With materials and energy costs on the rise, scotland�s microbreweries are struggling to keep rolling out the barrels
By Selwyn Parker

Snapping up Arran Brewery from administrators earlier this month shows that the deep-pocketed Marketing Management Services (MMS) may have faith in the beleaguered microbrewing sector, but the Scots invesment firm is hardly in a majority.

The rocketing cost of raw materials is giving Scotland's boutique brewery sector a king-sized hangover. It now faces its biggest test in the eight years or so since it achieved critical mass.

Scotland is now home to 52 microbrewers that between them employ at least 1000 people, many in rural or remote communities. Although there are no official figures on production or turnover, government accounts show that Scottish brewers contributed £500million in 2007 in beer duty and VAT out of the UK-wide total of £6billion, a figure that is rising steadily.

MMS at least is bullish:"This is our first acquisition in brewing, but it's not our last," managing director Gerald Michaluk says about Arran Brewery, a business that, according to industry sources, failed because of low-margin contracts with supermarkets. "We are looking to build market share by acquisition."

Michaluk seems determined to overlook the fast-rising prices of everything from hops to energy that currently beset the industry. He believes the better-managed microbrewers will profit from a stronger underlying trend towards higher-quality beer. "There's going to be winners and losers, but Arran Brewery is going to be a winner," he says.

The Scottish microbrewing industry's rate of growth has been phenomenal, and largely unobserved because of the domination of the mainstream sector by Edinburgh-based Scottish & Newcastle, since acquired by Carlsberg and Heineken.

As Douglas Ross, president of the Scottish branch of the Society of Independent Brewers Association and managing director of Stirling-based Traditional Scottish Ales points out, "10 years ago you could have counted the number of boutique brewers in single figures".

The range of boutique-brewed beers was not much bigger. Visitors to Scotland, big consumers of locally produced beers, now have between 400 and 500 differently labelled bottles to chose from, compared with around 20 in the late 1990s.

But is it true that the days of heady growth could be over? The industry says the challenge for Scotland's boutique brewers, many of whom have scooped up national and international ale awards, is to maintain adequate profit margins in the teeth of relentlessly increasing prices for all their essential commodities as well as for energy, distribution and even the stainless steel used in kegs.

"Malt is up 50% in just over a year and hops are up by even more," explains Fergus Clark, owner and managing director of Perthshire's Inveralmond Brewery whose best-selling brand is Ossian.

"The price of a kilo of hops has tripled from £6 to £18 since last November. We're having to swallow all these costs. It's a tough time for a brewer right now."

Indeed, most small brewers feel they are under siege from all sides. "It's a quadruple whammy," says Ross. "We face rising costs for energy, hops, barley, glass and stainless steel."

His own brewery is paying 35% more for barley than last year, and 50% more for organic barley. On top of that, the cost of kegs has increased by an average 25% a year, and energy costs have nearly doubled.

"It has been difficult to raise prices to compensate - the supermarkets don't want to pay more and the pub trade is suffering," he adds. "The majority of brewers in Scotland have been absorbing these costs, but we can't keep on doing this."

Other Scottish microbreweries, which lack the buying muscle of the industry giants, report similarly crippling increases.

"The cost of malting barley has gone from £360 a tonne two years ago to £740 a tonne," says Michael Gladwin of Black Isle Brewery, the award-winning organic brewery at Munlochy, near Inverness. "However, people don't want to pay more than a certain amount for a bottle of beer."

And there is no relief in sight, according to the British Beer & Pub Association (BBPA), which represents the UK's major brewers. "The price pressure on barley and hops is still upwards," a BBPA spokesman told the Sunday Herald.

Another unexpected blow was the average 4p a pint increase in government duty imposed in the most recent budget. "Nobody expected the duty to go up so sharply," explains Ross.

This tax hike accelerated pub closures, and there are worrying signs of declining consumption. According to industry sources, pub closures across Britain now average 35 to 50 a week. On-trade sales fell by 6.5% in 2007, equivalent to a loss of a million pints a day.

"The volume of beer sold through pubs is now at the lowest level since the great depression of the 1930s," notes the BBPA. (At that period, the chancellor of the Exchequer increased duties by a penny a pint, triggering a slump in sales.) As Keith Bott, chairman of the Society of Independent Brewers (Siba), points out in the latest annual summary, the overall result of the quadruple whammy is that "the majority of local brewers are making no improvement in gross margins". Nearly half of all Siba members were unable to increase net selling prices at all in 2007. And according to the Sunday Herald's enquiries, the situation seems unlikely to change this year as brewers report continuing opposition by the trade at large to accept increased prices for kegs or bottles.

For instance, despite runaway cost increases, Inveralmond Brewery has raised the price of its kegs by a total of only 4.8% in the last three years, way below the rate of inflation and many times lower than the price rises it has had to absorb. "We'll hold that until the end of 2008 and then we'll have to see," adds Clark. "Our margins have been steadily eroded."

However, local brewing is a resourceful business, and it is doing all it can to survive. Despite the current difficulties, after 11 years in business Inveralmond Brewery will shortly open a new brewery and brewhouse. Black Isle is pushing on with plans to increase production. And Stirling's Traditional Scottish Ales is pursuing markets beyond its home base for brands such as Lomond Gold and William Wallace, an India pale ale.

"We send about half of our kegs to England every week," says Ross. "And we've opened up sales in Germany and Switzerland, Singapore and Denmark." From a standing start two years ago, the brewery's export sales account for 20% of total production.

Of all the local brewers, it is the island-based ones that are taking the biggest hit from rising distribution costs.

"We have to travel long distances even to begin to make major deliveries," explains Dixie Taylor, sales consultant for Uig-based Isle of Skye Brewing, whose Red Cuillin, Darker Brother and Hebridean Gold sell right across Scotland. "We are able to make deliveries along the way, but the nearest population centre is Inverness, three hours away."

Right now, he is hoping for a good summer to boost the tourist trade on Skye. Although the brewery has a healthy turnover of around £750,000 a year, up by an average 7-8% in the past three years, the next few months are vital to the business.

Despite the pressures from all sides, Arran Brewery's new owner remains optimistic about the future of MMS's first foray into brewing. Although he acknowledges that the increase in costs shows no sign of slowing, Michaluk points out that everybody is in the same boat. Prices are rising equally fast for Arran Brewery's competitors. "We're not going to be out of step with anybody else," he says.

Also, he sees Arran Brewery's relatively remote base of Cladoch as a commercial advantage. "There's a little bit of mystique about its location," says Michaluk. "We have a very strong brand."

However, if costs keep rising as they are, he may find plenty of Scotland's relatively new boutique brewers willing to help MMS expand its footprint in the industry - by selling out.