The impact of duty/excise on the price of a pint

Captain’s log, additional… 

OK – yesterday I posted about gross profit, what it it means and how it compares between beers and pubs.

@YeastieBoys remarked that it is worth noting the impact of excise (duty) on the cost of beer. A definite factor, and one to be aware of – even if it is unlikely to change and thus a bit futile to worry about too much. But definitely worth having a good grump about from time to time…

In the UK at the moment the full rate of duty is £18.37 per-hectolitre-%… (a hectolitre is 100 litres, or 176 pints) i.e. on a hectolitre of 5% beer you’d pay £91.85 in duty. But only if you’re a “big brewer” – one that brews 60,000 hectolitres or more. A “small brewer” who brews no more than 5000 hectolitres pays half the duty rate. And there is a “progressive” rate between these two sizes. This is due to the progressive-beer-duty scheme which is intended to give start-up breweries a boost to counter the economies-of-scale unlocked by being bigger. (There is debate over whether or not this discount is right, too much, or too little…) I’ve illustrated the progressive beer duty scale previously.

At the end of the day duty is a part of the production cost of beer. Breweries pay it and factor it into their price. Then pubs calculate their GP on this price, typically as a %, then VAT is added also as a %. So duty gets amplified such that it can have a significant impact on final price.

Regardless of the price of a firkin of beer (ignoring economies of scale) the difference between half duty rate and full after amplification by a typical 65% GP* and 20% VAT is always 74p on the cost of you pint. (The reality is that large breweries economies of scale allow them to sell firkins at the same price as small breweries so this difference hits the brewery books but not the consumer.) And between a zero duty rate and the current full duty rate the difference in price is amplified such that the difference to the consumer can be seen as a whopping £1.48… £1.96 at no-duty versus £3.43 at full-duty. I.e. £1.48 of your 4% ABV pint from a big brewery is added purely as a result of duty.

So if duty was scrapped entirely we could probably enjoy more than a quid off the price of a pint. Wouldn’t that be nice!

 

It isn’t so simple of course – if the taxman had to lose the huge pile of £ made out of the duty and amplified VAT he’d have to tax us in other ways. Perhaps more equitible ways though? Do we really think the cost of alcohol to society is equal to the amount of £ raised by the level to which it is taxed? (I really don’t know – the beer industry would likely say ‘no’, but the schmucks at ‘alcohol concern’ probably think it needs even higher taxation!)

I expect I’d personally be in favour of scrapping or massively scaling-back beer duty and increasing VAT to 25%… but I’ve done no sums to support the total economic impact of such a change. This is just wild, and probably pointless, speculation at this point.

It is worth noting that across the EU beer duty varies… the UK is one of the highest.

There is very detailed comparative information in a PDF right here, this is from 2014 and is the pre-reduction rate of UK duty. Here’s a quick summary of how my £45-quid firkin would fare in a few different countries – all other things being equal. This is making all manner of assumptions… also I’m totally unsure of my translation of the German/etc hectolitre-degree-Plato duty to a roughly equivalent UK hectolitre-% rate. Think of it more as: were taxes from <country> applied within the UK context:

I’ve included both the pre-2015-budget “penny off a pint” rate and the current UK rate. At 4% it really is about a penny off a pint, which is then amplified to 3 pennies by VAT & GP. Woohooo…

So… there you go. Google tells me the average price of a pint in Germany is £2.12 so the above seems not too far off. Time to move to Germany!


* typical 65% GP – I say this as my observation here in Cambridgeshire. Across the country this varies. Rents and wages are higher in Cambridge than, say, Hull – so where I pay £3.50 for a pint of a given type of beer I know some folk up north are paying £3.00 or even less. All the numbers above scale with the change in GP. If you want to play here’s the spreadsheet.

Gross Profit – why £6 is a good price for a pint of Gamma Ray

Ich habe Pläne große Pläne” – Rammstein, Stein um Stein

No no, wrong take on “gross” – this is definitely not about making an obscene amount of profit… I’m writing about “gross profit” as in “GP” – a term often heard when industry folk are talking about beer prices. I have written about GP before, with a focus on the role of the distributor in pricing – in this post I focus more on the pub and the beer. The motivation comes from recently having had £4.50 pints of Beavertown Gamma Ray being compared to £3.00 pints of £60-per-firkin bitter as if the Beavertown ought to be closer to the £3.00. As it stands £4.50 for a pint of Gamma Ray is near unheard of as that is pretty heavily discounted for promotional purposes.

GP is the “gross profit” made on goods sold. That is the margin made by the business in ex-VAT terms. If I sell pints of beer for a bargain £3.20 per pint I have a revenue of£2.67 per pint once the 20% VAT is scraped off. If that pint comes from a cask that costs me £60 (about normal for a local “boring brown bitter”) then each pint is costing me 86p (assuming a 70 pint yield per cask). So my gross profit on a pint is about £1.81… typically GP is expressed as percentage – this is the percentage the gross profit is of the revenue and in this case is 67.9%. This would be considered “pretty healthy” by most pubs.

When pubs talk GP they’re generally speaking of the average for the beer they sell. They’ll be targeting some specific figure that suits their overall business plan. This can be anything from as low as 40% in a countryside tied pub that probably survives only on profits from non-drinks sales to 70% in a city-slicker freehouse which might get away with being pretty much “wet-led” (most income is based on drinks). Two extremes of the pub spectrum.

All business situations are different – tie, location, rent, staff costs, etc. There’s a good breakdown of the costs of running various sorts of pubs available from the BBPA. There isn’t a one-size-fits all when it comes to GP. Yet customer expectations set a pretty narrow band for acceptable pricing of a pint, a trend now being a little broken out of by the “craft beer” scene. Still – a tied pub next door to a freehouse can hardly sell equivalent beer for a quid more per pint than the freehouse… so it typically makes a significantly lower GP on beer.

Let us look at a well known brown bitter as an example, a “20th century IPA” style of thing at about 3.6%. I’m talking about Greene King IPA of course. This is available on the open market at pretty low prices, I’ve heard of pricing as low as £55 from one reliable source. Meanwhile I know one Greene King landlord who pays £99. These prices are all ex-VAT, as is the way of these things. The problem is both pubs have to sell this beer for about the same price… in Cambridge let us say this is £3.20 in the freehouse and £3.40 in the Greene King place. The Greene King place isn’t going over the top on the price and there are plenty of drinkers in Cambridge who won’t be at all fussed by 20p if the pub is otherwise pretty good.

Pricing: Tied vs Untied

The freehouse GP here is a very healthy 70.5%… but the poor old Greene King pub is only at 50%. Keep in mind that these are pretty much extremes and there is a range between them, and then things differ again per beer and per pub.

The GP as a % versus “margin” in £ is important because punters generally only go out with so much £ in their pocket. Most people are living within a finite budget when it comes to luxuries like having a pint. The freehouse is making more per average customer. If the tied pub want to achieve similar profits it has to sell more volume (be larger, be in a better location) and/or shift other products – i.e. turn into a gastropub. Or maybe it can get by just fine as a wet-led pub simply making less profit… like I said before, every business situation is unique.

So that’s GP – and GP compared for tied and untied pubs. Now I get to the next core point of this blog-post: what does this mean for “craft beer” and why does my pint of Beavertown Gamma Ray cost me six bloody quid?!

Great tasty beer costs more. I won’t try to explain why – there are plenty of debates about how reasonably, or not, it is priced. All I’ll say is the brewers I know brewing what I think of as awesome craft beer are mostly working at capacity and expanding. Textbook supply-vs-demand means they can command a higher price for their product – within reason. Flavour is a factor, ingredients, and quality – but big factors are also fashion and brand… the best have all of these right. These folk haven’t founded a brewery with the aim of competing in the lowest-common-denominator end of the market. If this craft beer also happens to be in keg it’ll cost even more per pint, another debate to be had (and has been had) elsewhere.

In my opinion Beavertown stuff is reasonably priced, in the grand scheme of mid-5%s kegged craft beers. A pub will be typically paying anything between £85 and £100 for 30 litres of this lush 5.4% beer – depending on location, volume, and supply chain. For some calculations below we’ll pick £95 for a 1-off keg purchase in a very craft-keg-rotation-happy bar. This is to compare to the same bar buying any one of a dozen mid-3%s local bitters at £60 for a firkin.

We’ll say you get 52 pints out of a Gamma Ray keg, so a pint is costing £1.83 – more even than the pint of *tied* Greene King IPA (£1.42). But at £6 per pint the GP the pub is making on this beer is 63.5%. Most freehouse crafty places I know are aiming for the 65-70% GP range. They’ll cut a bit from target GP selling Gamma Ray at around £6 but balance this out by selling a “craft lager” at £4.50-£5.00 and higher GP (in the 70-75% range).

But, the punter says, a 70% GP pub selling a 3.6% 20th-century-IPA (brown bitter) is only making £1.88 from my pint – but this craft beer bar is making £3.18 from my 5.4% new-wave IPA… the profiteering SCUM! Fuck’em!

It doesn’t work like that. Going back to my point of punters with only so much £ in their pocket. Their limited beer cash might get them 4 pints of bitter or 3 two-third glasses of modern-IPA. Either way your business needs its target cut of their precious limited £… and in the above numbers a freehouse will make £7.24 out of the £12.80 worth of bitter and £6.36 out of the £12 worth of modern-IPA. (In the graphic below we’ve assumed the lowest brewery duty rate, but it isn’t really going to make a lot of difference which rate is involved.)

Pricing: Keg vs Cask

So, at £6 per-pint the pub has just given you a discount on some pretty lush IPA.

That’s GP for you. And why you really cannot think a £60 firkin of 3.6% brown bitter ought to sell for a very similar per-pint price as a £95 keg of 5.4% hoppy modern IPA.

Check my working… hopefully I’ve got all the above correct. Here’s the spreadsheet to go with this post.

Whether the keg of modern hoppy IPA ought to be £95 is a trickier debate… but that’s the price and your choice is to have that beer at that price, or some other beer at a lower price. My experience of “cheap” keg IPAs so far has not been excellent, but there is some good stuff on the market at prices down to around £85 I think. Below that it mostly starts to get a bit suspect.

Who gets how much of your beer £?

EDIT: 2014-05-03: I have adjusted the figures in this post to not use the minimum GP I’ve been applying to beers but something more normal/average – I’ve moved it from 11.11% to 17.24% but I’ve been told I ought to be targeting 20%. As I stated I’ve seen margins spanning from as low as £5 to £15 out there and I sort of went for the middle to start with (since I’m not in London). I’m a newbie at this… on a steep learning curve.

Inspired by my new reality of being piggy-in-the-middle between pub and brewery beer pricing I’ve knocked up the following “infographic”… OK, it has minimal “info” and my “graphic” skills are suspect at best, Kat has drawn me a prettier version of the infographic now! But here we are, where does the hard earned money that you spend on a pint of beer go:

Cost of a Pint  (5% Distributor)

I have clumsily tried to show the progressive beer duty here, in steps from the full relief rate through 10k, 20k, 30k, 40k, 50k hectolitre breweries to the full rate on the right. (In reality this is a gradual increase dependant on brewery production – not stepped.) These figures are based on a 4% beer and as both the price of the pint and the duty will vary with the strength one could generate a variety of different versions of the above – however I believe the general gist of the ratios shown for my “£3.60 4% bitter in Cambridge” example will hold across a broad area and range of beers.

Of course if there is a PubCo involved then there’s a massive chunk missing from this that takes a big bite out of the “pub” section. Probably up to 50% of it based on the pricing I’ve heard from tied publicans I know. (Which makes me all the more perplexed by free-houses who pop a vein over £5.)

Van load of casks

Van load of casks

The format of this is inspired by Yeastie Boys Stu’s lower-tech but far more characterful infographic shown here: What’s in my beer? Stu breaks it down further than I have, although remember he’s in New Zealand and his breakdown is focused more on the bottle market so is rather different to the UK situation. Freight costs in my case are part of the brewery’s costs in getting beer to me and part of my costs in returning empties to them, it can get more complex in the case of using eCasks too. Each of the “brewery”, “distributor”, and “pub” sections could be broken down further in similar ways. Everyone needs to rent/maintain facilities, pay for consumables, pay staff, etc. In fact Dave Bailey of Hardknott fame has contributed this level of detail from the brewer’s point of view to the Guardian: Beer: how much would you pay? I don’t think I’ve seen a breakdown for pubs but I expect high rents and high wage bills to consume a large chunk of their share.

Kegs!

Kegs!

The “distributor” chunk is based on a mere £7.50 £12.50 margin on a cask – which is what I’m using in many (but not all) cases. This varies though – and the highest average margin I’ve seen is £15 down in London. But the retail prices are higher at the pump in London too, so the higher margin probably doesn’t change the total percent taken by the distributor. (Not to mention that the costs of operating in London must be even higher than Cambridge!)

Why did I put all this together? Mainly to show the “distributor” band there. That’s my bit… and when some landlord dismissively tells me “you need to sharpen your pencil“, this is why I’m inclined to tell him to go bugger himself. Of course I wouldn’t say that … even in the face of rudeness… sorry, I say, I don’t think we can help each other. The only way I can offer lower prices is by buying cheaper beer. As it stands I’ve moved my minimum margin from 3% to being closer to a whopping 5% of your pint… or 18p of your £3.60. Reducing the publican take to a meagre £1.96 from £2.04. Eyebrows will be raised. [2014-05-03: Numbers modified slightly. Originally the numbers and graphic were based on the lowest margin I’ve used -£7.50 per cask (3% of retail value). This is too low… bear with me, I’m new to this. Also, to avoid confusion: the 5% is of the retail cost of the pint and represents a GP to me of about 17.25%.]

Weird Beard

Weird Beard

Don’t take this as a negative post, my customer base is building and I’ll continue to try and do what I desire to do… bring different and interesting beer into my area. I’m not trying to rip anyone off, I cannot “sharpen my pencil” as I’m only working with a stub of charcoal here. If you’re interested in beer and beer excites you then I think I have something to offer… in effect I work for you to get hold of the beers that the national beer scene is talking about, enjoying, and wanting to get their hands on. I have a fairly broad coverage from what’s hot in CAMRA/traditional circles to what’s turning heads amongst craft beer junkies. I feel I’ve come to know the UK beer scene pretty well at several levels and all I really want to do is spread the love. But… if beer is a replaceable commodity of no individual character or value to you then I’m afraid we aren’t going to get along.

Finally – I’m a big believer in “openness”, I have hippy commie open-source roots, I’ve spoken of many variables in the text around the infographic… so, here’s my little spreadsheet: Who gets what from your beer money? You can duplicate this and play with the numbers as you like… or spot the errors in my calculations? (If so then please let me know!) Cheers to Geoff Latham of Pope’s Yard brewery for eye-balling my spreadsheet for me – however I do take full responsibility for any errors that snuck through of course!

Know any pubs in the Cambs/Herts/Beds area that you’d like to have some of my beers at? (Yes, I need to update that list…) Think they’re the run by the sort of people who’re not after the cheapest thing on the market? Point them my wayor point me their way… :)

Summer Wine

Summer Wine

[Edit: 2014-05-03: People have pointed out that this might make the pubs look “greedy”. This is not the intention at all! Yes pubs have a high GP, but they have huge costs as well. There are some numbers on the costs of running a pub available at the link provided by Jon in the comments. It is also worth noting that for a pub a mere 5p lost on a pint isn’t completely trivial… say a pub shifts 500 firkins of beer a year, 35000 pints… £1750 lost profit. And that’s a small pub. My thinking is that in the right pubs with the right customers that 5p cost can be passed on to these beer-loving customers who are willing to pay it for a better beer and better beer variety. Not all 4% beers are made equal so why should they all be priced equally? More on this another time…]