TRICKLE-DOWN ECONOMICS
Microbreweries toast Budget break as sector struggles,
IN THE hours following his latest Budget, Minister for Finance Paschal Donohoe received some unexpected news. He was to have a beer named after him. His Budget speech last week delighted microbrewers the length and breadth of the country, with Barbara-Anne McCabe, co-founder of Bridewell Brewery, Clifden, Co Galway, pledging to honour the minister with the company’s next creation. A pint of Paschal Pilsner, anyone?
In September, ahead of the Budget, McCabe was one of the 34 members of the Independent Craft Brewers of Ireland (ICBI) who issued a plea to Donohoe to retain the microbrewery relief on alcohol products tax. For beers over 2.8pc volume, the tax charges €22.55 per hectolitre (hl) per cent of alcohol in the beer.
The relief from the tax means microbreweries pay half the standard excise rate on their products in comparison with larger multinational breweries such as Heineken, Molson Coors or Diageo.
On Budget day, Donohoe delivered for microbrewers, increasing the amount companies can brew while claiming the relief to 50,000hl a year, up from 40,000hl, to help larger microbreweries grow their export sales. He also retained the 30,000hl ceiling for beer brewed for domestic sales, which proved most popular with the ICBI.
Elisabeth Ryan, the coordinator of the ICBI, toasted the minister for delivering some sorely needed good news for the sector, particularly given the turbulent times it has been facing. Last year, the ICBI released a report on the craft beer sector, which revealed that growth was slowing.
It has chosen not to release the report again this year, so it can gather more data.
According to the 2018 report, there were some 125 microbrewers in Ireland, brewing an estimated 157,000hl worth of beer, the equivalent of more than 27.6 million pints.
In the past two years, seven production microbreweries ceased operations, with five failures in the year to mid-2018.
It also showed craft beer had carved out a measly 2.6pc of sales in the beer market, with the big players drinking up the rest.
Sales for 2017 were worth €44.3m, with the yearly output having slowed dramatically to 11pc. The output growth rate was down from 31pc in 2016 and 56pc in 2015.
According to Ryan, the excise relief is vital to the microbrewers in helping them stay competitive in the domestic market, and ambitious internationally. “It has been a difficult atmosphere for craft brewers,” she said. “Any change to that (tax) reduction would have spelt disaster for a lot of small breweries.
“Yes, we were asking for maintenance of the status quo, but it is everything to this industry.”
The report led to claims the country had hit peak craft beer, and that consolidation would now be the order of the day for brewers.
However, many craft brewers are casting their eyes to international markets, where demand for craft beer is thriving.
In the US, craft beer sales were worth $27.58bn (€24.7bn) and made up 24pc of the beer market. The Irish Exporters Association indicated that Irish craft beer brands are performing well in countries such as France, Italy and Spain, and that opportunities for growth exist abroad, away from Ireland’s potentially saturated market.
Jonathan McDade, head of the Irish Brewers Association, recognises the sector has been going through some tough times, but believes that the appetite for craft beer remains strong.
For him, the extension by Donohoe will help more of the medium-sized brewers chase international growth, while providing them with the confidence to invest more in their businesses.
“It’ll benefit the brewers who are a little bit more ambitious about expansion and investment, particularly those looking to export,” he said.
“Some craft brewers see their future for growth in exports. Ireland is well-known for its stout, not just for the obvious brand; but the craft brewers too. For many, that is the hook for making an offering in other markets.”
The desire to export is strong among Ireland’s craft brewers, as shown in the ICBI’s craft beer report. Last year, 42pc of microbrewers were exporting, with 57pc of those who do not currently sell beer abroad saying they plan to do so. France, the UK and Italy were cited as the main markets for Irish craft brewers.
Microbrewers exported some 30,500hl of craft beer in 2017, accounting for around one fifth of total production. The report highlighted the issue of creating scale in the sector; only four microbreweries accounted for 75pc of those international sales by volume.
Tom Cronin, a co-founder of Rye River Brewing, followed an international strategy from the outset and is now reaping the rewards. The Celbridge brewery is responsible for brands such as McGargles and exports to 26 markets worldwide. Sales to Europe more than doubled, hitting €2.7m last year, accounting for nearly half of the company’s total revenue.
Cronin is set to launch his beers in Australia next March. He is also preparing to start a new Rye River-branded range of beers in the French market before the end of this year.
For Cronin, internationalisation is vital for his company’s growth, particularly as he has set an ambitious target of selling more than 31,000hl of beer this year. “Craft has probably gone flat in Ireland over the past two years,” he said. “The reality for the majority of Irish brewers is that there are only 4.7 million people in Ireland; we won’t all survive in Ireland. We have to look abroad.
“There is a market of around 850,000hl of craft beer in Europe... You’ve got to look to Europe and say there is a huge opportunity if my brand can cut through, and the quality can win consumers.”
Cronin believes that conditions in the Irish market will improve, but that more brewers need to sell into the “buoyant” European market.
For him, Irish brewers have a reputation for quality on the continent; a reputation he said firms could do more to profit from.
Seamus O’Hara, co-founder and chief executive of Carlow Brewing Company, also believes that the opportunities abroad for Irish companies make exporting hugely important.
The brewery behind the O’Hara’s range, which had retained profits of more than €1.5m for the year ended March 2018, exports to 40 markets around the world, and recently started selling beer in Singapore and Hong Kong. For O’Hara, the key to achieving international success is about taking advantage of Ireland’s brand value in global markets. “Every market you go to is competitive; they all have big breweries,” he said.
“As Irish brewers, we have a great reputation. If we navigate that properly, there are huge opportunities for us.
“We often look at the US market for inspiration, but they are next to cities with 10 million people. We are a small country at the end of the day, which is very competitive. We need to be able to break outside of that.”
O’Hara is now focusing on growing sales in the markets the company has already entered, but believes more could be done to improve the domestic scene. He said the pace of growth in Ireland had “slowed down”, which may force breweries to join forces.
“There is a bit of pressure on,” he said. “There are a lot of brewers out there, the market is a little crowded, and maybe some consolidation needs to happen. That new measure may help create a smaller number of stronger players, and a bit of merger and acquisition activity.
“The demand is still there for the beer in Ireland. We need to work with the bars, restaurants and off-trade to get craft out to a wider segment.”
Accessing new markets is not easy, particularly for the smaller microbrewers. Cillian Larkin, a co-founder of family-owned Larkins Brewing Company, from Kilcoole, Co Wicklow, experienced some of the difficulties first-hand.
He was about to begin exports to the UK, but the proposed distributor put the plans on hold due to the uncertainty created by Brexit.
Larkin also worries that the landbridge across the UK, which is the fastest route for Irish companies looking to access the European market, may close. This would threaten the company’s sales to France and the Netherlands.
For Larkin, the focus is now on developing the brand in Ireland and tapping into what is still a potentially lucrative market. Ireland still drinks a lot of beer, with 4.6 million hl worth consumed in 2018. “We need to get consumers away from the idea that there are only Heineken, Molson Coors and Diageo products,” he said.
“Ireland may have had brewing traditions centuries ago, but it hasn’t had one recently, like in the UK, Belgium, Germany and the Czech Republic, where breweries exist all over the country. People there are very used to trying the local beers; in Ireland, it’s almost like if it’s local then people don’t want it.”
David O’Hare, co-founder of Bru, also sees the UK as an “obvious market” for the smaller microbreweries to target, thanks to proximity and similar consumer tastes, but Brexit has made the market more challenging. The Trim, Co Meath brewery makes 30pc of its revenues from exports, 70pc of which come from the UK.
To reduce the reliance on the UK market, O’Hare recently started to target new business in France, Italy, Spain and Scandinavia.
He said exporting to new European markets was difficult, particularly when battling with local brewers for market share.
“As craft grows and expands across the world, more breweries pop up too. There are burgeoning breweries now in France, Spain and Italy, and the consumers there are also wanting to support local brands. It’s a very competitive market.
“In countries like France, provenance and buying local mean an awful lot to them, so where we compete is on quality and, if we can, price.”
The microbrewers agreed that the minister’s decision to protect and extend the excise relief would prove vital to future success.
There was shared recognition that only a few of the medium-sized microbreweries were likely to be immediately affected by the new 50,000hl ceiling.
Cronin’s Rye River Brewing is one of the breweries to have benefited as a result of the new ceiling. Earlier this year, the company, which employs 47 people, announced it is planning to raise €2.5m to increase its brewing capacity in 2020.
The company also recently placed its current premises on the market for €3.3m, as part of its efforts to raise funds.
Before Donohoe’s announcement, Cronin said he was reconsidering the planned investment, as the relief on alcohol products tax was so significant for his business. When news from the Budget filtered through last week, he decided that Rye River had more international growth to go.
He said: “Part of me was saying, ‘we have good volume, we are exporting to 26 countries, do I need to go any further? Should I just sit in and hold ground?’
“Without that rebate from the minister, Rye River Brewing would not be here. We wouldn’t be able to compete… That increase has given me the confidence to invest in my business… Just holding our ground isn’t what we want; we want to put more Irish craft beer out there and succeed.
“There is a long road ahead, but with ambition, we will succeed.”
‘We are a small country, which is very competitive. We need to be able to break outside of that’