Czech breweries are balancing the good news with the bad – the return of tourists is supporting the embattled on-premise trade in city pubs and restaurants but the increase of VAT could also endanger the countryside’s pubs.
“Business is going – about 80% of the pre-COVID level, but better than last year,” says Michal, manager at the Strahov Monastery microbrewery, near Prague Castle, standing in front of a restaurant terrace filled with patrons and a background of clinking glasses and a Babel of languages.
Czech overnight tourist stays were up by 14.5% during the second quarter in comparison to the same period in 2022. These tourists – both Czech and international – spent 13.8 million nights in Czech accommodations, according to the Czech Statistics Office. The increase was driven by the 31% growth in the number of international visitors’ overnights. While a marked improvement, this is still 12.1% below the pre-pandemic levels from the same period in 2019.
Tourism is critical for the Czech brewing industry as international tourists drink an estimated 5% to 10% of all beers consumed in the country. This helps make Czech beer consumption the highest in the world at 136 litres per capita a year.
It’s more than straight consumption, too. Tourists are likely to have their beer in a pub or restaurant – and not purchased much more cheaply in the local supermarket. With an on-trade beverage typically retailing at four times the supermarket price, it is a traditional profit driver for brewers and the hospitality sector.
However, the pandemic threw a wrench in the typical beer consumption patterns in the Czech Republic, where beer has long been a vital part of social life. Not only did international tourists stay away from the Czech Republic, Czechs also drank their beer at home instead of the pub. While during the pandemic shutdown, overall domestic consumption dipped, on-trade consumption plummeted to around 25% of total consumption – way below the 50% level registered in 2003.
Last year, the on-trade improved to 31% but still was substantially below the pre-COVID levels, according to the Czech Association of Breweries. The drop was also a blow to the country’s 500 microbreweries as around 80% of these breweries are directly linked to a restaurant.
The growth both in the first and second quarters of 2023 do have brewers looking ahead to more favourable times and to pushing the on-trade numbers substantially above the 31% level from 2022. “The prognosis is favourable, as long as there are no complications, the tourist industry will grow and with it the on-trade in this area,” says Tereza Melišová of the Czech and Moravian Association of Microbeweries.
Here comes the tax man
However, one complication on the horizon is a changing VAT structure. During the COVID-19 shutdown, the government tweaked the VAT rates, lowering the rates to help the hospitality sector. Beer consumed in a pub was taxed at 10% instead of the previous 21%.
Now with the pandemic declared over and the economy returning to a new normal, the government is looking for ways to cut its huge budget deficit and is planning to return the VAT rates to their earlier levels next year. Brewers are against the 11 percentage point increase, citing the economic and social impact and the low level of beer consumed in pubs and restaurants in the current cost of living crisis.
“The new VAT will increase the price of beer in pubs. The rate of beer consumption in on-trade/off-trade in 2010 was 50:50, now it is 25:75,” says Tomas Maier, economics professor at the Czech University of Life Sciences Prague. “It is very bad for social life, especially in the villages.”
In addition, brewers say inflation has already pushed prices up. “Beer prices have increased by 15% – 20 % over the last year and are at the ceiling of customer tolerance,” says the Microbrewery Association’s Melišová.
Not only are consumers squeezed before they get to the pub, but brewers are paying higher energy costs and there are higher costs for pubware and furnishings. Even Michal, manager at the Strahov microbrewery, sited in the historic heart of Prague, says tourists were more tight with their expenditures than they had been pre-pandemic.
“The situation is most complicated in villages and small municipalities, where pub owners have only a small number of guests who are, on top of that, very sensitive to any changes in pricing,” says Zdeněk Kovář, spokesman for market leader Plzensky Prazdroj. “It is very difficult for village pub owners to attract new guests.”
The increased price will fuel a less social type of beer consumption, he added. “At the same time, many people in villages and small towns now prefer consuming beer at home - in garages or in their gardens.”
Beer sector in a glass
The change in drinking patterns is likely to reinforce the structure of what is already a mature, consolidated market. Following the end of communism, international brewers stepped in, buying most of the local players. “The sector is mature, stagnant, and consumption is slowly decreasing,” says Maier. “The sector has been consolidated since 2009 when there was the last acquisition by Heineken.”
The domestic market leader is now the Japanese Asahi, owning Plzensky Prazdroj. With a 46% share, they have breweries in Plzen – where the original pilsner-type beer was first brewed – Velké Popovice, and Nošovice, and have four of the top five brands in the country. Molson Coors is number two at 15% with Pivovary Staropramen and breweries in Prague and Ostrava. Heineken is number three with 11% and breweries in Krušovice, Brno, and Velké Březno.
Two Czech-owned breweries are essentially tied for the fourth position – privately held Pivovary CZ Group and state-owned Budweiser Budvar, each with a roughly 3% market share. Pivovary CZ has breweries in the smaller towns of Přerov, Litovel and Hanušovice and is geographically strongest in Moravia in the east part of the country. The flagship Budvar brewery is in the city of Cesky Budejovice. Budvar is in an unusual position as it is state owned, is embroiled in trademark disputes globally with the US brewery giant over the Budweiser name, and exports 70% of its production – nearly three times the Czech industry average.
Nevertheless, covid only slowed – but not stopped –the recent rapid growth of Czech microbreweries. Maier points out that an additional 26 new microbreweries went online last year. Currently there are just over 500 microbreweries in the country, providing much more choice than just the typical pilsner beer, and offering some hope for future growth in the sector.