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The bruising business of brewing in Alberta

Tapped Out

Dec 1, 2010

by Jason Foster

Tall Cool One: Gene Dub inside his Yellowhead brewing company
Photography by Bluefish

Gene Dub knows how to win. He looks the part, too, with his silver hair, dark-rimmed glasses and made-to-measure suits.

The successful Edmonton businessman and internationally renowned architect has built both a personal and professional reputation around his ability to tackle difficult situations, be it the refurbishment of the dilapidated McLeod building in downtown Edmonton to the reinvention of the old City Market location on 97 Street. But the tricky business of craft brewing in Alberta is a puzzle that even he is finding difficult to solve.

Yellowhead Brewing, Dub’s attempt to crack the beer market in Alberta, opened this past spring. But despite its prime location in a stately historic building – owned by Dub – on 105 Street in the heart of downtown Edmonton, the brewery has struggled to get off the ground. “My experience trying to shepherd Yellowhead into existence has not been smooth,” he says. “Every second day you ask yourself why you didn’t lease the facility and let someone else have the headaches. But, then you drink a beer and you understand.”

Beer has become more than just another business for Dub. Brewing in Alberta, Dub explains, “is a labour of love,” and that’s a sentiment echoed by every small brewer in Alberta. It has to be, given the challenges that anyone who operates a brewery, particularly a small operation like Dub’s, has to face. Neil Herbst, the owner and brewmaster of Edmonton’s Alley Kat Brewery, calls this climate “the Alberta Disadvantage,” and after 15 years in business he understands it better than most. “It makes no sense to set up in Alberta.”

This might seem like a preposterous statement to make, given both the province’s business climate and the enthusiasm that its residents show towards the consumption of beer. After all, only the residents of Quebec, Newfoundland and Yukon down more beer each year than the 91 litres that every adult Albertan puts away. When one combines those demographic realities with the rise of a more sophisticated beer drinking culture across North America in which qualities like flavour and workmanship take precedence over volume and price, the business of craft brewing in Alberta ought to be an easy one.

The numbers, though, tell a much different story. Despite these apparent advantages, Alberta has just nine microbreweries and three brewpubs (bars allowed to produce beer for on-site sale only). Yet right next door in B.C. there are 34 microbreweries and 28 brewpubs, which gives the province more than four times the number of breweries than Alberta on a per-capita basis. Even tiny Nova Scotia dwarfs Alberta’s industry, with six breweries and seven brewpubs serving a population one-quarter the size.

What’s going on here, then? Alley Kat’s Herbst thinks the situation can be explained, at least in part, by Alberta’s unique culture. “Alberta is cautious,” he explains. “It is difficult to bring people around to an interest in local beer. We like our chains here because they are safe and reliable. We know what we are going to get.”

Tina Wolfe, the marketing manager at Calgary’s Wild Rose Brewery, suggests that much of the challenge for small operations like hers comes down to name recognition. “The biggest thing we battle is consumers not knowing beer other than the national brands. We don’t have the budgets of the big guys.” Trying to gain brand recognition without significant resources is a widespread problem among small brewers.

There is also a hesitance to carry local products on the part of Alberta’s pubs and restaurants. Patrick Devaney, the owner of a chain of independent Edmonton pubs that includes Sherlock Holmes and the Rose and Crown, says there is a limited interest in local beer. “There is always the group that wants microbrews, wants to support local companies, but they are a small percentage, maybe five per cent of the clientele.” Devaney has tried putting local beer on tap in his pubs, “but it didn’t work – no demand for it. It didn’t sell.” Why? “Maybe they weren’t advertised enough. Customers don’t know them. You have to have a media presence and they don’t have the budget for that.”

Devaney says that imports are more popular in his pubs than local beer, a point underscored by Alley Kat’s Herbst. “Perception is that import means high quality, while there is still a sentiment that if it’s from here it can’t be any good.” Herbst argues that the rise of imports came before the new wave of craft breweries, meaning imports squeezed out some of the potential space for local breweries.

This reluctance by Albertans to embrace local beer makers is unusual. In Quebec, for example, the pride that people take in consuming local beer is palpable. Stéphane Ostiguy, co-owner of Dieu du Ciel microbrewery in Montreal sums up his community’s passion: “We believe strongly in local. Local food. Local beer. Local culture.” It is that commitment to all things local that Ostiguy credits for his operation’s success, and similar sentiments can be found across most of the country, from Vancouver to Halifax and most places – Alberta excluded – in between.

There are more than just cultural factors at play here, Alberta brewers say. Government policy also shapes the beer industry. Beer is a highly regulated and taxed industry, a vestige of the post-prohibition era. Likewise, governments enact strict controls on who can operate a brewery and where and how they sell their product. Not only are the rules related to the production and distribution of beer complex and multi-layered, but they often differ from province to province. Worse still for smaller producers, these rules can often make it difficult to do business. For example, Alberta places a minimum annual production quota on any new brewery of 250,000 litres (about 733,000 bottles) and a 500,000-litre minimum capacity. This can be a formidable hurdle for a new brewery with no established market. In contrast B.C., Ontario, Quebec and Nova Scotia place no minimum requirements on new applicants.

All provinces offer a retail tax (sometimes called government “mark-up”) discount to small brewers as a way to make them more cost competitive. The rates vary, as do the implementation of the rules, but the Alberta regime receives mixed reviews. “The taxation rate for small volume breweries is favourable,” says Yellowhead’s Dub. Herbst agrees, but adds a caveat. The differential tax “helps with the economies of scale to keep our pricing competitive, but it isn’t ramped up. If you hit 20,000 hectolitres (two million litres), all of your production gets marked up at [the higher rate].” Herbst is referring to the fact that the tax rate is not graduated, which means that once a brewery hits the 20,000 hectolitre threshold it must pay the higher tax rate for the entire production volume rather than merely the amount in excess of the threshold. “It makes the 20,001st hectolitre very expensive,” he explains, noting that it creates a significant disincentive for breweries to grow beyond a certain level.

But perhaps the single most difficult hurdle that small breweries must overcome is Alberta’s privatized distribution and retail system. There is both good and bad in the system, and Wild Rose Brewery’s Wolfe believes that it “goes both ways.” “There is more choice here than any other province,” she explains. “There are more imports here. If the consumer is open to imports, they may become more open to drinking locally brewed craft beer.” But there is an equally large downside to Alberta’s unique approach to the sale and distribution of liquor. “The flipside is there is flat out way more competition – competing for shelf space against tens of thousands of potential [competing products],” Wolfe explains.

For smaller producers in Alberta, the act of selling beer is an exercise in persistence and patience that requires going from store to store, talking each of them into stocking your product. In other provinces, the government-run system guarantees single entry access for local breweries. Alberta’s craft brewers don’t even get the benefit of home-field advantage, either. “Getting my beer into B.C. is a pain in the ass,” Herbst explains. “However, for a brewery set up anywhere else in Canada [trying to get into Alberta], the paperwork takes less than 15 minutes, no limits on approval.”

The Alberta government admits privatization has caused problems for small brewers. “The privatized model makes it tougher for microbreweries,” says Vanda Killeen, communications officer for the Alberta Gaming and Liquor Commission (AGLC). “In B.C. stores you see signs for local [producers], they are front and centre. With our model we don’t get involved in marketing and help promote the product. They are all on their own.” Couldn’t the government work to create a more supportive environment for small brewers? “That’s not really our job,” Killeen says. >

There’s also a darker side of Alberta’s hypercompetitive beer market. A conversation with any craft brewer in Alberta about getting taps in bars – the most lucrative part of the beer market – quickly becomes a frustrated tirade against the cutthroat tactics used by competitors. For their part, pub owners argue they have limited space for new tap options. “Our biggest problem is there are so many beers out there and we only have so many taps,” says Devaney, who has between 14 and 17 taps in each of his pubs but only one “free tap” with which to experiment with new beer. The others, he explains, are committed to existing product.

But a beer industry insider and former sales representative for one of the large breweries (who spoke on condition of anonymity) argues that there is much more than that going on. Breweries regularly offer “inducements” to pub and liquor store owners, he says, to get them to carry their product and keep competitors out, a practice that’s commonly referred to as “greasing.” “We would pay to install tap lines, drop off free kegs at the back door, and even give cash to keep or steal an account.” Another common practice is called “buying down product,” which means reimbursing the retailer a portion of its cost either through promotional items, free product or cash.

Much of the demand for “grease” is driven by pub and liquor store owners looking for a way to reduce their costs, but the insider says the system was set up to protect the interests of the big breweries. He says that most of this greasing is “completely illegal,” and that “everybody does it,” but the big breweries, with their much deeper pockets, are far better armed in this war of gifts and graft. Where a representative for a bigger company might get a budget of anywhere from $80,000 to $120,000 a year for greasing, for example, all a small brewer can offer are a few branded glasses and some beer mats.

While the Gaming and Liquor Regulation clearly prohibits any kind of inducements by breweries, the AGLC was unable to clarify how it interprets these rules and denied that it is aware of any contraventions. Still, the insider’s account is confirmed by others in the industry. Herbst, for one, argues the rules around inducements are not enforced. “The province doesn’t police it. They don’t care. If you are going to have a rule but not enforce it, why have a rule?” For his part, the insider can’t see why there are rules in the first place. “Is it ALGC’s job to worry about what a few breweries are doing to win business? They should be worried about underage drinking, over-serving and problems like that.”

Back at Yellowhead Brewing, Gene Dub and his small staff of two continue to build their fledgling brewery one pint at a time. They know that the road to success is littered with obstacles, and that there’s unlikely to be a pot of gold waiting for them at the end if they do make it. In order to succeed they will need to be determined, creative and refuse to take no for an answer, just like the smattering of successful small breweries that has come before them. And while Dub has seen his share of success over the course of his professional career, he knows that just about everything would have to break right in order for his brewery to become the next big thing. Still, he seems to have made his peace with the challenges that lie ahead. “We will never be a Big Rock,” he concedes, “but we just might be happier because of it.”

Check out the Alberta Brewery Map.


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One Response to The bruising business of brewing in Alberta

  1. valeriekeefe says:

    Fair enough on the regulation front, but it’s hard to argue that beer is excessively taxed when a microbrewery (1-1.5 million litres) faces about 65 cents in combined federal and provincial excise on a six-pack. That’s 5% on most craft brews.