It was fascinating to read yesterday that one of Australia’s largest family-owned wineries says tax breaks for smaller wine producers are now a big threat to the wine industry.
It’s a short article and well worth reading. The ABC news article quotes De Bortoli as saying the Wine Equalisation Tax (WET) is threatening mid-sized players by allowing uneconomic smaller producers to stay in business.
In this case, the idea that not only is the grass greener on the other side of the fence but the fertilizer that is making it so is poisoning your own lawn.
As Australian craft brewers continue their battle for a similar tax break for their industry, and as many commentators unquestioningly accept that a WET would be ‘good’ for the ‘industry’ as if good and industry are uniform and indivisible concepts, it is always worth bearing in mind that the benefit is always in the eyes of the receiver.
If you are a small wine maker, the WET tax is obviously a great benefit but, as companies grow and their turnover grows, that $500,000 becomes less and less significant overall and the overall benefits of it diminished. At the same time, these larger companies start to see the WET as harming their business by giving smaller players an unfair advantage and distorting the market against them. Of course, depending on your own situation, both positions can be perfectly correct.
I regularly see similar situations in the brewing industry. Brewers when small and struggling regularly complain about such things as tap contracts being anti-competitive and hurting their business. Yet, as breweries grow and become established and they win an increasing share of taps, such talk seems to diminish. It is nothing to then start hearing their smaller rivals complain of that same brewery offering to install taps in new venues, or offer incentives to get or retain regular taps. When they do, the larger ‘small’ breweries seem to always find it easy to justify the new business tactic. The business justification is very understandable…to everyone but some of the smaller breweries that can’t afford the same business arrangements.
What’s the point? None really, it’s just an interesting thing to observe and a reality check that what you view as good or right or fair really depends on where you stand. I would love to hear readers thoughts on it though….
Great thought provoker as always, Matt … the world is full of contradictions and ambiguities … some things can be right and wrong at the same time. There are some analogies that be drawn between wine and beer, and the tax issue is one of them.
However there is a big difference in the wine industry that drives the outcome you mention above “tax incentives can distort the market place by making unviable businesses articially viable while at the same time artificially lower the price of alcohol?” and that is issue of supply and demand. Wineries don’t produce wine to fill the immediate demand for their products. They have to predict or anticipate the volume of wine that can sell in 12 months of five years time and grow the fruit (or purchase the fruit through contracts) to allow them to supply the hopeful demand. If they and the hundreds (if not thousands) of other small wineries can’t sell the volume they produce / or juice they buy, then they create a massive glut or over supply.
This wine or juice needs to be sold so the winery ends up selling on the spot market at very low prices. It either ends up in lower priced wines (which is a win for the drinker) but an issue for the winery that got their supply / demand balance right (they have to sell their wine at lower price to compete), or it ends up in the house brands of the big liquor retailers (once again at cheap prices). Meanwhile this crazy practice continues to be funded by the eventual WET rebate that is still paid on a transaction along the way.
So if you were a large winery making very good wine and always have your supply and demand in balance you would be frustrated by the fact that you can’t control your price, because the market is riddled with small wineries who can’t the get balance right fuelling a downward spiral in wine prices.
Some think that its the big wineries who are driving low prices and are responsible for the glut, and to some extent they are, but the little guys aren’t all about making 100 cases of $70 wine, en masse they have created havoc in the industry, and yes they are being propped up by the WET.
The beer industry doesn’t suffer from a supply glut cycle (yet?) and the small brewers provide a powerful halo in the industry, and yes there should be support mechanisms in place to help small businesses establish themselves, but at the end of the day the business needs be commercially viable and be effectively managed. We will see churn in the brewing industry and there will be businesses that don’t make it. This will be due to an ill-concieved plan or failure to manage the whole business not just the beer production component.
Cheers
Competition is usually a good thing in an expanding marketplace. The other businesses are creating customers for you, if you are savvy enough to engage them.
It’s easy to take the tax breaks to grow your business and then complain about how others have done just the same. Once you’ve outgrown the tax initiatives, you have to grow your business the way everyone else does, the hard way.
Interesting read Matt. Of course everyone will complain about what they don’t have – be that a tax break or tap contracts. I could envisage a future where there is either a thousand and one (tax-buffered) tiny breweries struggling with distribution issues, or only 3 megaliths supplying bland lager to the world. Either way would be really tough!
What can we take from historical and current trends in overseas markets like Germany, UK and the States?
Don’t get me wrong, I’m all up for buying my beer from the little guy, but I reckon (as you mention) that the sliding ethics of any size business to solely suit their own needs is part of the problem.
Perhaps we need more of a sliding scale of Tax benefits based on size, not just two categories or “small” and “large” like the winos?
Is it a “BET” (Beer Equalisation Tax) that the brewers should be chasing or help with the excise tax? After many chats with Matt it would be very likely that if the beer industry was to gain a BET the retailers especially the large duopoly retailers would expect that this tax saving to be passed on to them to lower their initial costs which they could use to allow their profits to grow on both on this beer and also on their in house “craft” beer brands as they would still sell at the already accepted carton price for craft beer or they would use this new reduction to have a “sale” on craft beer. By the large retailers doing this would cause the independent retailers to match hence it would erode all the benefits the brewer would gain from a BET.
After investigating setting up a brewery and now being involved in a start up beer import / distribution company one of the real issues I see for a small brewer and small importer is excise tax. Excise tax is required to paid 7 days after the product leaves your brewery and is also taxed at a different rate on it’s packaging size (ie tax rate is less of packages over 50 litres such as 52 litre kegs than that under 50 litres such as bottles and smaller kegs).
Why is this an issue? Well you have just had all the costs of producing the beer and now you are asked to stomp up the cash to the government at day 7 after it leaves your premise. Unless you are being paid within 7 days or selling your product on premise you have another burden to carry until you are paid. Four years ago a small craft brewer I spoke to told me that he could produce a carton of beer for $40 of which 25% of that cost was tax which is forever increasing due to the biannual increases in excise tax!!!
One way to delay paying the excise tax is to park your beer with an appropriate distributer which allows the beer to leave your premise but you don’t have to pay the excise until it has left the distributor’s door. You still have to pay the excise and pay it before you are paid but at least this can allow some management of cashflow. This offsetting of excise tax has been used by the macro breweries for years now but is available to all sized brewers.
Now if there was a sliding scale on the timing of paying of excise tax would relieve a lot of cashflow pressure from small brewers. A suggestion would be for small breweries they could be on excise repayment of 45-60 days once it has left their premise if direct to a retail or when it has left their distributor, for medium breweries they could get 30 days to pay the tax once it has left their premise or distributor and for the macros they would pay the excise 7 days after it left their factory. Just by making the macros who can presumably afford to pay the tax earlier would thereby allow the Government to wisely invest the money sooner which would easily pay for the delay in repayment terms for the small and medium brewers. The other positive for the Government is that they still get paid the same amount in tax by not having to pass out tax benefits through a BET. It would also not artificially prop up any brewery thereby not causing the issues raised in Matt’s article for the other breweries.
Also make the tax 1 flat rate (obviously the lower 50+ litre rate) for the small and medium brewers so that it doesn’t affect how they elect to package their beer as a kegging system and kegs is another expense small to medium breweries just cannot afford and would also help them simplify their accounting costs.
I don’t see any Government handing small brewers any tax relief in the future hence maybe it is time for the industry to try another approach that would be of benefit to them and the Government.
Now for the blatant plug – the import / distribution company mentioned above is the Bravo Group. The Bravo Group imports Thornbridge, Sunny Republic, Meantime, Marble, Harbour and Summer Wine from the UK and Devils Canyon, Coronado, Lakefront, Mission, Saranac, Brouwerij West and Anderson Valley from the US. We keep the beer refrigerated at all times while it is being transported and stored from when it leaves the brewer to when it arrives at the retailer so it can be enjoyed as the brewer intended. If you don’t see the above breweries in your favourite independent retailer or bar in the next month please ask them to contact us via http://www.bravogroup.com.au so that you can access these beers.