Grain, hops, yeast, and water are all it takes to make a beer. However, the recipe for a successful craft brewery is a little more complex. And in Australia, it seems the ingredients are in short supply.
More than a dozen high-profile craft brewers have collapsed in the past 18 months, souring optimism in a sector that seemed ready to thrive after pandemic shutdowns.
Speaking to SmartCompany, craft brewers and administrators say a tough macroeconomic environment has only magnified industry-specific challenges.
It isn’t last call for the sector, but experts predict further hardship to come.
Three kegs a week, down to one
Australia’s independent brewing scene has a long and proud history, but the number of craft breweries has vastly increased over the past 15 years.
Although beer consumption has dramatically fallen since the 1970s, a growing preference for boutique options created a new market for innovative brewers in the 2000s and 2010s.
The 2012 takeover of Western Australia’s Little Creatures brewery by Japanese-led Lion group, valued at some $382 million, also spelled new economic opportunities for Australia’s upstart breweries.
Soon, every state and territory counted a thriving community of craft breweries, spanning inner-city warehouses, suburban industrial parks, and regional tourism hotspots.
Peter Walsh is the co-founder of Bodriggy Brewing Co., which boasts a brewery, brewpub, and wholesale operation in the trendy Melbourne enclave Abbotsford.
Founded in 2016, Bodriggy Brewing Co. has achieved commercial and critical success, including a cluster of gold medals at the 2024 Australian International Beer Awards.
In a frank admission toSmartCompany, Walsh said the current trading environment is among the toughest he’s seen.
“We noticed that the total average sales order for both our on- and off-premises accounts have dropped quite significantly,” he said.
“So a bar that was ordering three kegs a week 18 months ago is now ordering one.
“This situation mirrors what we have seen in the venue. Our booking numbers are relatively similar to previous years, however the spend is well down.”
The overall cost of living, not a sudden rejection of craft beer, is forcing consumers to make tough decisions about how and where they spend.
“I think inflation is what’s really hit us hard in the last year or so,” Walsh added.
“In the big picture, it does feel a bit like death by 1000 cuts, and the accumulative situation is really taking its toll.”
Richard Abraham has observed the same trend, but from a very different vantage point.
As director of DBA Advisory, Abraham has served as voluntary administrator for Victoria’s Bad Shepherd, Dainton Beer, and Hawkers Beer, along with Sydney’s Wayward Brewing, all of which have entered administration since October last year.
All four are still trading after creditors agreed to a Deed of Company Arrangement, proposed after a careful analysis of trading conditions.
“There are issues specific to this industry that are that are creating strong headwinds for participants at the moment, but a lot of the issues are consistent issues facing small business across the economy, not just in this sector,” he said.
Key among those issues is the surging cost of living, which is making it harder for households to spend on discretionary goods like craft beer.
“From what we’ve seen, revenue from, say, two years ago is down, maybe 15 to 20%,” Abraham added.
Inflation hits craft brewers on both sides
Beyond its effect on consumer spending, inflation is perhaps most keenly felt through the alcohol excise, which is indexed twice a year based on the Consumer Price Index (CPI).
Surging CPI readings mean that for beers with an alcohol content of 3% and above, in containers below eight litres, brewers must now pay $60.12 in excise per litre of alcohol.
Kegged beers for use in pubs, with an alcohol content of 3.5% and above, attract excise fees of $42.37 per litre of alcohol.
Those rates will be re-indexed as of August 5, which industry observers fear will further carve into craft beer revenue streams.
The Independent Brewers Association (IBA), a peak body representing the craft beer sector, urged the federal government to pause excise hikes in the 2024-2025 federal budget.
The government chose not to.
“We are very disappointed the federal government did not see fit to use its power to help the small businesses that this nation was built on,” said Kylie Lethbridge, chief executive officer of the IBA, in its post-budget statement.
Past excise fees continue to challenge the sector, too.
To assist hard-hit businesses in the early days of the COVID-19 pandemic, brewers were permitted to defer their alcohol excise payments to the Australian Taxation Office (ATO).
For many brewers, those payments are now due; significant outstanding debts mean the ATO is the largest creditor in a large proportion of voluntary administrations.
“The significant downturn that these guys have faced over the last two years has meant that essentially their trading losses have been accumulating in the form of excise debt,” Abraham said.
“And they get to a point where that debt is just too big to overcome.”
Brewers are not holding off on excise payments to prioritise other spending, either, Abraham continued.
“They’re not disputing the debt and they’re not choosing not to pay. They’ve got to a point where they can’t pay.”
With the tax office now normalising its approach to debt collection after years of COVID-era leniency, some breweries that deferred excise payments are finding themselves with few options beyond administration.
The tide of international conglomerates collecting medium-sized brewers has receded, too; in its place are a handful of lucky local brewers acquiring the ones who weren’t.
In some ways, Australia’s burgeoning craft brewing sector may have been a victim of its own success.
“There was a really positive attitude to what the post-COVID picture looked like, and on an individual, case-by-case basis, there was a rational investment decision around expansion, or pursuing the wholesale market, or opening another venue,” Abraham said.
Yet a “large number of these brewers going down an expansion route at the same time, which in hindsight was the worst possible time, has created a lot of these industry issues now,” Abraham added.
Major labels challenging small brewers
Not every beer business is suffering so acutely.
Industry giants — including those craft brewers first set out to challenge — have seemingly prospered from the mainstream-ification of craft options.
Outfits like Endeavour Group, owner of Dan Murphy’s liquor stores, and Coles, operator of Liquorland, Vintage Cellars and First Choice Liquor, have released their own white-label beers with craft-esque packaging.
Frustrated brewers fear lookalike brands could siphon precious discretionary spending dollars away from ‘true’ craft options.
And major brewers continue to challenge craft distributors for pub tap contracts and liquor store shelf space, Abraham added, further diminishing the options available to independent producers.
Walsh, the Bodriggy co-founder, said those concerns are hardly new.
“Rising excise and tap contracts are issues in the industry we have had for 10 years,” he said.
Even so, he admitted the industry is at something of a “breaking point”.
“Unfortunately I do think there will be more casualties this year,” Walsh told SmartCompany.
“I try to imagine what my mindset would be been if I was opening Bodriggy right now.
“Breweries are dropping like flies at the moment, so that undoubtedly would affect any aspiring brewery businesses and their motivation to join the industry.”
“We have tried to just focus on what we can control”
The experts say relief will most likely arrive if, and when, inflation falls enough for the Reserve Bank of Australia to consider lowering interest rates.
Though it’s hardly the only data point in the central bank’s calculations, the most recent CPI figures suggest a rate cut is unlikely any time soon.
“But if interest rates turn in the next six to nine months, then consumer sentiment potentially turns, and discretionary spending maybe opens up a little bit… that’s positive for the industry,” Abraham said.
For now, Walsh said Bodriggy Brewing Co. is trying to meet customers where they are.
“People are gravitating towards affordable beer so it is important for us to generate as much traffic as possible in this field,” he said.
“It’s hard not to get caught up in all the hysteria but we have tried to just focus on what we can control.”
Among craft beer leaders, the sentiment is that more businesses will enter voluntary administration before the sector reaches equilibrium.
Whether they are businesses that would have failed without COVID-era support, or casualties of market over-saturation, craft beer dreamers and their employees can expect further upheaval.
Any wins, no matter how slight, will be hard-earned.
“It’s bloody tough, and there is only so much you can do, but there is arguably more skill and expertise managing a business through times like this compared to prosperous economic periods,” Walsh said.
“Hopefully the industry can come out the other end stronger, adaptable and more equipped than ever.”
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