Introduction to the Industry
In the province of British Columbia, craft beer is a major player in the liquor market. In the first Quarter of the 2018/2019 season, beer accounted for $308,484,384.00 in sales. This figure is further broken down into 3 categories. Domestic beer produced in BC, out of province beer produced in Canada, and international imports. Within the domestic category, there are 3 more sub-categories that relate to hectoliter (HL) production. Commercial beer (over 350,000HL), Micro beer (between 15000HL and 350.000HL) and Regional beer (less than 15,000HL). Each of these sub categories reported sales of $152,605,676.00, $36,291,037.00, and $40,113,222.00 respectively (BC Liquor Distribution Branch, 2018). The magnitude of such an industry suggests that government regulation on production, distribution, sales, and consumption are inevitable. Most of the government regulation in the craft beer industry, as well as all other alcoholic beverages, is the responsibility of the British Columbia Liquor Distribution Board (BCLDB). The BCLDB is in control of licensing brewers and retailers, regulating all distribution, and monitoring consumption and sales etc. The BCLDB has a very powerful position as they are the sole wholesaler of alcohol in the province of British Columbia (BC Liquor Distribution Branch, 2018).
How is the Craft Beer Industry Regulated
The are multiple regulations that are present in the craft beer industry. Each step in the supply chain is subject a specific set of standards and regulations. Beginning with the brewing companies, they are categorized by the amount they wish to produce. In the BC domestic market there are 3 sizes a brewery can fall into. If the brewery is producing less that 15,000 Hectoliters of beer annually, they are considered a regional brewery, between 15,0000 and 350,000 Hectoliters a brewery is to be considered a micro brewery, and over 350,000 hectoliters would be a commercial brewery. Every brewery in British Columbia must apply for a liquor licence from the BCLDB, corresponding to the size of the brewery. When it comes to packaging the product, liquor laws require the label to include the name and address of either a) the brewer that packaged the product or b) the person for whom the product is packaged.
When the production cycle is complete, the next step is to establish distribution channels. This proves to be trickier than expected as the BCLBD is the only wholesaler in all of BC. Each brewery must either apply to have product in liquor stores across the province through the BCLBD or alternatively have the permission of BCLBD to place product in stores. The BCLBD has strict capacity limits for how many liquor retailers can be in operation in the province. As well, there are limits to how much product can be in any given store (Hughey, n.d.). For breweries this means getting their product on shelves can be tough in a market that is growing and becoming more competitive. To sell outside of the province entails other stipulations. For example, a BC brewing company selling beer in Alberta is subject to taxation of $1.25/L (Sept, A BC Craft Beer Q&A – Your Questions Answered, 2017).
Now the product has hit the shelves of a retail outlet or the taps of an establishment, this is the point that liquor regulations have the most commonly known regulations. The consumption of beer, as well and wine and spirits, is heavily regulated in BC. Each establishment selling products, be it retail or service, is responsible for having the correct corresponding licence to do so (Government of British Columbia, 2018). Each licence outlines the time and place beer can be sold, it stipulates that beer must be sold for a minimum price, and there are strict policies in place for the staff members working in the establishment to act in accordance with the liquor act (Spirits Canada, n.d.).
How the Regulations of (Sept, What do Changes to BC Craft Beer Liquor Policy Mean, 2016) (Sept, A BC Craft Beer Q&A – Your Questions Answered, 2017)Craft Beer Came About
The regulation of beer in BC, as well as wine and spirits, is all derived from the days of prohibition in Canada. An article on Alcohol and Advocacy states “In the 1920s, as Prohibition in Canada was on the retreat, the federal government and each of the provincial governments were in agreement that liquor sales and consumption needed to be tightly controlled” (Coles, 2016). This is the true basis of most of the regulations in place today in the market. However, it is not the only contributing factor to the heavily regulated industry. An underlying motivation in the governments position in the industry is the amount of revenue generated by the taxation of liquor. In BC there is a 10% provincial sales tax on alcoholic beverages (Restaurants Canada, 2017). When we consider the amount of beer produced and sold in the province as previously discussed, it is obvious that the beer market in BC is a large revenue stream for the province. According to Statistics Canada, in 2017, provincial sales tax alone generated $332,914,000.00 on alcohol sales in British Columbia. This is just one small component of the revenue generated for the government from the beer industry (Statistics Canada, 2018).
The costs and benefits of the regulation
There are a number of costs and benefits associated to the regulation of the craft beer industry. The benefits of regulating beer production and distribution are evident throughout history. Monitoring the sale of beer has led to the elimination of illegal distribution. The regulations faced by breweries today depend on their size and product output. The most recent reform in British Columbia for breweries has provided tox breaks for micro-beer and regional beer breweries.
Craft breweries which brew less than 15,000HL per year were taxed at a rate of 55 cents per litre. After the regulatory changes on July 1st 2016, small breweries received a 27% reduction in tax rate down to $.40 per litre (Sept, 2016). With a saving of $.15 per litre, it is estimated that a BC craft brewery that brews 5000HL per year can gain an additional $75,000 in after-tax net income (Sept, 2016). Larger craft breweries that produce between 15,000HL and 350,000HL saw a decrease in their tax rate from $.56 to $1.02 per litre, down to $.41 to $.99 per litre depending on the level of output (Sept, 2016).
Winners and losers of the regulations
The winners of the regulation are the smaller to mid-sized breweries who are becoming more prominent in the beer industry. The new regulations make it attractive for small start-ups to open their own brewery with a heightened level of success.
The government has made an effort to improve cash flow for craft breweries meaning they will have more cash on hand to fund payroll, rent, and investments in new equipment. (B.C. Increases "Hopportunities" for Craft Brewers, 2016) Craft breweries will no longer have to remit all of the revenue from the sale of their products to the Liquor Distribution Branch before the markup is applied. (Sept, 2016). The new regulations allow microbreweries to showcase their products at local BC liquor stores before establishing themselves in the larger market as well as selling their product at on-site tasting lounges. (B.C. Increases "Hopportunities" for Craft Brewers, 2016)These new revenue generating platforms are essential for the craft breweries as they look to gain market share. The losers of the new regulations are the bigger breweries who are facing more competition from the smaller up and coming breweries. They are losing market share and are not getting tax breaks like the craft breweries.