBD allows pub companies to put on brewers, without being able to take advantage of PBD yourself. It also discourages those really small brewers who find themselves becoming successful from growing too much: earlier this week Gerald Michaluk, the MD of the Arran brewery in Scotland, which produces that country's best-selling bottled craft ale, admitted he was delaying expansion deliberately to try to stay below the PBD threshold: “We have modestly grown the business because of our not wishing to exceed the half-duty production threshold without first upgrading our brewery on Arran to make the savings necessary to be able to afford to pay the extra 24p per bottle in tax that an increase in production would bring." Any tax regime that inhibits growth and investment is a bad tax regime.
Black Sheep's answer to the problem of competition from those with a better tax deal is to shift over, in part, to a sector where very few of those 700 new small brewers since 2002 will compete – keg beer. Announcing the move, Robert Theakston, Black Sheep's MD, said: “I am aware of the preconceptions surrounding keg, but the opportunity the keg market brings is not to be dismissed. It will allow us to reach into the types of venues that can’t justify cask beer. There are an awful lot of sports clubs, hotels and restaurants than can only take keg beer that we currently can’t trade in." This cannot be the result Camra would have wished for when it campaigned alongside SIBA for Progressive Beer Duty: one of the best-known (and best) new cask ale brewers being forced into making keg beer because PBD has brought so much competition into the cask market.
Martyn Cornell is managing editor of Propel Info
The silly season by Paul ChaseThe Silly Season: it happens every year and usually coincides, for some reason, with the party political conference season. It may also have something to do with that feeling of expansive release that people sometimes have when they’ve just enjoyed a good holiday, and want to get some stuff off their chests!
The cops
First off was the ACPO proposal to create privately run "drunk tanks" to tackle alcohol-fuelled disorder. This was the brain-child of Northamptonshire’s Chief Constable, Adrian Lee, who leads for ACPO on the issue of problem drinking. The gist of it is that the police are fed up with having to deal with drunks in the night-time economy, and would like to hand them over to the private sector to deal with instead. For example, G4S, or some equally philanthropic organisation, could provide those drunks with accommodation for the night and then charge them £400 for the privilege. This proposal coincides with ACPO’s campaign on alcohol harms ahead of university freshers’ season. Ah! I get it – chuck students into drunk tanks and make their parents pay! Another campaign designed to endear the police to the middle classes. A policeman’s lot is not a happy one.
Then Durham’s police chief, Mike Barton, chipped in with a proposal to “end the war on drugs” by allowing the NHS to supply Class A drugs to users, thereby medicalising supply and cutting off the income of organised criminals. Whenever I have listened to proposals similar to this, it has always struck me that the analysis of what is wrong with the status quo, and why "drug prohibition" has failed, is far more compelling than the alternative to it that is then proposed. Let us be clear: replacing dealers with doctors represents State nationalisation of drug dealing, no more, no less; a proposal timed to coincide with the Labour Party’s conference – come on Ed!
Leaving aside the fundamental improbability of this, the proposition falls down when you consider the modalities of supply. Would users have to use the drug in the clinic, or would they be allowed to walk out with it? If it is the first, then this would provide users with the drug equivalent of pre-loading before a night out – great idea, Chief Constable! If it is the second, then tax-payer funded cocaine and ecstasy will simply fuel the black market.
The councils
In Ipswich, the local council has persuaded two thirds of its licensed premises to take high-strength lagers and ciders off the shelves in order to deal with the problem of aggressive street drinkers. Apparently this has led to a fall in complaints from members of the public from 191 to 94 between March and September this year, as compared with the same period last year. And the number of street drinkers lurking around the parish has also declined.
I am neither a defender nor a drinker of super-strength lagers and ciders, but what disturbs me about this report is how the issue of chaotic street drinkers is conflated with alcohol problems generally and schemes like this are touted as a solution. Super-strength ciders account for just one tenth of one percent of alcohol consumed in this country, but you would never guess it from the way the media reports this. Campaigns against "demon drinks" by groups such as Alcohol Concern serve to demonise alcohol more generally and are used to leverage ever-greater controls on all drinks and all drinkers. And what problem has actually been solved here? I understand the good intentions of this policy, but it represents a strategy of displacement – it solves Ipswich’s problem, but it doesn’t solve the problem. Where have all their chaotic street drinkers gone? It would be interesting to hear from Norwich.
Finally, a proposal has come from Lambeth council to "zone" opening hours for pubs and clubs and introduce stringent new regulations around licensee and staff training. Leaving aside the fact that every application for a premises licence, outside of cumulative impact areas, is supposed to be judged on its own merits, the council wants to pre-determine opening hours. Zoning was considered in the run-up to the Licensing Act 2003 and discarded as impractical. It reintroduces the "chucking-out time" issue of everyone in a given zone leaving licensed premises at the same time and scrapping for taxis and kebabs. And overly prescriptive local policies that gold-plate national training requirements for all premises, without targeting the premises that need additional training, gives us a foretaste of what to expect if the government’s proposal to abolish personal licences goes ahead. Remember to respond to the Home Office consultation on this one.
Paul Chase is a director of CPL Training and a leading sector alcohol and health policy commentator
Why you should be worried about the abolition of personal licences by John Gaunt.Last month, the government launched a consultation (out of the blue) on the possible abolition of personal licences, ostensibly as part of its "Red Tape Challenge". While this is superficially attractive at first blush, the proposal should be resisted by all with the utmost vigour. Already it has attracted much criticism from almost every side.
The personal licence has established itself as a respected qualification for which the attainment of the Award for Personal Licence Holders (APLH) is required. People believe that it counts for something and we know from those who attend our training courses, it is important to them. It also allows complete transferability between licensed premises in England and Wales. Indeed, it could be said to be one of the better provisions from the 2003 Act.
It is not expensive to obtain; with course fees, council fees and the required criminal records check, the total cost per candidate is of the order of £200. A personal licence currently lasts for 10 years but the government has separately announced the intention to scrap the requirement to renew, of which more below.
The real problem lies with how the government sees the system running in the absence of the personal licence regime. In exchange for no personal licences, the consultation envisages that licensing authorities are given greater flexibility to impose conditions on premises licences at a local level, for example for staff to undergo training.
This power, of course, already exists and is used on occasions (particularly on review) where appropriate for the promotion of the licensing objectives. It seems that the government will encourage this “targeted” approach in appropriate cases, and there is also a suggestion in the consultation that criminal records checks could also be required. Of course what is targeted or appropriate will be a matter for each local licensing authority in its discretion and is likely to vary from council to council. Indeed, some councils will in all probability adopt blanket criteria for such matters.
So the loosening of restrictions is only partial and in practice may well result in more heavily conditioned licences. Unrestricted transferability between different premises will go. Who may be a satisfactory DPS in Leicester may well be deemed unsatisfactory in Leeds for example and (re)training may be required as a condition of change. All this may lead to delay.
This brings the loss of certainty as to who is "fit and proper" and is likely to lead to greater cost, and not the saving of cost, in the long run.
As part of the ‘relaxation’, the consultation also proposes:
1 The amendment of the mandatory conditions to require all alcohol sales to be authorised by the DPS, rather than a personal licence holder (as presently is the case).
2 Allowing the police to object to a new DPS based on the crime prevention objective in general rather than as at present in “exceptional circumstances”; more objections are likely, dependant on the nature of the premises.
3 Allowing licensing authorities to require a "criminal records declaration" with each change of DPS.
4. Allowing a DPS or person with "accredited training" to give up to 50 TENs (temporary event notices); otherwise the limit will be five for those without accredited training. (So why abandon the current requirement for accredited training and a personal licence in the first place?)
In all respects this overall proposal appears to be a significantly retrograde step.
Which brings me onto personal licence renewals and the intention to scrap the requirement for such. At present all personal licences fall for renewal ten years after grant and a renewal application must be made not more than three months or less than one month before expiry. Renewals enables licensing authorities databases of personal licensees (there is of course currently no national database) to be pruned of those who have left the industry and kept to a manageable size, but also afford the opportunity to pick up on any undisclosed conviction which may have occurred in the interim, if, perish the thought, a personal licence holder has failed to disclose or overlooked disclosing it.
We have heard suggestion that one of the reasons for scrapping renewals is that fact that the agency which undertakes the criminal record checks may be in some difficulty in coping with more than 100,000 applications over a two-month period. There is currently a requirement for an up-to-date criminal records check to accompany the renewal application. The more sensible alternative might be to include within the renewal application a self-declaration on convictions which may have occurred, with accountability arising if ever if was found that the self-declaration was incorrect.
In both cases, the proposals seem to be misguided and ill-thought through, and the industry and other agencies should make their voices heard. The full consultation closes on 7th November 2013, and information on how to respond can be found here.
John Gaunt is a partner at John Gaunt & Partners
A machine income win by Kate NichollsI was at the Tory Party Conference this week and, with the Conservative Party firmly fixed on reclaiming its natural mantle of the party of business, there was only one question on every MP’s lips – how’s business and are there any signs of improvement?
The desire to grasp at green shoots was almost palpable – having understood that licensed hospitality was the best barometer of economic and consumer confidence, the health of the sector was seen by many as an indicator of the health of the nation. And the ALMR’s Benchmarking Report meant that we were equipped to deliver some good news. Eagle-eyed readers of the Friday Opinion will have seen last month’s results of the latest survey which show a sector in robust health: confidence, job creation, investment in staff and outlets, capex, profitability, margins – all up.
But it also shows a sector with very tight net profit margins and which is therefore highly responsive to external pressures – and that can be both good and bad. Impose a tax or an additional cost and our ability to invest in our staff and people is constrained; remove some red tape or unhelpful legislation, and we can deliver even more jobs and investment in local communities.
This is another message that Ministers understand very well as a result of our hard work over the party conference season. Yes, we have the capacity to respond positively to the demands of the modern economy, but we could do so much more if they backed us.
At a macro level, this is about the key economic levers to improve the cost of living, which is hampering British business. But our Benchmarking Report also gave us plenty of ammunition to respond to the requests of what more Ministers could do to help.
Let me give you just one example of how we have used our benchmarking data to deliver a positive win for the sector – an increase in the top prize for an amusement machine to £100, something which is likely to give trade in community locals a particularly welcome fillip when it is confirmed next week and introduced later this year.
Although the report is perhaps best known for its use in rent calculations and quantifying operating costs, it also looks at how businesses make money and which income streams are most important, not only to their turnover, but their bottom line. While only a small proportion of total turnover, amusement and other machine income is a critical component for many, as it translates directly into profits and in some outlets is equivalent to the bottom line.
But it is an income stream which has been eroded over time and has suffered from an unfair competitive environment on the high street as bingo halls, betting shops and even casinos have seen a more relaxed regulatory regime and a more attractive customer offer.
Machine income was equivalent to 3.6% of turnover in the first benchmarking survey back in 2007. This has fallen rapidly – by more than 77% – to just 1.3 % in 2011/12. In part this is also due to the changes in the pub market too: the move to food and a more rounded offer, not to mention the smoking ban. But the trend has been accelerated over the past year: the introduction of Machine Gaming Duty, a more costly tax regime and the challenging rent and supply agreement all mean it has now fallen off a cliff. In the 2013 survey, gaming machine income comprises less than 1% of turnover across the sector as a whole (0.8%).
Why does this matter to the government? Well, firstly, that gambling is happening elsewhere and it is more likely to be in a harder form – people who used to play pub machines for fun are now playing in a gambling environment. Secondly, it means that pubs which are more dependent on gaming machine income – traditional community locals – face a bleaker future as a result.
Gaming turnover is particularly important to community locals, comprising 2.1% of turnover for the segment, against 0.8% across the survey. The trend in machine income as a share of turnover within the community local segment has also been downwards, although more erratic. And this suggests that there are more than just normal market forces and socio-demographic trends going on here.
In 2007, gaming income contributed almost 6% of turnover to a community local and while this fell to 4% the following year, it reached record levels in 2009 before settling back into terminal decline in 2010. In 2009, the government gave the pub trade a boost by increasing pub machine stakes and prizes, and the benchmarking data clearly shows the beneficial effect of government intervention in the market as well as the susceptibility of this income stream to external competitive pressures.
So, when the officials needed evidence to support an increase in stakes and prizes – a slight levelling of the playing field for pubs – and when the Minister asked me this week what more could be done to help community locals, I was able to use the benchmarking data to make our case.
It is a simple, but compelling example of a larger message: look, Minister, at what has happened to hard-working businesses as a result of your additional taxes – but look what could happen if you free them up from regulatory restraint. Take a gamble, put your money and your support behind pubs and just see the payout we can deliver you.
Kate Nicholls is strategic affairs director of the Association of Licensed Multiple Retailers
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