Hold Fast: What To Do When a Storm’s Brewing

I. Introduction

The term “hold fast” originates in nautical and maritime terminology. It refers to a device or mechanism to secure a ship’s ropes and lines. A holdfast is designed to grip or hold onto a surface tightly, preventing the rope from slipping or becoming loose. Essentially, it’s a means of securing something firmly in place. It was the difference between a sailor surviving and being thrown overboard in a turbulent storm.

With further impending changes to the Master Framework Agreement expected to be announced before the year’s end, navigating Ontario’s maturing craft beer sector is akin to sailing through dynamic waters, requiring businesses to “hold fast” to their strategies. This exploration begins with a snapshot of the sector’s evolution from its fledgling stages to a thriving market.

Reflecting on the 1990s market collapse, some lessons from those previous closures can affirm positive business practices, emphasizing the importance of understanding the differences that have shaped the industry’s resilience. The winds of change are evident, with potential impacts arising from alterations in the Master Framework Agreement, challenging businesses to adapt while remaining steadfast.

Anchoring the discussion contrasts of the retail models of The Beer Store and the LCBO, pivotal decisions that demand strategic navigation. Additionally, the challenges confronting businesses in this maturing landscape – regulatory shifts, economic pressures, and operational hurdles – urge breweries to chart a course through these complex waters.

As we navigate these nuanced currents, it becomes clear that, like a ship at sea, the key to success in Ontario’s craft beer industry lies in understanding the past, adapting to change, and holding fast to core principles.

II. The Maturing Craft Beer Sector in Ontario

Amid the craft beer industry’s turbulent journey, the midyear update from the Brewers Association sheds light on the current situation. Despite a modest decline of -2 % in year-to-date figures, Chief Economist Bart Watson holds a cautiously optimistic view of craft beer’s future. This insight prompts reflection on the industry’s evolution, prompting questions about the speculated “craft beer bubble” and the profound impacts of market maturity and economics (Brewers Association, 2023).

Craft beer’s trajectory mirrors Theodore Levitt’s product life cycle, transitioning from a dynamic start-up phase in the 1990s and early 2000s to a booming growth period in the 2010s. However, the industry has now entered the maturity stage, characterized by market saturation, intense competition, and a need for heightened brand differentiation. Signs of a maturing market are evident, with a decline in the craft’s total points of distribution and volume, indicating a shift in consumer preferences and a demand for calculated innovation (Rhodes, 2023).

The challenges of this mature market phase are compounded by shifting consumer demographics, economic factors, and changing preferences. The once-thriving landscape of craft beer, marked by constant innovation, now grapples with a sense of stylistic stasis as consumers and wholesalers grapple with conflicting desires for innovation and stability. As the craft beer industry adjusts to these changes, businesses must embrace strategic planning, data-driven decisions, and an acute awareness of market trends. While the road ahead may be challenging, Watson’s message of optimism resonates, emphasizing the industry’s enduring demand and the potential for growth through new channels, occasions, and customer engagement. The “new normal” beckons, calling for adaptability and foresight as craft brewers chart their course through uncharted waters (Rhodes, 2023).

III. Contrasting the 1990s Market Collapse with Current Trends

In a series of conferences, Ray Daniels, the founder of the Certified Cicerone program, discussed the challenges the craft beer industry faced in the late 1990s. Drawing on his extensive experience in the field, Daniels highlighted the industry’s past hardships and stressed the importance of analyzing them to avoid repeating historical mistakes. He traced the parallels between the boom in craft breweries in the 2010s and a similar surge two decades earlier, underscoring the critical need to learn from past missteps (Daniels, 2013).

During the late ’90s, the craft beer industry experienced a severe crash due to various factors. Retailers frequently rotated their beer selections, hindering any brand from building a consistent following. Fueled by success, Brewers expanded into new markets without understanding regional nuances, relying on distributors for promotions. Quality control suffered, leading to subpar beers with short shelf lives. This scenario, where finding the same beer twice was rare and inconsistent taste prevailed, contributed to closures and amalgamations. To revive the U.S. craft beer industry, Daniels advocated a renewed focus on details, with breweries embracing solid business plans, conservative growth, and commitment to consumer relationships. Attention to consistency and shelf life became paramount, guiding the industry toward sustainable development and resilience against potential new challenges. (Daniels, 2013).

IV. Changes in the Master Framework Agreement

Once holding a dominant position with 90% control of beer sales in Ontario, the Beer Store faces a critical juncture as the provincial government contemplates not renewing the Master Framework Agreement. This agreement, set to expire in 2025, grants exclusive rights for beer case sales to The Beer Store and limits the number of grocery stores allowed to sell beer. The potential opening of the market to additional supermarkets, big box shops, and corner stores could present a formidable challenge, particularly as The Beer Store’s market share has already dwindled to just under 63% in the 2020-21 fiscal year (Rubin, 2023).

Retail analyst Lisa Hutcheson questions the relevance of The Beer Store, considering its outdated stores and limited product range. The struggles intensified with the introduction of the Master Framework Agreement in 2015, allowing grocery stores to bid for beer-selling licenses. The COVID-19 pandemic further increased competition by permitting restaurants and bars to sell beer and wine. Efforts by The Beer Store to offset financial challenges through real estate sales and renovations have proven unsustainable. As discussions with the government continue, the company aims to maintain the viability of its distribution arm post-Master Framework Agreement, raising questions about its future involvement in the Ontario Deposit Return Program and potential consequences for job losses and recycling infrastructure strain (Rubin, 2023).

The potential demise of The Beer Store has sparked differing views among industry experts. Some anticipate a smoother transition, while others foresee challenges such as rising beer prices and job losses for its 7,000 workers. The Ontario Convenience Stores Association believes that ending the Master Framework Agreement would lead to better pricing, convenience for consumers, and increased sales outlets for craft brewers. As Ontario awaits official government announcements, The Beer Store’s future remains uncertain, with the potential end of its retail arm possibly signaling a return to its roots as a warehousing and distribution entity reminiscent of its origins in 1927 (Rubin, 2023).

Premier Doug Ford in Ontario recently announced plans to start beer and wine sales in corner stores. “We’re the only jurisdiction in the entire world that you can’t go into the retail store and buy a case of beer or a bottle of wine when you’re buying a steak for dinner or whatever you’re buying.” (Southern & Marchesan, 2023). While changes in retail in 2015 allowed for 450 grocery stores to carry beer and wine, they are not available in retail outlets that do not also sell groceries. Corner stores in Ontario do not sell groceries like steak but pre-prepared low-risk foods such as prepackaged sandwiches or hot dogs. This is different from many jurisdictions in Canada, such as Quebec, where smaller convenience stores or depanneurs can sell beer and wine to customers.

V. Retail Dynamics

The Beer Store

Established in 1927, the Beer Store initially belonged to a group of Ontario-based brewers. It operates under a distinctive open retail and wholesale system primarily owned by three major brewing companies: Molson, Labatt, and Sleeman, all of which are subsidiaries of multinational corporations. The vast majority of shares are owned by the combination of these three groups, accounting for above 99.5% of all shares. This is due to the acquisitions of brewing companies over the decades, resulting in the consolidation of corporate assets into the hands of a few breweries (CBC News, 2015).

In 2015, the ability of new breweries to purchase shares was announced. With the introduction of Class E and Class F shares, more significant Beer Store owners with sales exceeding 5 million litres/year will pay the same fees as current owners. Smaller brewers (under 5 million litres/year) benefit from discounted fees, excluding certain costs. Any brewer can sell in the Beer Store, maintaining the autonomy to set prices competitively. New owners are welcomed at a nominal cost: those under 5 million litres/year pay $100 for a Preferred Class F Share, while those with higher sales pay $1,000 for a Class E Share (The Beer Store, 2018).

“The Beer Store’s efficiencies keep consumer prices low while providing significant tax revenues to the Province of Ontario and the Federal Government. Before tax, Ontario had among the lowest beer prices in Canada and the highest tax rates on beer. The Beer Store beer sales contributed almost $1B in estimated government tax revenues in 2022.” – The Beer Store Operations Report 2022

The Beer Store is commonly referred to erroneously as a monopoly when it is a non-profit organization with shares predominantly held by three large multi-conglomerates. Part of the terms and conditions for maintaining ownership of The Beer Store is that they have existing operations in Ontario and that the beer sold through the channel comes from Ontario manufacturing. There are arguments to be made that there are conflicts of interest between the large breweries and independent producers or that it is similar to an oligopoly. Still, as it is structured to serve the interests of multiple suppliers to the Ontario market, it is not a monopoly. Furthermore, it was established that the Province of Ontario did not want to get involved in the logistics or warehousing of kegged beer, leaving Prohibition, so it was best to let the manufacturers handle the supply chain.

Liquor Control Board of Ontario

“We are a best-in-class, customer-first, responsible retailer, and wholesaler, supporting our local communities and delivering value to Ontarians.” – LCBO Mission Statement.

The Liquor Control Board of Ontario (LCBO), a government business enterprise, reported its fiscal year 2022 performance across various facets. Operating 680 retail stores, an eCommerce platform, and special-order services, it offered a diverse range of over 34,000 spirits, wine, and beer products. In Fiscal Year 2022, it is estimated to sell more than 1.1 billion litres of beverage alcohol products in Ontario, with a value exceeding $9.8 billion. Financially, the LCBO’s revenue reached $7.34 billion, with a net income of $2.54 billion and a dividend transfer of $2.55 billion to the Ontario government (LCBO, n.d.).

The LCBO showcased resilience during the second year of the COVID-19 pandemic, maintaining essential services with a focus on customer and employee health and safety. Operational highlights included the addition of six new stores, the completion of the LCBO head office relocation, and ongoing enhancements to the eCommerce platform to meet increased demand during the pandemic. The pandemic influenced the financial landscape, with challenges such as global supply chain disruptions, high inflation, and rising oil prices affecting the economy (LCBO, n.d.).

 

Figure 1 - LCBO Sales by Category (LCBO, n.d.)

Notably, net income in Fiscal Year 2022 reached a record $2.54 billion, marking a 34.6% share of revenues. Dividends transferred to the Ontario government amounted to $2.55 billion, continuing a 28-year trend of increased transfers. The LCBO paid a total of $3.68 billion to all levels of government in FY2022, supporting various public programs. Sales growth, improved margins, and expense control contributed to net income growth of 53.4% from a decade ago (LCBO, n.d.).

Grocery Stores

Since 2015, Ontario has allowed up to 450 grocers to sell alcohol through a competitive bidding program initiated by the previous provincial Liberal government. In the bidding process, retailers committed to a margin rate, a percentage of profits they could retain, ranging from two to 6.9 percent. The competitive nature of the markets led grocers to bid lower to enhance their chances of obtaining a license. Recently, major retailers like Loblaw (owner of Real Canadian Superstore) and Empire (owner of Longo’s, FreshCo, Farm Boy, Foodland, and Sobeys) have closed their alcohol sections, sparking discussions about potential revisions to margin rates. While the Ministry of Finance is consulting with stakeholders to maintain consumer choice and convenience, it affirms its commitment to expanding alcohol sales to convenience stores and grocery outlets (Alsharif, 2023).

Over the past 18 months, there have been six license transfers, indicating a shifting landscape. Significant transfers include the Real Canadian Superstore in Sudbury transferring its license to No Frills in Elliot Lake and Longo’s in Brampton transferring its license to another Longo’s location in Whitby, subsequently moving to a Farm Boy location in Newmarket. Despite these changes, at least three stores have closed their alcohol sections but retain active licenses. The LCBO reported a significant revenue increase from grocery store alcohol sales in 2021, underscoring the evolving dynamics of alcohol retail in the Province (Alsharif, 2023). The overall sales volume of these products has emerged as one of the LCBO’s largest sales channels, as total beer and wine sales through grocery store transfers are more significant than all bars and restaurant purchases through the LCBO (LCBO, n.d.).

Selecting A Retailer

As a small business brewer, it can be challenging to determine an ideal partner for retail operations. While The Beer Store is straightforward in terms of product approval, the goals of The Beer Store are to provide low-cost distribution for its key shareholders of A.B. InBev, Molson-Coors, and Sapporo through the ownership of large manufacturing breweries in Ontario. While it has 424 locations throughout the Province, the system’s main advantage is the six warehousing and distribution centres that help keep handling costs low. The overall retail experience is not favourable to the consumer, but the barriers to entry are not much more complicated than agreeing to the service fees of the non-profit.

Working with the LCBO is much more complicated, as the LCBO takes on the retailer’s role more seriously. Product selection has several stages where the provincial corporation evaluates the overall product, the marketing message, and compliance with labelling and food safety regulations. While there is no direct shelving fee as there is with The Beer Store, it does not prioritize the fair handling of brewery products. Not all locations will refrigerate beer, even though it is the recognized best practice. While additional promotional programs are available for purchase, the LCBO earns sales income based on the profit margin of the products. Products not sold within their merchandizing timeline or their best-before date are discounted for the consumer, and the difference is billed against the manufacturer’s account. While a criticism of The Beer Store is that they hold the market on 12 and 24-packs of bottles, the market demand for large-format glass bottles has plunged in the last ten years. Even though the LCBO has the right to sell packs with six containers or fewer, the purchasing standards of the LCBO prioritize single-format sales above all other formats, making it much more difficult for manufacturers of multi-packs to be accepted as products.

To get onto a grocery store’s shelves the LCBO acceptance process is followed, but with fewer product demands as the LCBO views the grocery as the retailer and will take on fewer responsibilities. In recent years, it has been a strategy of smaller manufacturers to submit products to either The Beer Store or through the Grocery Channel to establish a minimum sales volume to sequentially list the product at the LCBO, as the product rejection letters typically do not provide sufficient details on the requirements by the purchases at the LCBO.

VI. Non-Alcoholic Beer & Ready-To-Drink Competition

The global landscape of beer consumption has witnessed a remarkable shift, mirroring evolving consumer lifestyles and a surge in health consciousness, coupled with a heightened awareness of responsible drinking. This transformative trend is exemplified by notable statistics, such as Canada experiencing a 0.5% decline in beer sales in 1990, contrasted with a staggering 48% surge in the consumption of alcohol-free beer during the same period. Similarly, the United States saw a 2% dip in total beer sales in 1991, while the market for non-alcoholic beer thrived with an impressive 33.3% increase (Stein, 1993).

The key driving force behind this shift lies in the changing preferences of consumers who seek alternatives aligning with healthier living and responsible choices. Notably, there has been considerable interest in producing non-alcoholic beer that preserves the complete flavour profile of its alcoholic counterparts. This demand has spurred innovation in dealcoholization processes, with various methods such as dialysis and reverse osmosis, interrupted fermentation and distillation getting much development (Stein, 1993).

The evolution of ready-to-drink (RTD) beverages from the alcopop era to the contemporary dominance of hard seltzers showcases a fascinating journey in consumer preferences. Often associated with the nostalgia of bygone hangovers, Alcopops share a conceptual foundation with today’s sophisticated canned cocktails and RTDs—blending spirits, or simulated spirits in the case of flavoured malt beverages, with flavours and mixers, akin to crafted cocktails. Notably, the U.S. gravitated towards malt-based drinks for RTDs due to favourable tax rates and less restrictive sales regulations, laying the groundwork for today’s diverse options (Smith, 2023).

Renowned brands like Bacardi and Smirnoff played pivotal roles in shaping the RTD landscape. Bacardi Breezers, launched in 1993, became a U.K. sensation, while Smirnoff’s foray into the market with the Smirnoff Mule and Smirnoff Ice marked significant milestones. The category expanded further with flavoured malt beverages such as Jack Daniel’s Country Cocktails, Zima Clearmalt, and Mike’s Hard Lemonade. The recent surge in hard seltzers, tracing their origins to the alcopop era, further demonstrates the category’s adaptability. Brands like White Claw and High Noon embody the contemporary shift towards lower sugar and calorie content, reflecting an ongoing commitment to meet evolving consumer preferences in the dynamic world of ready-to-drink beverages. As the market redefines itself, the allure of convenience and a more straightforward lifestyle remains a driving force, ensuring the enduring relevance of RTDs in the global beverage landscape (Smith, 2023).

VII. Potential Retail Organization Changes from Cannabis

As it was planned in 2017, Ontario was set to implement a detailed retail and distribution strategy for recreational cannabis. The LCBO, operating through a subsidiary corporation, will oversee the safe and socially responsible sale of cannabis, aligning with public safety standards and combating the illegal market. The plan includes opening about 150 standalone cannabis stores by 2020, with 80 operational by July 1st, 2019, serving all regions of the Province. Dedicated cannabis stores will exclusively sell products, adhering to socially responsible retailing standards, and online sales will follow stringent delivery safeguards. Ontario is collaborating with communities to tailor the system to local needs, emphasizing protection, public health, and harm reduction while actively working to eliminate illegal cannabis operations. The approach ensures responsible retailing, community engagement, and a balanced response to consumer demand and public safety in the legalization process (Ontario, 2017).

After the 2018 provincial election, Premier Doug Ford’s government in Ontario decided to deviate from the original plan of the Ontario Cannabis Retail Corporation to open physical stores. Instead, private stores were chosen to conduct cannabis sales in the Province. The OCRC retained its role in operating the provincial online cannabis sales service and became the wholesale supplier for private stores, now directly under the Ministry of Finance (Mulrony, 2018).

Regarding physical stores, the Ontario Cannabis Store, a branch of the Ontario Cannabis Retail Corporation, doesn’t run any outlets but supplies cannabis products to licensed private retailers regulated by the Alcohol and Gaming Commission of Ontario. Initially, the government intended to limit the number of retail outlets to 25, distributed through a lottery system. However, in January 2019, only 25 licenses were issued, followed by an additional 50 in August 2019. The government still operated the online sales business (AGCO, n.d. a)(AGCO, n.d. b).

In December 2019, a significant shift occurred. The Ontario government eliminated the lottery system and license cap, allowing qualified applicants to apply for a Retail Operator License and a Retail Store Authorization—this open-market model aimed to boost the number of retail outlets, curbing the black market for cannabis. From April 2020, about 20 new licenses were issued each month (Ontario, 2019). By March 2021, the number of authorized cannabis stores in Ontario had risen to 572, substantially from the 53 stores a year earlier (Xing, 2019).

VIII. Brewery Closures and Industry Impact

Barn Cat

Barncat Artisan Ales, a craft beer establishment that served the community for almost a decade, closed its doors at the end of August. Co-owners Matt MacDonald and Jeremy Skorochid, who initially started the venture as a side gig, cited the increasing time commitment, rising costs, and a changing market as reasons for the closure. Based on Industrial Road, the two-person operation faced challenges with a lease renewal, escalating costs, and a decline in peak beer sales. MacDonald acknowledged that moving to a new location would have been financially impractical, comparing the expense to opening a new brewery. Despite the challenges, the owners expressed pride in their positive industry reputation and the quality of their products. The brewery continued producing and releasing beers until July, marking the end of an eight-year run in the craft beer business (Betts, 2023).

Bell City

Bell City Brewing Company, located in Brantford, Ontario, experienced a significant drop in sales during the pandemic, prompting the co-founder, Muthu Sakthivel, to consider selling control of the brewery to a small beverage company from North Carolina called EARI Group. Sakthivel believes consolidation is necessary for the industry’s survival (Kirby & Lundy, 2023). While it is still listed as part of the EARI Beverage Group of offerings (EARI, n.d.), the brewery’s assets were sold through auction in October 2023.

Descendants Beer & Beverage Company

Descendants Beer & Beverage Company in Kitchener has officially closed its doors, as announced on social media just before New Year’s Eve. The closure is attributed to challenges posed by the ongoing pandemic, transforming the once-viable craft brewery and event venue into a struggling hospitality business. The owners expressed the difficulty of the decision and emphasized that the closure resulted from the impacts of COVID-19, despite their efforts to sustain the brewery. Descendants have been in operation since 2016, and the owners thanked customers, partners, and employees for their support. The closure announcement prompted concerns from individuals who had booked future events at the brewery, with the owners expressing regret and noting they had tried everything to avoid this outcome. Some comments on social media mentioned a lack of prior communication about the closure, and the brewery had been listed for sale in 2020. At that time, the owners attributed it to personal reasons rather than the pandemic (Anderson, 2023).

New Ritual

New Ritual Brewing, which opened in Ontario’s Durham Region in May 2021, has closed less than two years after its launch. The closure was not officially announced, but a social media post in January mentioned the temporary closure of the taproom. Subsequently, the New Ritual website and Instagram page disappeared, and the brewery’s Google listing was updated to indicate permanent closure. Although the brewery’s Facebook page is still online, it hasn’t been updated since December. A later update revealed that New Ritual has been sold and will reopen as Lightcaster Brewery, with no announced timeline for the relaunch. Details are expected to be posted on the Lightcaster Instagram page as they are confirmed (Canadian Beer News, 2023a).

OutSpoken Brewing

OutSpoken Brewing, a craft brewery based in Sault, has announced its closure for the remainder of January through a social media post. The post encourages patrons to stay tuned for updates while wishing everyone to stay safe, enjoy winter activities, and savour craft beer. Despite interview requests, the brewery’s ownership has not responded with further details (Soo Today, 2023). Their Google listing is still listed as closed at the time of publication.

People’s Pint

Toronto’s People’s Pint, a beloved craft brewery known for its support of home brewers and community space in the Aleyards District, has permanently closed due to many challenges. Rising costs of brewing supplies, a substantial rent increase, and a boiler failure proved insurmountable for the brewery. Despite attempting to navigate the difficulties, lower-than-normal sales and the aftermath of the pandemic created a situation where the brewery couldn’t sustain operations. Owner Doug Appeldoorn highlights the tight profit margins in the brewing industry, emphasizing that the rising costs of ingredients and the rent hike left them with few options. Appeldoorn acknowledges that the business downturn and financial constraints might not be unique to People’s Pint, urging support for local breweries facing similar hardships (Carlberg, 2023).

Rhythm & Brews

Cambridge’s Rhythm and Brews has recently closed its doors after a commendable five-year stint in the craft brewing industry. Owner Andrew Byer attributes the closure to a challenging combination of factors that proved too formidable to overcome. Despite experiencing a surge in business following pandemic-related lockdowns, the brewery faced insurmountable obstacles, prompting Byer to shut down operations. The escalating costs of beer ingredients, which doubled over the past five years, presented a significant financial strain. Byer also noted a decline in alcohol consumption among the younger demographic, potentially influenced by various factors such as the popularity of cannabis (Davis, 2023).

Reverence Barrel Works

Reverence Barrel Works in Cambridge made waves in the beer community as speculations arose about its permanent closure. Their Google listing and observations on Untappd indicate the removal of all beers and a “permanently closed” status. While no official announcement has been made, discussions among beer enthusiasts point to issues such as logistics, cost control challenges, and the departure of an owner. Reports of defaulting on rent and eviction add financial woes to the mix, echoing broader industry struggles in the face of rising costs and inflation (Reddit, 2023).

Square Timber

After nine years of operation in Ontario’s Ottawa Valley, Square Timber Brewing is set to cease operations next month. The brewery’s owner, Marc Bru, revealed in a video posted on Facebook and Instagram that plans for moving and expanding to a more prominent location in Pembroke were disrupted by COVID-related delays and cost increases. Consequently, the decision was made to close the brewery, with Square Timber’s last day of business scheduled for November 18th. Further details about the closure, including a one-day sale of beer and merchandise at the brewery warehouse, will be shared on social media soon (Canadian Beer News, 2023b).

Closures Ripple Effect

Various breweries generally faced shutdowns due to rising costs, pandemic-related sales drops, and difficulties in relocating or expanding. Common challenges include escalating expenses for brewing supplies, rent increases, and financial strains from the economic climate. The impact of the pandemic and changing consumer behaviours, like a decline in alcohol consumption among specific demographics, further contributed to the hurdles faced by these breweries. Additionally, the industry saw instances of consolidation, with some breweries considering selling control to larger beverage companies. There were several more significant acquisitions of brewing companies in 2022, which may have mitigated some potential closures in 2023 had those deals not gone through.

While no community would like to see their neighbour shutter their business, it can be much more heartfelt when that business is a brewery. In smaller communities, the loss of a single brewery can mean limited access to unique products or increased travel times to the nearest consignment LCBO or Beer Store. The taproom of a brewery can be a communal space for socialization, whereas traditional retail spaces do not offer a similar community level.

Figure 2 - Craft Brewery Failure Rate in the 1990s (Daniels, 2013)

It is important to note that in the late 1990s, the overall beer drinkers gravitated towards imported products over craft breweries, which resulted in a craft brewery closure rate of 10% or higher in some parts of the markets of the United States. While brewery closures are much harder to track than brewery openings or acquisitions due to the typical absence of press releases or local news articles, this number would correspond to a minimum of 35 brewery closures per annum in Ontario. There will likely be a number of brewery closures in January after a busy holiday season to recover as much cash as possible. Still, the current state of beer in Ontario is not this dire.

IX. Ontario Craft Brewers’ Campaign to Lower Beer Taxes

The Keep Craft Beer Local campaign by the Ontario Craft Brewers aims to raise awareness of the impact of excessive taxes on local craft breweries. Emphasizing the importance of local ownership, the campaign advocates for tax equity to ensure the sustainability of these businesses within their communities. Ontario Craft Brewers’ President, Scott Simmons, underscores that local breweries face the highest taxes among Canadian craft brewers, jeopardizing their ability to thrive (Ontario Craft Brewers, 2023).

The campaign argues that reducing the tax burden on local craft brewers is crucial for fostering employment growth, creating additional business opportunities, and strengthening local communities. A recent study by the Canadian Centre for Economic Analysis suggests that Ontario’s craft beer industry could expand by 40% with appropriate tax adjustments, generating over a thousand jobs across the Province (Smetanin, 2022).

Figure 3 - Ontario Craft Beer Costs Analysis (OCB, 2023)

The Ontario Craft Brewers does provide some visual information for consumers to understand their positioning, and the overall fixed vs variable costs of the product can be argued one way or another: the overall tax structure is worse than advertised. The total expenses are 3.75 CAD per unit, which is a reasonable sales price at the time of writing. For example, Nickelbrook’s Uncle Goose West Coast IPA is the first product listed online with this exact price structure (LCBO, 2023).

However, the infographic provided by Ontario Craft Brewers does not include HST in the pricing of their example product. By using the Pricing Calculators that must be used when a brewery submits products to the LCBO, the situation is much more straightforward in the pricing structure.

Figure 4 - LCBO Case Quote Comparison of Large and Small Brewers (Doing Business with LCBO, 2023)

As per the pricing structure, a craft brewery only has 0.23 CAD per serving of room to compete with a larger brewer’s product when both are listed at 3.75 CAD. That is less than the cost of the aluminum can itself. The Ontario Craft Brewers did not mention that the HST on either product is 0.42 CAD per serving. Like any business in Canada, there would be accounting methods of gaining some of this back at the brewery, but it is already included in the sales price at the point of sale, unlike sales taxes for other products.

An important detail is that the Ontario Craft Brewers calls several of the charges “taxes,” which the LCBO will refer to as “levies” or “fees.” As the LCBO is a crown corporation and not Queen’s Park, they do not have the legal right to collect taxes, but they do have the right to administer fees. Only the Province of Ontario can approve the use of a tax, which must be debated and voted upon through the Provincial Parliament. This was contested and validated through Toronto Distillery Company Ltd. v. The Alcohol and Gaming Commission of Ontario et al. 2016. However, the Justice did provide the context that retail licenses awarded in the Province of Ontario are conditional to the terms and practices of the LCBO, and any manufacturer hoping to conduct business within the Province will have to accept these terms and practices.

X. Strategies to Weather the Storm

Meticulous Business Planning

Craft breweries often sprout from a genuine passion for Brewing and a desire to offer something distinctive to consumers. However, transitioning this enthusiasm into a thriving business demands meticulous planning. This involves the creation of a comprehensive business plan encompassing the brewery’s mission, target market, competitive analysis, financial projections, and operational strategy. While smaller breweries may overlook the formalities of traditional business plans, the true value lies in the intimate research project they represent, delving into the intricacies of brewery operations.

Competition analysis is crucial in positioning the brewery effectively within the market, identifying unique selling points, and foreseeing challenges and opportunities. Financial projections ensure a realistic assessment of feasibility, resource allocation, and contingency planning. Meanwhile, the operational plan provides a practical framework for day-to-day activities, ensuring the brewery embodies its mission and does so sustainably. Embracing this business planning process beyond its documentation equips craft breweries with the strategic foresight to navigate a dynamic industry. It ensures that passion remains the driving force behind a thriving and resilient business. While faults in a business model could be overlooked during a growth phase, as the opportunities of a growing market will defer potential failures, these weaknesses will only expose themselves during a mature market phase and could cause substantial.

Conservative Growth Expectations

While ambition remains a driving force in small craft breweries, there’s pragmatic wisdom in adopting conservative growth expectations. Unlike the industry’s rapid expansion in the 2010s, a more measured approach to growth is prudent in the current landscape. Opting for gradual, organic development allows breweries to refine operational processes and ensures a steadfast commitment to consistent product quality. This deliberate pace permits adaptability to market changes without the pitfalls of overextending resources, a risk inherent in overly ambitious expansions. In the current market climate, where raising capital can be challenging and the spectre of debt looms, a conservative growth strategy becomes a financially astute path.

The financial landscape of small craft breweries demands a critical eye on capital expenditures, focusing on achieving a reasonable payback period of 7-10 years or the remaining duration of any building leases, whichever is shorter. This financial prudence is especially crucial given the potential need for business relocation as commercial leases expire and require renewal. By adhering to these principles, small craft breweries can navigate the industry’s complexities, ensuring sustainable growth while mitigating financial risks in an ever-evolving market.

Building Robust Consumer Relationships

Craft breweries thrive on community engagement and connection, recognizing that building and sustaining robust consumer relationships are pivotal for long-term success. Events, social media interactions, and tasting sessions are potent tools in creating a loyal customer base. Breweries can continually refine their offerings by actively seeking feedback and listening to customer preferences, demonstrating a keen awareness of evolving market trends. While brewers might lack traditional hospitality skills, a strategic emphasis on engaging customers, particularly those near the brewery, can yield significant dividends. Customers in the local community often generate the highest margins, making personalized interactions and tailored experiences essential. Implementing loyalty programs and collaborating closely with retailers fosters brand loyalty and enhances shelf visibility, fortifying the brewery’s market presence.

In addition to the social aspect, product education remains a cornerstone of the overall sales strategy. Educating consumers about the brewing process, the distinctive characteristics of each beer, and the brewery’s narrative enriches the customer experience. This emphasis on education and the brewery’s commitment to community engagement create a symbiotic relationship wherein customers forge a genuine connection beyond the product itself. By seamlessly integrating these elements, craft breweries can cultivate customers and nurture devoted advocates, ensuring a resilient and prosperous future in the competitive craft beer landscape.

Importance of Adaptability and Innovation

Adaptability and innovation are linchpins for success in the dynamic craft brewing landscape. Staying attuned to industry trends and proactively experimenting with novel flavours are critical strategies to keep the brewery ahead. The ever-evolving nature of consumer tastes demands a flexible approach, necessitating a keen eye on market shifts. A brewery’s ability to pivot swiftly and thoughtfully respond to emerging preferences safeguards its relevance and positions it as a trendsetter in a crowded marketplace. This dynamic approach encourages ongoing exploration, fostering an environment where brewers can push the boundaries of traditional Brewing, creating unique and exciting offerings that capture consumers’ imagination.

Moreover, as consumer preferences shift towards spirits, craft breweries can maintain competitiveness by embracing good manufacturing processes (GMP) and implementing Hazard Analysis Critical Control Points (HACCP) programs. These quality assurance measures ensure the production of consistently high-quality beer and demonstrate a commitment to safety and innovation. GMP and HACCP programs enhance the manufacturing process, providing a structured framework to identify and mitigate potential hazards. By aligning with these industry standards, craft breweries meet regulatory requirements and gain a competitive edge, assuring consumers of the quality, safety, and innovation inherent in their craft beer offerings, even as tastes in the beverage landscape evolve.

Leveraging Digital Platforms for Marketing and Sales

In the contemporary landscape of the brewing industry, digital platforms play a pivotal role in the success of craft breweries. Brewery owners need to recognize that, at its core, their operation is a business. In times of economic uncertainty and shifting social media dynamics, harnessing the power of digital tools becomes imperative.

A brewery’s website is akin to a storefront in the digital realm. Like any other business, it should provide clear and easily accessible information about the brewery’s location, contact details, and operating hours. Ensuring this vital information is displayed prominently contributes to a positive user experience and facilitates customer engagement.

While social media platforms offer a means of connecting with an audience, it’s crucial not to lose sight of the primary goal: selling beer. The allure of chasing engagement metrics on platforms like Twitter, Instagram, or Facebook should be balanced with a focus on the brewery’s digital space. This involves creating a user-friendly website that serves as a centralized hub for information, seamlessly integrating online sales platforms, and maintaining an up-to-date and relevant online presence.

In a market with limited attention spans, breweries must prioritize clarity, accessibility, and relevance in their digital strategies. By embracing these principles, craft breweries can navigate the digital landscape effectively, ensuring sustained success and resilience in a competitive industry.

Advocacy for Industry-Friendly Policies

Active participation in advocating for industry-friendly policies is not just a choice for craft breweries; it’s an imperative for fostering a conducive environment for their growth. Engaging with local and national regulatory bodies becomes a proactive strategy to champion policies that support craft breweries’ unique needs and challenges. By collaborating with these bodies, breweries can contribute to formulating regulations that recognize and celebrate the distinctive nature of craft brewing, ensuring that the industry remains a vibrant and integral part of the economy.

The collective strength of the craft brewing community plays a crucial role in these advocacy efforts. Craft brewers are dispersed widely, often with members in every provincial riding, forming a substantial and influential network. This decentralization contrasts with the more concentrated presence of wine and spirits manufacturers. Craft brewers’ diversity and widespread representation make their advocacy efforts potent and far-reaching. By leveraging their presence in local communities, craft brewers can effectively communicate the economic and cultural contributions of the industry, garnering support from policymakers at various levels. This united front amplifies craft breweries’ voices and enhances their ability to shape policies that promote growth and sustainability. In essence, fostering a sense of community and collaboration within the craft brewing industry contributes to the success of individual breweries and the resilience and vibrancy of the craft beer landscape as a whole.

XI. Conclusion

Ontario’s maturing craft beer sector resembles a ship navigating unpredictable waters, shaped by historical events, market forces, and regulatory frameworks. The journey will require any seasoned brewer to “hold fast,” however these are market situations previously navigated by the industry during the 1990s. Examining the sector’s growth requires a deep dive into its evolution from the 1990s market collapse to the present. Acknowledging the significance of these past market shifts provides crucial insights, urging businesses to navigate future challenges with caution.

The looming changes in the Master Framework Agreement add complexity, potentially impacting the craft beer landscape. As stakeholders grapple with these adjustments, vigilantly monitoring regulatory changes becomes essential for maintaining a thriving craft beer ecosystem.

Further, contrasting retail models, notably The Beer Store and LCBO, reveal businesses’ diverse strategies. This goes beyond mere operations, reflecting broader cultural and economic dynamics within the Province. Emphasizing local markets benefits craft breweries the most, aligning with the maritime philosophy of securing success within one’s immediate surroundings.

Challenges within the maturing craft beer sector underscore the resilience needed for long-term success. From navigating regulations to addressing changing consumer preferences, the industry demands constant innovation and strategic thinking.

The Ontario craft beer industry fundamentally reflects its historical roots and mirrors ever-changing market dynamics like a ship’s voyage. To foster a sustainable future, stakeholders must “hold fast” to comprehensively understand regulatory structures, retail intricacies, and business hurdles. Remember sailors: ships are safest in the harbour, but that is not what they are built for.

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