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Sep 8

Craft brewing conundrum – An introduction to Alberta’s beer mark-up policy

Posted on Sep 8 By: Tyler Difley

Some Alberta brewers, like Alley Kat Brewing Company, have expanded with the help of the small brewer mark-up policy. Credit: Alley Kat Brewing
In Alberta, buying beer can be a simultaneously exciting and overwhelming experience. As you enter your local liquor store, you’re greeted by a tantalizing selection of suds from around the world: Belgian whites, Irish stouts, Australian ales and American lagers, as well as a fine assortment of craft-brewed creations from across Canada.

Alberta has 16 independent craft brewers, including breweries and brew- pubs located throughout the province. In comparison, British Columbia has more than 50. So why are we lagging behind, especially when Albertans spent over $1 billion on beer in 2012, according to Statistics Canada? While other provinces are drinking less beer, opting instead for more wine and spirits, Alberta experienced a 7.1 per cent increase in beer sales from 2011 to 2012—the largest in the country.

Some believe the discrepancy is due, in part, to Alberta’s small brewer mark- up program. The program was designed to level the playing field between small craft breweries and the big players like Molson, Labatt and Sleeman by reducing the taxes paid by small breweries on their beer sales within the province.

The tax reduction is directly related to a brewery’s annual worldwide production. Brewers producing less than or equal to 20,000 hectolitres (two million litres) qualify for the largest tax discount, paying only $0.20 per litre of provincial sales. Brewers who produce greater than 20,000 hectolitres and less than or equal to 200,000 hectolitres are eligible for a smaller discount, paying $0.40 per litre.

Meanwhile, brewers producing over 200,000 hectolitres, including major multinationals like SABMiller and Anheuser-Busch InBev, qualify for no tax reduction, paying a $0.98 per litre mark- up on their Alberta sales. The program also includes transitional mark-up rates that allow breweries intent on expanding their production to smoothly shift from the lower to the higher rates with- out being immediately penalized.

As to the success of this program, many craft brewers believe it helps their bottom line.

“It’s certainly helpful, without a doubt,” said Neil Herbst, owner of Edmonton’s Alley Kat Brewing Company.

“It helps recognize that we have less opportunity to purchase goods in bulk.”

In theory, the program should pro- mote the growth of Alberta’s craft breweries. But the tax breaks apply to all small breweries selling beer in Alberta—not just those that are located in the province and using local brewing materials, like Alberta barley.

This allows breweries to produce their bubbly wares in jurisdictions with generous economic incentives in place for local brewers and strong protections against foreign products, while taking advantage of Alberta tax breaks. As a result, some argue that Alberta has become a market where it can be very profitable to sell craft beer, but not very profitable to brew it.

“In economic terms, it makes more sense to set up manufacturing facilities in other locations,” said Kevin Wood, co- owner of Red Deer’s Drummond Brewing Company. “There’s really no advantage to brewing in Alberta whatsoever.

“Ninety-nine per cent of our finished product is from Alberta. That’s our mot- to, that’s what we do, and if we’re buying local, we’re supporting local. We’re just asking that the mark-up not be given to breweries in Wisconsin or breweries in China or breweries in Estonia. It doesn’t make any sense—we’re not gaining any value here.”

Canada’s large breweries, many of which are now owned by multinational giants, also have a bone to pick with the current mark-up scheme.

“Having Alberta taxpayers provide financial subsidies to companies investing and creating jobs outside Alberta doesn’t seem to make sense,” said Jeff Newton, president of Canada’s National Brewers (CNB), the trade association that represents Molson, Labatt and Sleeman. “The total value of the subsidy provided to individual brewers today is excessive.”

Newton said CNB would like to see the maximum subsidy value and production threshold of the mark-up program reduced to levels more consistent with the other provinces, as well as a restriction of the reduced mark-up rate to only brewers who have invested in Alberta breweries and actually brew beer in the province.

At issue here is Alberta’s open-border trade policy, and the lack of reciprocal treatment coming from the other provinces. To preserve Alberta’s reputation as a free trade advocate, the government made the reduced rates applicable to beer from all locations to avoid conflict with treaties like NAFTA. This would not be a problem if the other provinces adopted a similar open-border policy for Alberta beer, but that is not the case. Instead, extensive restrictions on imports between other provinces put Alberta’s brewers at a sizable competitive disadvantage. For brewers like Herbst, this policy makes it difficult to compete.

“Other provinces have either tax advantages or non-tax advantages for local breweries that Alberta brewers don’t get,” said Herbst. “It makes it a little bit tougher for small brewers and that’s why you don’t see tons of them in the province.”

Alberta’s Deputy Premier Thomas Lukaszuk has long promised to examine the current mark-up system and implement reforms, but policy changes have not yet materialized. His ongoing review of the program is the ninth time the Alberta government has looked at the mark-up policy in the last decade.

“The review is examining the small brewer mark-up policy, including the rate and brewers’ eligibility for this rate,” said Lukaszuk. “The Government of Alberta remains committed to a provincial liquor industry that allows both large breweries and small craft breweries to grow and remain competitive in the markets they serve.

“We are looking at our policy to ensure that smaller beer producers are able to compete in this very competitive market.”

Lukaszuk did not provide a date as to when the review would be complete.

In the meantime, Albertans will continue to enjoy the expansive selection of beers that they’re used to, while trouble brews in the province’s beer industry, leaving some brewers with a bitter taste in their mouths.

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