Monday, 3 January 2011

What does a brewer do when tax increases? (part one)

It's a tricky question. How do you cope with an increase in beer tax?

Here's one of the more annoying claims I see thrown around: the reason British beer is so weak today is the tax system. That because more tax is paid on stronger beer, over time it has inevitably made brewers reduce strength. This theory ignores the fact pretty well every European country charges more tax on a beer of 8% ABV than one of 5% ABV. Why hasn't the same reduction in strength happened elsewhere?

Looking at British beer gravities over the period 1800 to 1970, it's clear that it's not the method of taxation but tax increases that have prompted falls in strength. Gravities didn't drop in 1880 when the Free Mash Tun Act was introduced. They fell after beer tax was increased to help finance the Boer War.

I was delighted to find an explanation of why brewers cut strength rather than in increasing prices. It's a bit long so I've split it over multiple post. I understand just how short attention spans are in the modern world.

"Broadly speaking, there are three possible—I do not say practicable —methods by which a brewer tan relieve his shoulders of the burden of an increase in the Beer Duty :—

1. By directly charging his customer with the amount of the increase.

2. By providing that the barrel of beer, in the cost of which is included the increased duty, shall not cost him (the brewer) more than it did when it only included the lesser duty.

3. By giving a less quantity of beer for the same money—a consideration in places where the  custom of giving a large amount of over-measure has obtained.

The greater portion of the beer brewed in the United Kingdom is sold by the brewers to persons licensed to sell by retail who distribute it to the public; and it is sufficiently easy for a brewer with a tied trade to charge his tenant with the amount of the extra duty, which by law may be added to existent contract prices : and which duty, by the words of the Chancellor of the Exchequer, ought not to be taken from brewers' profits. But if the brewer charges the retailer 1s. a barrel more for his beer, the retailer in turn must in some way obtain from the public the extra 1s. so charged: otherwise the burden of the tax is merely shifted from the shoulders of the brewer to those of the retailer. When, therefore, the Beer Duty was increased in March last, the question—" How is the retailer to regain from the public the extra Is. ?" became a very pertinent one to many brewers. They felt that in view of the recent preceding " boom" in the values of licensed houses, with all its attendant consequences of increased capital invested therein, of the spirit duty and of the Income Tax, it would be unwise to still further saddle the often struggling retailer with the additional Beer Duty; to, as it were, lay a further burden on an already heavily-burdened property. We are all here on earth to make a living : and if a retail business connected with a brewery does not provide a decent living for the competent retailer, that business is of very little value to the brewer. Considerations such as those above outlined, led many brewers to insist on an answer to the question- -"How can the retailer recoup himself?"  before they would decide to charge the retailer with the extra duty. And many of us are still waiting for an answer. To instance a typical difficulty. The standard retail price of a quart pot of X is 4d. Even if the modern working man would, upon an increase of duty of 1s, a barrel, agree to pay for X more than the customary price, which is doubtful,* it would be impossible to add to the 4d. charged the proportional part of the duty appertaining to a quart. There is no coin of the realm representing the twelfth part of 1d. And when we descend to half-pints the difficulty becomes aggravated. But whatever the difficulties may or may not be in the way of charging the retailer with the extra tax, one thing, in the event of the tax remaining with the retailer, is tolerably clear : that unless brewers unanimously agree to charge retailers with the extra duty, the practical competition which exists amongst retailers in London and other centres of activity will, caeteris paribus, unfailingly result in those retailers who are not the establishments of those retailers who have to pay the extra duty. The licensed trade is frequently spoken of as a monopoly. In some quiet country districts something like monopoly in the licensed trade may obtain, as it frequently does in other trades ; but in London and other large populous districts competition is as keen and as powerful amongst the licensed trade as in almost any other business which could be named.

No doubt in times gone by the prices of beer have been raised in consequence of the cost price of the beer per barrel to the brewer having been seriously raised either by a large increase in the duty or by a heavy rise in the prices of either malt or hops or of both.*

For instance, you will remember the passage in Goldsmith's comedy, The Good-natured Man completed at the beginning of 1767, in which the Bailiff's Follower attributes the increase in the price of beer to 3.5d. a pot, to the "Parley vous."

And Adam Smith, in his Wealth of Nations, published in 1776, in advancing the theory that beer, like tea, is to be classed in Political Economy as a luxury and not as a necessity, writes:—" The rise in the price of porter, occasioned by an additional tax of three shillings upon the barrel of strong beer, has not raised the wages of common labour in London. These were about eighteen pence or twenty pence a day before the tax and they are not more now."

The additional tax of 3s. a barrel on strong beer mentioned by Adam Smith was kept on, and the price of porter—a beer which seems to have held the place of the fourpenny ale of to-day—remained at 30s. a barrel wholesale and 3.5d. a quart retail until 1799, when, as a result of malt jumping up in price to something like 90s. a quarter and hops to £17 a cwt., the price of porter was raised to 36s. a barrel wholesale, and 4d. a quart retail.* In the days of our great struggle with Napoleon I. and the French, the days of heavy war taxation and of impeded importation, and of corn laws and protective duties, it was not an uncommon thing for the cost price of a barrel of beer to show a comparatively sudden increase of over 5s. a barrel, and sometimes one of even 8s. and 10s. a barrel. Of necessity in such case was the brewer compelled to raise his prices to his customer, and of necessity had the retailer in turn to charge his customer more. So sensitive, indeed, became the beer market, that, in London, the standard price of beer was altered at frequent intervals of a few yearsf only, doubtlessly to the unsettlement and to the damage of the Trade. But the matter was evidently one of necessity ; no brewer can afford to disregard a sudden rise in the cost price of his beer of from 5s. to 10s. a barrel. Subsequently the prices of beer fell again to a more ordinary level, and by the time of the Crimea we find porter selling in London for 33s. a barrel. In 1847 barley jumped up some 12s. a quarter, and an attempt was made to increase the price of beer, but the attempt was a failure. In 1854, until 1856, the Malt Duty was raised from 2s. 7d. + 5 per cent., to 4s. a bushel; or, taking 4 barrels to the quarter, from say 5s. 6d. a barrel to 8s. a barrel, an increase of 2s. 6d. a barrel. As a consequence of this, efforts were made by brewers to increase the prices of their beers, I believe in most districts without much lasting success. The disagreement or the defection of one or two competing brewers in a district with regard to the raising of the price, quickly reduced prices to their former level; and I am told that in many cases even where the amount of the increase in the taxation was charged separately as a war tax and insisted upon, the customers agreed to owe it, and still owe it to this day.

Nevertheless, a sudden increase in duty equivalent to 2s. 6d. a barrel is one which to many minds would warrant an increase in the price of beer. Some of the London brewers appear to have raised the price in May, 1854, and to have maintained the increase until July, 1856—practically the term of the increase in the Malt Duty ; and no doubt here and there other brewers charged their customers with and obtained an extra 2s. or 3s. a barrel. But, on the whole, judging from the experiences of 1847 and of 1854, it would seem that even then to generally and effectively raise the price of beer to the public was no easy matter; and with the present "Free Mash Tun," the comparative cheapness and facility of carriage, and the increased keenness of competition, it will be found exceedingly difficult to raise the price of beer to the general public unless it be a case of absolute and acknowledged necessity, or unless a firm be exceptionally situated; and in any event such a course must, according to rule, diminish the consumption of the article as a direct result of the increase in price.

* It is reported that the publicans of Thorne having intimated that they intended to increase the price of their beer from 2.5d. to 3d. a pint, the consumers engaged the local to cry round the town the following notice:—" We, the beer-drinkers of Thorne, object to the proposed increase in the price of beer, and hereby give notice that we shall not pay more than the present price, which is 2.5d. a pint."   Brewers' Journal, April, 1900."
"The Journal of the Institute of Brewing, vol.7", 1901, pages 53 - 57

Simple really, isn't it? Retailers couldn't pass on the increase to customers, because of limitations in the currency itself. How do you pass on an increase of 1/24th of a penny per pint when the smallest coin is a farthing (a quarter of a penny)?


Gary Gillman said...

The retailers could do one thing, not noted in this fastidious and well-written account. They could water the beer, or mix stronger and weaker to sell at the stronger's price. I am sure many did and that such practices survived circa-1900.

I believe in fact in the areas where mild ale was the standard drink, this must have been very common. No one can drink more than two pints of 7% ABV beer and not show the effects. If session drinking has a long lineage in England, the answer must have been that the pints were watered. Not that this was a bad thing and it may have been a hand-in-glove arrangement with the brewers. The retailers made a living, the drinkers had a session without getting wrecked, and all was well in the realm.

And so today with standard bitter in the 3.5-4% range in the U.K., things really haven't changed as much (in terms of beer strength) as may first seem the case.

Not to minimize the problems well-limned in this article for the honest retailer, but I think the reality was more complex.


Ron Pattinson said...

Gary, that would be illegal. This article discusses the legal options.

By 1900 local officials had been checking on goods looking for adulteration for a few decades. Watering was much less common than it had been 100 years earlier, because there was a much greater chance of getting caught.

I've seen analyses from the early 1800's and even the watered beers of that period were way stronger than modern British beers.

You have to remember that many families still bought casks directly from the brewer. No possibility of adulteration there.

Craig said...

Well there goes all of my unsubstaniated theories out the window.

Gary Gillman said...

Ron, points taken but I'd say two things: with regard to enforcement on watering post-later 1800's, it is difficult to say how effective it was. Man's ingenuity has no limits... Where there is a will there is a way.

Regarding watering strength, look at page 169 of Accum:

4.5% (probably by weight but it doesn't matter) is not that different from today's best bitter range. He gives 6.5% as the mean from the brewers direct. That's about a one-third reduction in strength, which is a lot.


Flagon of Ale said...

Still a pretty bizzare proposition. The brewers that this author speaks of must be the only group of manufacturers in the history of the world that have not passed increased taxation onto the retailer/customer. Like you say, it wasn't the case in many other brewing countries, and certainly not the case for spirits which are almost unanimously taxed at a higher rate than beer and wine. I certainly can't imagine any distiller or tobacco company or airline or phone company or winery or farm attempting to take on a similar burden. Perhaps he's correct, but if he is, it's not any less confusing to me.

Ron Pattinson said...

Flagon of Ale, you have to remember that the price of beer hadn't changed in 40 years. Drinkers just weren't used to it, hence the reaction of those in Thorne.

Rod said...

"No one can drink more than two pints of 7% ABV beer and not show the effects"

Ron can - I've seen him......

gondua said...

Maybe I should have said three pints. :)