Government Fiscal and Regulatory Policies

Government Fiscal and Regulatory Policies

Government regulations and policies play a significant role in the Alcoholic beverage industry in that they set the minimum age for alcohol buyers, the trading hours for retailers, and penalties for driving drunk. The regulations and policies have remained more or less the same throughout the last six years and likely will not alter the demand for industry products in the future.

There are also heavy regulatory burdens that create barriers to entry in the alcoholic beverage industry. The distribution of alcohol in Canada is highly regulated by both federal and provincial authorities. Licensed retailers only have a small degree of market power since their numbers and operating parameters are controlled. It is also more economic for retailers to deal with a limited number of manufacturers because this decreases their transaction costs, thus a company such as Big Rock is at a disadvantage to the major breweries in Canada.

The Agreement on Internal Trade (AIT) established a regulatory system that prevents provinces from hampering inter-province alcoholic beverage transactions. This has relieved some of the trade barriers for brewers in Canada. The AIT protects Canadian brewers from new and some existing regulations that would otherwise deter the shipments of their beer within Canada. However, both provincial and federal sales and excise taxes are charged to the brewers when their beer reaches the retailer. Additionally, since 2000 there have not been any import duties on foreign beer; thus, the Canadian beer industry now competes with beer importers and other alcoholic beverage producers abroad (Kaczanowska, Industry Report: Breweries in Canada, 2012).

Regulatory Policies

Food and Drugs Act

The Food and Drug Regulations of Canada set out a standard of conditions regarding health, quality, composition and labelling requirements that apply to breweries selling their products in Canada so that consumers have confidence in the safety of the products they purchase. The Canadian Food Inspection Agency (CFIA) and the provincial liquor boards work together to ensure that alcoholic beverages, including beer, conform to Canadian safety standards (for alcohol content, toxins, etc.) under the Food and Drugs Act before being approved for sale in Canada (AAFC, 2013-07-24)

The Canadian Wheat Board (CWB)

Under the authority of the Canadian Wheat Board Act, the Canadian Wheat Board has been the exclusive seller and price-setter of malting barley on behalf of producers in western Canada. The Canadian government eliminated the CWB monopoly in 2012 thus opening the industry to competition and competitive pricing (AAFC, 2013-07-24).

Agreement on Internal Trade (AIT)

The Agreement on Internal Trade has laid out a framework for non-discriminatory treatment of alcoholic beverages which has resulted in a number of inter-provincial trade barriers being addressed and efforts to avoid the creation of new barriers (AAFC, 2013-07-24)

Importation of Intoxicating Liquors Act

The Importation of Intoxicating Liquors Act requires that all liquor (including beer) imported into Canada be brought in through a provincial or territorial liquor board. The provincial and territorial governments are also responsible for regulating and controlling the sale of liquor within their respective jurisdictions. Through their liquor control acts the Provincial and territorial Government Issue licences to brew or sell beer in their jurisdictions. The provincial and territorial liquor boards collect federal and provincial duties and taxes on alcohol products, and then add their own mark-up prior to sale of the product (AAFC, 2013-07-24).

Excise Act

The Excise Act is a federal tariff imposed at the production stage on domestically-produced products such as spirits, beer and tobacco. These taxes and duties represent the single largest cost category to a brewing operation. They impose duties on beer produced in Canada when it is shipped from the brewery to provincial liquor board warehouses or industry-owned stores. This imposition point eliminates competitive distortions between domestic and imported beer, and between beer and other alcoholic beverages (AAFC, 2013-07-24).

Maturity of the Industry

Industry Life Cycle

In the context of the industry life cycle for the Craft Beer industry, the industry is currently in its growth stage. The characteristics of a Growth Industry are:

1. Revenue Grows faster than the economy

2. Many new companies enter the market

3. Rapid technology and process change

4. Growing customer acceptance of product

5. Rapid introduction of products and brands

(Kaczanowska, Industry Report: Craft Beer Production, 2013)

Craft breweries are continually increasing their production output and seeking out new markets, domestic and abroad. As is the case with Big Rock Brewery, many craft breweries are introducing new and seasonal varieties of their product and rapidly gaining market acceptance (Kaczanowska, Industry Report: Craft Beer Production, 2013). "According to Statistics Canada, beer generates three times the economic impact of the hard alcohol and the wine industries combined. Canadian brewers also account for 12% of the GDP generated by the entire food manufacturing industry" (Beer Canada, 2013). The Industry Added Value (IVA) of the Craft Beer Industry is forecast to increase at an annualized rate of 8.1% until 2018. At the same time, GDP is projected to rise by 2.7% during the same period (Kaczanowska, Industry Report: Craft Beer Production, 2013)

Competitive Dynamics of the Industry

Porter's Five Forces

i. Threat of new entrants

Entry into the Craft Beer Industry is facilitated by the option to purchase turnkey facilities, but starting a large-scale production requires significant cash flow and continuous investment. Barriers to entry include sunk costs and other high ongoing capital requirements, such as capital costs of manufacturing facilities and branding. Major companies own beer stores, which are also heavily regulated and limited to a regional basis, severely limiting the exposure available to new players and micro-brewers such as Big Rock. Merger and acquisition activity from well-established beverage companies has countered the