Mike O'Donnell: The 'perfect storm' that has hit Aotearoa's craft beer industry

Saturday, 12 August 2023

Mike O'Donnell is a professional director, writer and strategy adviser, and a regular opinion contributor. He is also chairperson of Garage Project.

OPINION: It’s just a week away from Beervana. The self proclaimed mind-bending, palate expanding, beer wonderland is Aotearoa’s national celebration of all things hoppy.

From small beginnings in 2001, Beervana now sees almost 20,000 beer enthusiasts gather in Wellington’s “cake tin” stadium to sample the weird and the wonderful from a wide range of New Zealand brewers, as well as a couple from overseas.

Sadly though, this year will be absent several craft breweries who have been unable to navigate the perfect storm that has hit craft brewing in Aotearoa over the last few years.

The storm started with Covid. While some breweries were able to ramp up their ecommerce operations during and after lockdowns, many were not.

2020 proved a diabolically challenging time for craft breweries in Aotearoa, particularly those dependent on venues, restaurants and public events to sell their product.

Then hard on the heels of this, in 2021 Refining New Zealand shareholders voted to stop refining petroleum at Northland’s Marsden Point plant. The decision cost 240 jobs but also inadvertently took away 70% of New Zealand’s food grade CO² production.

Food grade CO² that forms a vital part of not just producing beer, but also powering the lines in breweries and pubs, and is also used for cleaning out vats, fermenters and holding tanks.

Then Todd Energy’s Kapuni gas field in Taranaki (which produced about most of the other food grade CO² in the country) kicked off a big upgrade which more than halved its production.

Suddenly craft brewers, hospitals and food processing companies had to start using imported CO² which brought with it cost increases of up to 600%. Breweries previously paying $1200 a tonne are now paying over $6000.

Over the same period mortgage rates and inflation effectively tripled, meaning households are in a double squeeze of skyrocketing cost of living and higher interest rates. Unsurprisingly this means consumer spending is weak.

Households increasingly are spending more of their budgets on essentials with less left over for discretionary spending, as reflected in supermarket sales of beer and wine, with recent months down as much as 5%.

Against this perfect storm it's no surprise that some craft breweries have had no option but to throw in the towel. While there have been a number this year, over the last fortnight two particularly significant businesses went into liquidation/administration.

Epic Brewing was one of the beer pioneers of the late 2000s, shocking and delighting beer drinkers with its hop-heavy larrikinistic approach to brewing. Its Armageddon IPA became an icon and a highwater mark for enjoyable bitterness.

A few years later Brothers Beer set up its venerated brewhouse and tasting room in Auckland’s City Works Depot. While previously a bit of a craft brewing desert, Brothers beer lounge gave the people of Tāmaki Makaurau Auckland a home from which to explore the brave new world of craft beer.

Subsequently, it expanded into a major brewery in Mt Eden and six retail hospitality premises.

New Zealand’s brewing scene will be the poorer for their absence. But they won’t be the last to take the honourable route of facing facts in a perfect storm.

A storm that’s about to get worse with the elevated new living wage and a chunky lift in excise tax.

About a quarter of craft brewing companies are signed up to the living wage pledge. That means they are about to face a 10% increase in staff costs and the latest living wage increase takes effect from the start of September.

Meanwhile, all brewers are caught by last month’s hike in alcohol excise tax. From July onwards brewers have been hit with a 6.65% lift in tax, taking the total excise up to 6.65 per cent a litre to 53.17 cents.

For some brewers that means excise will account for 20 to 30% of expenses.

Not trivial and a long way from our friends across the Tasman, where the government has an excise rebate scheme for independent craft brewers.

Recognising that a 30 person domestic operation doesn’t have the deep pockets of a 30,000 person international brewing like Kirin/Lion or Heineken/DB, the Australian federal government has a programme in place that gives tax rebates of up to $375,000 for local craft brewers. A very useful buffer at a time when Australian craft brewers are facing the same challenges we are.

Here at home when you combine excise tax, GST and company tax, well over half the price of every beer we buy as customers goes to the government. Put another way, craft brewers spend January until around August working just to pay tax. Then they get a few months to try to earn enough to pay all the other input costs, pay staff and try to find a thin wedge to contribute to the mortgage.

To be clear there’s an argument that there are too many craft breweries for a country of just 5 million people. Depending on how you run your ruler, there are about 200 crafties around the country – from brew pubs who bottle, through to bigger operators who distribute nationally.

Which, in an industry where founders often forget to pay themselves, is OK when interest rates are low and consumer confidence is high. But now that perfect storm has hit, it’s not sustainable.

My last thought here is never waste a good crisis. The perfect storm brings opportunities as well as challenges. Opportunities around product, partnership, acquisition and merger. For canny investors it's potentially a great time.