Agriculture Minister Oneil Carlier, ASBA ED Terry Rock and Finance Minister Joe Ceci pull a couple pints. (Photo courtesy of Calgary Herald)

As I feared/suspected, the Alberta government announced the details of its brewery grant program last week while I was being completely, joyously unproductive. But you wouldn’t know it from reading the media coverage last week, which was woefully short on details (see here and here for examples) and focused mostly on stakeholder reactions.

So, if I may, allow me to offer some of that missing detail and analysis. I have received a copy of the program terms and conditions sent to all Alberta breweries late last week. The program, officially called the Alberta Small Brewers Development (ASBD) Program, appears to make good the government’s promise to make Alberta brewers “whole” from the recent mark-up changes (see my summary here). Here are the pertinent details:

• All Alberta breweries who produced less than 300,000 hL are eligible (which means everyone but Labatt’s and Minhas – if you consider either of those Albertan).
• The program offers a per litre grant, calculated according to production volume. There is a sliding scale according to a set schedule. Under 10,256 hL, a brewery would receive $1.15 per litre – the equivalent of the difference between their old mark-up and the new mark-up. The rate gradually reduces over 35 steps until it reaches $0.80/litre at 150,000 litres. The grant appears to NOT be graduated, meaning whatever step the brewery falls into, they receive that amount for every litre produced. After 150,000 hL, the amount of the grant is reduced by $0.80 per litre, meaning the real dollar amount of the grant is decreased as volume increases, eventually reaching zero at 300,000 hL. It also means the grant has a hard cap of $12 million – no brewery can receive more than that amount.
• Payments will be provided monthly, based upon the previous 12-months production data. Breweries’ eligible rate will be re-calculated every 6-months using the most recent 12 months of production.
• The grant and the production calculations only apply to beer under 11.9% alcohol. Product above that will have existing mark-ups apply. This is consistent with existing AGLC policy around beer mark-ups.
• The Terms and Conditions indicate the program has a 10-year term, although later it indicates the Minister may alter or amend or terminate the program at any time simply by giving notice to participants, so I am not sure of the relevance of the 10-year clause.
• The Terms also leave open the possibility that additional terms may be worked up for “affiliates”, “contract brewing” and “collaboration brewing”. I have been told this clause is to allow the possibility for some kind of exemption for Alberta-based contract breweries who are in the planning stages of opening a brewery. It is also acknowledging sticky issues like collaboration brews might need some special rules.
• It is anticipated the program, when coupled with the mark-up increases, will be a net-positive on revenue, as the costs of the program will be lower than the increased earnings from the mark-ups.

Overall, the program seems surprisingly simple in its implementation. Early indications from Alberta breweries is that they are very happy with its set-up. I know some of the newer, smaller operations won’t be pleased about a monthly payment – which may create some cash flow issues – but it is more frequent than some had feared before the announcement.

While Alberta breweries seem relatively happy about the program, early indications are that it will not mollify critiques of the policy. Outcry from the opposition Wildrose Party is not unexpected. So far Premier Wall and breweries from other provinces have not yet spoken out, but I suspect they will express displeasure at the arrangement. There were no surprises in the announcement, meaning we should not be expecting anything unusual in the reactions.

Does the grant shield Alberta from trade complaints and lawsuits? I am not a lawyer, so I don’t know. The case against the new arrangement does seem harder and more complex than the previous rule of differential mark-ups. All breweries have the same mark-up applied. Period. The Alberta government has chosen to provide grants to its local breweries to help develop the industry. Many provinces have grant programs, although Alberta’s is the first – to my knowledge – to be a regularized grant based on production. Is that a trade barrier? Maybe. Maybe not. If nothing else it at least allows the Alberta government to respond to complainants that Alberta has the most open system in the country, in contrast to every other province. It is much harder to claim a grant program is more of a barrier than a tasting panel and uncertain approval to sell product.

What is my take?

I have said all along that mark-ups and grants are a clumsy way to resolve issues related to growing local beer production in the province. That goes for this announcement as well. On the positive side, the new policy package should be more effective in achieving the government’s goal of bolstering Alberta beer. The grant program will create the financial space for Alberta breweries to make their beer price competitive, offering an ever so slight nudge in their favour. That said, pricing is only one of a host of factors shaping craft beer consumers’ choices. But if the flood of B.C. breweries into Alberta last fall is any indication, pub owners and liquor stores will be very open to a visit from their local Alberta brewery sales rep in the coming weeks.

On the downside, the indirect relationship between the grant and the mark-up could create unintended consequences. The mark-up is paid by consumers, while the grant goes to breweries. The logic of the grant is that breweries will use the it to maintain their beer at the previous price with the grant making up the lost margins (i.e., to keep prices as previous level requires a brewery to “eat” the $1.15 increase in the mark-up). However, there are no rules requiring this course of action. It is entirely possible – as pointed out to me by an industry insider this weekend – a brewery could choose to slightly adjust their prices, say by 50 or 60 cents per litre, while still collecting the full grant amount. That price would keep them lower than import competitors (who feel the full impact of the new mark-ups), but actually INCREASE the margins they receive overall. They get the full grant and a slightly higher price from the consumer.

Will it work that way? I don’t know. One factor reducing the likelihood of that outcome is that Alberta breweries are also competing against each other, and if one brewery holds prices while the other increases them, it might disadvantage the latter. All of this uncertainty is evidence that economics isn’t really a science, after all, no matter how gloomy.

My final takeaway is that I feel the grant is unsustainable in the long term. It might work as a short term solution for creating some elbow room for Alberta breweries, but I have to wonder if at some point the government needs to find another solution for supporting its local industry. Grants in perpetuity just don’t seem like a viable long term strategy. It is possible in a few years, when the Alberta industry is more robust, there will be less need for a blanket grant and the program can become more targeted.

Ultimately, I am coming to the position that we need a Canada-wide strategy to really resolve this issue. It is all fine for other provinces to whinge at Alberta, but every jurisdiction has its own forms of protectionism. We need the mature adults in the industry to sit down and work out a long term solution for the good of craft beer in Canada. There has GOT to be a way to both promote free flow of beer across provincial borders and foster the creation of vibrant, local beer production.

Until we figure that out, expect to see more beer skirmishes and partial fixes. At least it will keep me busy!