THE GIST
U.K. beer businesses—breweries, pubs, and retailers—are desperate for government intervention to curb rapidly increasing costs that many fear will put them out of business within the year if left unchecked. Tripling energy prices caused by a shortage in gas supply and rising gas prices, exacerbated by Russia’s invasion of Ukraine, have made the situation dire: The Federation of Small Businesses estimates that companies’ electricity bills have risen +349% and gas bills by +424% between February 2021 and August 2022.
But energy costs are not the only factor at play. Hospitality and brewing trade groups in the U.K. have sounded the alarm to lawmakers that historic inflation and spikes in the price of raw materials like aluminum, carbon dioxide, and malt have also put much of the industry on the brink of collapse.
“Find a solution to this now or face mass pub and restaurant closures,” Heath Ball, managing director of pub company The Frisco Group, told pub trade publication The Morning Advertiser.
U.K. Prime Minister Liz Truss has announced the government will cap energy costs for businesses for six months, with few other details available about this plan. However, with parliamentary activity suspended for a 10-day mourning period following the death of Queen Elizabeth II on September 8, the fate of Truss’ energy package and other policies aimed at confronting the burgeoning crisis is currently uncertain.
Seventy percent of U.K. pubs said they will not be able to stay in business through the winter without government assistance, according to results of an August survey conducted by The Morning Advertiser. This has ripple effects for the rest of the industry, especially for small breweries whose main source of revenue is sales to local pubs. (About half of all beer produced in the U.K. is sold at bars and restaurants, versus the U.S., where this figure is about 20%.)
“The government needs to do something, otherwise it’s going to be carnage,” says Alex Troncoso, co-founder of Lost and Grounded Brewers in Bristol. “Our London manager summed it up perfectly the other day … She said, ‘It’s just fucked on every level.’”
There is precedent for intervention: The government distributed small business grants during the height of the pandemic. But as businesses wait in hope of government aid, they have to make difficult decisions now. And one of the only quick and obvious solutions—raising prices—risks driving up inflation and slowing sales when breweries need them more than ever.
WHY IT MATTERS
In a letter to lawmakers urging government relief, CEO of Carlsberg Marston’s Brewing Company, Paul Davies, summarized: “We are going to lose in one winter, generations of iconic beer brands.”
Multinational companies and large pub or brewery chains may have the capital to withstand price increases from many fronts, but the majority of small businesses do not. Still trying to recover from COVID’s on-premise closures, breweries and pubs have depleted what financial reserves they had.
“There’s no way we can absorb this increase,” Troncoso says of his brewery’s recent CO2 bill, which jumped from £1,000 per ton of CO2 to £4,000 per ton in early September. “If everything was happening in isolation, you’d have the capacity to deal with it. That it’s all happening at once … this is beyond.”
With inflation hitting +10.1% in August—and predicted to rise as high as +22% early next year, if nothing is done to constrain energy prices—Lost and Grounded also expects it will need to raise employees’ pay soon. (The idea that there is a causal, ongoing link between higher prices and higher wages, sometimes called the wage-price spiral or inflationary spiral, worries some economists.) And on top of CO2 costs quadrupling, Troncoso has already seen malt costs increase +80% in the past year. All these increases are, in part, a result of rising energy costs and Russia’s invasion of Ukraine.
“It’s death by 1,000 cuts,” Troncoso says. “[The government] has got to subsidize energy somehow because everything’s coming back to that.”
Indeed, the economic crises gripping the U.K. and other European countries are interconnected, and have energy costs at their core.
As Russia has cut off the supply of relatively cheap natural gas to the European continent, it’s created a domino effect that raises costs of everything from electricity to malt.
While imports from Russia make up just 4% of the U.K.’s gas supply, the country is still subject to high prices set by international markets, and small businesses need to react to these rising costs in real time.
In the short term, Lost And Grounded expects to raise prices for the second time this year—an unprecedented step in the brewery’s six-year history. That means pubs will pay an additional +6-8% for the brewery’s kegs, increases which Troncoso expects they’ll pass along to consumers in the form of higher menu prices. (That will likely bump the final price of a pint by an additional £0.30-0.40.) Lost and Grounded is contractually locked into its current energy rates for the next nine months, otherwise Troncoso says the business would be adding another +10% to that bump.
He’s not thrilled about the prospect of higher prices for Lost And Grounded beer, though, as U.K. residents are themselves struggling to cope with cost-of-living increases. The End Fuel Poverty Coalition estimates that 28% of U.K. households will be unable to heat or cool their homes to “adequate” temperatures by Oct. 1 (the definition of adequate is not defined). That leaves little budgetary room for indulgences like more expensive beer.
“If you raise prices, you’re worried that your sales might slip. But if you don’t do it, then you run out of money,” Troncoso says.
Jen Ferguson, co-owner of independent bottle shop Hop Burns & Black, which has two locations in London, says shelf prices on some of the store’s craft IPAs have risen from £6 ($6.96) to £7.50 ($8.70) this year as those breweries are charging retailers higher wholesale prices. Rising fuel costs have also increased the prices her shop pays for beer, adding £2 ($2.30) to £3 ($3.48) per case on average. She worries that while some drinkers can still afford more expensive beer, others will trade down to less expensive brands available in grocery stores.
“There is very much in people’s minds that ‘beer costs this much,’” Ferguson says. “And now some are having to choose whether to buy beer or heat their homes.”
Price calculations represent the difference between survival and failure for hospitality businesses running on tight margins. Proactive, a U.K. financial media company, reports that hospitality companies typically see profit margins under 10%, with normal energy costs representing 2-3% of sales. If those costs quadruple, as they have for some small businesses, it makes the entire operation unprofitable.
“If your utility costs are 12% of sales, you’re loss making,” Nick Collins, CEO of U.K. cafe and bar chain Loungers, tells Proactive.
Even for Lost and Grounded, the clock is ticking. Troncoso says that his brewery has done all it can to operate efficiently, including installing automation equipment and energy-recapture technology, but there are no savings left to squeeze.
“We have another nine months to go, but it feels like it’s impending doom.”Ferguson feels similarly about the six-month energy price freeze for businesses that Truss announced: It avoids confronting the true problem and caps energy costs at historically high levels.
“Capping prices at their current rate, it’s already too high for many businesses,” Ferguson says. “I am so concerned about what happens after this, not so much for our own business, but I see so many people that are already clinging on with their fingernails.”
Words by Kate Bernot