Keeping spirits high: brewing in a niche market

The 2019 Australian Craft Beer Survey results backed up what a lot of anecdotal evidence has shown over the past five years – Australian consumers like their craft beer. The survey showed that the attitude of 68 per cent of those surveyed towards the regular release of new/limited beers was ‘exciting and shows the creativity of breweries’, while only 5 per cent thought it ‘reduces the quality of beer’.

Craft brewing has been around since beer was invented, however as a brand becomes more popular and moves into the mainstream, it loses the moniker. In modern times, Western Australia’s Matilda Bay is considered the first in the renaissance of craft beer when it was launched in 1984.

The average craft beer drinker is aged between 30 and 49, while unsurprisingly the Eastern states make up 86 per cent of all craft beer drinkers. It is a business that is not only flourishing but attracting new start-ups at a fast rate.

Peter Philip is chairman of the Independent Brewing Association (IBA), and founder of the Wayward Brewing Co. The IBA has more than 500 members and is a fierce advocate of the industry, which is currently growing at the rate of one new brewery opening every six days.

“The craft movement started because people were looking for something different,” he said. “I don’t particularly think that is a new trend. It has been a trend for the past 50 years that craft brewers tapped into and that is what created the whole craft industry.

“It is a segment that is a major growth area and really resonates with rural and regional Australians. They are bringing a whole new beverage to country towns. Country towns are thirsty places so people are really getting behind those small breweries.”

Acquisitions
Some have been so successful, they have been bought by some of the bigger players. Carlton & United Breweries’ (CUB) acquisitions over the past couple of years include 4 Pines, Pirate Life, the award-winning, Mick Fanning-backed Balter and its initial purchase of the aforementioned Matilda Bay Brewing in 1990, which has closed and opened on different sides of the continent.

“We opened the Matilda Bay microbrewery in Healesville, Victoria late last year, with the father of craft beer in Australia, Phil Sexton,” said Julian Sheezel, vice-president of corporate affairs for CUB.

Another major brewer, Lion bought Little Creatures but tends to start up its own craft beer brands from its Malt Shovel subsidiary, including its James Squire range.
For some younger consumers, they will be hard-pressed to know that such a well-known brand as Hahn’s started out a boutique beer. And while founder, Chuck Hahn might not be the father of craft beer, he could claim the title of grandfather. Approaching his 50th year in the business, starting out at Coors in the US, Hahn is now the Brew Master at Lion and shows no signs of slowing down. He has some nostalgic memories of those days gone by.

He even helped revive one of the original craft brands that was established on the east coast in the 1980s.

“We’ve been developing authentic brands rather than going out and buying,” he said. “The Hahn brewery was one of the first craft breweries on the east coast, along with Power Burning Company, which was born in 1988 along with the Eumundi Brewery started by John Lynch up on the Sunshine Coast.

“Ten years ago, Lion was able to buy the trademark for Eumundi and about a year ago we put a small brewery back in to the same motel – the Imperial Hotel just across the way from the Eumundi markets – and we rebirthed that brand. We eventually convinced our marketing department to develop the brand and that is what we have done.”

While some brewers are happy to rest on their laurels and find a niche in their local country town, shire or even city, a lot of companies – Balter being the latest example – are looking for the big pay day when one of the bigger brewers can no longer ignore their presence.

What does a multi-national brewer look for when buying up a smaller player?

“Businesses we’ve purchased have all had great people, great products and enormous potential,” said Sheezel. “We look for businesses whose owners are passionate about making great beverages and are committed to creating value not only for both parties but also for our customers across the country.”

There have been many ups and downs in the industry. According to a report in the Sydney Morning Herald, data showed that just over 250,000 businesses were deregistered from the Australian Securities and Investments Commission between July 2017 and June 30 2018. In other words a lot of businesses fail. The specialty beverage space is no different. Many players believe that the state and federal governments could do more to help.

A taxing time
If you talk to Philip and Hahn, they believe that the craft brewers in particular have it a little harder as they are treated differently from the big players.

“Australia is one of the highest taxed countries for beer and alcohol,” said Philip. “We’re contributing more than our fair share to the tax coffers. Over half the production cost of the beer is tax – more than we are paying for the malt; more than we are paying for the hops; more than we are paying our staff. It is our single biggest ‘supplier’ that we are having to pay. We’re overweight in terms of what we are paying compared to other countries.”

Hahn concurs.

“Australian alcohol is taxed almost more than most other places in the world. Excise is based on your alcohol level,” he said. “We’re paying over $2 a litre in tax, even more so if it is more than 5 per cent alcohol. In the US it is a about one tenth of that – about $0.20 a litre. Excise tax is the biggest single cost to making beer. It’s crazy. You might use $1 a litre or $1.5 a litre for all your malted barley and hops and processing, but not $2 a litre. People don’t realise that and the excise just went up again. It goes up every six months.”

There has been some relief thanks to lobbying of the IBA and its predecessor the Craft Brewers Industry Association (CBIA), according to Hahn.

“This is something we fought for in the CBIA and finally got the government to allow the smaller breweries to claim back $30,000 a year on excise,” he said. “Further lobbying by the IBA got it up to $100,000. That has helped smaller brewers exist. It doesn’t hide the fact that Australia pays more money to the government than almost any other country in the world.”

CUB’s Sheezel also believes it is an issue that needs addressing.

“Australians now pays one of the highest beer taxes in the developed world, much higher than the UK, NZ, the US and Germany,” he said. “Beer should not be a luxury – it’s the drink for the everyday Australian. Given the sensible approach shown to alcohol consumption by the vast majority of Australians, the high tax slug on Australians is just not right.”

A matter of choice
One of the key issues that is always on the drawing board is how sustainable is the industry? With a brewery opening up every six days, won’t there become a saturation point somewhere? Depends on who you talk to. Under the right conditions, Sheezel believes it is sustainable.

“Australian beer lovers have more beers to choose from than ever before,” said Sheezel. “We believe any brewery that will brew consistently high-quality, small-batch beers in an environmentally sustainable way can expect to be sustainable.”

The IBA does see a bit of a David and Goliath situation playing out between its members and the bigger brewers. As well as the tax issue, he believes that the government should examine the tap contracts the bigger breweries have with hotels and bars, which he believes are not as fair as they could be towards the smaller brewers. He said that the craft brewers get on well together and back each other up – not just in trying to gain marketshare, but in the more practical aspects of making their favourite tipple.

“There’s an amazing camaraderie in the industry. Small, independent brewers help each other every day,” he said. “We don’t view each other so much as competitors, we view each other as co-partners in building an industry. Most days of the week I’ll get a call from somebody saying, ‘I’m short a bag of grain, can I borrow one off you?’ And they come on over and grab it. That is the kind of industry we are in.”

But with a lot of craft beers now becoming mainstream, isn’t it an industry that will slowly become the norm anyway? There are also aforementioned beers like Hahn and Balter that are now mainstream or about to become so. Philip pulls out an interesting statistics that shows that there is still a gulf – whether it gets bigger or not, only time will tell.

“Large brewers own 94 per cent of the market and have virtually unlimited access to capital and they can use that to automate their processes to a massive extent,” he said. “We are 6 per cent of volume but employ 47 per cent of all the people in the industry. It shows how automated they are, and how much of a craft industry we are. It truly is hand-crafted products and that has a cost implication. Our operating costs and production costs are massively higher than the multi-nationals.”

Distilleries
And it’s not just beer where boutique beverages are making a splash. The spirit space is also making waves and not just in Australia.

Mr Black is a high-end coffee liqueur that is distilled in New South Wales’ Central Coast. It was started by Thomas Baker and Phillip Moore and was borne out of a gap in the market that both men saw.

“Philip was so excited when he met Tom at the distillery. Together, they collaborated, started a company, and after two iterations, released Mr Black,” said the company’s operations manager Rick Roper.

In 2014, Mr Black went on to win a gold medal award at the London Spirit Show as the finest in its category and has consistently won international awards since that time.

“They launched the product in the UK not long after developing it, and in a relatively short period of time it has become the leading coffee liqueur in both of those markets,” said Roper. “In 2017, it was launched in the US and is now the biggest selling Australian spirit in the US. Although it is Australian based, it is expanding globally. It is continued to manufactured at Distillery Botanica. It is highly regarded. It’s blended with a high-quality grain spirit and is crafted into Mr Black. It is sold through on and off premises. It’s now also now being distributed through the Asia Pacific.”

Then there is Bryon Bay Slow Gin (see story page 36 of this issue), that uses the Davidson Plum as its main ingredient.

The plum is a native of Australia, and something that co-founder of the Cape Byron Distillery, Eddie Brook, sees as something that all spirit producers can embrace and make them a point of difference in the world market.

The company also produces a macadamia nut and roasted wattle seed liqueur.
“You get this rich butterscotch, toffee, toasted nut flavour, almost coffee and dark cacao notes coming through as well,” Brook said. “It has been a really great addition. Later this year we will be releasing a few other spirits around the native fruit-infused line in particular.”

The future
Overall the niche beverage industry is expanding and there are a slew of distilleries and breweries popping up all over the country. What is the advice from some of those who have already made the journey to those that are starting out?

“One thing I would say about brewing is that cleanliness is next to godliness,” said Hahn. “Any problems that are associated with brewing are usually housekeeping and in hygiene.
“The next is you have to deliver on consistent, quality favour. If the beer looks flat, then it doesn’t look appealing. If it doesn’t look appealing, then you need to work on presentation.

“Finally, you have to have the brewer out there talking about the beer. That is something that I have always done.

“I used to have three or four beer dinners a month at various hotels to get Australians to taste beer rather than just drink it. It’s more about tasting rather than slamming it down. I say slam it down slowly and savour the flavour, which leads to responsible drinking, which is what the craft element is about.”

Sheezel sees a few trends coming through that are not just about beverages themselves but where they come from.

“Over the past five years we have seen an increase in mid-strength beers sales, the demand for a greater variety of beers and more demand for beer in cans and we expect these trends to continue in coming years,” he said. “Consumers are increasingly consumption-conscious, and interested in what goes in to their products. Consumers are increasingly interested in sustainability, a focus that will only intensify in coming years.

“We also believe drinkers will place a greater premium on convenience, so that they can enjoy drinks in much the same way beer has traditionally been enjoyed.”

The last word is left to Philip, who despite some of the challenges, loves the industry.
“It is enormously satisfying to deal with people who have fun and enjoy the product that they create,” he said.

“We are being creative in how we come up with new products and how we engage with customers. And this is why the public respond like they do to independent beers because we’re giving them an experience that they can’t get from some of the mainstream beers.”