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Evin O’Riordain of The Kernel Brewery

Like many of the generation of British craft breweries that set-up during the early stages of the current beer renaissance The Kernel Brewery in London’s Bermondsey area is now contemplating whether it should put a lid on future growth and remain at its present size.

It is driven by an unusual aspect of brewing in Britain. Like a clutch of brewers of its vintage The Kernel has reached annual output of 5,000 hectolitres up to which point they only pay 50% of the standard rate of duty. Every pint they brew above this level is charged at the full rate.

This Small Brewers’ Relief (SBR) has been a boon for young craft brewers setting up their brewing kits in railway arches across the UK but the successful ones now face some big decisions. Should they stay at their present size or go for growth and allow more drinkers to enjoy their beers.

For Evin O’Riordain, founder of The Kernel Brewery, output this year will hit 7,000 hl, which he says will result in the same profits being generated as for 5,000 hl of production once he has taken into account the additional costs and resources involved.

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The Kernel Brewery

“The rate of duty increase goes up dramatically on the extra production. We will be producing our beers more efficiently but for the same profits. Staying below the threshold would have meant more profits for less work,” he explains.

Although the extra duty is only chargeable on the output above 5,000 hl it can have a more dramatic effect than some brewers expect, according to Will Calvert, co-owner of Windsor & Eton Brewery: “The extra duty is spread across the whole production and charged the following year so you do not notice it at first. However, slowly but surely you end up with a different cost structure,” he explains.

Calvert says it is inevitably the better brewers that reach the 5,000 hl level and so although SBR is a great accelerator for all small brewers the good ones then have the disadvantage of having a tough time when they want to go over this level.

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“It gives brewers producing poor quality beers the ability to give away the duty benefits by selling their product at lower prices while the brewers of the beers that consumers really want to drink are being penalised by the obstacle of the threshold,” he suggests.

Brewers recognise that only by going for significant growth can the economies of scale kick-in and it is only then worth the effort of breaking through the 5,000 barrier. Ed Mason, co-founder of Five Points Brewing Company – which operates from a railway arch in Hackney, East London, set up in March 2013 and last year it hit 5,000 hl at which point a new brew kit was installed and most crucially two large fermenting vessels were placed outside in the brewery’s yard – doubling the capacity to 16,000 hl per year.

Five-Points

“When you’ve made the decision to go over then you’ve got to really go over. There is no point in going to 6-8,000 hl. We’re much better off at 16,000 hl than 6,000 hl. We get economies of scale from better buying power, doing more brews on the equipment, and we’ve brought the bottling in-house with an automated line and we can get the returns on this over the longer term,” says Mason.

It is the same story at Redemption Brewery that has just moved to a new site in North London where its founder Andy Moffat says he has installed a new brew kit from which he can produce 23,000 hl per year compared with only 5,000 hl on the old kit.

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Andy Moffat of Redemption Brewery

“If you go over the 5,000 hl then you need the economies of scale and we can now produce three-times the amount of beer per week with the same amount of people. And the malt bill is also going to be 10% less because we are using it more efficiently in the larger tanks,” he says.

For those brewers who choose not to go for big scale including Windsor & Eton there are options available such as boosting non-beer sales selling merchandise and running brewery tours. And Calvert says they and also generating an increased cash margin per barrel by selling more beer in its own tap room.

Andrew Morgan, managing director of The Bottle Shop – which imports US beers into the UK including Green Flash, says the likes of Burning Sky Brewery, based in Sussex, has also chosen to remain below the 5,000 hl level and is focusing on selling more premium beers.

“They’ve a barrel-ageing programme and are diverting more of their production to these long range products than easier to produce beers. The duty has come into their thinking and they are balancing the production of high volume beers with the specialist products,” he says.

A limited edition 750ml cuvee of Belgium Lambic and Burning Sky sour ale was in high demand despite the price tag of around £13, which represents a significant premium to some of the brewery’s other beers that include session IPA Arise and pale ale Plateau.

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Ed Mason of Five Points Brewing Company

The Kernel has also taken the decision to roughly stay the same size although O’Riordain says the current site would enable the brewery to go to 9,000 hl output per year. Such levels are not going to deliver the economies of scale to make it a particularly profitable move but he suggests it is more important to remain on the brewery’s existing site even though it is restrictive on space and therefore future production capabilities.

“We’ve got to take into account the community that has built up around the brewery. We’ve limited space but we’ve neighbours and this is really important to us. It’s like terroir – we’ve happy employees here and it comes across in the drink,” he suggests.

The Kernel might be something of an exception in terms of its thinking and philosophy but all the many brewers that are now bumping up against the 5,000 hl threshold have to consider all aspects of their businesses before taking the next steps on their journey’s.

Glynn Davis, editor, Beer Insider

 

 

2 Comments

  1. Csaba Babak on 22nd June 2016 at 8:35 am

    Good question raised, Glynn!

    Excise is definitely one of the major consideration in expansion but you wish it was the only one.

    Unfortunately, the implications of the SBR are explained in many different ways in the article, and therefore I find it important to note the full excise rate only applies above 60,000hl production level, but gradually increases above 5,000hl and the new rate applies for the entire production.

    SBR is supposed to help small brewers’ and make them competitive – and so it does! Even in terms of growth it is relatively more supportive with its gradual increase than some other tiered systems in Europe.



  2. Glynn Davis on 22nd June 2016 at 8:51 am

    Thanks for your email. Good points raised. It’s the rapid change from 5,000hl that comes as the shock to brewers.