Bitter taste of the brewers' duty: The UK's big five beer makers have begun cutting back the alcohol content of their drinks to counter an increase in excise taxes. John Shepherd reports

THE PINT that Britain's long-suffering beer drinkers are served will soon - quite literally - no longer be the pint it used to be. Last week, the big brewers began watering down their beer.

The news will be received with resignation in pubs across the country, where drinkers have come to feel almost victimised by the combined activities of brewers and Government. Over the last few years, price rise has followed price rise, and now the strength of the beer is set to fall.

The decision to reduce the alcoholic content of beer is the result of an arcane agreement between the brewers and the Customs & Excise over the way excise duty is calculated on the drink. The new rules were introduced on 1 June, and the brewers estimate the change will cost them about pounds 64m a year. So rather than passing this on to customers by raising the price of a pint, they have decided to reduce the duty payable by reducing the alcoholic content.

For example, a pint of Skol draught lager, produced by Carlsberg-Tetley, will be 3.4 per cent alcohol rather than the 3.8 per cent it was previously. The alcohol content of Holsten Pils, the lager distributed by Courage in the UK, is coming down from 6 to 5.5 per cent, while Lamot Pils, part of Bass's extensive stable, drops a full percentage point to 5 per cent.

The brewers are taking a huge gamble. They particularly risk the wrath of customers, should the latter notice even the minutest of changes in taste - remember the furore caused by the decision to change the original production formula of Coca-Cola.

Stephen Locke, policy director of the Consumers' Association, warned: 'They water down our beer at their peril, because if people do notice the difference then they will vote with their wallet.'

But weakening the alcoholic content of premium-priced brands such as Holsten Pils, marketed under the banner of 'all the sugar turns to alcohol', will also be construed by consumers as a disguised price increase. Paying the same for something with one-twelfth less alcohol represents a price rise of 8.5 per cent, regardless of the brewers' argument that they are compensating for the change by improving the body of the beer by tweaking the original gravity specifications. From now on, there must be a worry that the brewers will disguise future price rises by knocking the odd 0.1 of a percentage point off the alcoholic content of their beers.

The implied price rise in the watering down of beer, moreover, is only the latest in a series of price increases that beer drinkers have had to suffer. The alcohol dilutions come on top of an increase in the last Budget, when drinkers were served up another 5 per cent increase in duty. Added to the current change in excise duty - which equates to another 3 per cent - the total price rise in the last four months has been 8 per cent.

And there is more price agony to come. The brewers are now putting through yet another annual round of above-inflation price increases, which will add around 4p to the pub price of a pint.

It is part of the continuing story of beer's escalating price. Since 1989, the price of cask-conditioned beers has risen by 17 per cent more than the rate of inflation and ordinary bitters by 11 per cent over inflation.

To Britain's millions of pub-goers, the villains of this tale are the beer barons - the men who run the five big brewers that control the beer market. Ian Prosser, the head of Bass, is probably the most powerful. Courage is run by Michael Foster, and Carlsberg-Tetley, the joint venture between Carlsberg of Denmark and Allied-Lyons, the international drinks group, is fronted by Tony Hales. Brian Stewart is the moving force behind the Scottish & Newcastle group, while Peter Jarvis heads Whitbread.

But the blame does not lie exclusively with the beerage. The Government, too, has played a big role in forcing changes on the industry that have cost millions, which have ultimately been paid for by raising the price of a pint.

The brewing industry, as was starkly highlighted by a report from the Agriculture Select Committee, has suffered unnecessary change, dumped on it in 1989 by the Government acting on a three-year investigation by the Monopolies and Mergers Commission. The Beer Orders, which set in motion a fundamental restructuring of the industry and the selling off of thousands of tied pubs by the brewers, have cost about pounds 500m to implement.

The confusion over excise duty is yet another example of how Whitehall and the brewing industry seem unable to co-operate in the best interests of consumers.

The extra pounds 64m that the new rules will cost the brewers is equal to less than 3 per cent of the expected take in excise duty from beer for the financial year to last March. The original idea was that there should be no extra revenue raised from the industry by switching from an antiquated system of levying duty before fermentation to one of taxing the product as it leaves the brewery. Unfortunately for brewers and consumers, it did not work out that way.

Under the old system, introduced in 1880, duty was levied on the wort - the unfermented sugar solution before the yeast is added. Duty was calculated by measuring the sugar strength and liquid volume, commonly known as original gravity.

The duty charge was therefore based on the liquid's ability to produce alcohol; the higher the gravity, the higher the potential strength of the beer.

Mainly because of evaporation during fermentation, brewers were permitted a wastage allowance of 6 per cent. That allowance, however, was unfair to small brewers, which did not have access to high-cost, high-technology brewing aids such as temperature and humidity controls. It is not unusual for small brewers to have wastage levels of 10 per cent, which means they were paying duty on beer that they could not sell. The big brewers, however, were able to make savings of 3-4 per cent by limiting wastage to 2-3 per cent.

Despite their gain, the big brewers recognised that the old system was unfair and agreed to change - as long as the new system cost no more: it was 'fiscally neutral'.

The Government agreed to change the system, so long as there was no loss to the Treasury's coffers. For the past two years, Customs & Excise has worked with the Brewers' Society, the industry's trade body, to come up with a fiscally neutral solution.

Based on a comprehensive survey of beer production in 1990, the changes they agreed should not have lost the Government a penny in duty or cost the brewers a penny more.

However, the difference between theory and reality emerged early this year, when Bass pointed out that it would take at least a pounds 10m duty hit. And once fully audited production figures for last year were available, it became apparent that the problem was twice as bad as feared and would cost Bass pounds 20m.

Carlsberg-Tetley provided another example of the malfunctioning of the new system. Under the old method, the duty on a 36-gallon barrel of Castlemaine XXXX lager was pounds 67.97, but under the new it is pounds 68.41 - a difference of 44p which is then captured by the 17.5 per cent VAT net, giving another 7.7p to the Treasury.

Tony Portno, chief executive of Bass Brewers, said: 'We have skewed away from fiscal neutrality, and the chances of it being reversed are probably not high because of the pressures (financial) on the Government. I believe I've acted in the best interests of customers, who would not have been too happy if we passed on the duty cost to them.'

In the middle of the argu ments is Whitbread, the country's fourth largest brewer. By chance, its diversified product mix means that the effect on it of the duty change is actually fiscally neutral. Despite this advantage, however, Miles Templeman, managing director of the Whitbread Beer Company, fully backs the stance adopted by its chief competitors.

He said: 'The industry's mix of products has changed since the original analysis, and they (Customs) didn't need to stick to the original estimates. And we don't think the industry should lose.'

As so often in the world of beer, however, it is the consumers who eventually pay the price. It is unlikely at this stage that the industry and the Government will agree to switch back to the old duty system, so weaker beer is here to stay.

The weakening of beer has not gone down well among the brewers' trade customers, who are angry at being asked to pay the same for an inferior product.

John Conlan, chief executive of First Leisure, one of the brewers' largest free-trade customers in the country, said: 'We are not too pleased about it.'

The brewers' decision to water down their beer is in danger of becoming a public relations disaster. It may also turn out to be a long-term financial mistake made for a very short-term financial benefit.

Beer consumption in Britain has been falling for more than a decade. It is now down to the level last seen in the early 1970s and continues to fall. Lowering the quality of the product is no way to reverse this decline.

(Photographs omitted)