What happened to the craft beer sector in Australia?

Grain, hops, yeast and water are all you need to make beer. But the recipe for a successful craft brewery is a bit more complicated. And in Australia, the ingredients seem to be in short supply.

More than a dozen high-profile craft breweries have gone out of business in the past 18 months, dashing optimism in a sector that seemed poised to thrive after the pandemic shutdown.

Speaking to SmartCompanyCraft brewers and administrators say the difficult macroeconomic environment has only exacerbated the challenges facing the industry.

This is not the last chance for the sector, but experts predict that further difficulties await it.

Three barrels a week, now one

The Australian independent brewing scene has a long and proud history, but the number of craft breweries has increased significantly over the last 15 years.

While beer consumption has declined dramatically since the 1970s, between 2000 and 2010 a growing interest in boutique options created a new market for innovative breweries.

The acquisition of the Little Creatures brewery in Western Australia in 2012 by Japanese group Lion, valued at about $382 million, also brought new economic opportunities for start-up breweries in Australia.

Soon every state and territory had a thriving craft brewery community, located in inner-city warehouses, suburban industrial parks and regional tourist attractions.

Peter Walsh is the co-founder of Bodriggy Brewing Co., a brewery, brewery restaurant and wholesaler in Melbourne’s fashionable Abbotsford district.

Founded in 2016, Bodriggy Brewing Co. has achieved commercial and critical success, including winning a number of Gold Medals at the 2024 Australian International Beer Awards.

In a sincere admission SmartCompanyWalsh said the current trading conditions were among the most difficult he had ever seen.

“We saw the overall average sales order value across both our local and external accounts drop significantly,” he said.

“A bar that ordered three kegs a week 18 months ago now orders one.

“This situation mirrors what we’ve seen here. Our bookings are relatively similar to previous years, but expenses are significantly lower.”

It’s the overall cost of living, not a sudden aversion to craft beer, that’s forcing consumers to make tough decisions about how and where they spend their money.

“I think inflation is what really hit us hard over the last year,” Walsh added.

“When you look at it as a whole, it’s a bit like death by a thousand cuts, and that cumulative effect really takes its toll.”

Richard Abraham observed the same tendency, but from a completely different point of view.

He serves as a director of DBA Advisory, which since October last year has overseeing the voluntary management of Bad Shepherd beers in Victoria, Dainton Beer and Hawkers Beer, as well as Wayward Brewing in Sydney.

All four companies continue to trade after creditors agreed to a company arrangement, which was proposed following a thorough analysis of the trading conditions.

“There are issues specific to this industry that currently pose significant obstacles for participants, but many of these issues are issues that small businesses face across the economy, not just in this sector,” he said.

The top concern is the rising cost of living, which makes it harder for households to spend money on discretionary items like craft beer.

“From what we’ve seen, revenues from, say, two years ago are down maybe 15 to 20%,” Abraham added.

Inflation Hits Craft Brewers on Both Sides

In addition to the impact on consumer spending, inflation is felt most strongly in the alcohol excise tax, which is indexed twice a year to the Consumer Price Index (CPI).

The soaring CPI readings mean that for beer with an alcohol content of 3% or more in packages of less than 8 litres, brewers now have to pay $60.12 in excise duty per litre of alcohol.

Draught beers destined for pubs, with an alcohol content of 3.5% or more, are subject to an excise duty of $42.37 per litre of alcohol.

Those rates will be re-indexed from August 5. Industry observers fear that this could further reduce craft beer revenues.

The Independent Brewers Association (IBA), the main organisation representing the craft beer sector, has called on the federal government to halt excise duty increases in the 2024-25 federal budget.

The government has not made such a decision.

“We are extremely disappointed that the federal government has not seen fit to use its powers to help the small businesses on which this country was built,” IBA CEO Kylie Lethbridge said in a statement after the budget.

Existing excise duties also continue to pose a challenge for the sector.

To help businesses hit hard by the early stages of the COVID-19 pandemic, breweries have been allowed to defer their alcohol excise duty payments to the Australian Taxation Office (ATO).

For many breweries, the payment deadline is now upon us; significant outstanding debts mean the ATO is the largest creditor in a large proportion of voluntary administration cases.

“The significant decline these people have faced over the past two years has seen their trading losses start to accumulate in the form of excise debt,” Abraham said.

“And they get to a point where the debt is just too much to repay.”

Abraham added that breweries are not refraining from paying excise tax in order to devote themselves first to other expenses.

“They are not disputing the debt and they are not choosing not to pay. They have reached a point where they are unable to pay.”

As the tax office now normalizes its approach to debt collection after years of leniency related to the COVID-19 pandemic, some breweries that have deferred excise tax payments have few options but administrative proceedings.

The wave of international conglomerates bringing together medium-sized breweries also subsided; in their place came a handful of lucky local breweries taking over those who did not yet have breweries.

In some ways, Australia’s burgeoning craft brewing sector may have become a victim of its own success.

“There was a really positive attitude about how the situation looked after COVID-19, and in each individual case, rational investment decisions were made regarding expansion, entering the wholesale market or opening another location,” Abraham said.

However, “a large number of these breweries went on an expansion path at the same time, which, looking back, was the worst possible moment, which is now creating a lot of problems in the industry,” Abraham added.

Big brands challenge small breweries

Not every brewing business struggles with such severe problems.

Industry giants — including those who were the first to challenge craft brewers — have clearly found success with the rise of craft options.

Companies such as Endeavour Group (owner of Dan Murphy’s off-licences) and Coles (operator of Liquorland, Vintage Cellars and First Choice Liquor stores) have released their own white-label beers in craft-style packaging.

Disappointed brewers fear that similar brands could be siphoning away valuable discretionary spending dollars from “real” craft beers.

Abraham added that large beer producers continue to compete with craft beer distributors for contracts to sell beer in pubs and for shelf space in off-licences, which further limits the opportunities for independent producers.

Walsh, the co-founder of Bodriggy, said these concerns are nothing new.

“Rising taxes and employment contracts are issues the industry has been struggling with for 10 years,” he said.

Still, he admitted the industry had reached a “tipping point” of sorts.

“Unfortunately, I think there will be more victims this year,” Walsh said. SmartCompany.

“I try to imagine how I would feel if I opened Bodriggy right now.

“Breweries are dying like flies at the moment, so this will undoubtedly impact any aspiring brewer and their motivation to join the industry.”

“We tried to focus only on what we could control”

Experts say relief is most likely to come when inflation falls enough for the Reserve Bank of Australia to consider cutting interest rates.

While it is not the only benchmark in the central bank’s calculations, the latest CPI data suggests that an interest rate cut is unlikely in the near term.

“But if interest rates change in the next six to nine months, then consumer sentiment potentially changes and discretionary spending could pick up a bit… that would be positive for the industry,” Abraham said.

For now, Walsh said, Bodriggy Brewing Co. is trying to meet customers where they are.

“People are gravitating towards inexpensive beer, so it’s important for us to generate as much traffic as possible in this industry,” he said.

“It’s hard not to get caught up in the hysteria, but we tried to focus on what we could control.”

Craft beer industry leaders believe more businesses will go bankrupt before the sector reaches equilibrium.

Whether they are businesses that would have gone under without COVID-era support or victims of market glut, craft beer dreamers and their employees can expect more upheaval.

Every victory, no matter how small, will be hard-won.

“It’s bloody hard and there’s not much you can do, but it’s safe to say that managing a business in times like these requires more skill and experience than in periods of economic prosperity,” Walsh said.

“We hope the industry emerges from this stronger, more agile and better equipped than ever.”

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