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Salient. Victoria University Student Newspaper. Volume 39, Number 14, 5 July 1976.

How much Profit do they make?

How much Profit do they make?

The breweries, of course, don't think they make enough But the irony of an NZB profit announcement the same day as they got their price increase was striking to an outsider. NAB announced a profit increase of 24 percent for their year to March 31 st 1976. The argument during the inquiry was that the breweries were under financial strain.

The truth of the matter however was that NAB has consistently performed better than its competitors, also had much smaller cost increases and on the industry price rise stands to over-recover costs by more than $500,000.

The table attached summarises the profit performance of the companies.

It can be seen from this table that while industry profitability has fallen relative to both previous years and to the Reserve Bank returns, profitability can scarcely be said to be at a level causing serious problems, and much of the fall in profibability in any case results from the costs of expansion as detailed later in this article.

The Brewers' Association claimed price increases on the basis of increased costs of production which they claimed they and incurred. The aggregate of increased costs was 56,908 million. The claim was for a net over/recovery of $35,000 on increased costs. The proposal was to make an under-recovery on draught beer and an over-recovery on bottled quarts which is the main growth area.

The Breweries argument was that they had no capacity to absorb costs which were amounting to $575,000 per month. They indicated that it was their intention to apply for another price increase to "restore profitability" at some later date. Because these increased costs "had in fact been incurred" they should be recognised in a price increase virtually without argument.

The Department of Trade and Industry accepted most of this, but argued for a large reduction in the claimed amount on the basis that a big volume of costs was being charged to the manufacturers price of beer which in fact should be charged against the cots which in fact should be charged against the costs of wholesaling or retailing beer. The costs which the Department wanted to disallow were those relating to the ownership and control of outlets, a proportion of which the breweries have previusly claimed as part of the costs of brewing beer.

The Department's approach became nonsense however as it emerged that they did not want to exclude backward linkage operations from consideration, and they were quite happy for the costs to be recovered in other sectors of the industry, e.g. by raising the retail price of beer. One major element in the Department's argument was that independent hotels and licensing trusts were disadvantaged by this pricing system because in the price they were paying for beer they were paying a large part of the costs of brewery hotels with which they were competing.

C.S S.O. argued that in principle no increase should be granted because the claim was based on on increased costs. In fact the Act (Section 98C in particular) required a full examination of the industry cost structure. For example it had to be ascertained whether costs were legitimately incurred by an affluent producer. There were several cost items where this was considerabl in doubt.

It became clear however that the Commission was determined to see its price fixing functions as being in essence a price justification scheme rather than a price control scheme.

Consequently C.S.S.O. argued that a more rigorous division of the industry should be made on the basis of the International Standard Industrial Classification of all Economic Activities. This would exlude from the manufacturers price of beer all costs relating to the acquisition of inputs such as investments in malt companies and also of points of sale to final consumers. The current pricing formula encourages brewery expansion An application of this approach reduced the reasonable claim to a maximum of $2.333 million.

The Commission rejected this argument and decided to retain the present pricing system. Apart from the direct effect of this on brewery expansion, the decisions illustrates the farce of price control as it is practiced at the moment.

The ability of the breweries to recover part of the costs of owning outlets in beer prices ex-brewery has been a significant factor in the rush of hotel purchase which resulted in nearly one in ten hotels in New Zealand changing hands in just two years. This is illustrated in the table below:

ACQUISITIONS Year to 31 NZB March DB Purchase Sales Net Total 1975 6 5 4 1 7 1974 16 4 23 -19 - 5 1975 72 63 2 61 133 1976 20 4 10 -6 14 COMPARISON OF INTEREST ALLOWED AND NET ACQUISITIONS Interest ($000* Acquisitions 1973 324 7 1974 44 - 3 1975 2,243 133 1976 334 14

But far more important than the advantages to the breweries are the implications of this decision for price control. While wage restraint is rigorously practiced, the so-called price control system has produced only 2 public scrutiny occasions sicne the Commerce Act was introduced. The Department of Trade and Industry seems happy to allow price increases on a justification basis.

Until an effective price control system is introduced which actually discourages price increases, workers and consumers will be justified in laughting at so-called control.

BREWERS ASSOCIATION OF N.Z. INC. COMPANY 8c INDUSTRY PROFIT BEFORE TAX, SHAREHOLDERS. FUNDS, AND PERCENTAGE OF PROFIT BEFORE TAX TO SHAREHOLDERS FUNDS Financial year ended in 1970 1971 1972 1973 1974 1975 A. NEW ZEALAND BREWERIES LTD Shareholders' funds 40.858 Financial year ended in 1970 1971 1972 1973 1974 1974 Financial year ended in 1970 1971 1972 1973 1974 1975 A. NEW ZEALAND BREWERIES LTD Shareholders' funds 40,858 44,094 47.851 53,013 63,596 66,799 Profit before tax 8,775 10,776 9.153 10.426 13.202 9.175 % Profit to Funds 21.5% 24.4% 19.1% 19.7% 20.8% 13.7% B. DOMINION BREWERIES LTD. Shareholders' funds 25,130 36,225 37,816 39,726 43,565 49,298 Profit before tax 4,558 5.670 5.233 5,751 7,763 6,080 % Profit to Funds 18.1% 15.77% 13.8% 14.5% 17.8% 12.3% C LEOPARD BREWERY LTD Shareholders' fundi 3,362 3,569 4,146 4,372 4,368 4,447 Profit before tax 509 594 724 421 620 423 % Profit to Fundi 15.1% 16.6% 17.5% 9.6% 14.2% 9.5% INDUSTRY Shareholders' Funds 73,844 88,966 95,235 103,116 111,529 120.544 Profit before tax 14,938 18,071 16,187 17,495 21,585 15.678 % Profit to Funds 20.2% 20.3% 17.0% 17.0% 19.4% 13.0% RESERVE BANK - All companies exluding Financial 19.4% 18.5% 17.3% 20.4% 23.5% 16.6%