Alberta’s strange brew

The Alberta Gaming and Liquor Commission presumably had good intentions in mind when it brewed up a policy to lend a helping hand to small breweries. Namely, beer companies qualify for substantially reduced beer tax rates on the first 200,000 hectolitres sold in Alberta. The explicit aim was to help small players compete against industry leviathans such as Molson and Labatt. And, implicitly, the tax break would entice craft breweries to set up shop in the province.

However, eight years after the reduced beer tax rates—estimated by one analyst to total about $200 million in savings—were first implemented, little in the Alberta beer business has worked out the way the AGLC envisioned. Only five small breweries have opened for business in Alberta since the policy was implemented. And in that time Alberta has, in fact, become a market characterized by discount beer. And at least one of the breweries taking advantage of the AGLC policy doesn’t even brew in the province, let alone Canada.

Companies like high-end craft brewer Big Rock Brewery argue that the reduction in the beer tax helps them compete against the likes of Labatt and Molson. Levelling the playing field is the main goal of the program, says the AGLC. Nevertheless, critics wonder how well the program works, given the modest size of Alberta’s craft beer industry compared to other provinces.

While other jurisdictions offer tax incentives, in Alberta the level of small brewer support dwarfs other Canadian programs. While Edmonton adds a provincial tax of $98 per hectolitre (or 98 cents per litre) to beer sold by the big brewers, small producers receive a tax break of at least $58 per hectolitre for their first 200,000 hectolitres sold in the province—the equivalent of a $4.75 break off the price of a standard case of 24 cans. And for those that qualify, the maximum beer tax reduction works out to $11.6 million a year, or nearly four times the level of support available to Quebec brewers and almost six times more than in Ontario. A brewery industry analyst, who does not want to be named because he deals with the industry’s players, points out one big difference in the provincial plans. He says that while the Ontario and Quebec ones are for in-province brewing operations, the Alberta program doesn’t restrict where the brewing actually takes place.

Certainly in the case of Big Rock, the AGLC program has been good for the bottom line. In 2010, its profit was $6.1 million whereas the value of its tax savings in Alberta was $8.9 million, based on sales of 153,000 hectolitres. “We’re a Canadian-owned company up against companies that were at one point Canadian but are now multinational organizations and therefore efficiencies of scale are definitely not in our favour,” says Big Rock president Bill McKenzie, who adds that the provincial government is making the industry fairer and more competitive. And although McKenzie acknowledges the AGLC program is very important to Big Rock’s business model, he says if such tax breaks were to end, Big Rock would adapt.

The other large beneficiary of Alberta’s small brewer tax break is Minhas Craft Brewery. Though its head office is in Calgary, the main brewing operation is in Monroe, Wisc., where it has recently poured US$3.5 million into the operation. While the firm would not release financial information, co-owner Ravinder Minhas says it shipped 96,000 hectolitres to Alberta in 2010. The reduction in the beer tax was worth $5.6 million.

Still, Minhas contends that whatever the numbers are, Alberta is getting good value from its beer strategy. “Eighty per cent of our Canadian beer sales are in Alberta, so Albertan consumers are reaping the benefits. [The tax policy] is responsible for bringing the price of beer down. It’s not about subsidizing jobs in Wisconsin.” Also, Minhas is slated to open a brewery in Calgary in the first week of November that will produce up to 35,000 hectolitres of beer in its first year.

Indeed, consumers in search of cheap beer can’t complain. Minhas retails in Alberta for around $1.25 a bottle. “The average price in Alberta is lower than anywhere else in Canada. People from B.C. and Saskatchewan make trips to buy their beer in Alberta,” says Minhas.

Bryan Cox, a vice-president of Canada’s National Brewers (a trade association that represents Molson, Labatt and Sleeman), says Minhas’s rationalization for the tax break “is interesting. Our understanding of the policy is that it was to incentivize local craft brewing in the province of Alberta.” While his association represents the interests of Canada’s three largest breweries, Cox says “a strong, vibrant, local brewing environment is good for beer—it gets people talking about beer, and it helps grow the pie, which is good for all brewers.” Yet Cox points out there’s actually a dearth of craft brewers in Alberta. And there have been other side effects. John Sleeman confirmed that his firm, Sleeman Breweries, cancelled plans for a new Alberta-based brewery, in part because of the brewer tax break, which it would not qualify for.

AGLC CEO Gerry MacLennan declined to comment on the program. However, AGLC spokeswoman Christine Wronko insists Alberta’s “unique mark-up system” is all about creating a “level playing field for liquor companies” (an often repeated refrain among supporters). The fact that just five breweries have opened in the province since the tax break scheme was unveiled in 2003, and that the Alberta beer market is defined by discount brands, are consequences that are out of the government’s control. “The AGLC doesn’t dictate what products can be registered in the province for sale,” says Wronko.

Alberta’s small brewer system would appear to be yet another case of the law of unintended consequences—especially when a government agency tinkers with the free market economy. From a dearth of craft brewers to a helping hand for American jobs, the AGLC’s beer tax policy is enough to drive a teetotalling Albertan to drink.