CONTRACT BREWING CONSULTATION THE FUTURE OF THE GRADUATED MARKUP - PowerPoint PPT Presentation

CONTRACT BREWING CONSULTATION THE FUTURE OF THE GRADUATED MARKUP SYSTEM

Why Does This Matter? • The Graduated Mark-Up System was established to improve gross margins for smaller brewers by helping to offset higher cost-of-goods. • Brewing is capital-intensive. Designed to provide relief so brewers can reinvest savings into their operation growing capacity and creating jobs . • World-wide production determines where you land on the chart and what mark- up rate you pay .

$/HL $0.00 $0.20 $0.40 $0.60 $0.80 $1.00 $1.20 $1.40 $1.60 $1.80 1000 7000 13000 19000 25000 31000 37000 43000 49000 55000 61000 CURRENT MARK-UP RATE 67000 Graduated Markup Rates 73000 79000 85000 91000 97000 103000 109000 115000 CURRENT VS. OLD MARK UP RATE 121000 127000 OLD MARK-UP RATE (PACKAGE ONLY) 133000 139000 145000 151000 SIZE OF BREWERY (HL) 157000 163000 169000 175000 181000 187000 193000 199000 205000 211000 217000 OLD MARK-UP RATE (DRAFT ONLY) 223000 229000 235000 241000 247000 253000 259000 265000 271000 277000 283000 289000 295000 301000 307000 313000 319000 325000 331000 337000 343000 349000

Current Model Wholesale Mark-Up Rate is based on the sum of: 1. The total volume of beer manufactured within the reporting brewery’s own production facilities for itself. 2. The annual worldwide production of any affiliated breweries (defined as 10% or more common ownership)

Proposed Model Wholesale Mark-Up Rate is based on the sum of: 1. The total volume of beer manufactured within the reporting brewery’s own production facilities for itself (same as today); 2. The total volume of beer the reporting brewery contract manufactures for other breweries and/or unlicensed third parties (new); 3. The total volume of beer any other breweries contract manufacture for the reporting brewery (new); 4. The annual worldwide production of any affiliated breweries (defined as 10% or more common ownership, same as today); and 5. The annual worldwide production of any breweries that the reporting brewery has a branding agreement with (new).

Contract Brewer: Current Model Brewery C Brewery B Brewery A 35,000 HL 15,000 HL 5,000 HL 30,000 HL CONTRACT PRODUCED FOR Mark-Up Rate: Mark-Up Rate: Mark-Up Rate: 15,000 HL = $0.40 5,000 HL = $0.40 35,000 HL = $0.47 They pay: They pay: They pay: 5,000 HL @ $0.40 15,000 HL @ $0.40 35,000 HL @ $0.47

Contract Brewer: Proposed Model Brewery B Brewery C Brewery A 15,000 HL 35,000 HL 5,000 HL 30,000 HL CONTRACT PRODUCED FOR Mark-Up Rate: Mark-Up Rate: Mark-Up Rate: 5,000 HL + 30,000 HL 15,000 HL + 30,000 35,000 HL = $0.47 = $0.47 HL = $0.48 They pay: They pay: They pay: 35,000 HL @ $0.47 5,000 HL @ $0.47 45,000 HL @ $0.48

Branding Agreement: Current Model Brewery B Brewery A 10,000 HL WWP of 100,000 HL BRANDING AGREEMENT 10,000 HL Mark-Up Rate: 10,000 HL + 10,000 HL = $0.40 They pay: 20,000 HL @ $0.40

Branding Agreement: Proposed Model Brewery B Brewery A 10,000 HL WWP of 100,000 HL BRANDING AGREEMENT 10,000 HL Mark-Up Rate: 10,000 HL + 10,000+100,000 HL = $0.50 They pay: 20,000 HL @ $0.50

Is Issues Outstanding: In Industry ry Agg gglo lomeration to Contract Brewing Facil ilities Foregoing investment into their own facility leads to agglomeration of production to a few large-scale producers. Industry Risk Consumer Risk By foregoing investment into their The magic of craft brewery own facility, small brewers can connects the consumers to become reliant on contract brewers their community brewer and who control their margins by how allows them to buy local and they choose to set or change rates. build local economies. The experience of visiting the craft brewery is an integral part of Government Risk our value and our point of We matter because we create jobs in communities difference. across the province. Ultimately it undermines the spirit and integrity of the graduated markup is to allow existing brewers to invest in their business, continue to expand and create more jobs.

Issues Outstanding: Shadow Brands • Defined as an IP/Brand owner who does not own a manufacturing license in any jurisdiction. • They have no facility to invest in which means they receive the benefits of markup savings without burden of capital investment into a facility. • This practice is not only unfair, but increased cash flow gives them a competitive advantage over all BC craft brewers who are creating jobs.

Recommendations 1. Endorse the current proposal but seek clarity on “branding agreement”. 2. Recommend the LDB adopt the Shadow Brand definition as: “an IP/Brand owner who does not own a manufacturing license in any jurisdiction”. Recommend that any Shadow Brands pay full commercial rate of $1.08.

Further Questions? Contact: Ken Beattie ken@bccraftbeer.com