Earlier this year H.R.836 was introduced to the House of Representatives, if approved this bill would it would reduce the federal excise tax on beer from US$18/barrel to its pre-1991 levels of US$9/barrel.  In order to better understand the history of beer excise taxes the Punks contacted our Capitol Hill liaison Jeffrey Last, and this is what he had to say on the matter:

Excise taxes on alcoholic beverages are amongst the oldest in the history of the United States.  The first federal tax was established in 1791 as a short lived budget measure to pay off our debts from the Revolutionary war.  This tax has been reinstated several times in our history, not surprisingly either after wars, i.e. the War of 1812, to pay off debts or in the run-up to arms, i.e. the Civil War, as a means to finance them.

It was when the tax was reinstated during the antebellum period, the years just prior to the Civil War, that it was extended from just spirits to all fermented beverages including those we know and love as beer and ale.  Additionally, this tax has prevailed to the present day (minus prohibition); where today it exists at a rate of $18 per 31 gallon barrel for large producers and at $7 per barrel for smaller producers, ones that produce less than 60,000 barrels a year.  This tax is universal, so foreign and domestic brewers are equally impacted by it.

While I am in no position to determine what impact this tax has on the domestic brewing industry, I can give you the numbers on the revenue it creates and leave the judging to you.  In fiscal year 2007 the federal beer excise tax generated $3.8 billion with $3.3 billion coming from domestic brewers, and $500 million from imports.  Keep in mind these are just revenues from the federal tax of $18 per barrel.  Each state has its own excise tax that ranges from the lowest in Wyoming of $0.62 to the highest in Alaska of $33.17(ouch).

While the federal tax isn’t earmarked for anything specific other than a revenue stream, the state taxes are usually levied as a means for paying for certain state programs and initiatives.  For example, Arkansas uses their excise tax to fund education and child care development funds.

There have been many justifications for having an excise tax, both federal and local, on beer.  Some argue that these so-called “sin taxes” are a great tool for curbing habits that are deemed less than healthy, while others see them simply as a tax on a luxury item.  However, there are those who feel the rate adversely punishes lower-income individuals and feel it should be lowered or repealed.  In fact, there have been efforts by Congress recently to halve the federal excise tax on beer.

Regardless of your personal views on the matter, keep this in mind. When you go out to the bar and order a pint of your favorite brew, between 40 and 44 percent of what you pay is the various excise taxes being passed on to the consumer.

Thanks Jeff!

I just spotted an article on CNN’s website about the success story of Guinness in Nigeria. I didn’t expect to find anything amazing here, just another affirmation of Mike’s hypothesis about the amazing international growth opportunities for brewers as the developing world’s growing middle class acquires a taste for beer (and frankly they could do much worse than Guinness in my opinion, I salute Nigeria’s good taste!) It turns out that Nigeria now consumes more Guinness than Ireland, and is second only to the UK in consumption of this most renowned of dry stouts. That’s not to say that Ireland is slouching here; Nigeria is a nation of 150 million people, the UK about 60 million, and Ireland only about 6 million…I’d say they’re pulling their weight, for sure.

What was surprising to me is that in Nigeria, Indonesia, and other markets in which Guinness is brewed under contract this way, Guinness is apparently an extract beer.

Without getting too technical, there are two ways to brew beer, all grain or extract. An all grain brewer steeps malted grains like barley in warm water (a process called “mashing”), which creates a sort of tea by dissolving sugars and other compounds out of the grain and into the water. This “tea” is then called wort. Hops are added, the mixture is boiled for sanitization and to trigger certain chemical reactions, then the result is cooled and the yeast are unleashed, creating beer. All grain brewing is like making soup from scratch, if you will.

Extract brewing on the other hand can be thought of more like making condensed Campbells soup. A manufacturer of malt mashes the grains at the factory, then dehydrates the wort, extracting as much water as possible, which improves the shelf life. Sometimes hops are added, sometimes not, and then the dehydrated mixture is diluted by the brewer and boiled.

Homebrewers usually start out with extract brewing because it is easier, but then switch to all grain when they feel they can handle the challenge and want to increase the quality of their brews. However, this doesn’t mean that all extract beers are bad; I’ve heard of many extract homebrews going on to win awards at major competitions, and have also heard of professional brewpubs that make extract brews exclusively, among them two in Canada (one in Calgary, the other in Nova Scotia) and another in California (Pacific Coast BC in Oakland). I haven’t been to any of the three but have always been secretly skeptical, even though I’m sure that a good brewer can make proper use of any ingredient to make good beer, so long as they are smart about selecting and using it.

As for Guinness Nigeria, they use an unfermented, hopped extract shipped in from Dublin and add it to unspecified local ingredients. My guess is that certain ingredients are easy to get locally, the others are not of the same quality (or quantity) as those available in Dublin, so the extract replaces those that are harder to come by.

The Nigerian brewery was the first outside of Ireland and Great Britain and has seen torrid growth despite a global economic recession and challenging operating environment (including failing infrastructure and unpredictable governance according to CNN). I’d love to get my hands on their product and see what extract Guinness tastes like, but I don’t think it’s distributed in the US, so I’ll have to wait for now.

I was perusing the internet the other night, as I usually do, and began to notice a trend.  It all started with this headline: “SABMiller Halts Beer Volume Drop on Chinese Demand”.  At first I didn’t think too much of it, so I moved on.  Several minutes later, on a completely unrelated site, I come across this headline “Net profit in China’s major beer producer Yanjing up 25% in first half”.  Now I was convinced something was up, and I wanted to know more.

To my surprise, it turns out that by volume China is the world’s biggest beer consumer.  But, on a per capita basis China’s beer habit appears far less impressive at just 22.1 liters per year, this compares to 81.6 liters per year in the US.  However, both pale in comparison to the Czech Republic, whose residents imbibe an astounding 156.9 liters per capita–that’s roughly 41 gallons of beer per person per year!

This chart shows 2004’s annual beer consumption by volume for the top 15 countries, along with their per capita beer consumption:

Source: Kirin

Once my mind synthesized the headlines I mentioned earlier, and these beer statistics, I realized the global beer industry could be at the dawn of a new age, especially in China.  China’s population is currently estimated at around 1.3bn, compared to just 0.3bn in the US.  China’s rapid economic expansion has created a burgeoning middle class, whose tastes have shifted as incomes have risen.  Not only does this expanding middle class palate now crave things like pork over just vegetables, but also beer.

With this in mind lets run a simple exercise; let’s say as China’s economy develops, its per capita beer intake catches up with its nearby neighbor South Korea at 38.5.  This means China’s total beer consumption would rise to   50,050 ML–more than 2x the total US consumption…  Taking it one step further, if China’s per capita consumption catches up to that of the US, then China’s total beer consumption could equal that of the rest of the world combined.  I won’t event get into what happens if they catchup with the Czech’s, but I hope you have a stockpile!

My point is that the Chinese beer industry’s potential is far from being realized.  In fact a recent report by Citigroup pointed out that China’s beer sector has bucked the recent economic slowdown with volumes up near 10% y/y in May. Major players in the domestic Chinese beer market include Tsingtao, Zhujiang, and Yanjing.  Tsingtao should stand to benefit quite nicely from increased consumption, based on its strong domestic brand name–I’ve thrown back more than my fair share while living there.  Numerous local brewers are also spread out across the country mostly catering to smaller geographical regions; consolidation is inevitable as the industry continues to develops.  Potential for brand-name foreign brewers is also off the charts, whether through local acquisitions or other types of investments.  I can’t imagine anything will slow this trend down, so just in case, here’s how to order a beer in Mandarin:

“Wo yao yi bei píjiu”

In case you need two…

“Wo yao liang bei píjiu”