Reverse ABV creep and why it’s happening

Reverse ABV creep and why it’s happening

In August, the British government launched an overhauled alcohol duty system, affecting all UK producers of beverages from wine and spirits to beer and cider. While the changes were numerous, and in some cases complex, the largest fundamental move was that alcohol would be taxed at the same rate, per litre produced dependent on their ABV, rather than each sector having its own separate duty system.

One of the most intriguing changes affects drinks being produced at the lower end of the alcohol spectrum. Prior to the legislation’s introduction, breweries would have received a discounted rate for drinks rated at 2.8 per cent ABV or lower. Under the new system it has been extended to account for drinks rated at 3.4 per cent or less. The savings that can be made will likely encourage producers to focus on drinks that are lower in alcohol and therefore, in the government’s eyes, carry less long-term health risks. Encouraging news for a market where younger customers are increasingly focused on mindful consumption and wellness.

Breweries large and small have quickly and understandably taken advantage of this. Greene King was quick to say it would be “crafting” the ABV of its IPA from 3.6 to 3.4 per cent, while Danish brewing giant Carlsberg applied the same reduction to its previously 3.8 per cent flagship lager.

Plenty of small, independent breweries are also getting in on the act, with Salford-based Marble brewery reducing the ABV of its best-selling pale ale Pint from 3.8 to 3.4 per cent. In London, the Five Points Brewing Company has chosen to launch a 3.4 per cent product exclusively for the cask market. Called Five Points Gold, this will sit alongside the Hackney brewery’s core beers, that have so far remained unaltered.

The savings made producing a beer below this new threshold are, quite frankly, dramatic. At a time when producers have their backs well and truly against the wall due to the inflation driven costs that have made trading conditions as challenging as many will remember, they are understandably quite welcome. For example, most large breweries will pay £21.01 per litre of pure alcohol produced in products rated 3.5-8.4 per cent but will only pay £9.27 per litre produced in beers rated 1.3 per cent to 3.4 per cent – beers rated below 1.3 per cent do not pay duty.

When rounded up, at the full duty rate a brewery is paying 42 pence per pint at 3.5 per cent. If this was lowered to 3.4 per cent, it would pay just 18p per pint. That might not sound like much, but over production volumes, it suddenly creates a far different picture.

Based on the above rate if, over a year, a small brewery produces 5,000 hectolitres (880,000 pints) of a beer it has reduced from 3.5 to 3.4 per cent, it will make a saving of £211,400. That’s enough to cover the wages of several members of staff, or offset the dramatically rising price of ingredients, utility bills and business rates, some of which have increased by more than 50 per cent (or more) over the past 18 months.

Now let’s look at a beer like Greene King IPA, of which around 32 million pints are reportedly produced each year. Reducing the ABV will save the brewery around £7.5m. That will likely bring a smile to the face of its owners, Hong Kong-based property company CK Asset Holdings, which, coincidentally, is registered to pay its corporation tax in the Cayman Islands.

Admittedly, for brevity’s sake, there are other workings I have omitted from the above. Smaller producers, for example, will also benefit from what’s now elegantly known as Small Producers Relief, a sliding scale that gives further duty discounts based on overall output. There is also a new, additional 9.2 per cent discount called draught relief, applied to all beer sold on premises in 20-litre containers or above, which all breweries receive regardless of their size. However, to save this short piece from becoming a drawn-out mathematical exercise, I have kept things simple by using the base duty rate, but this is for example’s sake only.

Around five or six years ago I was introduced to a beer-market phenomenon which was called ABV creep. This applied to the increase in sales of stronger beers, potentially influenced by the increase in popularity of stronger imports from the United States, coupled with the success of homegrown beers such as Thornbridge Jaipur (5.9 per cent) and BrewDog Punk IPA (5.4 per cent). Duvel is a good example, as sales of the 8.5 per cent Belgian ale were growing in the years leading up to the Covid-19 pandemic.

Post pandemic however, the popularity of stronger brews seems to be on the wane, a fact that will only be hastened by the introduction of lower-strength beers, the new duty rules acting as a catalyst for this. It’s something I have started referring to as reverse ABV creep and, due to the financial struggles that breweries are currently facing, I expect it to continue for some time.

Does it mean the death of beers in the popular 3.8 per cent to 4.4 per cent range? I don’t think so, as I feel consumer demand for beers of this strength will remain high. It is inevitable however, to assume that we will see an increasing number of 3.4 per cent beers available as breweries seek to take advantage of the new duty legislation, whether it’s a small operation desperately trying to recoup lost margin, or a far larger one doing its best to keep its shareholders smiling.

Thanks to Beer Nouveau’s Steve Dunkley, who assisted me with my arithmetic.

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