EPA — 230/1-74-064(8)
MARCH 1977
ECONOMIC ANALYSIS
OF
EFFLUENT GUIDELINES
Miscellaneous Foods And
Beverages Industry
VOLUME II: BEVERAGE INDUSTRIES
Urn
QUANTITY
U.S. ENVIRONMENTAL PROTECTION AGENCY
Office of Planning and Evaluation
Washington, D.C. 20460
\
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ECONOMIC IMPACT OF PROPOSED EFFLUENT GUIDELINES
MISCELLANEOUS FOODS AND BEVERAGE INDUSTRY
VOLUME II - THE BEVERAGE INDUSTRIES
Prepared for
Environmental Protection Agency
Task Order No. 21
BOA 68-01-1533
Development Planning and Research Associates, Inc.
P.O. Box 727
Manhattan, Kansas 66502
March, 1977
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TABLE OF CONTENTS
Page
PREFACE
EXECUTIVE SUMMARY 1
PART I. INTRODUCTION AND METHODOLOGY I- 1
I. INTRODUCTION 1-1
A. Scope I-i.
B. Organization of This Report 1-2
C. Data Sources. 1—3
1. MajOr Primary Sources 1-3
2. Major Secondary Sources I 3
II. METHODOLOGY 1 1-1
A. Industry Structure and Subcategorization 11—2
B. Financial Profile of the industry 11-4
C. Model riants 11—4
P. Pricing Patterns .11-5
E. Waste Treatment Technological Options
and costs . . 11-5
F. Analysis of .Economft Impacts 11—5
1. Fundamental Core Methodology 11-6
2. Price and Production Imp ict AnalysesIi-43
3. Financial Impact Analysis 11—14
4. Plant C.losures. and Production
Effects . 11-14
5. Einployrnent Impact Analysis 11—14
.6. • Community Impact Analysis .11-14
7. Balance of Payments Impact Analysis 11—1.5
8. Other Impact Analysis . 11—15
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TABLE’ OF CONTENTS (continued)
— MALT BEVERAGES
INDUSTRY STRUCTURE
A. Characteristics of the Industry
1. ,Number and Size of Firms and Plants
2. Value of Shipments
3. Level of Integration
4. Number ofProducts
5. Level of Diversification
6. Location of Breweries
7. Age of Plants and Level of
Technology
8. PlantEfficiency
B. Employment Characteristics
C. Segment Portions of the Total Industry
0. Significant Impacts on the Industry
II. FINANCIAL PROFILE OF THE INDUSTRY
A. Sales and Taxes
B. Distribution of Sales Dollars
C. Earnings
D. Ability to Finance New Investment
1. General Industry Situation
2. Expenditures for Plant and
Equipment
3. Capital Availability
: Cost of Capital- After Tax
III. MODEL I II—1
A. 1 1 1-1
B. 111—3
C. ‘ 111—3
111-3
111-7
111-7
‘111-7
111-9
111-9
111-9
II’I-g
111-9
“I-jo
111-10
111-10
PART II., SIC 2082
I.
Page
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I-10
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1-15
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11-4
11-4
11-7
11-8
11-8
TI—il
‘I—il
PLANTS
Types of Plants
Sizes of Breweries
Investment
1. Book Value of Investment
2. Salvage V lue
3. Operating Capital
D. Model Brewery Capacity and’Utilization
E. ‘ Cost Structure of Model Plants
1. Materials
2. Labor
3. Supplies
4. Depreciation and Interest
5. Total Costs
F. Annual ‘Profits
G. Annual Cash Flows
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TABLE OF CONTENTS (continued)
IV. PRICING PATTERNS.
A. Price Determination
1.. Consumer Demand and ‘Attitudes
2. :Supply of Malt Beverages:
3. Market Structure
B. PriceTrends
V. EFFLUENT CONTROL
A. Pollution
B. Discharge
C. Pollution
COSTS :
Cofltrol. Requirements
Status pf• .th .Industry
Control Costs
Page
IV -1
‘V-i
IV -1
•IV-3.
IV-3
IV-5
V’— 1
V-4
V-4
V I-i
‘VI.—’
‘Vt- ”
VI ’ - 2
Vt-4
V 1-7
VI-7
V1-7
V . 1-8.
VI ‘8
Vi.-9
VI-9
VI. ECONOMIC IMPACT ANALYSIS
A. Price Effects .
1. ‘Required Pri ce. Increases
2. Expected Price Increases
B. Ftha’nc al Effect.s
i. After Tax ‘Income
2. RetUrn on Sales
3. Return on Invested Capital
4. Cash Flow
5. Net Present Values’
C. Production. Effects
D. Other Effects
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TABLE OF CONTENTS (continued)
Page
PART III. SIC 2083 - MALT
I. INDUSTRY STRUCTURE . . I-i
A. Characteristics of the Industry I—i
1.. Number and Size of Firms and Plants I-i
2. Value of Shipments 1-3
3. Level of Integration 1—3
4. Level of Diversification 1—3.
5. Location of Maltsters 1-4
.B. Employment Characteristics 1-4
C. Other Considerations . 1-4
II. FINANCIAL PROFILE OF THE INDUSTRY It—i
A. Sales 1 1-1•
B. Distribution of Sales Dollar . 11 -4
C. Earnings 11—4
D. Ability to Finance New Investment 11—4
E. Cost of Capital - After Tax. II -4
III. MODEL PLANTS I l l—i
A. T eMalting Process Il l—i
B. NSPS Model Plants 111-2.
IV. PRICING PATTERNS IV-i
A. Price Determination tv—i
1. Demand . IV-i..
2. Supply . . . IV i
3. . Market Structure IV-4
B. Price Trends . . IV -5
V. EFFLUENT CONTROL COSTS .. . V-i
A. Pollution Control Requirements . . V —i
B Discharge Status of the Industry V-2
C. Pollution Control Costs V—2
VI. ECONOMIC IMPACT ANALYSIS VI-i
A. Price Effects Vt-i
1. Required Price I.ncrease . . VI-i
2. Expected Price Increases VI-2
B. Financial Effects VI—3
C. Production Effects VI-5
D. Other Effects . . VI-5
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TABLE OF CONTENTS (continued)
E.
III. MODEL
A.
‘I—i
I—i
1-2
1-4
1-4
1-6
1-6
I -f:
1-8
1-8
1-10
1—12
1-14
1-14
1-15
1-16
.1—17.’
‘I—i
h—i
1.1—3
11-5
11-8
11-9
11-9
11-12
• 11—12
• I l l—i
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1, 1 1—1
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111-2
111—2
111-2
111—2
111-3
111—3
111-3
111-3
• 111-7
111—7
Page
PART IV SIC 2084 - WINES, BRANDY AND BRANDYSPIRITS
I. INDUSTRY STRUCTURE
A. Characteristics of the Industry
1. Number-and Size of Firms and ’Plants
2. Value of Shipments
3. Level of. Integration
4. Number of Products
5. Level of Diversification
6. Location of Wineries
7. Ageof Plants and Level of Tech-
nology.
•8. Plant Efficiency
B. Employment Characteristics
C. Segment Proportions of the Total Indus-
try
D. Significant Impacts on the •Ind: stry
1. Capacity of Low Cost Producers
Relative to High Cost Producers
2. actor Dislocation Within the
Industry
3. Reasons for Dislocations
4.’ Narrowing the Study’ ‘Scope
II. FINANCIAL PROFILE OF THE INDUSTRY
A. Sales andTaxes
B. Distribution of. Sales Dollar
C. Earnings
D. Ability to Finance New.Investment
1. General Industry ‘Situation
2. Expenditures for Plant and
Equipment
3. Capital Availability
Cost of Capital - After Tax
PLANTS
Types of Plants
1. Destemming and crushing
2. Fermentation
3. Pressing
4. Clarification
5. Maturation
6. Bottling
B. Sizes of Wineries
C. Investment .
1. Book.Value.of ’ Investment
2. Salvage Value
3. Operating Capital
D. Model Winery Capacity and Utilization
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TABLE OF CONTENTS (continued)
IV. PRICING PATTERNS
A. Price Determination
1. Consumer Demand and Attitude
2. Supply of Wines
.3. Market Structure
B. Price Trends
E. Cost Structuréof Model Plants
1. Materials
2.’ Labor
3. Supplies and Other Costs
4. Depreciation and Interest
5. Total Costs
F. Annual Profits
G’. Annual Cash Flows
Page
111-8
111-8
111-8
111—8
111-8
111-9
111-10
1,1 I -10
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IV-3
IV-3
IV-5
v-i
V-i
V-4
V- L I
VI-’
VI-’
VI-’
VI-2
VI-3
VI-5
VI-6
V. EFFLUENT,CONTROL COSTS ‘
A. Pollution Control Requirements
B. Current ‘Status of the Industry
C. Pollution Control Costs
VI. ‘ ECONOMIC IMPACT ANALYSIS
A. Price Effects
i . Required Price
2. Expected Price
B. Financial Effects
C. Production Effects
D Other Effects
Increases
Increases
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TABLE OF CONTENTS (continued)
I. INDUSTRY STRUCTURE
A. Charac teristics.. of the Industry
1; Number andSize of Firms and Plants
2. Value of Shipments
3. Level of Integration
4. Number of Products
5. Level of DiversificatiOn
6. Loc tion of Plants
7. Age of Plants and Level of
Téchno.l ogy
8. Plant Efficiency
B. Employment Characteristics
C. Segment Porti.ons.of the Total Industry
D. Significant Impacts on the Industry
I. Capacity of Low: Cost Producers
Relative to High Cost Producers
‘2. Factor Dislocation Within the
Industry . .
3. Reasons for DislocatiOns
4. Na.rr o ingthe . Study’ Scope
II. FINANCIAL PROFILE. OF THE INDUSTRY
A. Sales and Taxes
B. Distribution of Sales ‘Dollar
C. Earnings
•D. Ability to Finance New Investment
1. General Indu.stry.Situation
2. Expenditures for Plant and Equip-
ment
3. Capital Availability
E. Cost of Capital - After Tax
III. . ODE.L PLANTS
A. Types of Plants
1. Grain Handling and Milling
2. Mashing
3. FermentatiOn
4. Distillation
5. Maturation
6. Packaging
Sizes of Plants
B.
C.
Investments
1. Book Value of Investment
2. Salvage Value
3. Operating Capital
D. Model Plant Capacity and Utilization
1 II— 1,
‘I l l—i
“‘I—i
‘‘I—i
I 11-2
111-2
‘111-3
111-3
111-4
111-4
11’I- 7
111-7
111—7.
111-9
PART V SIC 2085 -. DISTILLED SPIRITS
Page
• I—.1
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1-2.
1-3
1-14.
1-15
1-15
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1-17
I -1.7
1-19
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1-22
1-23
1-24
1-25
1 , 1—1
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11—3
11—5
11-6
• 11-8
11-8
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II—.1 1
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TABL:E OF CONTENTS (continued)
IV. PRICING PATTERNS
A. Price Determination
1. Consumer Demand and Attitudes
2. Supply of Distilled Spirits
3. Market Structure
B. Price Trends
•Page
E. Cost Structure of Model Plants
1. Ingredient Costs
• 2. Labor Costs
• 3. Supplies and Other Costs
4. Depreciation and Interest
5. Total Costs
Annual Profits
G. Annual Cash Fldws
111-9
111-9
I l l—il
I ll—li
I l l—il
II•I- l1
111—12
111-12
‘V-i
‘V-i
IV- 1
IV-3
IV-3
IV-5
V.
EFFLUENT CONTROL COSTS
V-i
A. Pollution Control Requirements
V-i
B. Discharge Status of the Industry
V-4
C. Pollution Control Costs
V-4
VI.
ECONOMIC IMPACT ANALYSIS
VI-i
A. PriceEffects
VI-2
1. Required Price Increases
.
VI-2
2. Expected Price Increases
VI-4
B. Financial Effects
VI-5
1. After Tax Income.
2. Return on Sales
•VT-8
VI-8
3.Return on Invested Capital
4. • Cas h Flow
•
VI-8
Vi 9
•
• 5. Net. Present Values
VI—9
C. Production Effects
VT-b
0. Employment and Community Effects
VI.-1O
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TABLE OF CONTENTS (contiñuéd)
PART VI SIC 2086 THE SOFT DRINK INDUSTRY
I. INDUSTRY.STRUCTURE
A.. Characteristics of theSoftDrink
Industry
1. Number and Size of Firms and
Plants .
2. Value.of Shipments
3. Level .of Integration.
4. Number cif Products
5. Level . of Diversification
6. Location.of Plants
7. Age of the Plants and Level of
Technology
8. Plant Efficiency
B. Employment Characteristics
C. Segment Proportions of Total Indus-
try
D. . Significant :Impacts.Qn the Industry
1. Capacity of Low CostProducers
Relative to High Cost Producers
2. Factor Dislocation Within the
Industry
3. Reason s for Dislocation
4. Narrowing the Study Scope
II. FINANCIAL PROFILE OF THE INDUSTRY
A. Sales
B. Distribution of Sales Dollars
C. Earnings
D.’ Ability to Finance New.Investment
1. General industry Situation
2. Expenditures for Plant and Equip-
ment
3. . . apital Availability
Cost of Capital - After Tax
PLANTS
Types, of Plants:
Sizes of Plants
Investment
1. Book Value o.f Investment
2. Salvage Valu.e
3. Operating Capital
D. Model Plant Capacity and. Utilization
E. Cost Structure of Model Plants
1. Raw Material.s Costs
2. Operating COsts
3 Other. Costs
4. Depreciation and Interest
5. TotalCosts
F. Annual: Profits .
G. . Annual CashFlows
Page
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1 —1
I —.1
1-4
1-4
-6
1-6.
1-6
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1-9
1-9
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j 3
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1-16
i l—i
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11-4
11-5
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1 1—11
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1.11-6
.111-6
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111-8
111-8
111-8
111-10
E.
III. MODEL
A.
B..
C.
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TABLE OF .CONTENTS (continued) Page :
IV. PRICING PATTERNS TV_i .
A. Price Determination TV-i
1. Demand for Soft Drinks IV-1
2. Supply of Soft Drinks IV-2
3. Market Structure IV-2
B. Price Trends IV-3
V. EFFLUENT CONTROL COSTS V-i
A. Pollution Control Requirements V-i
B. Discharge Status of the Industry V-4
C. Pollution Control Costs V-4
VI. ECONOMIC IMPACT ANALYSIS VI—1.
A. Price Effects VT-i
1. Required Price Increases VT-i
2. Expected Price Increase VI-2
B. Financial Effects VI-4
1. After Tax Income VI- 5
2. Return on Sales VI-5
3. Return on Invested Capital VI-8
4.. Cash .Flow VI-8
5. Net Present Values VI-9
C. Production Effects . VI-lO
.0. Other Effects VT-b
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TABLE OF CONTENTS’(continued)
I. INDUSTRY STRUCTURE
A. Characteristics of the Industry
1. Number and Size of Firms and
Plants
2. Value of Shipments
3. Level of Integration
4. Number of Products
5. Level of Divers.i fication
6. Location of Plants
B. Employment Characteristics
C. Other Considerations
••II —1
II . —’
I I—].
11-3
11-3
11-4
“I—i
‘‘I—i
:111 -2
1V1
IV-1
‘v_i.
IV-3
IV-3
IV-4
V. EFFLUENT CONTROL COSTS . . V-i
A. Pollution Control Requirements. V-i
•B. Discharge Statu2 of the Industry V-2
C. Pollution Control Costs V-2
VI-i
VI- ’
Increase VI.-i
Increases . . VI-2
VI-3
VI-5
VI -5
PART VII SIC 2087 -. FLAVORING EXTRACTS AND SYRUPS
Page
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I—i
1-2
1-2
1-4
1-4
1-4.
1-6
1-6
1-9
II. FINANCIAL.PROFILE OF THE INDUSTRY
A. Sales.
B. Distribution ofSaies Dollars
C. Earnings
D. Ability to Finance New Investment
E. Cost of Capital - After Tax
III. MODEL PLANTS
A. . Industry Process
B. NSPS Model Plant
IV. PRICING PATTERNS
A. Price Determination
1. Demand
2. Supply
3. Market Structure
B. Price Trends
VI. ECONOtIIC IMPACT ANALYSIS
A. Price Effects
1. Required. Price
2. Expected Price.
B. Financial Effects
C. Production Effects
0. Other Effects
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TABLE OF CONTENTS (continued)
Page .
PART VIII LIMITS OF THE ANALYSIS
I. LIMITS OF THE ANALYSIS VIII-1
A. General Accuracy. V. 111-i
B. Range of Error VIII-2
C. Critical Assumptions VIII-3
D. Remaining Questions VIII—4
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PREFACE
The attached document is a contractors’ study prepared for the Office of
Planning and Standards of the Environmental Protection Agency (“EPA”)..
The purpose of the study is to analyze the economic impact which could
result from the application of alternative effluent limitation guidelines
and standards of performance tO be established under sections 304(b) and
306 of the Federal Water Pollution Control Act, as amended. Some of the
costs contained in this document are currently being revised and will be
amende& within this report befdreregulations are proposed.
The ‘study supplements the technical study (“EPA Development Document )
supporting the issuance of proposed regulations under sections 304(b) and
306. The Development Document surveys existing and. potential waste treat-
ment control methods and technology within particular industrial source
categories ‘and supports proposal of certain effluen’t limitation guide.-
lines, and standards of performance based upon an analysis of the feasibility
r’f these guidelines and standards in accordance with the requirements’of
sections 304(b) and 306 of the Act. Presented in the Uevelopment Document
‘are the investment and operating costs associated with various alternative
control and treatment technologies’. The attached document suoplements
this analysis by estimating the broader economic effects which ‘might result
from the required application’of various control methods and technologies.
This study investigates the’e’Ifect of alternative approaches in terms of
product’ price’increases, effects upon employment and’ the continued viabil-
ity of affected plants, effects upon foreign trade and other competitive.
effects. , ‘ ‘ ‘
The study has been prepared with the supervision,’and review of the Office
of Water Planning and Standards of the ‘EPA. This report was submitted
in fulfillment of Contract’No. 80A 68-01-1533, Task Order No.’ 21 by
Development Planning and Research Associates, Inc. This report reflects
work completed as of March, 1q77.
The study has not been reviewed by EPA and is not an official EPA publica-
tion. The study will be considered along with the information contained
in the Development Document and any comments received by EPA on either
document befo -e or during proposed rule makin proceedings necessary to
establish final regulations. Prior to final promulgation of regulations,
the accompany study shall have standing in any EPA proceeding or court
proceeding only to the extent that it represents the Views of the
contractor who studied the subject industry. It cannot be cited,
referenced, or represented in ‘any ‘respect, in any such proceeding
as a statement of EPA’s views regarding the subject industry.
this is Volume II in a series of four volumes for selected miscellaneous
food and beverage industries. The full series of volumes and industries
covered in this study are shown in Exhibit 1.
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Industry SIC
Edible Oil Industries
Cottonseed Oil 2074
Soybean Oil 2075
Vegetable Oil 2076
Edible Fats and Oils 2079
Vol. II Beverage Industries
Malt beverages 2082
Malt 2083
Wine and brandy 2084
Distilled spirits 2085
Bottling and blending of distilled
spirits 5182
Soft. drinks 2086
Flavoring and extracts 2087
Vol Ill. Confectionery and Bakeries Industries
Blended:and prepared flour 2045
• Bakery products 2051
Cookies and crackers 2052
• • Confectionery products 2065
Chocolate and cocoa 2066
• Chewing gum 2067
Vol. IV . Special Products Industries.
Egg processing 20172
Shell eggs 5144
Dehydrated soups 20342
Fro2en specialties 2038
Pet foods 2047
Coffee and tea (instant) 2095
Yeast 20994
Pectin. *.
Vinegar 20996
Hydrolyzate *
Chili pepper and paprika *
Baking powder 20994
Bread crumbs *
Chicory *
Almond paste *
Bouillon *
Desserts, ready to mix *
Honey 20991
tlacaroni, spaghetti 20993
Molasses *
Non-dairy coffee creamer *
Peanut butter *
Popcorn
Spices
Tea, packaged *
Prepared sandwiches *
Manufactured ice 2097
Volume
Vol. 1
Exhibit 1. Miscellaneous Foods and Beverages Industries includes in this study
by volume
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EXECUTIVE SUMMARY DRAFT
ECONOMIC IMPACT OF PROPOSED EFFLUENT GUIDELINES
MISCELLANEOUS FOODS AND BEVERAGE INDUSTRY
VOLUME II. BEVERAGE INDUSTRIES
Prepared for
Environmental Protection Agency
Task Order No. 21
BOA 68-01-1533
Development Planning nd Research Associates
P.O. Box 727
Manhattan, Kansas 66502
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ECONOMIC ANALYSIS OF PROPOSED EFFLUENT GUIDELINES:
THE BEVERAGES INDUSTRIES
EXECUTIVE SUMMARY
I. INTRODUCTION AND METHODOLOGY
A. Introduction
This study analyzes the economic impact of the proposed EPA effluent control
standards on the beverage industries. Specifically, it examines the econ-
omic effect of those standards primarily engaged in the manufacturing of
maitbeverages’ (SIC 2082);.malt (SIC 2083).; ’wines, brandy and brandy
spirits (SIC 2084); distilled”spirits (SIC 2085); soft drinks ‘(SIC ”20B6);
and flavoringextracts and syrups (SIC 2087). Each beverage industry was
initially analyzed separately and as such this summary will discuss the
respective industries in a similárfashion.
B. Methodology
The economic impact analysis utilizes the basic data developed on the
industries and their respective segments, financial profiles and price
effects, together with pollution abatement technolo y’and costs developed
by ‘EPA.. Impacts analyzed include: Price Effects, Fina icial Effects,
Production Effects, Employment Effects and Community Effects’.
The effluent control system requirements and costs utilized by this, analysis
were furnished by the EPA and were developed specifically for the models
described. Three effluent guideline star:dards were considered:
,BPT.- Best Practi’cable’Control Technology Currently
Available, to be achieved by July, 1977.
BAT - ‘Best Available Pollution ‘Control Technology
Economically Achievable, to’ be achieved by
July, 1983.
NSPS - New Source Performance Standards are recommended.
to be equal to one half the BAT control level and
to apply to any source for which construction,starts
after the publication of the proposed guidelines.
Costs furnished included investment requirements., operating costs and
total yearly costs (operating costs, interest and depreciation).:
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II. MALT BEVERAGES
A. Industry Structure
The Malt Beverage Industry is defined as an industry comprised of establish-
ments primarily engaged in the manufacture of a variety of types of malt
beverages but which is usually lager beer.
1. Characteristics of the Industry
According to the Bureau of Alcohol, Tobacco and Firearms, as of January 1,
1976., there were 54 brewing companies which were authorized to operate 94
breweries. Historically, the trend has been for the number of breweries
to decline. . In 1935, 750 breweries operated but this has been reduced
to the 94 authorized in 1976. Generally those breweries leaving the
industry have been the. smaller operations with the existing firm’s
market share being acquired by the larger, more powerful remaining breweries.
In 1974, the five largest companies produced over 63 percent of the total
industry’s barrelage.
Estimates of.the industry’s 1975 value of shipments are expected to total
nearly $5.4 billion. This estimate represents an increase over the 1974
shipments of 11.2 percent. Since 1958, the value of shipments has had
an annual increase averaging 6.1 percent per year. Due to the bulkiness
of beer and the corresponding high costs of transportation, breweries tend
to be located in or near primary market areas.
Integration within the brewing industry is highly varied and backward inte-
gration ranges from those whichare vertic lly non-integrated to those
which manufacture their own malt, cans and bottles and contract with
farmers to grow specific types of grains. Most brewers are not highly
forwardly integrated as most brewery responsibilities do not go beyond
their sale of beer to distributors.
Brewing firms are not highly diversified and as such most efforts con-
.centrate on the production ar:d sale of beer. Technologically most
brewerie are relativ6ly advanced. While several breweries are over
100 years old, throughout their useful life new equipment has been
added or used to replace that which is worn out or obsolete. This has
resulted in a mixture of both old and new equipment which has enabled
many of the older breweries to maintain comparable plant efficiencies
as those obtained by the newer modern breweries.
2. Employment Characteristics
Total employment within the industry decreased by over 28 percent in the
14 year period from 71,700 employees in 1958 to 51,500 in 1972. Esti-
mates for 1975 indicate that the industry employs approximately 50,000
persons. Production workers represent approximately 65 percent of
2
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all.eniployee’s and are characterized as predominately union and semi-
skilled. Production workers averaged nearly 2000 hours per year (50 - 40
hour weeks) and were paid an average of $6.11 per hour in 1972. This
wage ra.te represents over twice the hourly wage in 1958, a time during
which.the value added per production worker doubled and the value, ‘of
shipments per worker tripled.
3. . Segment Portions of the Total Industry
Because of their differing economic characteristics, the breweries in
this study were, categorized into older, and modern breweries. These
categories then weresegmented into various size segments. The nUmber’
.of breweries in each segment and each segment’s respective portion of the
industry’s total barrelage are depicted below.
Percent of ‘ . Percent of
Segment . Corresponding Breweries all Breweries Industry Barrelage
Older
• Small 64 68 28
Medium 9 ‘ 10 16
Large 6 6 22
Modern 15 16 34
4. Significant Impacts to’ Industry Segments
The industry contains only 3 breweries which are considered direct dis-
chargers and according to EPA all of these meet’ BPT and one meets’BAT.
Accordingly, ‘industry impacts on existing breweries ‘should be limited.
Some existent breweries have incurred significant increases municipal
treatment charges and may consider private treatment. These potential
new source dischargers as well as new breweries yet to be’constructed
could be affected by control standards, and thus all the industry seg-
ments potentially could be impacted.
B. ‘ Financial Profile of the.: IndUstry
Th.e industry is characterized b.y rising value, of sh.ipments $2,180 milliQn
in 1960; $3,833 million in 1970; and an estimated $5,361 million in 1975.
Consumer expenditures for malt beve ’ages, however, are considerably higher
with the 1974 estimate being $13,800 million.. This reflected an 12’ percent
increase over expenditures in 1973. Breweries also generate substantial
tax revenues for federal, state and local governments. In 1974, these
taxes amounted to $1,973 million, whi’ch represented 41 percent of the
industry’s value of shipments and 14 percent of consumer expenditures
for malt beverages. ‘ ‘ ‘
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The industry has experienced a deterioration in profits during the past
few years. Hardest hit have been the small regional brewers. In a
recent FTC survey, utilizing quarterly data from July, 1972, through
March; 1975, after-tax profits on sales were estimated 0.8 percent for
those brewers with less than $50 million in total assets and 4.3 percent
for those brewers with assets of $50 million or more.
The ability of a firm to internally or externally generate new investment
funds to finance pollution control facilities is a reflection of the
firm’s past earning record, present financial condition, future earning
potential, industry position and the stateof the overall economic
conditions of the industry and the nation. The industry production
and:financial characteristics previously discussed indicate that pollution
control investment funds may not be readily generated by some establishments.
This is especially true for smaller, less diversified brewers whose recent
earnings suggest unprofitable potential.
The cost of capital, utilized as a measure of expected ‘performance is
defined as the weighted average of the •cost of’ each type of capital
employed by the firm. Utilizing performance measures of the industry
the after tax cost of capital was estimated to be 8.8 percent.
C. Model Plants
The industry is comprised of several breweries which utilize slight
variations of a basic p,rocess to produce differentiated types of beer.
Breweries were categorized according to their age and technological
state and models developed which best represented the various sizes of
operations.
1. ‘ Types and Sizes of Model Breweries
This analysis developed models representing the fOllowing segments of the
industry.
Model ‘ Barrels/Year , Comments
Older ‘
Small , ‘ 621,000 , Built manyyears ago and through
Medium 2,530,000 remodelin,g and expansion have main-’
Large 5,060,000 tairied their place in the industry
Modern ‘3,222,000. Built within the last 15 to 20 years
and ‘are ‘technically considered modern.
New Source ‘ ‘
Small ‘ 1,725,000 Yet to be constructed and represent the
type of facilities which would be built
Large 5,750,000
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2. Investment
Model brewery data included for each model its estimated book value,
salvage value and operating capital requirements. Book values for the
models’ assets were determined based on a derived estimate of ‘asset
value per annual barrels produced. The values per annual barrel were
$12.00, $13.33, $15.00, $25.00 and $45.00 for the older small, medium
and large; existing modern; and new source models respectively. Salvage
values will vary widely from plant to plant depending on the overall
location and condition of the facility.’ For purposes of this analysis,
salvage value was estimated to be 10 percent of the plants’ book
value.. This re .atively low percentage represents the fact that
there exist few markets for used breweries or their equipment. Operating
capital values assume current assets at 17 percent of sales for the
small model breweries, 19 percent for the medium brewery and 21 percent
for the remaining models. Current liabilities’ utilized a current’’rat:io
of 1.8 for the older ‘small model , 1.6 for the older medium model and
1.4 for the’ remaining models.
3. Model Breweries’ Financial C,haracteristics
Cost structure of the models included development of costs’ for raw
materials, labor, supplies, and other, depreciation and interest. MaterIal
costs ra 1 iged from 49.6 percent of total sales for the older large,
existing modern and new source models to 53 percent for the older ‘small
model. ‘Labor represented the greatest percentage for the older large’
model, being 17.1 percent.’ The other two older models labor costs repre’—
sented approximately 16 percent and the existing modern and new source
models’ labor costs were 10.1 and 7.0 percent of sales respectively.
Finally, expenditures for supplies and other costs wer,e not widely
spread with “all brewery ñi 1 dels ranging between 22.9 and 26.6’ percent.
Depreciation was derived from IRS data and expressed as a ,percent of
assets. Book values were determined to be 4 percent for the older
small model, 5 percent for the older medium model and 6 percent for the
remaining models. Interest was estimated to be one percent of the annual
sales.’
Annual profits and annual cash flows wire based on average 1973-74 condi-
tions and ard depicted below (after-tax):
Return on Total Annual Cash Flow
Return on Sales rnvested Capital as Percent of Sales
(%) (%) ‘ (%)
Older Small 0.8 1.7 2.4
Medium L8 3.5 4.1
Large 3.1 5.6 ‘ 6.1
Modern , 4.2 4.7 9.1
New Source Small 5.0 3.2 13.9
Large 5.5 3.5 14.4
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D. Pricing Patterns
Historically the price of beer has shown a constant annual increase. This
trend is attributable to several factors with the more significant being
strong consumer demand and increasing ingredient costs. Determination of
actual beer prices involves a complex interaction of consumer demand
and attitudes, the available supply and to some extent, government
taxes. The market structure of the industry can be basically characterized
as oligopolistic with a few large brewers dominating the market and to some
degree acting as price leaders.
E. Economic Impact Ana’ysis
The resulting direct impacts from the imposition of effluent controls on
the Malt Beverage Industry for existing breweries are expected to be
negligible as all but three of the industry’s breweries discharge their
effluent to municipal treatment systems. The impacts on the three direct
dischargers are expected to be slight as according to EPA all the plants
presently meet the proposed BPT standards and one meets BAT. Thus the
potential direct impacts will’ primarily be limited to those plants which
are yet to be constructed and will discharge their effluent to navigable
waters (hereafter referred to as New Source). While the direct impacts
are limited primarily to the new source breweries, there exists the
possibility that existing breweries may be indirectly impacted due to
the impostion of effluent controls. These indirect impacts stem from
existing breweries’ experiences of increasing changes for municipal waste
treatment which have instigated some breweries t explore the alternative
of”constructing their own treatment system and breaking their dependence
on •the municipal system. As municipal charges increase, in some cases,
this may become a viable alternative.
1. ‘Price Effects
An implicit indication of the expected price effects is the amount of sales
price increase necessary to offset effluent control expenditures such that
the breweries’ profitability remains t ,e same’. These were estimated and
ranged from 0.8 to 3 4: percent. However, due to the market structure
and sinôe all but three breweries presently utilize municipal systems
it is doubtful impacted breweries could pass these required increases on
to, the consumer. If sufficient number of breweries incur increases in
municipal treatment charges then the industry as a whole might increase
pric:es and those direct discharging breweries could recover some of their
‘required price increase but the portion which they could recover would be
dependent upon the magnitude of t’he municipal charge increas’es.
2. Financial.Effects
The financial impacts of effluent controls were measured by analyzing
various financial ratios for the model breweries both before and after the
installation of the controls.
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The analysis of control cost effects on after-tax income and return on
sales basically follow the same pattern. The effects of BPT on the
older small ‘brewery cause it’s income to become negative.. The ‘older
medium model’s income is reduced by 72 percent, the older large by 43
percent and the existing modern by 19 percent. The effects of BAT
requirements results in an additiOnal small reduction for each model.
The effects of. NSPS on the new source models result in a reduction of 33
percent for th small and 11 pe.rcent for the large new source model.
Returns on invested capital , after taxes, are affected by the impact
of control costs such that the returns are reduced from 1.0 to 4.8 percent
with the most significant impact occurring on the small brewery. F3r the
new source models the imposition of NSPS results in reductin of0;9 percent
for the small new source model and 0.3 rercent for the large.
Annual cash flow are similarly impacted by control costs: smai.1 breweries
(both old and new source) are more significantly impacted than the other
breweries and the impacts become even more significant under BAT requirements.
Net’ present values were calculated under baseline and subsequent treatment
levels as the final step n the financial. Under baseline conditions
the values are all positive for the existing model breweries and negative
forboth new source models. Under BPT guideline impacts,the older small.
and medium models fall below the zero value and results in a 60percent
reduction in the older large value’ and a 27 percent reduction in the
value of the modern model. BAT requirements result in a further deteriora-
tion of the respective model’s net present values. The impacts.of NSPS
on the net present values of both new source models indicate that these
standards make it increasingly difficult to warrant new brewery investment.
3. Other Effects
Other types f economic impact such as produc€ion, employment., community.
and balance of payments deficit effects are normally assessed when there
are plant closures due to pollution controls. However, these other effects
are not meaningful nor quantifiable in a report in which no closuresare
projected. Although employment is an important consideration to a potential
new firm and increases in employment anu local business are important to
surround ng communities of a potential new plant, these effects are.more
related to the deci.sion to construct anew plant. Thus, in this report,
these related effects were not pursued.
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III. MALT
A. Industry Structure
The Malt Industry is defined as an industry comprised of. establishments
primarily :engaged in manufacturing malt or malt by-products from barley
or other grains.
1. Characteristiás of the Industry
The ‘ Census of Manufactures states that in 1972 there were 30 firms in
the industry operating some 40 establishments. Historically the number
of establishments has been relatively constant with 46 operations in
1958, 43 in 1967 and then 40 in 1972. Maltsters are primarily concen-
trated in the north central region of the United States as this area
produces the majority of the barley.
These 40 operations, had shipments which were valued at $226.3 million in 1972.
Estimates for 1975, indicated shipments for the industry should be valued
at $530.0 million. Since 1958,: the industry 1 s value of shipments has
increased at an estimated rate of 6.9 perc.ent per year.
The industry is characterized as containing varying degrees of integration
with the most common integration being forward as some firms are owned
by breweries (the largest purchaser of malt products). Most maft •operations
are not highly diversified as their facilities do not lend themselves
to production of other non-associated products.
2. Employment Characteristics
Total employment within the industry decreased by 29 percent from 2,400
employees in 1958 to 1,700 in 1972. Production workers have consistently
represented approximately 75 percent of all employees and are characterized
as predominately semi-skilled. Production workers averaged 1923 hours
:each in 1972 with the •average hourly wage being’ $5.92. This wage rate
represents nearly twice the rate in 1958; a time period during which the
value of shipment per worker increased by 60 percent and the value added
per worker increased by 45 percent.
3. ‘Other Considerations
As only one maltster in the industry is known to discharge to other than
municipal treatment, the aggregated effects of effluent controls are
expected to be small. However, some effects may be encountered by the
yet-to-be constructed new source plants. Also, other Federal, State and
local regulations may affect maltsters and change the operating environment
of the industry.
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B . Financial Profileofthe Industry
Sales of malt, in terms of the Census’ value of shipments, have fluc-
tuated during the 1967 to 1971 period and then in 1973 and 1974 substan-
tial increases occurred. These values, however, when adjusted by the
wholesale price index for.malt to reflect real dollars, show,a more
constant trend with average annual sales being $221.6 million.
The ability of a firm to internally or externally generate new investment
funds to finance pollution controls is a reflection of the firm’s past
earning record, present financial ‘condition, future earning potential,
indu2try position and the state of the overall economic conditions of
the industry and the nation. While financial data are limited, it ‘is
anticipated the .overal 1 industry will not have difficulty in generating
funds. In many instances plants are owned by larger conglomerates with
adequate abilities to finance new investments.
Finally the cost of capital, utilized as a measure of expected performance,
is defined as the weighted average of the cost ofeach type of capital
employed by the firm. Utilizing performance measUres of the industry
the after tax cost of capital was estimated to be 8.8 percent.
C. Model Plants
Maltsters can vary in the procedures they use to produce malt to differ-
entiate their product (to the extent that it is passable); but, yet tI
basic process is the same for most plants.. As all, but one current
maltsters utilize municipal systems only the new source model plant was
developed. It was determined to consume 16,000 bushels of barley daily
for 300 days per year. The model requires approximately $27.6 million.
in total invested capital and yields an after tax return on invested,
capita,l of 1.8 percent. Its after tax return on sales was determined
to be 2.6 percent.
D. Pricing Patterns
Historically,’ the price for malt remained relatively stable.between 1967
and 1972. After 1972, however, malt prices increased rather substantially
(29 percent increase in 1973 and 113 percent increase in 1974). The market
structure can basically be depicted as oligopolistic and as such price
leadership occurs. The recent pr-ice increases are attributable to several
factors with the most significant being increased prices of materials
inputs (barley).
E. Economic Impact Analysis
The resulting impact from the imposition of effl’uent controls for existing
maisters is expected to be negligible as all known plants ,but one dis—
chargé to municipal systems. The effects of NSPS on the new source plants
results in a required price increase of 1.5 percent such that the plant
can maintain the same profitability as before the installation of controls.
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However, due to the market structure of the industry and the fact that
all but one existing’ firm thus are on municipal systems, it is extremely doubt-
ful new source impacte,d plants can increase prices to offset control
costs.
The financial impacts were measured by analyzing various financial ratios
for the model both before and after the installation of controls. The
imposition of NSPS controls results in a decrease in the models return
on sales from a baseline condition (before controls) of 2.6 percent to
an after NSPS condition of 2.0 percent. After-tax return on invested
capital declines from 1.0 to 1.4 percent and cash.flôw as a percent of
invested capital declines from 6.8 to 6.6 percent. The baseline net
present value (NPV) for the model plant was deterrninedtó $-16,59l,000
After consideration for controls, the NPV ‘drops to $-18,017,000. While
the’ baseline negative NPV indicates few new firms would enter the in
dustry, the NPV after’ lISPS controls is reduced such that it is doubtful
any firms would enter unless they could utilize municipal treatment.
Due to the fact that existing maisters will not be impacted, it is
doubtful the..bindustry will incur production, employment,’ community
or other impacts.
IV. WINES, BRANDY AND BRANDY SPIRITS
A. Industry Structure
The wine industry is defined as those establishments primarily engaged
in the manufacture of wines, brandy and brandy spirits. Also included.
are those es ab1ishments which are bonded storerooms and which blend and
bottle wines. The industry is comprised of three,basic types of operations
includingwineries with stills, wineries without stills and the bonded
storerooms engaged in blending and bottling.
1. Characteristics of the Industry
No precise estimates for the number of wineries are known to exist.
For purposes of this analysis, it was estimated 369 wineries were in
operation during 1973. Also it was estimated an additional 52 wineries
had stills and there were 33 tax-paid bottling houses (bonded storerooms).
In recent years’ all sources indicate that the number of wineries has ‘been
relatively’ stable. The majority of the wineries are located in the
west coast region of the U.S.., with 60 percent being located in California.
The majority of the remainder of the industry are concentrated in New York,’
Ohio and New Jersey.
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In 1972, the industry’s value of shipments totaled $865 million. Esti-
mates for 1975, indicated shipments should be valued at $1,182 million,
an increase of nearly 37 percent over the 1972 shipments. Since 1958,
the industry’s value of shipments has increased at an estimated rate of
9.4 percent per year.
Most wineries maintain limited backward integration in that they own
some vineyards, however, often wineries require additional grapes which
they contract with from local farmers. Wineries generally are not highly
diversified as their facilities do not lend themselves to the production
of non-related products. The wineries are highly specialized operations
which technologically consist of a mixture of both old and new proc .dures
and equipment. Most operations are limited by the quantity of grapes they
can crush and store during the season (10 to 14 weeks). For the remainder
of the year they usually bottle that which was crushed.
2. Employment Characteristics
Total employment within the industry increased by nea: ly 58 percent from
5,900 employees in 1958 to 9,300 in 1972. In 1972 produc.tion workers
represented approximately 60 percent of all employees and are characterized
as predominately union and s2mi-skilled. Production workers averaged 2,107
hours each in 1972 with the average hourly wage being $4.08. This wage
rate represents nearly twice. the rate in 1958; a time period during
which the value added per worker also doubled.
3. Other Considerations
Wineries were categorized into three operational categories andtwo
locational categories. Locationally, wineries are categorized as eastern
and western. Information from.industry sources indicate thatthe western
wineries already meet the proposed guidelines via land application and as
such were excluded from further.analysis. In terms of operatiOnal cate.-
gories, all known wineries with stills are located in California; thus
they too were eliminated. Bonded storerooms generate little if any efflu-
ent and were also excluded. Finally, during the latter phases of the
study, it was learned from the EPA tha.t a recent EPA survey revealed
only one eastern winery which could be classified as a.dir.ect discharger.
This determination was based on he acceptance of septic tanks and land.
application as an effective means of disposing eastern wineries’ effluent.
While much of the analysis included.consideration for the existing eastern
wineries, the final impact analysis was limited to only new source wineries.
Accordingly, this summary will consider only a discussion of new source
operations.
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B. Financial Profile of the Industry
The Wine Industry can be characterized by using values of shipments;
$279 million in 1960; $591 million in 1970 and $1,182 million in 1975.
Consumer expenditures for wine products, however, were considerably
higher with the 1974 estimate being $2.6 billion. Wineries also generate
substantial tax revenues for federal, state and local governments. In
1973 these taxes amounted to $193 million which represented approximately
20 percent to industry’s value of shipments.
Until 1973, the industry’s earnings achieved impressive progress which
was primarily attributable to volume growth. However, due to consumer
resistance, earnings since have declined and remainunstable. At the
present the outlook is not predictable and will depend upon the general
economic environment.
The ability of a firm to internally or externally generate new investment
funds to finance effluent controls is a reflection of the firm’s past
earning record, present financial condition, future earning potential,
industry position and the state of the overall economic conditions of
the industry and the nation. It is anticipated that the larger wineries
will not have significant problems generating the required funds.. Small
firms, however, may face some difficulties.
Finally, the. cost of capital, utilized as a measure of expected performance,
is defi ,ed as the weighted average of the cost of each type of capital
employed by the firm. Utilizing performance measures of the industry,
the after-tax cost of capital was estimated to be 7.9 percent.
C. ‘Model. Plants
Wineries utilize slight variations of a basic processas well as different
varieties of grapes to produce differentiated types of wines. Nearly all
of the existing wineries already meet theproposed guidel nes; thus only the
new source model plants were, utilizedfor the impact analysis. Two new
source models were developed with the medium sized model’ producing
194,000 wine gallons per year and the large model producing 2,511,400
wine gallons per year. the medium model requires $1.8 million in
total invested capital and yields an after-tax return on sales (ROS) of
8.9 percent and a return on invested capital (ROl) of 2.9 percent. The
large model requires $21.9 million in invested capital and ‘has a ROS
and ROlof 8.9 and 3.1 percent respectively.
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0. Pricing Patterns
The price of wineshave historically remained relatively’stable until
1970. However, after 1970, consumer demand increased significantly and
accordingly,’wineri ’es increased prices to offset higher production and
raw material costs. Basically the industry can be characterized as
competitive but wineries are subject to numerous state and federal
regulations which sometimes limit competition within aparticular state.
E. Economic Impact Analysis
The, resulting impact from the imposition of effluent controls for existing
wineries is expected to be negligible as nearly al wineries ãlreadymee,t
the proposed guidelines. The effects of NSPS on the new source models
result in a required price.increase of •l.4 p.ercent for the medium winery
and 2.0 percent for the large winery, such that the wineries can maintain
the same profitability as before the installation of controls. However,
the existing wineries will not beaffected by the guidelines and it is
doubtful that any new source: winery will be able to pass on the required
pri’ce increase and as such will have to absorbe any effluent control
costs. .
The resultant financial impacts •were measured by analyzing various’
financial ratios for the models both befove and after the installatio.n
of controls. The results are summarized below.
Medium New Source. Large New Source
Before After - Before After
AfterTax Return on Sales Controls Controls Controls Controls ’
After Tax Return, on Sales (%) 8.9 8.3 ‘ 8.9 8 .O
After Tax Return on Invested
Capital (%) 2.9 2.6 3.1 ‘ ‘.2.7
Cash Flow as a Percent of
Invested Capital (%) 8.3 8,3 9.6 9.4
Net Present Value ($000) -795 -838 -8,493 -9,291
As can be seen from theábove ratios, the imposition of NSPS results in
the medium winery’s income becoming negative and. results in a 13 percent
reduction in the large model winery’s income. The wineries’ cash flows
however remain positive. The net present values (NPV) both before’ and
after controls are negative. Negative NPV’s ‘indicate that it is doubtful
the new facilitieswould be built in the,first place. After NSPS’, the’
NPV’s are even more negative which indicates NSPS standards will, make
it increasingly difficult to warrant new winery investments.
Due to the fact that existing wineries will not be impacted it is. not
foreseen that production, employment, community or other impacts will occur.
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DISTILLED SPIRITS
V.
A.
Industry Structure
The Distilled Spirits Industry is defined as an industry comprised of
establishments pr imarily engaged in the manufacturing of alcoholic
liquors by distillation and rectification, and in manufacturing cordials
and alcoholic cocktails by blending processes or by mixing liquors and
other ingredients.
1. Characteristics of the Industry
According to the Bureau of Alcohol, Tobacco and Firearms, as of July 1,
1975, there were 63 distilleries and 80 rectifiers authorized to operate
in the United States. Distilleries tend to be located in the central
eastern and southeastern regions of the United States. Kentucky alone
accounts for 46 percent of all distilleries.
in 1972, the industry’s, shipments were valued at $1,798 million.
Estimates for 1975 indicate shipments are expected to total $1,932
million, an increase of 7.5 percent above the 1972 shipments. Since
1958, the industry’s value of shipments has increased at an annual
rate of 3.8 percent.
Theindustry is characterized as containing varying degrees of inte-
gration with backwards integration being the most common. This inte-
gration is usually limited to the production of grain and/or barrels.
By requirements of governmental regulation most distilleries are not
diversified; they produce only distilled spirits. However, many dis-
tiller es are owned by highly diversified, conglomerates.’ Most distil-
leries’are relatively old but throughout their useful life new equip-
‘ment has been added or used to replace that which is worn out or tech-
nologically absolete. ,As aresult, most distilleries represent a áom-
bination of both old and new procedures and equipment.
2. Employment Characteristics
Total employment in the industry decreased by 10 percent prom 20,500
employees in 1958 to 18,400 employees in 1972. Production workers
represent approximately 80 percent of all employees and are characterized
as predominately union and semi-skilled. Production workers averaged
1972 ,hours each in 1972 with the average hourly wage bei’ng $4.63. This
wage rate represents twice the rate in 1958; a time period during which
the value added per worker also doubled.
• 3. Other Considerations
Distilleries were categorized into ‘two separate categories’- rectifiers
and distillers. The rectifiers typically purchase distilled alcohol and
rectify, blend and/or bottle it to, produce the desired beverage. These
operations generate very little effluent and none are known to be, direct
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dischargers. The second category of operation are those which have a
‘still and produce distilled spirits for either further processing which
leads to bottling or for sale to a rectifier and/or bottler.” These’,
distilleries can’ be further classified as either grain or citrus,molasses
distilleries. Grain distilleries commonly produce the traditional dis-
tilled spirits (i.e., vodka, whiskey) and molasses distilleries primarily.
produce rum. Presently of the 60 grain distilleries and 3 citrus molasses
distilleries, known directdischargers number 18, and 2 respectivêly. Thus,
the major effort of thisanalysis will concentrate on these direct dis-’
chargers as well as yet t’o be constructed new source distilleries.
B. Financial Profile of ‘the Industry ,
Sales of distilled spirits, in terms of,the Census’ value of shipments
have shown a steady gain s’ince 1960; in 1960 the industry’s shipments
were valued at $927 million, in 1970 shipments were $1,757.5 million
and i’n 1974; $1 ,868 million. Besides generating annual sales, distil—
‘leHes also generate substantial revenues for the federal, sta’te ‘and
local governments. In 1974, these tax revenues amounted tó.over 3
times’ the industry’s value of shipments, $6.1 billion.
‘Earnings within the industry have, varied, with a few firms attaining
consistent, though moderate, growth but yet the majority experiencing a
deteriorat,ion in. earnings. Someof this deterioration is attrIbutable
to sub-par consumption growth and the few firms achieving earnings
growth are doing so utilizing diversification and proof cutting. The
outlookat this time is considered unpredictable.
The ability of a ‘distillery to internally or externally generate new
investment funds to finance effluent controls is a reflection of the
firm’s past earning record, present financial cond,ition, future earn ng
potential, industry position and the state of the overall economic
‘conditions of the industry and the nation. Cons’idering the situation
‘experienced by the industry it is anticipated large, highly diversified
firms will not have significant difficulties generating the required
funds. Smaller, less diversified firms, however, may encounter some
difficulties. ‘ ‘ ‘ ‘
Finally, the cost of capital, utilized as a measure áf expected perfor-
mance, is defined as the weight average of the cost of each type of
capital employed by ‘the firm. Utilizing performance measures of the
industry’the after-tax cost of capital was estimated to be 7.9 percent.
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C. Model Plants
Distilleries utilize many different techniques to produce a wide variety
of alcoholic beverage’s. Even so, the basic processes for most distillery
operations are similar. Economic models were developed to represent the
various sizes of grain distilleries which presently are in operation as
well as new source models (those which reflect new distilleries to be
built).
1. Type and Sizes of Model Distilleries
The existing model grain distilleries were depicted as small, medium and
large operations and determined to process daily 1,000, 5,000, and 15,000
respectively, bushels of grain. Two new source grain models were developed
which.corresponded to the medium and large.existing models.
2. Investment
Model distillery data included for each model show its estimated book
value, salvage value and.operating capital requirements. The book values
for the grain distilleries were based on the asset value per proof gallon
of annual capacity of each model. These values were $.31, $.30 and $.29
for the small, medium and large existing grain models respectively and
$1.00 and $.75 for the medium and large new source modelsrespectively.
Salvage values will vary widely from plant to plant depending on the
locationand condition of the facilities. For purposes of this analysis,
salvage values were estimated at 30 percent of the model’s assets.
Operating capital values assume current assets as a percentage of sales
and were 35, 45 and 55 percent of sales for the small , medium and large
(both existing and new source) grain distilleries.
Current liabilities were estimated utilizing a current ratio (current
assets divided by current liabilities) of 1.8 for the, small grain model,
1.6 for the medium grain models, and 1.4 for the large model grain dis-
tilleries. , . . , , , .
3. Model Distilleries’ Financial Characteristics
For the existing grain distillery models, ingredient costs ranged from
19.O’percent of the sales dollar for the medium and large distilleries
to 20.4 percent for the small distillery. Labor.costs represented the
greatest percentage for, the small distillery, being 33.4 percent. Labor
16
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for the medium distillery represented 29.1 percent of the sales dollar
and for the large distillery model, labor represented 25.8 percent.
Finally, the expense for supplies and other costs was relatively equal
proportionately for each of the models, being between 42 and 45percent.
Thus for the existing model grain distilleries, total costs for the small
model were estimated to represent 96.4 percent of its sales dollars. For
the medium and large distilleries, total costs were estimated to be 91.5
percent and 89.6 percent respectively. For the NSPS models,. total costs
represented .87.4 percent of sales for the medium NSPS model and 87.3 per-
cent for. the large NSPS model. Annual profits and annual cash flows are
depicted below (after-tax):
Annual
Return on Total cash flow
Return on Sales Invested Capital as % of sales
Grain bistilleries . (%)
Existing Small . 1.0 2.7 2.3
Existing Medium 3.5 11.7 4 4
Existing Large . 4.6 17.7 53
New Source Medium 4.9 . 9.9 72
New Source Large 5.1 11.3 7:2
D. Pricing. Patterns
The prices of distilled spirits have remained relatively stabl:e in recent
years. . This stability may be attributable to only a smal increase in
consumer, demand in recent years plus the fact that many distilleries
are reducing the proof of their products in lieu of increasi.ng prices.
Basically, the industry can be characterized as competitive but distilleries
are subject to numerous state and federal.regulations whichoften limit
competition in one aspect or another.
E. Economic Impact Analysis
As both molasses distilleries in the U. S. presently meet the proposed
standards, the molasses distillery models were excluded from the impac.t
analysis. Thus, only the grain distilleries will be discussed irithis.
impact analysis. Of the 60 grain distilleries authorized to operate 18
are known to discharge effluents directly to navigable waters. However,
17
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12 of these direct dischargers, already meet the proposed BPT standards,
and one meets BAT. The remaining 5 direct dischargers have some form
of treatment currently in place and subsequently will not incur the fufl
financial impact depicted below.
1. Price Effects
The required price increases necessar.y to offset the expense of the
installation of effluent controls for distilleries with no treatment
currently in place for the existing grain models range from 0.6 percent
to 22. percent. As would be expected the larger distillery models
required smaller price increases than the smaller models. Also going
from BPT to BAT resulting in only a small (less than 0.2 percent) incre$e
in the required price adjustments. For the new source models, the
requirements fo NSPS resulted in the medium new source model requiring
1.1 percent price increase while the large new source model required
an inc.re.ase of only O.. 7 parcent
While same of the distilleries will be affected by the control require-
ments it is not anticipated the distilled spirit prices as a whole will
increase due to the guidelines. This is due to the market structure of
the industry and the fact that only a few distilleries will actually
incur impacts.
2. Financial Effects
The financial impacts of effluent controls were’measured analyzing
various financial ratios for the model grain distilleries both before
and after the installation of controls. The analysis of control costs
effects on after-tax income andreturn on ales basically follow the
same pattern. The effects of BPT on the small model cause its income
to become negative. The medium models’ income is reduced by 15 percent
and the large models’ income by 6 percent. The effects of BAT result in
an additional small reductionfor each model. The effects of NSPS on
the’ new source models’ result in a reduction of 9 percent for the medium
model and 5 percent for the large new source model.
After ta:•: return on invested capital (ROT) after BPT impacts become
n gative for the small existing model and are reduced from 11.7 and
17.7 percent for the medium and large ‘models to 9.4 and 16.1 percent
respectively,. BAT requirements reduce the ROT’s by an additional 0.1
percent. For the new source models, the imposition of. NSPS results in a
reduction from 9.9 and 11.3 percent for the medium and large new source
modèls’t6 8.7 ‘and 1G.4’percent respectively.
Cash flows, after the imposition of controls will remain positive and follow
the same pattern as described previously (i.e., ‘the smaller incurring
more significant impacts than the larger models).
18
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Net present values (NPV) were calculated under baseline and subsequent
treatment levels as the final step in the financial analysis. Under base-
line conditions all NPV’s except the existing small were positive.
The negative small models’ NPV indicates that under the assumed financial
conditior 3 it would be doubtful if such a firm would remain in operation.
‘Accordinq to industry sources this is exactly the case. After the impo-
sition of BPT standards on the existing models, the small.models NPV
become lore negative, the medium model’s was reduced by 25 percent and
the large existing model’s NPV declined by 8 percent. BAT requirements
result in a further decline in the NPV’s, however, the significance is
much smaller. The impacts NSPS on the new source models result in the
medium new source models.. NPV declining by 54 percent and the large model’s
NPV by 20 percent.
3. Other Effects
BPT and BAT guidelines are not anticipated to result in any other severe
impacts on the industry. Due tothe small number of direct dischargers
‘no,t meeting either standard and the fact that all of these.operations
already have aerated lagoons in place it is not projected that” any
closures will occur. Wich regard to new source distilleries, while
returns are lowered, the magnitude of. these reductions are not
sizable enough to restrict entry to the industry. Accordingly, it is
not anticipated that the imposition of effluent guidelines will result
in any employment, community or other impacts.
VI. SOFT DRINKS
A. Industry Structure
The Soft Drink Industry is defined as an industry comprised of establish-
ments primarily engaged in the manufacture of soft drink (non alcoholic
beverages) and carbonated waters.
1. Characteristics of the Industry
In 1975, the National Soft D ’ink Association estimated the industry was
comprised of 2,317 establishments. ‘Historically, the number of operations
in the industry has declined with a reduction of 39 percent between the
years 1958 and 1972. While the majority of the operations in the indus-
try have less than 50 employees (in 1972, 73 percent) ‘those with more
than 50 employees account for a significant portion of the industry’s
value of shipments (83 percent in 1972).
Estimates of the value of shipments for the industry, are expected to total
$7.2 billion in 1975, 10 percent above estimated shipments of $6.5
billion in 1974, and 31 percent above the shipments in 1972. Historically,
the value of shipments have increased by’an average of 9.5 percent per
year since 1958. Most soft drink plants tend to be located near concen-
trated population areas and in the warmer climate areas. Plants normally
are not highly integrated and most firms are not diversified.
19 ‘ .
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2. Employment Characteristics .
Total employment within the industry has increased by 27 percent from
97,100 employees in 1958 to 123,427 in 1973. As the total number of plants
has decreased during this period, this increase in employees reflects a
trend for fewer but larger plants. Production workers represent only 40
percent of all employees in 1972 and this low percentage is explained
by the fact that most plants employ several driver/salesmen which are
not considered production workers. Basically workers are semi-skilled
and in 1972 production workers averaged 2,013 hours each at an average
wage of $3.24 per hour. This wage rate represents approximately twice
the rate in 1958; a time period during which the value added per worker
also doubled.
3. Other Considerations
Soft drink operations can be classified in three different classifi-:
cations. First, the traditional type of operation consists of plants
which only bottle soft drinks for sale to their customers. Second,
due to changing consumer demands, the above traditional plants may have
been modified such that they are also able to can soft drinks. Finally,
there are those operations which only can soft drinks. This last type
of operation may can only its own brands (typically local or regiOnal
brands). Furthermore, some soft drink canners may actually be a fruit
and/orvegetabTe canner, who can soft.dri.nks. during the off season.
For purposes of this analysis, those operations which bottle soft drinks
and those which both bottle and can wft drinks are considered tobe
very closely related in terms of operating characteristics. The primary
differences being that the canning operation will require a separate
production l 4 ne and does not require the bottle wash. Typically, opera-
tions which do both bottling and canning will tend to be the larger
more modern facilities.
The industry can be predominately characterized as discharging its
effluent tomunicipal treatment facilities. At the present only 20
plants have been identified which can be considered direct dischargers.
It is recognized that the impact of substantially increased user charges,
now and in the future, to plants discharging to or planning to discharge
to municipal sewers is extremely critical to the industry, 1ocal business
Communities and to. consumers. However, the scope and the economic impacts
in this report, pertain to those plants directly discharging to navigable
surface waters and plants that are constructed after the promulgation of
the guidelines which will be direct dischargers.
20
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B. Financial Profile of the Industry
Total sales of the soft drink industry were estimated to be $7.8 billion in
1974. This compares to $4.8 billiQn in 1970 and $1.7 billion in 1960.
The increase in total sales has resulted from both an expansion of
production facilities, an increase in per capita consumption, and an
increase in the overall price level. During the past two decades, the,
total soft drink production has inëreased from 1.18 billion 192-ounce.
cases in 1954 to 3.80 billion cases in 19.74, an increase of over 200
percer. .
The Soft Drink Industry has historically been considered to be strong’’in
terms of growth in both sales and earnings. However, in recent years
while sales have continued’to grow, earnings have deteriorated. This”
deterioration has .been reflective of increased costs associated with the
switch from returnable bottles to the less profitable disposable containers.
The ability of a firm to internally or externally genera.te new investment
funds to finance pollution controls isa reflection o the firm’s past
earning record, present financial condition, future earning potential,
industr.y position and the state of the overall economic conditions of.
the industry and the, nation. As this industry has historically maintained
reasonably strong growth and return and although it has recently experienced
a slight decline, it is anticipated the overall industry will not have,
difficulty generating funds. ‘
Finally .the cost of capital, utilized as a measure of expected performance
is defined as the’weighted average of the cost of each type of capital
employed by the firm. Utilizing’ performance measures of the industry
the after tax cost of capital was estimated to be 7.5 percent.
C. Model :I ants
As mentioned previously, the 3 classifications of plants are closely
related and as such the representative model, plants developed for this
analysis were ascumed to at least ‘bottle soft drinks and some may. also
can soft drinks. Relevant summary data for the model plants are depicted
in Table VI-1.
D. Pricing Patterns
The price of soft drinks is based primarily on the cost of inputs and
the demand for soft drinks by the consuming public. In the past, consumer
demand has-been the more influential factor affecting prices; however,
recent significant increases in materials costs have caused the’ cost of
inputs to gain in influence of prices and as material costs have increased,
the prices of soft drinks have also increased. Basically the market
structure facing bottlers is highly competitive and consumers are considered
.21 ‘
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Table VI-1.. The Soft Drink Industry - Model Plant Data
.,
. S Existing
Small Medium Large
New
Large
Source
X-Large
X-Large
Annual PrOduction
(1,000/1.92 ounce cases)
.
.
105
720
3,000
11,000
3,000
11,000
Number Corresponding Establishments
596
1,108
706
58
-
-
Total Invested Capital ($000)
82.4
521.8
2,351.6
10,614.0
4,390.1
16,709.2
Gross Sales ($000)
178.5
1,224
5,100
18,700
5,100
18,700
After Tax Return a ,: Sales (%)
0.9
2.3
2.1
1.O
3.7
3.5
After Tax Return on Invested Capital
(%)
1.8
5.3
4.4.
1.7
4...4
3.•9
Cash Flow as Peröentof Sales
3.7
5.1
5.5
5.2
11.4
11.4
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price conscious. Thus the ability of a single bottler to set his own
prices is limited.
E., Economic Impact Analysis
The resulting impacts from the imposition of effluent controls on the
Soft Drink Industry for existing soft drink plants are expected to nominal.
as only 20 plants discharge their wastewaters to navigable waters. Further-
more, the overall impacts are expected to be limited because of the 20
known direct dis hargers, 11 .lants presently meet the proposed BPT standards
and 5 of these 11 plarrts meet proposed BAT standards.. Of the plants nOt
meeting either BPT or BAT standards, 2 have some form of treatment already
in place and only the remaining 7 plants have no form of treatment systems.
Thus, of the 2,317 plants operatingat the end of 1975, 99.1 perc.ent utilize
municipal treatment systems, 0.5 percent meet either BPT or BAT, 0.1 per-
cent have some form of treatment and 0.7 percent have no treatment what-
so ever.
For those plants which do riot meet standards, expenditures for controls
will be required. However, no plant closures are anticipated as dis-
cussions with the respective managements of these operations by the
EPA resulted in the determination that all 9 operations not meeting the
proposed standards will make the required investments and do•expect
to remain in operation.
New source plants, if not utilizing municipal treatment systems, are also
expected to incur financial impacts such that it is doubtful if direct dis-
charging new source plants would be constructed.
VII. SOFT’DRINK SYRUPS AND CONCENTRATES
(Non-synthetic Flavoring Extracts and Syrups),
A. Industry Structure
The Flavoring Extract and Syrup Industry is defined as an industry com-
p ’rised of establishments primarily engaged in the manufacture of flavoring
•extracts, syrups and fruit juices, not elsewhere classified, for soda
fountain use or for the manufacture of soft drinks and colors for bakers’
and confectioners’ use. Emphasis in this industry analysis is primarily
directed’ toward the Soft Drink Syrup and Concentrate Segment of the
aggregate industry. This narrowing of the analysis was resultant of
the fact that the remaining s egments of the SIC 2087 industry’ were not
included in the Miscellaneous Foods and Beverages’ Development Document
but rather in another EPA document. However due to limitations of
available disaggregated data much of the actual industry description
concerns itself with the entire SIC 2087 industry.
23
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1. Characteristics of the. Industry
The Census of Manufactures states in 1972 there were 350 firms in the in-
dustry operating some 400 establishments. Historically the number of
establishments has declined with 534 establishments in.operation in 1958,
431 in 1967 and 400 in 1972. Plants tend to be located either near a major
metropolitan area or near a source of raw materials. For the latter case
this location is usually near a port. From a regional point of view the
northwest region contains the largest portion of the plants (35 percent’l.
Estimates of’ the 1975 value of shipments for the industry are expected to
total $1,803 million, 8 percent above the estimated shipments for 1974
and’ ’22.5 percent above the 1972 value of shipments. Historically, the
value of shuipments increased by an annual average rate of 8.3 percent
between the years 1958 and 1975.. During this period, the actual rate has
fluctuated between minus 2.2 to 18.2 but for most.years the range has been
relatively near the 17 year averageof 8.3 percent.
2. Employment Characteristics
Total employment in the industry hasincreased by nearly 10 percent from
9,3.00 employees in 1958 to 10,200 in 1972. Production workers have consis-
tantly represented between.55 to 60 percent of the total work force and can
be characterized as semi-skilled. Production workers averaged 2067”hou s
in 1972 with an average hourly rate of $3.98. This wage rate represents
nearly.twice the rate of 1958; a period .during which the, value added per
worker tripled.
3. Other Considerations
No known plants in the industry discharge waste waters to other than
municipal treatment systems. For this reason, aggregated effects of
effluent guidelines are.expected to be small. ‘However, some effects may be
encountered by the yet-to-be constructed new source plants. Also, other
Federal,. State and local regulations may affect firms a’nd change. the
operating environment of the industry.
B. . Financial Profile of the Industry
Sales, in t rms, of the Census’ value of shipments, have’ shown a steady trend
to increase fr,om year to year. Between 1958 and 1975, the average increase
amounted to 8.3 percent per year.
the ability of a firm to internally or externally generate new investment’
funds to finance pollution controls is a reflection of the firm’s past
earning record, present financial condition, future earning potential,
industry position and the state of the overall economic conditions of the
industry and the nation. While financial data are limited, it is anticipated
the overall industry will not have difficulty in generating funds. In
many instances plants are owned by larger conglomerates with adequate
abilities to finance new investments. ‘
Finally the cost of capital, utilized as a measure of expected performance,
is defined as the weighted average of the cost of each type of capital
employed by the firm. Utilizing performance measures of the industry the
after tax cost of capital was estimated to be 8.1 percent.
24
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C. Model Plants
As the, industry presently discharges waste waters to municipal systems only
anew source model plant was developed.
Based on information provided in the Development Document , the new source
model plant (that is, the plant which has yet to be constructed and will
be required to meet ‘new source performance standards if it will be a.direct
discharger) was determined to be a facility which primarily produces
beverage bases and which manufactures approximately 80,000 gallons per day.
The model plant is based on a total invested capital requirement of $25
million with annual sales of $44 million.’ The.mcdel yields.2.2 percent after
tax return on sales and 3.9 percent return on invested capital.
D. Pricing Patterns
Historically the prices for flavoring syrups have remained relatively stable.
However, in 1974 prices increased significantly with the December 1974
price being 139 percent higher than the average 1973 price.. As much of. the
materials input are of a sugar basis, much of these’ price increases can
be attributab’e to increased material costs.
The market structure of the industry is.highl ’ varied and ranges from a
somewhat competitive environment to ologopolistic to near monopolistic.
E. Economic Impact Anaiysis
The resulting impact from the imposition of effluent controls for existing
plants is expected to be negligible as all known plants discharge to
municipal systems. The effects of NSPS on the new source plants results
in a required price’ increase of 0.5 percent such that the plant can main-
tain the same profitability as before the installation of controls.
However, due to the market structure of the industry and the fact that all
existing firms are on municipal systems, it is ‘extremely doubtful new
source impacted plants can increase prices to offset control costs.
The financial impacts were measured by analyzing various financial ratios
for the model both before and after the installation of controls. The
imposition of NSPS controls results in a decrease in the models return
on sales from a baseline condition (before controls) of 2.2 percent to
an after NSPS condition of 2.0 percent. After-tax return on invested
capital declines from 3.9 to 3.5 percent and cash flow as a percent of
invested capital declines from 13.3 to 13.0 percent. The baseline net
present value (NPV) for the model plant was determined to be $-10,781,000.
After consideration for controls, the NPV drops to $-11,813,000. While
the baseline negative NPV indicates few new firms would enterthe industry,
the ‘NPV after NSPS controls is reduced suchthat it is doubtful any
firms would enter unless they could utilize municipal treatment.
Due to the fact that existing plants will not be impacted, it is doubtful
the industry will incur production,employment, community or other impacts.
25
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PART I
GENEPJ\L BEVERAGE INTRODUCTION
AND
METHODOLOGY
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PART I. INTRODUCTION AND METHODOLOGY
I. INTRODUCTION
A. Scope
This study for the Environmental Protection Agency: was designed .f.o,
analyze the economic impact of the costs of pollution abatement require.-
ments.under the Federal Water Pollution.Control Act Amendments of 1972
on selected miscellaneous foods and beverages industries as listed in
the Preface.
Specifically, the following types of economic impacts were analyzed
and, to the extent thay they were ftund to’be significant,’ are des-
cribed in this report.
1. Price and productioh effects - including effect upon
industry’s suppliers and consumers
2. Financial effects - profitability, growth, and capital
availability
3. Number, size and location of plants that can be expected
to close or, curtail production
4., Changes in emplo ’ment
5. Community impacts
6. Balance. of payments consequences, and
7. Any other impacts.
Three levels of waste’ water treatment, or control for plants’ dTscharging
directly to navigable waters are considered in this ‘study. These are:
1. Best practicable control technology currently available (Level .1
or BPT) - to be met by July, 1977.
2.’’ Best available technology.economically achievable (Level II or
BAT’) - to be met by”July, 1983.
3. New source performance standards (‘Leve’l III or NSPS) - tobe
applied to all new facilities (that discha’rge to navigable
waters) commencing construction after promulgation of guidelines.
I—’
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In total direct dischargers represent only a small portion of the
beverage’ industry. However, some plants do exist in the Malt
Beverage, Wines, Distilled Spirits and Soft Drink Industries which
discharge their effluent to navigable waters. As such, these four
industries will be analyzed for potential economic impacts due to
Levels I and II controls.
Level III controls or New Source Performance Standards (NSPS) apply to
establishments that discharge directly to navigable Waters which commence
construction after prr’mulgation 0. guidelines. The possibility exists
that companies may decide in favor of constructing a new plant, treating
their effluent and discharging directly to navigable waters. Volume II,
then, is also concerned with assessing the economic impact of ,NSPS on
plantscommencing construction after, promulgation of guidelines in the
beverage industries.
B. Organization of This Report
This volume, Beverage Industries , is organized as follows:
Part I Introduction
Part II SIC 2082 Malt’ Beverages
Part III SIC 2083 Malt
Part IV SIC 2084 Wines, Brandy and Brandy Spirits and SIC 5182
Bottling and Blending of Distilled Spirits
Part V SIC 2085 Distilled Spirits
Part VI SIC 2086 Soft Drinks
Part VII SIC 2087 Flavoring Extracts and Syrups
In general, the analysis of Parts II ttirough VII are organized as follows:
I Industry Structure’;
II Financial Profile of the Industry;
III Model Plants;
IV Pricing Patterns;
V Effluent Control Costs;
VI Economic Impact Analysis; and
VII Limits to the Analysis
1—2
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C. Data Sources
Both.primary (unpublished) and secondary (published) sources of infor-
mation were used in the analysis.
1. Major Primary Sources
a. Data from the Distrilled Spirits Council of the United
States, Puerto, Rican Rum Producers, Finger Lake Wine,
Growers Association and,the Flavor and Extracts Manufac-
turers’ AssOciation. Cooperative arrangements were
developed with these associa’tions to survey their members
to provide information on final disposition of effluent,
capital and,operating costs of regulatory controls and
product mixes.
b. ‘ In addition tO the above associations’, contacts with the
following associations were established in efforts to
,gain insight to th,e characteristics of their respective
industries: , United States Brewers Association, Barley
and Malt’ Institute, .Wine Institute and the National Soft
Drink Association.
c. Model plant’.information was developed through’ trade “
associations a,nd industry contacts, agreeing to cooperate.
d. ‘, Pollution contro,l information - the Environmental Protection
Agency, Effluent Guidelines’ Division provided investment and
annual, costs of effluent treatment systems as zprepared by
Environmental,Science and Engineering of’ Gainesville, Florida.
‘St’atus of final dispos’itio.n of effluent discharge was also
provided by the Effluent Guidelines Divis’ion.
e. ‘Other primary information was developed through numerous
personal contacts and telephone discussions with industry
trade associations, ‘firms in, the industry and other specialists
in state i’nd federal government agencies,. universities, and
private engineering and ëonsulting ‘firms.
2. Major Secondary: Sources
a. , Census of Manufactures , Bureau of the Cen’s’us, U.S.’ ‘Department of
Commerce, Washington, D. C.
b. Price and Profit Trends in Four Food Manufacturing Industries ,
Staff report to Federal Trade Commission, July 1975.
c. Brewers Almanac , United States Brewers Association, 1975.
d. Industry Surveys- Liquor , Standard and Poors, October 16, 1975.
‘—3
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e. Distilled Spirits, Wine, Beer, Tobacco, Firearms, Enforcement,
Taxes, Summary Statistics , Department of the Treasury, Bureau
of Alcohol, Tobacco, and Firearms, FY 1974.
f. U.S. Industrial Outlook, 1975 , U.S. Department of Commerce,
Domestic and International Business Administration, 1975.
g; Almanac of Businessand Industrial Financial Ratios , Leo Troy,
1975.
h. Annuái Statement Studies, . R. J. MorrisAssociates, 1975.
i. Source Book of Statistics of Income , Internal Revenue Service,
U.S. Department of the Treasury (1968-1971).
j. Financial Survey of the Soft Drink Industry , National Soft
DrinkAssociation, 1973.
k. 1974 Sales Survey of the Soft Drink Industry , National Soft
Drink Association, 1974.
.1. . Statistical Profile, the SoftDrink Industry , National Soft
Drink Association, 1974.
m. Wine Industry Statistical Report , Economic Research Report,
Wine Advisory Board, 1975.
n. Wines and Vines , the Hiaring Company, December, 1973.
o. Public Revenues from Alcoholic Be’ rages , Distilled Spirits
Council of the United States, 1973.
p. Distilled Spirits Industry, Annual Statistical Review , Distilled.
Spirits Council of the United States, 1974.
1-4
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II. METHODOLOGY
The niethodological approach utilized to assess the likely economic
impact of. proposed effluent limitation requirements pursuant to the
Federal Water Pollution Control Act Amendments of 19.72 (PL 92-500) on
selected miscellaneous foods and beverages industries is summarized in
this chapter.
In this study, economic impact is defined as the comparison between (1)
the projections of the likely effects on plant-, local area, U.S.. and
foreign ctivity which would result from an industry’s cbmp]iance with
a given level of effluent controls and (2) projection of. industrial acti—
vity and changes which would likely occur in the absence of the .Act (baseline).
In particular, the principal economic variables of interest in this study
are:
I. Price effects - including effects upon industry’s suppliers
and cohsw;ers.
2. Profitability, growth and capital availability
3. Number, size, and location of plants that can be expected to
close or curtail productions
4 Changes inemploynient
5. Comrnunity. .inipacts
6. Balance of payments consequences
7. Any other impacts.
Economic impacts were evaluated for the following levels of effluent limi-
tation requirement.. .
1. Bestpracticablec@ntrol. technology urrently available (Level I) —
to be met by industrial dischargers by July, 1977.
2. Best available technology economically achievable (Level II)
to be met byJüly, 1983.
3. New source effluent standards (Level III) - to be applied to all
new facilities (that discharge directly to navigable waters)
constructed after the.promulgation of these guidelines.
I 1—1
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Effluent limitation requirements for miscellaneous foods and beverages
industries are described in detail in the Development Document . j/
In the case of best practicable and best available technology, the analyses
focus on price increases, plant closings, curtailments of production, dis-
locations of production, unemployment,, community impacts, and balance of
payment effects. In the case of ne , source perfor nance standards, economic
impacts are assessed in terms of effects on industry growth, prices, plant
locations (i.e., domestic or foreign production) and balance of payments.
Several interrelated analyses are used to evaluate likel ’ economic impacts
resulting from various levels o f water pollution controls on the miscellaneous
foods and beverages industries. These in—depth analyses ?! include: ( ‘1)
characterization and subcategorization of the tec inical and economic structure
of eac.h industry; (2) description, of the financial profile of each industry;
(3) construction of representative model plants; (Li) evaluation of pricing
patterns within each industry; (5) determination of technological options
for meeting designated levels of effluent control and the costs associated
with each option; (6) analysis of economic impacts.
The analysis, however, is not a simple sequential analysis; rather it em-
ploys interacting feedback steps. The schematic of the analytical approach
is shown in Exhibit lI—i. Due to the fundamental causal relationships among
the financial and prodw.;tion effects and other impacts, a greater emphasis
is devoted to plant closure analysis.
A. Industry Structure and Subcat prization
Ihe industry structure and subcategorization phase of the methodology
primarily invoi’ s describing and segmenting the respective industries
in terms of past and current economic c aracteristTcs. The purpose ot
this phase of the aha’lysis is to provide an information base to be’ used.
in subsequent ar alysis. In particular, the information on industry char-
acteristics is useful in determining an appropriate disaggt’egation design
for industry subcategorization.
Subcategorization involves segmenting the plants within each industry into
relatively homogenous classes with respect to plant size, regional differ-
ences,. technology employed, number of products, existing level of pollution,
scale of technological processes, level of output, or other relevant factors
important for assessing the impact of pollution controls. The delineation
of industry subcategories developed in the early stages of the analysis
serves as the basis for thedefinition and construction of representative
niodcl plants and the determination of waste treatment technological options
and costs.
ii Environmental Science arid Enqineering, Inc., et al., Development Document
for. Effluent Limitations Guidelines and New Source Performance Standards -
‘ Miscellaneous Foods and Bovera es, Point Source Category , EPA, Part 1-5.
.?/For those industries determined to have only negligibel potential impacts
resulting from effluent controls, detailed in—depth’ analysis was abbrevi-
ated and consisting primarily of the characterization of the technical and
economic structure of the industry.
11-2
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.:EPd\ Pollution.
Control Costs
j Plant Closures
I Due to Control
Exhibit Il-i. Schematic of economic impact analysis of ,effluent control
guidelines.
“-3
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B. Financial Profile of the Industry
The ability of firms within an industry to finance investment for pollu-
tion control is determined in part by past and expected financial conditions
of those firms. Under the heading “financial profile of the industry,”
various factors are studied to develop insight into the financial charac-
téristics of actual plants in the industry. Much of the data’ compiled in
this.section is also useful in determining financial profiles of represen-
tative model plants.
Key financial statistics include after-tax nrofit as a percent of sales,
after-tax profit as a percent of invested capital, sales to total assets
ratios, sales per employee, assets per employee, and after-tax profit to
net worth., Other financial factors are studied with respect to the ability
of firms to generate funds to finance investment for effluent management,
either internally through cash flow or.external ly through new debt or equity
issues. The data compiled in this ph .se of the analysis provide an infor-
mation base useful for projecting key technical and economic factors and
for carrying out subsequent economic impact analysis.
C.. Model Plants
The model plant concept represents a systematic frarl2work from which to
assess likely economic impacts on individual types and sizes of actual
plants within the industries. Usually more than one model plant is re-
quired for an industry in order to represent various types and sizes of
existing plants or plants which are likely to be constructed after the
promulgation of the guidelines.
Model plants represent a. variety of financial, economic, and technical
variables such as sales, investment, fixed and variable costs, profits,
size, type of process, etc. Model plant profiles are constructed from
data and information gathered .in the industry characteristics and sub-
categorization and financial profile phases of the analysis. Additional
data, as required, are generally obtained from industry representatives,
trade publications, and from engineering cost-synthesis methods.
The applicability of utilizing model plant data for assessing expected
economic impacts of water effluent controls rests principally on the
representativeness of the selected model plant(s). For example, the
economic concept of “economies-of-scale” in production is often present
in processing plants, e.g., average unit costs of production are usually
lower in large plants as compared with medium or small plants of the same
type. Furthermore, there are expected economies-of-scale in waste treat-
ment., which, in effect, will compound the economies-of-scale relationships
among differing sizes of plants.
“-.4
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In general, economies—of-scale realtionships in pollution control costs
have been demonstrated; and this alone would necessitate multiple model
plant analyses to evaluate differential economic effects. Other pro-
cessingfactors, e.g., type of manufacturing process employed (technology)
may also affect prodessing costs and/or wasteflows. Thisagain may neces—
sitate further segmentation of an industry and the inclusion of additibnal
model plants .for more comprehensive analysis.
D. Pricing Patterns
The analysis of pricing pat.terr in each respect ve industry focuses on
factors det2rnhiming supply and deniand Where available, appropriate
elasticites are noted and their significance to pricing patterns is dis-
cussed. Market structure and the nature of competition are evaluated
and the ability of impacted plants to. rAecover increased costs of pollution
control is assessed.
E. Waste Treatment Technological Qptions and Costs
Waste treatment options and associated cdsts are obviously instrumental
in the assessment of ecohomic impacts of water pollution controls. In
general, basic technical and cost data are developed specifically for
the types and sizes of model’ plants ‘ihich are identified as direct effluent
dischargers, including ncw facilities which, in our judgment, are most
likely to be constructed after the prcmulgation of the guidelines. In
determining appropriate options and costs, it is necessary to pecify
(1) points of final di pos tion ‘of discharge in each segment of an in-
dustry, and (2) types: and propOrtions of ef’iluar ,t’ systems in place. This.
information is partly in the DeveThpn nt Document and, in part, obtained
from EPA Effluent Guidelines Division through the techni al contractor.
Cost’ data from the technical cbntractor normally include estimated inci’e—
mental investment costs for each model plant and for each abatement level
(I, II and III), plus the estimated annual operating and maintenance costs
based upon normal operating rates or annual production.
F. ! 1 ro.iysis of Economic Impacts
In carrying out an economic impact analysis, it is important to establish
a baseline of industry conditions that are expected without pollution con-
trols and to estimate the impact in terms of the change from this baseline
attributable to the imposition of pollution controls. Thus, in this study
a “dynamic base1ine’ , namely a projection of the industry structure in
terms of number of plants, production, employment and other parameters over
time is used as opposed to a “static” baseline which assumes a baseline
condition equivalent to that currently present.
11-5
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Fundamentally, the impact analysis is similar to that usually required
for any: capital budgeting study, of new investments. The problem is one
of deciding whether a commitment of time or money to a project is worth-
while in terms of the expected benefits. The analysis is complicated by
the fact that benefits and investments will accrue over a period of time
and that, in practice, the analyst can not reflect all of the required
imponderables, which by definition must deal with future projectIons. In
the face of imperfect and incomplete information and of time constraints,
the industry se.gments.are described in the form of financial budgets of
model. plants. Key non-quantifiable factors were considered in the inter-
pretation of the quantified data. Actual financial, results will deviate
from the model results, and. these variances will be considered in inter-
“preting the findings based on model plants.
The analysis of anticipated economic impacts ofwater pollution controls
are described as follows.
1. Fundamental Core Methodology
The fundamentals for analysis are basic to all impact studies. The core
methodology is described here as a unit with the specific impact analyses
discussed under the appropriate headings following this section.
The core analysis for this study was based upon synthesizing the physical
‘and financial characteristics of the various industry segments through
representative model plant projections. Estimated financial profiles
and’ cash flows are presented in the industry reports. The primary factors
involved in assessing the financial and production impact of pollution con-
trol ‘are profitability changes, which are a function of the cost of pollu-
‘tion control, and the ability to pass along these costs in the form of
higher prices. In reality, closure decisior., are seldom made on a set
of well—defined and documented economic rules. They include a wide
range of personal values, external forces such as the inability to
obtain financing, or the relationship between a dependent production.
unit’ and its, larger cost center whose total costs must be considered.
Such circumstances include’ but are not limited to the following factors:
1’. inadequate accounting. systems or procedures. This is especially
likely to occur in small, independent plants whicli’do not have
effective cost’ accounting systems.
2. Insufficient production units. This is especially true of
plants where the equipment is old and fully depreciated and
the owner has no intention of replacing or modernizing them.
Production continues as long as labor and materials costs are
covered and/or until the equipment fails entirely.
I 1-6
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3. Personal values and goals, associated with business ownership
thatoverride or constrain rational economic rules. This com-
plex of factors may be referred to as the value of psychic income.
4. Production dependence. This is characteristic of a plant that
is a part of a larger integrated entity which either uses raw.
materials being produced profitably in another of t ie firm’s
Operating units or supplies raw materials to another of the
firm’s operations where the source of supply is critical.
When the profitability of the second operation mqre than off—
sets the losses in the first plant, the unprofitable operation
may continue indefinitely because the total enterprise is pj’o-.
fitable.
5. Temporary unprofitability.• This may be found whenever a.n owner
operator expects that losses.are temporary and that adverse con-
ditions will.cha.nge. His ability to absorbshort -term losses
depends upon his access to funds through credit or personal re—
sources not presently utilized..
6. Low (approaching zero) opportunity costs for the fixed assets.
and for the owner-operator’s managerial killsänd/or labor. As
long as the operator can meet labor and materials costs, he will
continue to operate. He may even operate with gross revenues
below variable costs until he has exhausted his working capital
arid credit.
7. Plant site appreciation. This factor is important in those
situations where the value of the land on which the plant is
located is appreciating at a rate sufficient to offset short—
term losses.
These factors are generally associated with proprietorships and closely
held eiterprises rather than publicly held corporations.
While the above factors are present in and relevant to business decisions,
it is argued that comnion economic rules are sufficient to provide useful
and reliable insight into potential business responses to required invest—
merit and operating costs in po’l lution control facilities.
In the simplest case, a plant will be closed when variable costs (Vc)
are greater than revenues (R) since by closing the. plant, losses can be
a vo i ded.
In a more probable situation, the variable costs are less than revenues
but revenues are less than variable costs plus cash overhead expenses (TCc)
which are fixed in the short—run. In this situation a plant. would likei.y
continue to operate as contributions are being made toward covering a portion
11-7
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of these fixed cash overhead expenses. The firm cannot operate indefinitely
under this condition, but the length of this period is uncertain. Basic tä
this strategy of continuing operations is the firm’s expectations that, re-
venues will increase to cover cash outlay., Identification of plants where
variable tosts plus cash overhead expenses are greater than revenues, but
variable costs are less than revenues leads to an estimate of. plants that
should be closed over some period of time if revenues do not ‘increase.
However, the timing of such closures is difficult to predict.
In another situation the variable costs plus cash overhead expenses
are lessth’an revenues. In this case, it is likely that plant operations
will continue if the net present value (NPVk) of the cash flow 1/ at he
firm’s (industry) cost of capital (k) is greater than zero. If the.net
present value is less’than zero, the firm.could liquidate, realizing salvage
value (S) .?I in cash, and reinvest and be financially better off, assuming
reinvesting at least at the firm’s (industry).cost of capital.
Computation of net present value involves discounting the cash flow
through the discounting function:
y.
= . A (1 + k)
n=O
where:
HPV = net present value
= the cash flow in the th year
k = discount rate (after-tax cost of capital)
n = number of conversion periods, i.e., 1 year, 2 years, etc.
y = years
The “cash flow t ’ including pollution control investment and annual costs
for BPT and BAT and NSPS are described in the.subsequent sections.
Construction of the Cash Fl w
The cash flow used in the analysis of Level I (BPT — Best Practical Tach-
nology) and Level II (BAT - Best Available Technology) effluent control
costs was constructed as follows:
Refer, to “Construction of the Cash Flow’ t
Salvage value is defined here as the liquidation value of fixed assets
plus working capital
lI-B
-------
1. Salvage value taken in the year t 0 , assumed ta be equivalent
to 1976.
2. After-tax cash proceeds taken for years t 1 to’t .
3. Annual replacement investment,, equal to annual current deprec—:
iati,on taken for years t to t . A 20-year depreciation period
was used for the effluent control system.
4. Terminal value equal to sal.vSge value taken in year t 1 .
5.’ Incremental pollution control investmen.t taken in ,vear.t 0 ’ (1976)
for 1977 standards and year t 6 (1982) for 1983 standards.
6. Incremental pollution expenses taken for years. t 1 to t, for,
1977 standards and years t 7 to t,- for 1.983 standards, if, addi-
tive to the 1977. standards.
7. Replacement. investment taken in’year t o’n incremental ‘pollution
investment inBPT on assumpti’ön.of life of facilitis as provided
by ‘EPA.
8. No terminal value of pollution facilitie.s to betaken in ‘year’
t . Land value will probably be assumed to bevery small and/ar
zero, unless the costs provided indicate, otherwise.
The length of the cash flow will depend i.pon the-life ofthe pollution’
control technology provided by EPA. The length of the, cash flow will be
equal to ‘the life of control equipment, specified for 1.983 ‘installation.
The cash flow used in the analysis of Leyel 1.11 (New Source Effluent
Standards) is cOnstructed as .foilows: ,
1. Initial investment taken in year to, considered to be,outlays
for fixed ass’ets and working’cápital. ‘
2. After-tax cash proceeds taken for years t 1 to t .
3. Anhual replacenient. investment, equal to annual current deprec—
“iation taken for years tl to t .
4. Terminal value taken 1n year t .
5. Investment for pollution control is added to ‘outlays’for fixed
assets and working capital in year t 0
6. Annual ‘pollution control operating expenses are’ taken for years.
t 1 to t 1 .
11-9
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7. Replacement investment taken on pollution investment on
assumption of life of facilities as provided by.EPA.
8. No terminal value of pollution facilities to be taken in year
t . Land value, will probably be assumed to be very small and/or
zero, unless thecosts provided indicate otherwise.
Baseline cash flow excludes investment and other costs associated with
the effluent controls.
It should be noted that a more common measure of’profitability is return
on investment ‘(‘ROl) where after-tax income (as’ defined in equation belowl
is,. expressed as a percent of invested capital (book value) or as a percent
of net worth. These measures should not be viewed so much as different
estimates of profitability compared to net present value,, but rather these
should be seen as an entirely different profitability .concept.
The da’ta requirements for return on investment and net present value
measures are derived from the same basic financial information, although
the final inputs are handled differently for each.
In the construction of the cash flow for the net present value analysis,
after—tax cash proceeds are defined as:
(1) After—tax income = (1. — t) X (R - E — I — 0)
(2) After -tax.cash proceeds = (1 - t) X (R - E - ,D) + 0
where
t = tax rate
revenues
E = expenses other than depreciation and interest’
I interest expenses
0 = depreciation charges
Depreciation i’s included’ only in’ terms of its tax effect and is then
added back to obtain’ after-tax cash proceeds.
There is a temptation to include dutlays for interest payments when computing
the cash proceeds of a period. Cash disbursed for interest should not affect
the cash proceeds computation. The interest factor is taken into consider-
ation by the use of the present-value procedure. To alsO include t,he cash
disbursement would result in double counting. The effect of interest
payments on income taxes is also excluded from the cash proceeds computa-
tion. This is brought into the analysis when computing the effective rate
of interest of debt sources of capital, which is used in the determination
of the cost of capital.
11-10
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A tax rate of 22 percent on the first $25,000 income and 48 percent on
amounts over $25,000 was used throughout the analysis. Accelerated
depreciation, methods, investment credits, carry forward and carry back’
provisions were not used due to their complexity and special limitations.
Cost of Capital - ‘ After -tax
Return on invested capital is a fundamental notion in ‘the U.S. business.
it provides both a measure of the actual performance of ‘a firñia’swèll
as ‘its expecte,d performance. In the latter case, it is also called the
cost of capital and this, in turn, is defined’ as the’weighted average of
the cost of each type of capital employed by the firm —— in general terms,
eo;;iiti,es and intere t-bearing liabilities. There’ is no methodology that
yields the:precise’ cost of capital,’ but it can be approximated within
reasonable bounds.
The cost of equity capital. is estimated ‘by two methods -- the dividend
yield method and the earnings stock price CE/P ratio) method. Both’are
s-implifications of the more complex DCF methodology. The dividend method
is:
where
c = cost of equity capital
D = dividend yield
P = stock price
g = growth
The EJP method is simply
c E/P
‘where
c = cost of’ equity capital
E. earnings
P = stock ,price
and is a further simplification of the first. The latter assumes future
earnings as a level, perpetual stream.
The after-tax cos.t of debt capital wa’s estimated by using an’ ‘eStiniated
cost of debt (interest rate) and multiplying it by .52 —- assuming a 48
percent tax rate.
d’= .521
Il —il
-------
where
d = after-tax cost of debt capital
I = before-tax cost of debt (interest rate)
The sum of the cost of equity and debt capital weighted by the respective
equity to total assets and total liabifities to total assets ratios, yields
the estimated weighted average cost of capital - after tax (k).
Investment
In evaluating the feasibility of new. plaj .ts, investment is thought of as
outlays for fixed assets and working capital. However, in evaluating
closure of an on-going plant, the investment basis is its salvage value
(opportunity cost or shadow price). 1/ For this analysis, salvage value
was taken as the sum of liquidation value of fixed assets plus working
capital (current assets less current liabilities) tied up by the plant.
This same amount was taken as a nec ative investment or “cash out” value
in ‘the terminal year.
The rationale for using total shadow priced investment was that the cash
proceeds do not include interest expenses which are reflected in the
weighted cost of capital. This procedure requires the use of total capital
(salvage, value) regardless of source. An alternative would be to use as
investment, net cash realization (total less debt retirement) upon liqui-
dation of the plant. in the single plant firm, debt retirement would be
clearly defined. In the case o the multiplant firm, the delineation of
the’debt by’ the plant would likely not be clear. Presumably this could
be reflected in proportioning total debt to t e individual plant on some
plant’paraneter (i.c., capacity or sales). Under this latter procedure,
interest and debt:’retirement costs would be ncluded in the cash flows.
The two procedures will yield similar results ‘if the cost of capital and
the interest charges are estimated on a similar basis. The former procedure,
total’ salvage value, was used as it gives reasonable answersand simplified
both the computation and explanation of the •cash proceeds and salvage values.
Replacement in.v stment was considered to be e uaI to the annual depreci-
ati,o’n. This corresponds to the. operating policies of’some managements
and s2rves as a good proxy for replacement in an on-going business.
Investments in pollution control facilities are from estimatesprovided
by EPA. Only incremental values are used in order to reflect in-place
facilities. Only the value of the land for control was taken as a nega-
tive investment, or “cash out” value, in the terminal year.
This should n’ot be confused with a simple buy-sell situation which.
merely involves a transfer of ownership from one firm to another.
In this instance, the opportunity cost (shadow priôe) of the invest-
ment may take on a different ‘value.
11-12
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2. Price and Production Impact Analyses
Price and production impact analyses necessarily have to proceed simul-
taneou ly. In order to evaluate these impacts, two types of analyses are
used: one is at the micro level utilizing the model plant as the basis
of the analysis to arrive at required price impacts to maintain. profIt-
ability levels; the other is at the industry level utilizing supply and
demand analysis.
Application of the preceding DCF procedure to these costs yields the
present value of pollution control costs (i.e., investmer t plus operating
cost less tax savings). If this is kn vin, the. price increase require to
pay. .for pollution control can r adily be approximated by the formula ±1.:
— . ( PVP.) (laD )
x . — fl T).(PvRi
where
X = rC uired percentage increase. in price
PVP = present value of pollution control costs
PVR present value of gross revenue starting in the year
pollution control is in posed
T = average tax rate
The require price increase at the plant level is evaluated in light of
theprice elasticities of the commodity involved and the competitive
structure of the industry. This represents.the second’approach Using
supply and demand analysis. The supply and demand analysis provides
some insights into likely quantities and supply response to different
prices. This allows a preliminary estimate of the production and price
impact of pollution control costs; Following this, further analysis at
the micro level is performed to obtain a more detailed insight into the
plants t response to expected prices, absorption or shutdown. The indi-
cated plant shutdowns are then. aggregatedto test whether or not the lost
production could be absorbed by the remaining capacity or whether such
curtailm nts would increase prices.
11’ The above procedure is conceptually correct where an a ’erage tax
rate is used. .Howevcr,.;to insure accuracy in the machine program
.where the actual tax brackets are incorporated, a more detailed
iterative process is rec üired.
11—13
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• 3. Financial Impact Analysis
The financial impact analysis involves preparation of pro forma income
statements and cash flow statements following the assessment of the
likely price change. The analysis provides estimates of profitability
with and without pollution control costs and also provides information
rela ive to the ability of the industry to finance this investment and
estimated financial requirements. The ability to finance plant investment
for pollution control may have a definite bearing on judgments and esti-
mates with regard to likely plant closures.
4. Plant Closures and Production Effects
Plant closures may result from the inability of less profitable plants
to adequately recover required pollution abatement cost through in-
creased product prices, decreased input prices, or improvements in econ-
omic efficiency. Often closures can be anticipated among older, smaller,
and less efficient plants as a result of economies of scale in pollution
control which would lower the overall costs to a larger operation. Since
the larger plants, whose unit pollution.control costs are usually much
less, will be able to afford to sell at a lower price than the high-cost
plants, the high-cost plants will have no recourse other than to.sell
at the long run equilibrium price set by the low—cost plants. Conse-
quently in the long run, it is.expectéd that the older, smaller, less
efficient plants will eventually yield to the dominance of the larger
more efficient units. However, in the short run, it is always possible
that a plant may continue to operate even when economic considerations
indicate closure. Possible exceptions will occur to the extent that
smaller high cost plants are protected by regipnal markets and other
non-price impediments to competition from the larger low cost plants.
5. Employment Impact Analysis
This analysis is concerned with estimating likely employment losses due
to curtailed production and/or plant closures as a result of pollution
controls. If the actual plants which are expected to curtail production
and/or close can be identified, employment impacts can be estimated directly.
Otherwise the employment impact analysis involves the application of esti-
mates of employment changes by model plants. Employment changes in model
plants are then generalized according to the number of actual plants repre-
sented by the model plant and aggregated to derive an estimate of tota
employment effects for the industry. Employment dislocations will be. noted
as appropriate. . .
6. Convaunity Impact Analysis
This task is designed to identify potential impacts on local community
economies where the impacted plant might represent a major source of
employment and income. This analysis is based on a knowledge of the
location of plants, particularly threatened plants, and a geheral under-
standing of the economic base of those coiminunities and the relative im-
portance of threatened plants to local economies.
11-14
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7. Balance of Payments Impact Analysis
Balance of ‘payments impact analysis deals with those products’ that have
competitive positions ‘with regard to imports and exports. The analysis
considers whether or not theestirnated price changes would,hinder. corn—S
petit ve positions with regard to exports or increase foreign imports.
Where important, estimates on the amount of trade that, potentially could
be impacted and total trade levels are presented. .
8. Other Impact Analysis
Other poteri ciai impacts may be created by the imposition of pollution
control guidelines., This will likely be unique ,to given industries
requiring a’ case—by—case approach. An illustration of thepossible type
,of impact would be a plant that produces’a critical intermediate, an input.
for other industries. ‘ The loss of this plant or large price increases
could produce serious backward or forward effects on producers or consumers.
To the extent additional impacts are identified and are important, these
wiTi be noted. ‘ . ‘
11—15
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PART II
MALT BEVERAGES
-------
I. INDUSTRY STRUCTURE
The Census of Manufactures defines the Malt Beverage Industry (SIC. 2082)
as an industry comprised of establishments primarily engaged in manufacturing
a variety of types of malt beverages. The vari.ous beverage types include
lagerbeer, malt liquor, draught’beer, ale, porter or stout beer and
bock beer. Of the beverages produced approximately 90 percent is lager
beer. Malt beverages are sold in a variety of packages including cans 1
bottles, both returnable and non-returnable, and barrels..
A. Characteristics of the IndUstry
As previsouly discussed, breweries primarily produce lager beer (here-
after.referred to as beer) and may or may not also produce other malt
beverage products.
The industry is highlycompetitive and accordingly industry members do
not readily release information regarding the operational data of their
facilities. As a result, information concerning the industry character-
istics must be derived from traditional sources such as the published
reports of the Census of Manufactures, Internal Revenue Service, and the
Bureau of Alcohol, Tobacco and Firearms (BATF). The United States
Brewers Association (USBA) also provided their available information and
helped act as a liaison with industry members. Some, of these sources
dO have their limitations; however, overall they do provide an aggregated
source of the general industry characteristics. Finally, when possible,
discussions with industry members were utilized .to fill the voids where
published data are nOt available.
1. Number and Size of Firms and Plants
Accordingto BATE, in 1935 there were 75.0 breweries authorized to operate
in the United States. Since 1935, this number has decreased steadily and
as of January 1, 1976, there were 54 brewing companies which operated 94
breweries (Table I-i). In terms of percentages, the Malt Beverage
Industry has maintained an average, annual decrease in the number of breweries
of 4.5 percent.
The Census.of Manufactures states in 1972 there were 167 establishments in
the Malt Beverage Industry. For the same year BATE Statistics indicate
only 139 breweries were authorized to operate. While the two sources
disagree, the Census does provide some additional information which is
useful for the purposes of this analysis and accordingly when other data
are lacking, Census data will be used.
I—1
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Table I-i. The Malt Beverage. Industry, number of breweries
Year
Number of Plants Percentage Change
(Percent)
1935
1940
750
611
-
-.19 ...’
1945
468
-23
1950
407
-13
1955
•‘
292
-28
1960
1965
1970
229
197
143*
•
—22
-14
—27:
1 975
94*
34
*Excludes experimental breweries.
Source: U.S. Treasury, Bureau of Alcohol, Tobacco, and
Firearms and. the United States Brewers Association.
I -2
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As can be seen in Table 1-2, Census data indicates the majority ofthe
breweries leaving the industry employed less than 250 people. The
reasons for the smaller brewers leaving the industry are numerous.
According to the USBA the smaller brewers have been unable to build
modern efficient plants as they have lacked sufficient financing and
subsequently they: cannot produce malt beverages as cheaply as larger,
more efficient operations. Additionally, many smaller brewers lack.
effective distribution programs and thus, they are hard pressed to
provide a product which is competing in price with larger companies
even though they may market in smaller areas with more specific or
regional taste preferences.
Table 1-2 also indicates each employment size group’s value of shipment
and the corresponding percentage of the total. As can be seen, in
1972, over 87 percent of the industry shipments were made byestablish—
ments with over 250 employees. These larger establishments account
for only 37.7 percent of all brewery plants. Furthermore, it should be
noted that 56.4 percent of the industry shipments were accounted for
by less than 15 percent of the. establishments.
As stated previously, the Malt BeverágeIndustry is currentlycomprised
of 54 brewing companies which operate 94 individual breweries. These
companies and their respective plants are listed in Table 1—3.
From the table it can be seen that of the 54 brewing cOmpanies 41
operate singl brewery operations with the remaining 13 companies
operating 53 breweries. Of the multi-plantcompanies Anheuser-Busch oper-
ates the most breweries, 9, Schlitz operates 7, Falstaff operates 6 and
Caning and Pabst operate 5 each. These five companies operate 34
pércentof the total breweries in the industry.
In terms of barrels produced, the five largest companies produced 63.6
percentof the total industry’sbarnelagein 1974. Individual companies’
estimated proportionsfor 1974 were: Anheuse.r-Busch, 24 percent; Schlitz,
16.1 percent; Pabst, 1O..1percent; Coors, 8.5 percent; and Miller, 7.2
percent. Historically, these brewers have increased their portion df
the market steadily; from 50.9 percent in 1968, 55.5 percent in 1972
and 59.4 percent in 1973 ./
.- -‘Estimates by Joseph C. Frazzano, analyst at Edwards & Hanly,
The Wall Street Journal , “Beer Drinkers Continue to Favor Big Brewers
Despite the Higher Prices for Premium Brands,” July, 18, 1975.
I - 3
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Table 1—2. The Beer Industry, by employment size group, number of establishments, and value of shipments, 1963-1972
.
1963
V 1i .e of S ,onerrts
flTiiion Percent
1957
.
•
1972
Est 5lisrv rts
Et ol1s 2n s
“a 1 ue Cf
Ship s
Estdbi
s ne ts
‘aije or
Sni ’rents
;
Percc t
T1iion
Percent
No. of
Percent
Percent
T lion
Percent
Employees
Number
of Total
Dollars
of Total
Numbe ’
of Total
Dollars
of Total
Number
of Total
Dollar
of Total
1-4
17
7.7
.5
< .1
22
11.9
1.0
< .1
22
13.1
2.4
0.1
5—9
6
19
2.7
.7
< .1
5
2.7
1.0
< .1
3
1.8 .
0.8
< .1
10-19
8.5
5.6
.2
8
4.3
3.2
.1
.
12
7.2
9.8
.2
20-49
50-99
31
30
14.0
13.5
21.7
45.1
.9
2..1
23
22
12.4
11.9
70.3
2.4
17,
ig
10.2
10.8
31.3
57.2
.8
1.4.
100-249
52
23.4
295.5
12.8
40
21.5
313.i
10.9
32
19.2
400.3
9.9
250-499
33
14.9
4 4.6
19.6
32
17.3.
587.3
20.0
39
23.3
1,266.3
31.2
500-999
1,000-2,499
23
8
10.4
3.5
591.1
499.9
25.5
21.6
21
9
11.4
4.9
678.4
772.0
23.2
26.4
15
6
9.0
3.6
835.3
710.1
20.6
17.5
?,500÷
3
1.3
399.3
17.3
3
1.6
498.4
17.0
3
1.8
.740.9’
18.3
Total
222
100.0
2,315.0
100.0
185
100.0.
2,929.7
100.0.
167
100.0
4,054.4
100.0
Source: Census of Manufactures .
-------
Table 1-3.
The Malt Beverage Industry, Breweries operating as of January 1,
1976.
1. Anheuser — Busch, Inc .
LOS Angeles, .Ca•liforni.a
Jacksonville, Fiori da
Tampa, Florida
St. Louis, Missouri
Merriinäck, New Hampshire
Newark, New Jersey
Columbus, Ohio
Houston, Texas
• Williamsburg, Virginia
2.. Rlitz WeinhardCo .
Portland, Oregon
3. Caning Brewing Company .
Belleveile, Illinois
Baltimore , Maryl and
• Natick, Massachusetts
Frankenmuth, Michigan
Tacoma, Washington
4. Cold Springs Brewing Co .
Cold Springs, Minnesota
5. Coors Co.,.Adolph
Golden, Colorado
6. ç pale Products Corp .
Virginia
7. Champale, Inc .
Trenton, New Jersey
8. Dixie Brewing Co .
New Orleans, Louisiana
9. Duncan Brewing Co .
Auburndale, Florida
10. Eastern Brewing Co .
1-jammonton, New Jersey
ii ..
Erie Brewing Co .
Erie, Pennsylvania
12. Falls CityBrewing Co .
T [ ouisville, Kentucky
13. Falstaff Brewing Corp .
Fort Wayne, Indiana
New Orleans, La.
St. Louis, Missouri
Omaha, Nebraska
Cranston, Rhode Island
Gal veston, Téxás
14.. General Brewinci Company
Los Angeles, ualifornia
Vancouver, Washington
15. Genesee Brewing Co .
Rochester, New York
16. Geyer Bros. Brewing Co. .
Frankenmuth, Michigan
17. Hand Brewing Co., Peter
Chicago, Illinois
18. Heileman Brewing Co. , G .
Evansville, Indiana
Newport, Kentucky
St. Paul , Minnesota
LaCross, Wisconsin
19. Honolulu Sake Brewery
and Jce Co .
Honolulu, Hawaii
20. . Horlacher Brewing Co .
Allentown, Pennsylvania
21. Huber Brewing Co., Jos .
Monroe, Wisconsin -.
22. Hudepohl Brewing Co .
Cincinnati, Ohio
I—S
-------
Table 1-3 (continued)
23. Hull Brewing Co .
New Haven, Conn.
24. Jones Brewing Co .
Smithton, Pa.
25. Koch, Fred, Brewery: Inc .
Dunkirk, New York
26. Latrobe Brewing Co .
Latrobe, Pa.
27. Leinenkugel, Jacob Brewing Co .
Chippewa Falls, Wis.
28. Lion, The., Inc., Gibbons
Brewery
Wilkes-Barre, Pa.
29.. Lone Star Brewing Co .
Sap Antonio, Texas
30. Miller Brewing Co .
Azusa, California
Ft. Worth, Texas
Milwaukee, Wiscunsi’n
31. ‘ Mt. Carbon Brewery
Pottsville, Pa.
32. National. Brewing Co .
Phoenix, Arizona
Baltimore, Md.
33. . OJ mpia ‘Brewing Co .
Olympia, Washington
St. Paul, Minnesota
34. Ortlieb, Henry R. Brewery Co .
Philadelphia, ‘Pa.
35. Pabst Brewing Co .
‘Los Angeles, California
Pabst, Georgia
Peoria Heights, Illinois
Newark, New Jersey
Milwaukee, Wisconsin
36.: Pearl Brewing Co .
San AntoniO, Texas
37. Pickett & Sons, Joseph S. Inc .
Dubuque, Iowa
38. Pittsburg Brewing Co .
Pittsburg, Pa..
39. Rainier Brewing Co .
Seattle, Washington
40. Reading Brewing Co .
Reading, Pa.
41.
Rheingold Brewerys, Inc.
New Bedford, Mass.
Orange, New Jersey
Brooklyn, New YOrk’
Co.
42. Schaefer, F&M Brewing
Baltimore, Md.
Brooklyn, New York
AllentOwn’, Pa.
43. Schell, Aug., Brewing Co .
‘New ‘Ulm, Minnesota
44. Schlitz, Jos. Brewing
Van Nuys, California
Tampa, Florida
Honolulu, Hawaii
Winston Salem, N.C.
Memphis, ‘Tenn.
Longview, Texas’
Milwaukee, Wis.
45. Schmidt & Sons, C., Inc .
Philadelphia, Pa.’
Cleveland, Ohio
46. Schoenling Brewi’ng’Co’ .
Cincinnati, Ohio’
47. Spoetzl Brewery Inc .
Shiner, Texas
Co.
1-6
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Table 1-3 (continued)
48. Steam Beer Brewing Co .
San Francisco, California
49. Stevens Point Brewery
Stevens Point, Wisconsin
50. Stráub Brewery
St. Mary’s, Pelinsylvania
51. Stroh Brewery Co., The
Detroit, Michigan
52. Walter Brewing Co. ,
EauClaire,.. Wis.
53. West End Brewing .Co .
Utica, New York
54. Vuengling & son, Inc., D..G .
Pottsville, Pa.
1-7
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2. Value of Shipments
Value of shipments and other receipts of the Malt Beverage Industry in
1972 totalled $4,054.4 million. This included shipment of malt beverages
(primary products) valued at $4,029.2 million, shipments of other products
(secondary products) valued at $2.5 million and miscellaneous receipts
(mainly resales) of $22.7 million.
Esti.thatesof the 197! value of shipments a’e expected to total $5,361.0
million, 11.1 percent above the estimated shipments for 1974 and 32.2
percent above the 1972 value of shipment (Table 1-4). Historically, the
valueof, shipments have increased by an average of 6.1 percentper ‘ear
since 1958, from $1,983.0 million ir 1958, to the estimated $5,361.0 million
in 1975. This rate of increase has fluctuated, from. year to year in the
past and in 1972 the value of shipments was actually lower than the
previous years. Since 1972, the value of shipment has increased
at relatively high rates (6.2%, 12.0%and 11.2%for1973, 1974, and
1975 respectively).
Shipments of malt beverages (primary products) in 1972 represented 100
percent (specialization ratio) of the industry’s total products shipments
(primary and secondary). The industry specialization ratio in 1967 was
also 100 percent. .
Shipment of malt beverages (primary products) from establishments classi-
fied in industry 2082 in 1972 represented 100 percent (coverage ratio)
of theseproduct valued at $4,038.7 million shipped by all industries.
This ratio in 1967 was also 100 percent. Thus ,t can be concluded
that establishments producing and shipping malt beverages are all classi-
fied in industry 2082.
3. Level of Integration
The Malt Beverage Industry is coniprised of firms which vary in their
degree of integration. In terms of forward integration, most firms do
not integrate any further than their sales to distributors. Some firms
may operate their own distributorships but these are usually limited to
extremely small brewers or to brewers who act as their distributor for
export markets.
Brewers vary in their degrees of- backward integration from those pur-
chasing all raw material inputs to those which manufacture their own
cans and bottles and contract with farmers for their grain. Also some
of the larger brewers also maintain their own malting operations.
I-B
-------
Table 1-4. ‘The malt beverage industry, value of ship-
ments, 1958-1975
Year Value of Shipments Percentage. Change
($ Million) ‘ “ (%)
1958 1,983
1959, ‘2,095 5.6
1960. 2,180’, 4.1:
1961 ‘2,200’’ 0.9
1962 2,282 , 3.7
1963 • . 2,315 1.4
‘‘1964 ‘2,470 6.7
1965 ‘2 ,497 1.1
.1966 2;’700 8.1
1967 2 930 8.5
1968 3,131 6.9
1969 3,418 ‘ 9.2
1970 3,822 11.8
1971 4,140 8.3
l 72 4,054 —2.1
1973 4,305. 6,2
1974 4,822 ‘ 12.0
1975 5,361 11.2
Source: Department of’Commerce, Bureau of Census,. Bu’reau
‘of Labor Statistics-, BDC. ‘
1-9
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4. Number of Products
The Malt Beverage Industry primarily produces lager beer, but it also
produces malt liquors, draught beer, ale, porter or stout beer and
bock beer. As stated previously approximately 90 percent of the ‘beer
produced is lager beer. ‘ Most breweries produce various container
sizes and types, (cans, returnable bottles, non-returnable bottles and
kegs) of one brand label. Some of the,larger breweries may produce
other brand labels; however, the basic’ brewing process is changed. very
little for tne different labels.
5. Level of Diversification
The Census of Manufactures shows the Malt Beverage lndustry with a very
high’ specialization ratio of 100 percent in 197?. As stated previously
this indicates that 100 percent of the sales of the establishments
classified in industry SIC 2082 are in the primary SIC code. The typical
brewery is not diversified as governmental restrictions’ limit the
facility’s possibilities as well as the fact that the, processes and
equipment are’ specialized, non-interchangeable and do not lend themselves
to the production of other products.
6. Location of Breweries
The specific locations of breweries presently operating are available in
Table 1-3 which list the specific brewers and their respective,’plant
locations. Presently, there are 94 individual breweries and these are
located in 31 states (Table’ 1-5). Because of the bulkiness of beer and the
corresponding high costs of transportation, breweries have tended to
locate in or near market centers. As a’result, there are few breweries
in:the High Plains or Mountain Regi,ons of the United States.
7. Age of Plants and Level of Technology
Within the Malt Beverage Industry, there exist a wide variety of plant
ages varying from o’ver’lOO years old to those which only recently have
been constructed. While many of the breweries are relatively old,
throughout their useful life new equipment has been added or used to
replace that which is worn out or technologically obsolete. As’ a
result, most older breweries in the industry represent a combination of
both old and’new equipment. Furthermore, it can be generally assumed that
the newer the plant and its equipment, the more technologically advanced
the plant. ‘
1-10
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Table 1-5. The Malt Beverage Industry, numberof plants
by state, 1975.
State . Number of.Breweries
Arizona . 1
.alifornia 6
Colorado 1
Connecticut 1
Florida 4
Georgia 1
HaWaii 2
:Illinois 3
Indiana 2
Iowa 1
Kentucky 2
Louisiana . 2
Maryland 3
Massachusetts 2
Miáhigan 3
Minnestoa 4
Missouri. . 2
Nebr aska.: 1
NewNarnpshire 1
New Jersey 5
New York 5
North Carolina 1
Ohio 4
Oregon 1
Pennsylvania 13
Rhode Island 1
Tennessee 1
Texas 7
Virginia 2
Washington 4
Wisconsir 8
Total United States 94
I—li
-------
In a 1974 survey of the breweries conducted for the USBA, brewers
were asked to indicate the date of construction of the original brewery
as well as the date of the last major expansion. Of the 45 responses
38 percent indicated their breweries were built prior to or about 1900,
18 percent were built between 1910 and 1950, 13 percent were built
between 1950 and 1960, 20 percent between 1960 and 1970 and finally
11 percent were built after 1970. In terms of the last major expan-
sion of the 38 responses, 42 percent indicated a major expansion had
been completed since 1970, 37 percent indicated their last major
expansion was between 1965 and 1970 and the remainder, 21 percent,
indicated their last major expansion was between 1955 and 1965.
Another measure of the physical state of the industry can be obtained
utilizing IRS data to depict, for variously sized breweries, the
brewers’ ‘accumulated depreciation expressed as a. percent of their
total depreciable assets. As can be seen in Table 1-6, there is an
obvious trend for the smaller brewers to be more highly depreciated
and accordingly it can be assumed that these brewers have plants and
equipment which are older and thus less efficient.
8. Plant Efficiency
Breweries vary significantly between each other in terms of plant
efficiency. Primarily the difference bètweén plants’ efficiency will
e dependent on the technical level with which the plant operates. Further-
more, the age and condition of the equipment will signfficantly influence
the efficiency of the brewery. Those breweries with old and neglected
equipment will undoubtedly encounter many more hours of down-time
due to mechnaical failures.
B. Employment Characteristics
Total employment within the Malt Beverage industry has decreased by over
.28 percent from 71,700 emplpyees in 1958, .to 51,500 employees in 1972.
Current estimates by the industry ‘indicate that in 1975 there were a7proxi-
mately 50,000 employees. Of the employees in 1972, productien workers
represented approximately 65 percent of the total employees, and during
the above period decreased’from 48,000 in 1958 to 33,800 in 1972.
Overall, the productivity of the production worker has increased signifi-
cantly since 1958. Since then the value added per production worker
has more than doubled and the value of shipment per production Worker
has nearly tripled. Some’ of these increases are attributable to inflation,
however, a good portion is explained by the installation of automated
equipment (especially in the bottling and canning lines) as we’ll as.
the better utilization of those employed.
I— 12
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Table 1-6. The Malt and Malt Liquor Industries, accumulated depreciation as a percent of total depreciable assets,
by total asset size
Size of Total Assets ($1,000)
Fiscal Year
. .. . . . . ‘500- 1.000- 5,000-
0-100 ‘100-250 250-500 1,000 5,000 10,000.
10,000- 25,000- 50,000- 100,000—
25,000 50,000 “100,000 250,000 250,000+
Percent
1968-1969
61 - 59 48: 29
49 50 51 45 36
1969-1970
- - - ‘ 63 16
52 49 50 381/ —
197d-1971
- ‘71 79 76 54 61
53 ‘ 46 54 341/
197’11972
— — 62 77 65: —
55 51 54 30 36
Average
‘ ‘ 66.0 70.5 70.7 ‘ 57.5 35.3
52.2 49.0 52.2 36.8 36.0.
l1#’Asset size group is 100,000. or more.
SoUrce: Department of Treasury, Internal Revenue Service, Sou ’ce Book’ of Statistics of Income , Annual.
-------
Table 1—7. The malt beverage industry, employment statistics, 1958-1972.
•
All Employees
Production Workers
Value of
Shipments!
production
worker
Man hours!
production
worker
Wage per
Production
worker
Man-Hour
Value added/
production
worker
Man-hour
Year
Number Payroll
Number Man-Hrs. Wages
•
(000) ($ Nil)
(000) (Million) ($ Mi ])
($000)
. ($)
($:)
1958
.71.7 443.3
48.0 91.7 280.1
41.3
1,910
3.05
12.18
1959
70.9 461.1
48.0 91.9 292.6
43.7
1,915
3.18
13.06
1960
69.8 461.7
47.7 90.0 296.8
45.7
1,887
3.30
13.87
1961
68.2 466.5
46.2 87.5 297.7
47.6
1,894
3.40
14.25
1962
66.0 476.8
44.8 86.0 304.8
50.9
1,920
. 3.54
14.77
1963
62.6 470.8
.42.7 81.9 302.3
54.2
1,918
3.69
15.70
1964
61.9 485.6
42.0 80.6 311.4
58.8
1,919
3.86
16.95
1965
60.4 488.1
40.6 78.7 310.4
61.5
1,938
3.94
17.28
1966
60.5 509.2
40.3 78.5 334.0
67.0
1,948
4.25
17.99
1967
59.6 519.8
40.0 76.8 331.4
. 73.2 .
1,920
4.32
20.13
1968
58.7 537.0
39.7 76.5 343.5
78.9
1,927
4.49
21.35
1969
57.3 570.8
38.6 74.2. 359.4
88.6
1,922
4.84
24.09
1970
57.3 615.6
38.0 74.3 382.6
100.6
1,955
5.15
27.29
1971
57.0. 653.6
37.2 71.6 4C•5.2
111.3
1,925
5.66
30.40
1972
51.5 652.8
33.8 66:9 408.7
120.0
1,979
6.11
29.80
Source: U.S. Department of Commerce, Bureau ofCensus, Census of Manufactures .
-------
The brewery production workers can be characte.rized as predominantly
union and semi-skilled. Much ofthe labor involves the monitoring
of either the brewing process or the bottling operations. The average
annual hours worked per production worker totaled 1,979 hours in 1972.
Hourly wages have more than doubled since 1958 from $3.05 per hour
in 1958 to $6.11 in 1972. Corresponding to the wage increase, the value
added per production worker also has doubled duringthe same .pcriod..
As can be seen in Table 1-8, the majority of the industry s employees
are concentrated in the middle td larjer sized establishments with 85.4
percent of all er ployees and. E’LO percent of the production workers.
being empl3yed by breweries with 250 employees or more.
C. Segment Portions of the Total Indust
While the preceding sections of this chapter have been concerned with
brewery data for the overall Malt Beverage Industry, concern i also
warranted about the äifferenttypes of operations within the overall
industry.
Breweries within the industry can be ca tegorized into two distinctively
different type of operations. First, ther.e are those breweries which
were built many years agO and through remodeling and expansions have
been able to maintain their place in the industry. These breweries
number 79 and can be classified according to size as either small,
medium or large operations. For each of the size classifications it has
been determined that there are 64 small breweries, 9 medium sized
breweries and 6 large older breweries.
The second type of brewery category are those operations which have been
constructed within the last 15 to 20 years and by industry standards are
considered modern breweries. Some of these breweries, particularly
those built in the late 1950’s or early 1960’s, have required in-house
modifications to be considered in the modern brewery category. As of
January, 197.6, it was determined that there were 15 of these breweries
in operation. .
In terms of the aggregated Malt Beverage Industry, it has been estimated
that the small, older breweries represent 68 percent of all breweries
and produce 28 percent of the industry’s annual barrels. The medium
older breweries represent 10 percent of all breweries and produce
16 percent of the industry’s total annual barrels. The large, older
breweries represent only 6 percent of all breweries but produce 22 percent
of the annual barrel’s.
I -15
-------
Table 1-8. Malt Beverage Industry Employment -. 1972
.
Employment Size
:
All
••
Employees
Percent.
of Total
P
•
rOductio
Workers
n
Percent
of Total
1-4
<.50
< .1
< 50
.
< 0.1
5-9
< 50
< .1
< 50
< 0.1
10-19.
.200
0.4
10Q
0.3
20-49
600
1.2
400
1.2
50-99
1,200
2.3
800
2.4
LO0 249
5,500
10.7
3,900
11.5
50-499
13,700
26.6
9,500
28.1
00-999
10,400
20.2
6,700
19.8
1,000-2,4.99
10,800
20.9
6,700
19.8
2,500,or more
9,100
17.7.
5,500
16.3
Total
51,500
1OQ.O.
.
33,800
•
100.0
1-16
-------
The remaining category, the modern breweries represent 16 percent of the
total number of breweries and produce 34 percent of all barrels produced
by the industry.
D. Significant Impacts to Industry Segments
The Malt Beverage Industry has only three breweries which are known to be
directly discharging to navigable waters.
It is understood that all of the three plants are meeting BPT and two
of the three is already meeting BAT. As a result the direct impacts on
the industry resulting from the imposition of effluent controls on the direct
dischargers are expected to be limited.
Anuniber of the breweries utilizing municipal treatmentsystems have
reported rapidly increasiflg user charges (see also discussion in Chapter
II, Section C). As a result the possibility of br’2weries now discharging
to municipal systems constructingtheir’own end-of-pipe system may
become an economically attractive alternative in certain individual
situations.
It is also recognized that differencesmay exist in the federal standards
and the state or local regulations. Asa result, individual plants may
find that added expenditures are necessary co comply withlocal or state
regulations. Even though this problem is recognized, the impact of regula-
tory variability is not addressed in this report.
Narrowing the Scope of Study
The preceding has attempted to describe an overall picture of the Malt
Beverage Industry. In the remainder of this analysis, ëffortswill be made
to concentrate on those breweries which could be subject to potential
impacts due to the imposition of effluent controls including new plants
tobe constructed after the promulgation of the Guidelines. This will be
accomplished utilizing representative model plants to estimate impacts
and extending these impacts by association to the wider spectrum of
breweries which correspond to the model plants.
1—17
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II. FINANCIAL PROFILE OF THE INDUSTRY
Firms inthe Malt Beverage Industry.are primarily either family or
closely held corporations or divisioñsor subdivisions of’large, often
multi-plant operations. As a result, financial information relating to a
single brewery is ‘difficult to obtain. However, by relating information
available from a variety of sources, a picture of the MaltBeveragelndus—
try can be attempted. Information used to develop financial profiles
was int._grated from several sources, including the Census of Manufactures,
\nnual Survey of Manufactures, Internal Revenue Service, United States
Brewers Association, and associated published industry operational and
financial, statistics.
A. Sales’and Taxes
For 1975, the Malt Beverage Industry’s value of shipments amounted to,
an estimated $5,361 million. This compares to $4,305 million in 1974,
$3,822 million in. 1970 and $2,180 million in’ 1960 (Table 11-1). While
the above data reflects the value of the industry’s shipment’, Standard
and Poorsl! estimate consumers expenditures for malt beverages to be
$13.8’ billion in 1974. This was up 12 percent from the 11.5 billion
estimated in 1973. According to Standard and Poors, most of the 1974
increase was due to a 5 percent gain in volume, as well as substantial
increase’s in retail beer prices.
Breweries besides generatinq annual sales also generate substantial
tax’revenues for the federal, state and local governments. I.n 1974,
federal excise tax collected trom the breweries amounted to $1,262.9 million
orapproximately 26 percent of the industry’s total value of shipments.
The federal taxes are collected at a rate of $9.00 per 31 gallon barrel.
In terms of state revenues derived from malt beverages, states tax at an
average rate of $4.63 per barrel. State reveneus amounted to $710 million
in 1974. •Thus when state and federal taxes are combined the Malt
Beverage Industry generated approximately $1,973 million to these
governments in 197.4. This amounted to approximately 41 percent of the
industry’s total value of shipments and 14 percent of total consumer sales
for malt beverages. -
The 1972 Census of Manufactures’ estimate of value of shipments for the
industry was based on information provided by 167 ‘establishments. This
gives the shipment for an average brewery to be $24.3 million (Table 11-2).
This compares to $15.8 million in 1967.
While the average brewery had shipments valued at $24.3’million in 1972
with 308 employees, the actual breweries in the industry vary considerably
in size. Actual breweries ranged in 1972 from small plants with less than
Industry Surveys - Liquor , Standard and Poors, October 16, 1975.
1
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Table lI-i ,.
The Malt Beverage Industry, an .ual value of shioments, production, consumption and taxes.
1960
1961
1962
1963
1964
1965
1968
1969
1970
1971
1972
1973
1974
Total Value
of shipments
(million
dollars)
2,180
2,200
2,282
2,:315
2,470
2,497
2,700
2,930’
3,131
3,418
3,822
4,140
4,054
4,305
4,822
Total Production
of
Malt Beverages
(1,000 barrels)
94,547.9
93,496.5
96,417.5
97,961.4
103,017.9
.08 ,015.2
109,736.3
116,564.4
117,523.5
122,657.5
134,653.9
134,091.7
140,326.7,
143,013.6
153,053.0’
Total Tax Paid
Withdrawals
(1,000 barrels)
88,928.9
87,925.8
90,693.3
91,493.6
96,247.4’
100,306,7
101,510.3
107,301.4
107,470.4
111,866.6
122,550.2
123,850.4
130,740.6
133,960.5
142,312.0
Per Capita
of Consumption
Malt. Beverages
(gallons)
15.4
14.9
15.1
15.0
15.6
16.0
16.1
16.8
16.7
17.2
18.7
18.6
19.5
19.8
20.9
Federal Excise
Federal Excise
Taxes Paid
(Million dollars)
796 2
795.4
813.5
825.4
887.4
950.7
887.3
940.6
959.. 6
1,003.4
1,077.5
1,104.2
1,164.3
1,199.5:
1,262.9
State Excise
‘Taxes and
License Taxes
Paid
(Million dollars)
275.2
295.0
32.4.1
349.4
375.0
394.7
414.9
442.6
469.,9
527.2
580.1
622. ,2
672.7
710.0
Year
Source: Bureau of the Census, Bureau of Alcohol, Tobacco, and Firearms and United ‘States ‘Brewers
Assoc’i ati on.
-------
Table 11-2. The Malt Beverage Industry, value of shipments, value added, and emplQ ees, census years 1963, 1967,
and 1972
.
Item
.
Units
1963
1967 .
1972
Industry
Total
Per
Establi’shment
Industry
Total
Per
Establishment
Industry
Total
Per
Establishment
Establishments
No.
222
—
.185
—
167
—
Value of Shipments
$ Mu.
2,315.0
10.4
2,929.7.
15.8
4,054.4
24.3
Value Added
$ Mu
1,286 0
5 79
1,545 7
8 36
1,993 6
11 94
Total Employees
No.
62,60.0
282
59,600
322 .
51,500
308
Source: Census of Manufactures .
-------
5 employees and annual shipments valued at $109,000 to extremely large
breweries employing over 2,500 employees and annual shipment of
$247 million.
B. Distribution of Sales Dollars
The allocation of the sales dollar among the various cost components
incurred by the Malt Beverage Industry shifted slightly during the
period 1967 and 1972. For themost part, the most signific -ant.change
has been experienced by the portion of the sales dollar going to. raw
materials and purchased production suppliers. In 1967, these costs repre-
sented 47.2 percent of sales and by.1972 had increased to 51.0 percent,
an increase of 3.8 percent. Tb offset this increase the portion attri-
butableto labor and related expenses decreased by 1.6 percent and the
portion attributable to other-indirect costs, taxes and profits decreased
by 2.2 percent. These percentages are summarized below.
Distribution of Sales Dollar (Percent)
1967 1972
Total Sales 100.0 100.0
Raw Materials 47.2 . . 51.0
Payroll . 17.7 . 16.1
Other indirect operating
costs, taxes and profits 35.1 32.9
Some of Lhe above shifts can be explained by the cos.ts for some items
increasing at rates faster than the costs for other items. Furthermore,
as the percentages depicted above reflect only the 1967 and 1972 period, it
is assumed. that additional changes in the allocation have occurred since
1972 as the brewers’ prices of corn, malt, and barley all began to increase
in 1973 and then increased substantially in 1974 and to some extent 1975
- (these ingredients costs are discussed further in Chapter IV, Pricing
Patterns).
C. Earnings
According to Standard and Poors, the Malt Beverage Industry has experienced
a deterioration in earnings in the past recent years. This has been
resultant of the increasing inter-industry competition generated by the
increasing concentration of brewersas well as significantly large increases
in container costs and prices paid for agricultural commodities. The lower
earnings have particularly been experienced by smaller regional. and, local
I 1-4
-------
brewers who, even before input costs began to increase, have been faced
with a decreasing market share. This is primarily due to their inability
to effectively compete against the large national brewers who usually
operate larger, more efficient plants and have much more effective dis—
•tribution systems and advertising campaigns. Following the 1972 wheat
sales to Russia, grain costs also began to increase substantially and
this effected not only the small brewers but the large, national brewers
as well. In addition all brewers have had to absorb substantial cancost
increases which rose an unprecedented 35 percent in 1974 alone.
The aggregated earnings for t e Malt and the Malt Beverage Industries as
compiled I- y the Internal Revenue Service also reveal that in general
earnings deteriorated during the years 1969 to 1972 (Table 11-3). According
to the IRS data the average net profits before taxes expressed as a percent
of net sales declined from 6.4 percent in 1969 to 4.1 percent in 1971 and
4.2 percent in 1972. Table 11-4 also indicates the profits by the size
of the operation. As has been previously discussed, profits for ‘the
smaller sized operations on the average have been lower than those for
the larger operations. This trend is also the conclusion of a recent
report submitted to’he Federal Trade Commission concerning price and
profit trends in selected food manufacturing industriesj../ This •report
utilized quarterly data from July,.1972, through March, 1975, and determined
that for the 11 quarter period, the after-tax profits on sales were 0.8 per-
cent for the brewers with total ‘assets under $50 million and 4.3 percent
for those brewers with assets of $50 million or more.
The outlook for the Malt Beverage Industry at the presentis somewhat
unstable due to the unpredictability of the economic environment. However,
Standard and Poor’s indicate that the industry, particularly the larger
brewers, is showing some signs of a restoration of earnings. This has
primarily come about .due to an increase in volume which has coupled with’’
some rather substantial price increases (13 percent in 1974). The’ longevity
of this recovery will be dependent upon several.:factors some of which are
the ability of brewers to increase prices as costs increase and still
maintain consumer demand and the effect of the potential state banning of
one-way contai ners.
Finally, one factor which may contribute to the deterioration of.earnings
for.some individual firms ‘is the tret d for increasing user charges for
municipal dischargers. While at the present these charges represent only
a small portion of the breweries’ total costs, industrymembers. indicate
that the user charge significance is of increasing concern. ‘In a recent
survey conducted for the USBA, 52 breweries responded to indicate that
the average costs for municipal wastewater treatment increased from almost
-“Priceand Profit Trends in Four Food Manufacturing Industries , Staff
Report to the Federal Trade Commission, July,, 1975.
11-5
-------
Table II- 3. The Malt an Malt Liquor Industries, Net Profit before. tax, by asset size, 1969-1972
—
—
Fiscal Year
As et Size
Zero Under 100— 250- 500- 1,000— 5,000- 10,00P
Assets 100 250 500 1,000 5,000: 10,000 25,000
($UO0)
- 25,000-
50,000
.
50,000- 100,000- 250,000
100,000 250,000 or more Total
.
1968—1969
——-- Percent of
7.4 - 5.6 - 2.6 2.8 8.8 7.3
- - - - - 0.87. 11.1 4.2
net
sales
3.2
--h—
3.4 11.1 8.8 6.4
1959-1970
4.4
3.3 6.61/ 5.1:
1970-1971
4.6 —5.2 —1.2 3.1 1.5 3.1
2.2
0.90 5.81 / 4.1
1971-72
0.38 - — 6.7 1.0 4.7. — .2.9
2.9
-0.29 6.5 5.7 4.2
° 1 ’Asset size is 100,000 or more.
Source: Cepartment of Treasury, Internal Revenue Service, Source Book of Statistics of Income , Annual.
-------
4 cents per barrel of beer produced in 1970 to 8 cents in 1974. Thus
in a five year period, user charges increased by 100 percent, or an
average of 20 percent per year.
D. Ability to Finance New Investment
The ability.of a firm to finance new investments for pollution abatement
is a function of several critical financial and economic factors. In
general terms, new capital must come from one or more of the following
sources: (1) funds borrowed from outside sources; (2) equity capital
c-nerated through the sale of common or preferred stock;’ (3) internally
generated funds -- retained •earning and the stream of funds’ attributed
to depreciation of fixed assets.
For each of the three major sources of new investment, the most critical
set of factors is th financial condition of the individual firm. For debt
financing, the firm’s credit rating, earnings record over a period of
years, stability of earnings, existing debt-equity ratio and the lenders’
confidence in management will be, major considerations. Ne ., egui funds
through the sale of securities will depend upon the firm’s’future earnings
as anticipated by investors, which in turn will reflect past earnings:;
records. The firms’ record, compared to others in its’ own industry and
‘to firms in o her similar industries, will be a major determinant of the
ease with which new equity capital can be acquired.’ In the comparisons,
the investor will probably look at the trend of ea;rnings for the past
five years.
Internally generated funds depend upon the margin of profitability and the
cash flow from operations. Also, in publicly held corporations, stockholders
must be willing to forego dividends in order to make earnings available
for reinvestment.
The condition of the firm’s industry and general economic conditions are
also major considerations in attracting new c pital. The industry will be
compared to other similar industries (i.e., other beverage industries)
in terms of net profits on sales and on net worth, supply-demand relation-
ships, trends in production and consumption, the state of technology,
impact of’ government regulation, forei n trade and other si’ nificant
variables. Declining or depressed industries are not good prospects for
attracting new capital. At the same time, the overall condition of the
domestic and international economy can influence capital markets. A firm
is more likely to attract new capital during a boom period than during
recession. On the other hand, the cost of new capital will usually be
nigher during an expansionary period. Furthermore, the money markets play
a’ determining role in new financing.
11-7
-------
These general guidelines canbe applied to the Malt Beverage Industry by
looking at general economic data and industry performanóe over the
recent past.
1. General Industry Situation
As was depicted in Table 11-3, the Malt Beverage Industry has experienced
a declining trend in its profits during the past few years. However,
Standard and Poors have projected that t he industry has good earnings
potential if the general economic environment stabilizes.
Total assets and liariilities of the alcoholic beverage industry are
shown in Table 11-4 for the years 1968-1969 through 1971-7’2 From the
table, it is apparent that the industrys fixed assets represent approxi-
mately 70 percent of all assets and that current assets represent approxi—
rnately.30 percent. Also, it is apparent that of the total liabilities,
long term debt represents approximately 25 percent, current liabilities
represent 18 percent and net worth represents 57 percent.
2. Expenditures for Plant and Equipment
New expenditures as reported by the Annual Survey of Manufactures and
the Census have increased from $75.9 million in 1960 to $158.1 million
in 1972 (Table 11-5). The yearly expenditures have fluctuated from
year to year, but overall has been increasing except that beginning in
1969 expenditures tended to peak. Since 1969, expenditures have decreased.
A closer look at the $158.1 million spent as capital expenditures in
1972 (depicted below) reveals $39-8 million were spent for new structures
and additives to plants, $115.8 million for new.machinery and equipment
and the remainder, $2.5 million, being spent to purchase used plants and.
equipment.
As also’depicted below, comparable data for 1967 reveals that the industry
utilized a greater portion of its capital expenditures for new machinery
and equipment and a smaller portion for new structures and additions to
existing plants and also used plants and equipment. This can be inter-
preted to suggest that the industry is moving toward the upgrading of
existing facilities instead of the con•;truction of i;ew facilities.
Expenditures for Plants and Equipment
1967 1972
$ Million Percent $ Million Percent
Total 176.9 100.0 158.1 100.0
New Structures & Additions
to plants 62.2 35.2 39.8 25.2
New Machinery & Equipment 110.6 62.5 115.8 73.2
Used Plants and Equipment 4.1 2.3 2.5 1.6
11-8
-------
Table 11-4. The Malt ‘and .Malt Liquor Industries..
1968—69
($‘ Mu.) (%)
1969—70
($Mil.) (%)
1970-71
1971—72
( ‘$ Mjl•) (%) ‘
$ Mjl..)
‘%)
Assets
Current Assets 782.6 33 831.0 ‘29 954.4 29 929.2 28
Fixed Assets 1,567.3 67 2,037.0 71 2,379.1 71 2,424.2 72
Total Assets 2,349.9 100 2,868.0 100 3,333.5 100 3,353.4 100
Liabilities & Equity
Long term debt ‘414.6 17 695.9 24 87?..2 26 919.7 27
Current liabilities. 464.7 20 5.22.6, 18 562.6 17 554.4 17
Net worth 1,470.6 63 1,649.5 58 1,898.7 57 1,879.3 56
Total ljabilitj s & .
equity , , 2,349.9 100 , 2,868.0 100 3,333.5 100 3,353.4 100
Source Department f Treasury, Internal Revenue Service, Source Book of Statistics of Income , Annual
-------
Table 11-5.. The Malt Beverage Industry, capital expendi-
tures 1960 through 1972.
Capital
Year . Expenditures
($ Million)
1960 . 75.9
1961 89.9
1962. 84.6
1963 86.2:
1964 105.4
1965 115.4
1966 168.8
1967 140.4
1968 193.. 6:
1969 249.8
1970 177.7.
1971 160.. 2
1972 158.1
Source: Census of Manufactures. .
-------
3. Capital Availability
In summary, it would appear the Malt Beverage Industry can be cate-
gorized into two types of financial positions in terms of the availability
of capital., to utilize’ for expendi.tures on pollution controls. . First,
there are the large diversified firms who have experienced reasonably
steady profits and through diversification have been able to maintain
adequatecash flows. For these firms the acquisition of additional
capital for pollution controls should not be a major problem.
fhe other financial’position will be encountered by the smaller firms.
who do not have the available sources from which additional capital can
be readily generated. These firms will primarily have to rely on inter-
nally generated capital (if available) or attempt to borrow it. Depending
on the firms’ potential and the industry’ outlook, some of the smaller
firms may encounter significant problems in obtaining capital. -
E. Cost of Capital - After Tax
Return on invested capital is a fundamental notion in’ U.S. business. It
provides both a measure of actual performance of a firm as well as expected
performance. In this’latter case, it is also called the cost of capital.
The cost of capital is defined as the weighted average of the cost of each
type of capital employed by the firm, in general terms equities and in-
terest bearing liabilities. There is no methodology that yields the
precise cost of capital, but’ it can be approximated within reasonable
bounds.’
The cost of capital was determined for purposes .of this analysis by esti-
mating performance measures of the industry. The weights of the two res-
pective types of capital for the Malt Beverage Industry were estimated
at 23 percent debt and 77 percent equity. The cost of equity was deter-
mined from the ratio of earnings to net worth and estimated to be 9.8 percent.
To determine the weighted average cost of capital, it is necessary to, adjust
the before tax cos s to after-tax costs (debt capital only in this .case)’.
This is accomplished by multiplying the costs by one minus the tax rate
(assumed to be 48 percent). These computations are shown below and result
in the estimated after-tax cost of r.apital being 8.8 percent.
Weighted Average After Tax cost of Capital
Before Tax . After Weighted
Item Weight Tax Cost ‘ Rate Tax Cost Cost
Debt ‘ .23 10.0 . .48 5.2 1.2
Equity .77 9.8 . 7.6
8.8
Il—il
-------
[ II. MODEL PLANTS
The Malt Beverage Industry is comprised, of several breweries which
utilize slight variations ofa basic process to produce differentiated
types of beer. As stated previously, the industry.consi.stsof establish-
ments engaged in the manufacturing of malt beverages which include lager’
beer, malt liquor, draught beer, ale, porter or stout beer and bock
beer. As this chapter is concerned with the development-of economic
model plants representative o’ breweries which could be directly or
indirectl , . effected by the imposition of effluent controls,’an attempt
will be made to describe models which together could typify most
brewery operations in the, United’ States.
A. . Types.of Plants
Breweries can be catcgorized according to their age and techrwlogical
state. As was mentioned in Chapter I,,breweries fall into two ‘distinct
categories: ‘(.1) those breweries built many years. ago and through remod-
eling and expansion have’ maintained their place in the industry; and
(2) those breweries built within the last 15 to 20 years and are basically
considered to be modern. ‘ ‘‘ ‘
While the above categories differentiate breweries, the basic brewing
process utilized by all breweries is about the same. The manufacture of,
beer is an ancient activity which has evolved into a modern’industry.
The primary raw material inputs of malt beverage manufacture are barley,
rite or ‘corn, hops, yeast, corn syrup and water. ‘The basic manufacturing
‘process is briefly described below:
1. Cleaned barley is steeped in aerated water and spread out
on floors or in special compartments and reguTarly turned
for five to eight days for germination.
2. At the point in germination where enzymes are formed,
-moisture is- removed and the germinated grain is trans-
ferred to a drying kiln. ‘ Sprouts are removed and the
remaining starch material,, malt, is ready for the
brewing prOcess.. .
3. Following the malting process (which may occur in another
locatiOn) the malt ,is’ ground and the malt adjuncts, ground
corn or rice, ,are added.
h I—i
-------
4. A small portion of the malt and adjunctis cooked until the
starch is liquified and then added to the cooker mash (step 5).
5. The next step, mashing, extracts the valuable constituents
of malt, malt adjuncts, and sugars by macerating (separating)
the materials with water. In the cooker the malt’s natural
enzymes. convert the insoluble starches to liquified starch and
the soluble malt starch into dextrin and malt sugars.
6. The resulting liquid materials called “wort” are separated from
the insoluble spent grains by filtration (lautering).
7. The wort is transferred to a brew kettle where, after about one
hour of boiling, hops are introduced and the substance is cooked
for an additional period.
8. Boiling wort is then filtered to remove the hop leaves and the
clear wort is then cooled. The cooling process, by allowing
thewort to absorb air, facilitates fermentation.
9. The chilled wort flows into fermenting tanks where yeast is
added to initiate fermentation, the process which converts
fermentable suga ’s into alcohol and carbon dioxide. The
evolved carbon dioxide is collected and stored for subsequent
use in carbonating the beer,. Fermentation occurs over a
sevento ten day period as the yeast gradually settles.
10. The yeast is removed and the remaining wort, now beer, is
piped into vatting tanks for aging and mellowing (lagering)
for three to six weeks at a temperature of approximately 30
to 32 degrees. During this period clarification, separation,
and the precipitation of hard resins occurs through several
filterings.
11. The beer is then carbonated and filtered.
12. The product is packaged in bottles, cans, or kegs. The bottles
Or cans of .bet?r are typically pasteurized at 140 degrees F.
Thea draught beer is diverted to a racking room where it is
immediately placed in kegs. Keg beer is kept refrigerated and
does not require pasteurization.
13. The spent grain left after separation of the wart is sold wet or
• is dried for animal feed. Remaining brewer’s yeast is often
also sold but in some breweries, it is discharged with the effluent.
111-2
-------
B. Sizes of Breweries
The value of shipments of the Malt Beverage Industry in 1972 was $4,054.4
million according to the Census. This’ gives an average for the 167
breweries of $24.3. million. While this. figure reflects the shipments of’
the average brewery in 1972 it does not provide a good representation
‘of the industry as the range of,plant size varies considerably from the
small breweries to the extremely large.
According to the Bureau of Alcohol, Tobacco and Firearms and the
United States Brewers Association (USBA) as of’ January 1976there were
94 breweries in operation. To determine the criteria for defining the
size of the model brewe’ries discussions with the USBA resulted in the
determination that the daily number o,f barrel’ equivalents produced is the
most rea’listic measure. Accordingly, model, brewery sizes were determined
for’ the small, medium and large older breweries as well as defining sizes
for a representative existing modern brewery and new, ‘yet to be
‘constructed breweries (new source).
The model breweries are depicted in Table 111-1. For the, models, the
small older brewery produces.’ 2,700 barrels of beer a day, the’,medium,
older model produces 11,000 barrels, the large older brewery produces”
22,000 barrels, the existingmodern brewery produces 14,000’ barrels per,
day, and the new, ,yet to be constructed breweries produ,ce ‘ei’ther
7,500 or’ 25,000 barrels per day. Other relevant informatiOn con-
cerning the brewery models are also shown,.c i Table 1 1 1—i.
The financial prof,iles for each’ of the model breweries are shown in
Table 111-2. These profiles were derived from a variety of sources
including the Census .of Manufactures , Internal Revenue Service, Bureau
ofAlochol, Tobacco and Firearms, Standard and Poors -‘ Industries Surveys ,
and discussions with the United States Brewers’ Association.
C. Investment
The estimated book value andsalva’ge value for’ each model brewery are
shown in Table 111-3. Also shown are current assets, current liabilities
and net working capital.
1. Book Value of Investment
The estimates of book value of assets were developed from data available
published sources as well as datafurnished from industry sources. The
estimates were computed utilizing a derived estimate ofasset.value per
annual barrels.produced. The values per annual barrel we,re $12.00,
$13.33, $15.00, $25.00 and $45.00 for the older small, medium, large.
existing modern and new source bre,wery models respectively.
111-3
-------
Size
Older.
Small
Older
Medium
Older
Large
Existing
Modern
N
Small
ew Source
•
Large
NewSource
Barrels per day
270O
11,000
22,000
14,ObO
7,500
25,000
Barrels per year
621 ,OO O
2,530,000
5,060,0’OO
3,220,000
1,725,000
5,750,000
Days per year
230
230
230
230
.230
230
Average number of
..
.
.
• employees
283
977
1,939
733
265
885
Barrels per man
per year •
2,194
2,589
•
2,610.
•
4,393
•
.6,500
6,500
Table 111—1. The Malt Beverage Industry, model breweries,. descriptive information.
I - .
I -I
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Table 111-2.
The Malt
Beverage Industry, model breweries financial profiles
Older
Size Small
Older
Medium
Older
Large
Existing
•Modern
Small
New Source
Large
New Source
($000)
Barrels/Year (000)
621
2,530
5,060
3,220
1,725
5,750
Number employees
283
977
1,939
733
265
885
R venue
Sales ($30/ .bbl.)
Dried Grains
l8 ,63O ,
‘—---s’
75,9001,
—— —,
151,800
1,138
96,600.
•. 725
51,750
388
•
172,500
1,294
Total revenue
18,630
75,900
152,938
97,325
52,138
173,794
Costs .
.
.
.
Cost of Materials
9,874
39,088
75,905
48,273
25,860
86,202
Labor . .
3,037
12,2.13
26,176
9,830
3,644
12,169
Supplies& Other
4,955
19,498
35,687
25,596
12,522
39,850
Total costs
17,866
70,799
137,768
83,699
42,026
138,221
Cash Earnings
764
5,101
15,170
13,626
10,112
,
35,573
Less
.
.
.
.
..
Depreciation
Interest
298
186
1,686
759
4,554
1 ,518
4,830
.973
.
4,658
521
15,600
1 ,725
Pre-tax Income
280
2,655
9,098
7,823
4,953
18,248
Income Tax .
128
1,268
4,361
3,749
2,371
8,753
After-tax Income
152
. 1,388
4,737
4,07.
2,582
9,495
Cash Flow
450
3,074
9,291
8,904
7,240
25,095
Assumes the older small and medium.niodel plants disposedof
revenue. .
spent grains wet and generated little if any
-------
Table, 111.3. The Malt Beverage Industr5’, estimated capital costs fdr model: breweries.
Older Small Older Medium Older Large Existing Modern New Source Small
Book Salvage Book Sa’ivage Book Salvage Book Salvage ‘ Book Salvage
New Source Large
Book’ Salvage
:.
Total Fixed Assets
Current Assets
Current Liabilities
•
($1,000)
7,452 745 33,725 3,372 75,900 7,590 80,500 8,05O 77,625 7,763
3,194 3,194 14,454 14,454 32,529 32,529 20,430 20,430 10,948 10,948
1,774 1,174 9,034 9,034 23,235 23,235 14,593 .14,593 7,821 7,821
258,750
36,495
26,069
‘ 25,87,5
36,496
‘26,069
Net Working Capital
1,420 1,420 5,420 5,420 9,294 9,294 5,837 5,837 3,127 3,127..
10,427
10,427
Total Invested Capital
8,872 2,165 39,145 8,792 . 85,194 16,884 86,337 , 13,887 80,752. 10,890
269,177
36,302
-------
2. Salvage Value
The salvage value of breweries will vary widely from plant to plant,
depending upon the age of the plant and its condition, the age ‘of the
equipment and its condition and the location of the plant. In some
instances the salvage value of old, obsolete plants will be equal to
site value plus the scrap.value of the equipment.
There i a market for certain types. of used machinery and. equipment,
however, this is’ limited primarily to modification of existing Operations
as virtually all new plants begin with all new equipment. As no data
are available on actual salvage values for breweries and only a limited
market exists for used equipment, it is difficult to estimate the salvage
value of plant closed due to the added costs of effluent controls. For
purposes of analysis, the estimated salvage value has been determined
based on 10 percent of the book value, brewery’s assets.
3. Operating Capital
Current assets, current liabilities art.d net:working capital are also shown,
in Table 111-3. Current assetswere determined to represent approximately
17 percent of sales for the small model brewery, 19 percent for the niedium
brewery’and 21 percent far the remaining model breweries.
Current liabilities were estimated utilizing.a current ratio (current
assets divided by current liabilities) of 1.8 for the olde” small model,
1.6 for the older medium model, brewery and 1.4 for the old large, exist-
ing modern and new source model breweries.
D. Model Brewery Capacity and Utilization
As breweries vary from one to another, there appears to be no industry
rule by which the model breweries’ capacity or utilization can’ be
accurately described. The limiting factor for most breweries ‘are the
capacity of, their brew kettles or ferrr ntation tanks. In some instances
the capacity of th bottiinglines ma also.be a constraint under which
the brewery must operate.
Commonly, breweries will operate 5 days per week for approximately 230
days per year. The model breweries were based on these numbers but it
should be noted that due to the seasonal trend in the consumption of beer,
(Tabl,e 111-4), it will not be uncommon for breweries to operate 6 to7
days per week during the peak demand season and only 3 or 4 days per’
week during the reduced demand period’.
111—7
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Table ..TII-4. The Malt Beverage Industry, monthly production, with-
drawals and consumption, 1974.
Month.
January
February
March
• April
May
June
‘July
.August
September
October
November
December
Beer
Produced
12,191.6
10,984.1
13,047.0,
13,089.6
14,713.3
15,043.0
15,731.2
14,610.9
12,667.1
12,277.2
10,711.7
11,113.6
Total
Withdrawals
1,000 barrels
10,967.0
9,871.1
11,816.2
.11,741.2
13,758.1
13,859.4
14,734.3
13,886.0
12,090.4
11,586.1
10,419.2
10,735.0
Cons umpti on
10,534.8
9,719.4
11,274.1
11,626.0
13,485.3
13,859.3
14,505.5
13,9.1 . 8
12,408.7
11,475.6
10,625.1’
10,767.0
III-8
-------
The brewing process is basically .a batch process (in tanks) and as Such
breweries can reduce their daily production by using less tanks.
For purposes of this analysis, however, it was assumed that when
operating the model plants maintained near maximum utilization levels
(used all their tanks).
E. Cost Structure’of Model Plants
The cost structure for the model breweries were shown in Table 111-2.
Major items are discussed below.’
1. Materials
Materials purchased by breweries represent the greatest expenditure
the industry ‘incurs.’ Included in materials purchased by’ breweries are:
agricultural products such as barley, rice, corn, hops, yeast and corn
syrup; packaging and related materials; and other’ miscellaneous items.
Of the purchased materials agricultrual products represented approximately
21 percent of ailmaterials purchased’and packaging and related materials’
represented 64 percent. ‘ ‘
2. Labor
Labor costs were estimated using the number of employees per model plant
multiplied times an estimate annual costs, per employee. Labor costs, as
estimated, included indirect expenditures incurred by the brewery fo,r
such things’ asfringe benefits, taxes, etc. The estima.ted annual, ,e ployee
costs ranged from $11,500 for the older ‘small model brewery to $13,500
for the new source models.
3. Supplies
This cost c1assification inclUdes miscellaneous other costs’ as well as
expenditures for fuels and indirect costs (i e , administrative costs)
4. Dep eciation and IntereSt
Depreciation was derived from IRS data and determined to be, expressed as
a percent of the book value of assets, 4 percent,for the older small’
brewery, 5 percent for the medium older brewery and 6 percent for the
remaining four brewery models. These varying percent,ages are based’ on
the assumption that the older small and medium breweries are relatively
old and have not been up-dated to any great extent. Thus the portion
of depreciable assets would vary. The older large brewery model’,s
percentage was determined to be the same as the newer plants’as in
order to maintain efficient operation ‘the older large’plants have had
to, at various times, invest relatively large sums of money in remodeling
or expanding. ‘ ‘
111-9
-------
Interest was estimated to be one percent of the annual sales.
5. Total Costs
Material costs ranged from 49.6. percent of total sales for the older
large, existing modern and new source models to 53 percent for the
older small model. Labor represented the greatest percentage for the
older large model, being 17.1 percent. The other two older models labor
costs represented approximately 16 percent and the existing modern and
new sôu:rce mudels’ labor costs were 10 .1 and 7.0 percent of sales
respectively. Finally,’expenditures for supplies and other costs
were not widely spread with all brewery models ranging between 22.9 and
26.6 percent.
Thus, for the model breweries, total costs for the older small model.
were estimated to represent 95.9 percent of its annual sales. For
the older medium and large models, total costs were estimated t,o repre-
sent 93.3 and 90.1 percent.respectively. Total costs for the existing
modern model plants were estimated to be 86.0 percent and for the new
source plants, 79.5 percent for the large and 80.6 percent for the small.
F. Annual Profits
After-tax income, return on sales, both pre-tax and after-tax and
return On total invested capital for the various sized model breweries
are depicted in Table 111-5. It should be noted that the model breweries
were, based on average 1973-74 conditions as no later published sources
of information were available.
G. Annual Cash’ Flows
Estimated annual cash flows for the different sizes of models breweries
are shown in Table’ 111-6. Cash flow as calculated represents ‘the’ sum
of after-tax income’ plus depreciation. In the table it is’ shown in
absolute dollars as well as a percent and as a percent of total invested
capital. ‘ ‘
111-10
-------
Table 111-5. The Malt Beverage Industry, net income, return onsales, and investment
for model breweries
Sizeof
Model Brewery
•
.
•
After-tax
Income
(1,000
Dollars)
Return on Sales
Return on Total
Invested: Capita1
Pre-täx After-tax
Percent
:
Pré-tax After-tax
Older small
152 .
1.5 0.8
.3.2 1.7
Older medium
1,388
3.5 1.8
6.8 3.5
Older large
4,737
6.0 3.1
1.0.7 5.6
Existing’modern
4,074
8.0 4.2
9.1 4.7
New Source Small
2,582
9.5 5.0
6.1 3.2
New Source Large
9,495
10.5 5.5
6.8 3.5
111—11
-------
Table 111-6. The Malt Beverage Industry., annual cash flows for the
model breweries
Cash Flow
Cash Flow
as a perceht
Size of
Annual
as a percent
of
total invested
Model Brewery
Cash Flow
.
of sales
capital
.
(1,000
Dollars)
.
(Percent)
(Percent)
Older Small
450
2.4
5.1
Older Medium
3,074
4.1
7.9
Older Large
9,291
6.1.
10.9
Existing Modern
8,904
9.1
10.3
New Source Small
7,240
13.9
9.0
New SOurce Large
25,095
14.4
9.3
.
111—12
-------
IV. PRICING PATTERNS
Historically the price of beer has shown a ‘constant annual increase.
This has been attributable’to several factors with the more significant
being strong consumer demand and increasing ingredient costs.
A. Price Determination
The determination of prices for ‘malt beverages involves a complex
interaction of consumer demand ‘and attitudes, the available supply and to
some extent•government taxes. ‘While supply and taxes play an important
function in influencing the overall determination of prices, consumer
demand and attitudes along with breweries’ costs dominate the actual
price determination process.
1. Consumer Demand and Attitudes
Consumer demand can be defined as the quantity or beer consumers are
willing to purchase at, the current level of prices. In the past,’the
demand for beer (consumption) has in’creased’at a’n’annual’rate’of 3.5 ‘1
percent. Thls increase, however, has not been steady as the annual. rate
has fluctuated between a low of minus Li percent in 1961 to a high of
9.6 percent in 1970 (Table IV-1). During the most recent five years the
rate of increase in demand has varied between 1.1 percent and 9.6 percent
and has averaged 5.0 percent.
The trend for increased consumption of malt beverages is also evident when
the per capita consumption of beer is reviewed (also in Table IV-i). Since
1960, the per capita consumption of beer has increased from 15.4 gallons
to the 1974 figure of 20.9 gallons. While between these 15 years, per.
capita consumption increased by 36 percent,, at an annual average’ rate of
2.2 percent, there were’ four years in which per capita consumption decreased.
Thus when total consumption is viewed with per.capita consumption, it,:
becomes obvious that while individuals are drinking more malt beverages,
the number of individuals drinking malt beverages, has also increased.
During 1975 the growth rate for the Malt Beverage’ Industry dropped rather
substantially due to a’series of wholesale price increases beginning in
April 1974 through early 1975. These increases coupled with. ‘the
recession resulted ‘in reduced consumer incomes and accordingly individual
malt beverage consumption did not increase as much as it had previously.
The outlook for the future is reasonably good as it appears that consumers
incomes will recover and that the number. of individuals in the lower age
groups, primarily the 20 to 34 year old segment, will increase by 21 percent
between 1975 and 1985. This age group is generally regarded as the most
frequent users of malt beverages. ‘ ‘
IV-1
-------
Table IV—l. The Malt Beverage Industry, consumption since 1960.
Taxable
Withdrawals. .
Percentage Change
from Previous Year
Per Capita. Consumptionl!
Percentage Change
Gallons from Prèviôus Year
Year
Barrels
1960.
1961
88,928.9
87,925.8
- .
(1.1)
15.4
14.9.
-.
(3.2)
1962.
1963
1964
90,693.3
91,493.6
96,247.4
3.1
0.9
5.2
15.1
15.0
15.6
1.3
(0.7)
4.0
1965
100,306.7
4.2
16.0
2.6
1966
101,510.3
1.2
16.1
0.6
1967
107,301.4
5.7
16.8.
4.3.
1968
1969
1970
107,470.4
111,866.6
122,550.2
0.2
4.1
9.6
16.7
17.2
18.7
(0.6).
3.0
8.7
1971
123,850.4
.1.1
18.6
(0.5)
1972
130,740.6
5.6
19.5
.4.8
1973.
.133,960.5
2.5
i9.8’
1.5
1974
142,312.0
6.2
20.9
5.6,.
SOurce: United States
Brewers Association.
!JBased On total population regardless of age.
IV- 2
-------
Consumer demands and attitudes between individual brands of beer also
is an important factor in the determination of the overall demand.for
malt beverages. In 1974, the five largest brewers accounted fOr 63.6
percent of the total industry’s barrelage /. As stated in Chapter I,
these brewers and their’resoective shares are as follows: Anheuser
Busch, 24 percent; Schlitz, 16.1,percent; Pabst, 10.1 percent; Coors,
8.5 percent; and Miller, 7.2 percent. Historically, these five brewers
have ‘increased their aggregated share of the beer market from 50.9 percent
in 1968 to 55.5 percent in 1972 to the 1974 level of 63.6 percent. According
to some sources, the ability to continue expanding their market share by
the major brewers is not too Jrprising as they have experienced an
advantage to compete vigorously against smaller brewers in the economic.
climate of the past two years. Traditionally, it had been thougnt that
malt beverage consumers might “trade down” to lower-priced brands of
small or regional brewers but according to data compiled by Mr. Frazzano ./,
the cleartrend is that higher-priced brands that have been well-adver-
tised continue to dowell. Thus, an individual brewer’s demand for its
beer is dependent on a variety of factors with the most important being
beer consumption trends and the image which that brewer’s brand maintains
in the consumers eye.
2. Supply of Malt Beverages
Given the present levels of consumption,. there are very few constraints
on the Malt Beverage Industry in its ability to supply enough malt
beverages to meet demand. Presently the production of beer is geared
toward the expected future demand with consideration for production and
distribution lead-times. Some problems may arise if single-plant brewery
is operating at full capacity and additional output is needed. But
these situations are few and even when they do exist, they usually
occur in a regional area. 1hen they do arise, the end: results;are
usually that the consumer purchases anotherbrand of beer.
3. Market Structure
Predicated on the industry concentration among a few larqe brewers described
previously the Malt Beverage Industry can be basically characterized as
oligopolistic in ‘its market structure. A strict, economic definition of
an oligopoly is as follows:
“A market situation where sellers are so few that the supply
offered by any one of them materially affects the market price,
and, in which, because’ sellers are so few, each one is able to
“Estimates by Joseph C. Frazzano, analyst at Edwards & Hanly, The Wall
• Street. Journal , “Beer Drinkers Continue to Favor Big Brewers Despite
the Higher Prices” for Premium Brands,u July, 18, 1975.
I bid .
IV-3
-------
measure, with a fair degree of accuracy, the effect of his.
price and production decisions upon similar decisions by his
competitors.
In an oligopolistic industry, the pricing, decision is subject to a greater
uncertainty because of interdependent reaction, i.e., if a price increase
does not succeed the firm may experience a substantial loss in sales,
profit, and prestige. Therefore, the oligopolistic firm is likely to
possess more discretion, and therefore to view the pricing decision in
a longer-term perspective and is less likely to attempt to equilibrate
supply. and demand in the short run. When demand rises, more of the burden
of markêt adjustment’ Will fall on rationing and backlogs of orders’,
particularly since pruchasers have fewer alternative sources of supply.
When. demand falls, more of the adjustment will be on lower production
instead of cutting of price.. /
According’ to interview studies, a common principle of long term pricing
appears to be to set price to earn a target rate of return on capital at
a standard volume of output J. Price.is altered if the cost of producing.
the standard output changes, either because of changes in’ prices of the
main inputs or because of technological progress. According to this
practice, for a level of output at or above breakeven point, average direct
cost per unit is estimatedand a given percentage of direct cost is added
to direct cost to cover both fixed cost per unit, and the desired target
rate of return. The price based on this formula may be called the-normal
price. The actual price that a firm seeks to charge in a given location
is the normal price adjusted for freight charges, discounts or allowances
and the market strategy (i.e., advertising campaigns and “specials”) for
‘that area.
The firms that ordinarily set the prices a price leaders usually have
cost advantages based on location and scale and are usually large, in terms
of their local’market share. Other firms that have less of a cost advan-
tage and produce lower volumes of output will charge an actual price close
to that of the actual prices charged by the price leaders’, which is often
lower than the price leaders’ prices. The normal price’s determined by
the price leaders in a given location are often the price at wh çh they
presumably maximizes their profits (or minimizes, their losses)._’
‘Eckstein, Otto and From, Gary, “The Price Equation,” The’ American
Economic Review , December, 1968.
-“Kaplan, A.D.H., Dirlam, J.B., and Lazzilotti, R.R., Pricing’ is Big
Business - A Case Approach , 1958.
- 1 Environmental Protection Agency, Economic Analysis of Proposed Effluent
Guidelines Cement Industry , August, 1973.
IV-4,
-------
Finally, it should be noted that the market structure also may vary
from state to state. This is primarily the result of various state and
local controls over the sale of alcoholic beverages. Brewers also must
meet variàus federal controls which indirectly may also effect the basic
nature of the market structure.
B. Price Trends
The priced of malt beverages have, traditionally, remained relatively
constant with only occasional increases to keep pace with inflation.
The brewers could afford to do this for many years as their gained
efficiency in production due to technological advances usually offset
increased material and labor costs. (Note, the smaller breweries often
could not afford to implement these changes and as a result were forced
out. of business.) Thus most breweries haveoften been characterized as
being able to maintain respective profits without increasing- their prices
substantially. This trend has been experienced for several years and
as can be seen in Table IV-2, the malt beverage wholesale. price index
increased by only 14 percent between 1965 and 1973, a period of 9 years.
In 1974, however, brewers began experiencing substantial increases in
material .costs particularly for agricultural products and containers.
The price of metal cans rose 21 percent in the first half of 1974 and another
13 percent in the latter half. In the first quarter of 1975, metal can
prices increased another 7 percent. Glass container prices rose 16
percent in 1974 and malt, which in 1972 constituted about 8 percent of
tOtal direct cOsts, rose by 70 percent.
-. As a result of the increased costs being incurredby the brewers, the
average annual prices paid for malt beverages rose by over 9 percent
between 1973 and 1974, with the December, 1974 wholesale price index for
malt beverages being nearly. 17 percent higher than the average index for
1973. According to Standard and Poors, these price increases should
level off in 1975 as there appears to be improvement in •the prices of
the major purchased ingredients.
Finally, it should be noted that brewer’s price their product differently
for different container types. As can be seen in Table IV-3, the
majorityof beer is sold in metal cans with one-way bottles representing
the next most popular form. Recent governmental action has considered.
banning one-way beverage containers and if such a ban was imposed, the
industry may see an additional need to again increase prices.
IV-5
-------
Table IV—2. The Malt Beverage Industry, Wholesale price index for selected products
Year
Malt Beer— Beer
Beverages Bottle Can
No.
Barley
3, Mm
Corn
n. No. 2, Chicago Malt
1967
=100
—
1965
. 97.9 ‘97.5 98.4
99.1’
100.2 N.A.
1966
98.4 .98.1 98.9
104.3
105.4
1967
100. 0 100.0 100.0
100.0
100.0 100.0
1968
101.4 .101.8 101.1
91.1
88.0 97.1
1969
103.2 104.5 101.7
83.4
95.3 97.1
1970
106.0 108.4., 103.2 ‘
88.0
105.4 94.6
1971
110.2 113.8 . 105.7
91.6
107.8 98.5
1972
‘110.8 114.5 106.3
92.1
100.8 94.2
1973
‘
111.6 11.5.0 107.4
138.7
172.3 121.3
.
1974
121.9 126.6 116.1 ‘
214.0
248..0 , 206.2
January
February
114.9 119.0 109.9 .
114.9 118.6 110.4
.
199.6
‘237.8
.225.6 163.2
234.8 171.4
March ‘
116.1 .119.9 111.3
.
216.6
231.9 ‘177.2
April
118.5 123.1 112.8
131.6
204.8 190.6
May .
117.4 121.9 111.9
176.6
208.2 204.2
June
118.7 123.0 113.3
193:6
222.5 204.2
July
. 122.5 127.3 116.5
189.0
245.6 204.2
August
September
October
November
.
125.3 130.4 118.9
125.6 130.5 119.5
129.7. 135.7 122.2
129.4 134.7 122.9
239.5
196.2
259.0
282.4
290.2 204.2
269.6 221.4’
291.2 237.4
275.2 237.4
.
December
‘
130.2 135.7 123.5
246.3
276.3 258.8
Source: U. S. Department of Labor, Bureau of Labor Statistics, Wholesale Price Index
-------
Table IV-3. The-Malt Beverage Industry, tax paid removals of malt beverages
by type of container
.
•
Draught
:
Packaged
Removals
.
Total
One-Way
Returnable
Total
Year
Sales
Metal
Cans
Bottles
Bottles.
Packaged
Removals
-
1967
16.3
36.8
17.6
29.3
83.7
100.0
1968
1969
1b.6
14.9
•
40.5
41.7
17.7
18.7
26.2
24.7
84.4.
95.i
100.0
100.0
1970
14.1
44.7
18.9
22.3
•
85.9
100.0
1971
13.6
48.4
18.1
19.1
86.4
100.0
1972
13.3
50.3
•
18.2
18.2
86.7
100.0
1973
13.1
53.0
18.3
15.6
86.9
100.0
1974
12.5
•54.2
18.4
14.9
87.5
100.0
Source: United States Brewers Association
IV-7
-------
V. EFFLUENT CONTROL. COSTS
The effluent control system requirements and costs depicted in this
chapter were ptovided by the Effluent Guidelines Division of the
Environmental Protection Agency as provided by the technical contractor,
Environmental Science Engineering. The recommended.and optional treat-
ment alternatives for the model brewerieswere the’ same as’ presented in the
Development DocumentV . However, the associated i’nvestment and anhual
costs have been revised by the technical contractor to reflect the model
breweries production’ characteristics previousiy described in ‘Chapter III.
A. Pollution Control Requirements
Three effluent control levels for, point source categories (d’irec,t dis-
chargers) w’ere originally considered as proposed’by EPA:’
BPT - Best Practicable Control Technology Currently
Available, to”be achieved by July, 1,977.
BAT , Best Available Pollution Control Technology
Economically Achievable, to be achieved by
July, 1983.
NSPS - New Source PerFormance Standards were recommended to,be
equal to the BAT control technology but the standards
were based on an “average’of the best” raw waste load
‘data applying to that technology. These apply to any
source for which construction ,starts after’ the’ publi-
cation of the’ propo,sed regulations.
Raw.waste loads for the existing and new source model breweries are shown
in Table V-i. From this table it can be seen ‘that variation in flow,,
biological oxygen demand (BOD) and’susp nded solids.(SS) do exist wi th the
BOD and SS concentrations being higher for the modern and new source breweries
than for the, older existing breweries. Thi’s is. explained by the reduced
consumption of water’by the newer breweries which therecore reduces the
dilution of discharged brewery wastes. The cnncentrations of fats, oils
and grease ‘(FOG) are not significant. The recommended effluent limitation
guidelines for the model breweries as prOposed in the Development Document
are shown in Table V.2.
Deve o ment Document for Effluent Limitation Guidelines and New Source
Performance Standards, Miscellaneous Foods and Beverages , Point Source
Category, Draft Report prepared by Environmental’Scjen’ce and Engineering,
Inc. for the U.S. Environmental Protection Agency.
V-.i
-------
Table V-i.. Raw waste loads for, model breweries
•
Production
FlOw
BOlD
SS•
•
FOG
• bbi/day
MGD •
mg/i
mg/i
mg/i
Exist ij
.
Small-older
2,700
0.921.
1,710’
667
N.A.
Medium-Older
11,000
3.750
1,71O
667
N.A.
Large-Older
22,000
7.500
1,700
670
N.A.
Modern •
14,000
2.350
1,940
713
N.A.
New Source ‘
.
.
Small
7,500
.
1.040
‘ 1,900
624
N’.A.
Large
25,000
3.500
1,900
624
N.A.
Source: Effluent Guidelines Division, Environmental Protection Agency.
‘V -2
-------
Table V —2. Recommended effluent limitation guidelines for the malt
beverage :thdi 5.t ’Y..
.
BPT
BAT
Older Modern ‘.N$P:S
Older Modern
kg/cu.. m beer produced
BOD
Max 30
day ave.
0.55 0.28
O.27 0.14 0.099
.
Max Day
1.40 0 :70
0.67 0.35 0.257
sS
.
Max 30
day ave.
0.76 0.39
0.38 0.19 :0.139
Max Day
1.90 0.97
•O.95 0.48 0.361
Source: Devélopnient Document , Environmental Protection Agency.
V-3
-------
B. Discharge Status of the Industry .
The Malt Beverage Industry can be characterized as consisting of breweries
which predominately discharge their wastewaters to municipal treatment
facilities. in fact, of the 94 breweries’which are presently authorized
to operate, only three breweries are known to treat their own effluents.
Of these three known direct discharges, (according to EPA), two’ meet the
proposed BPT standards and the remaining brewery meets the proposed BAT
standards.
C. Pollution Control Costs
The cost estimates as provided by EPA, in 1972 dollars, and the components
of the recommended and optional (if considered desirable) treatment alter-
natives for the model breweriesare shown in Tables V-5 through Table V-12..
From the information provided,’ total investment and annual. costs were in-
flated so as to be consistent with the cost associated with the models.
Investment and’ annual •costs were inflated from 1972 to 1974 dollars by the
use of the Engineering News Record Construction Cost Index (1.205’ times the
provided EPA costs). The resulting treatment costs in 1974 dollars for
both the recommended and optional treatment alternatives are summarized in
Table V-3.
Investment costs include costs for construction, land, engineering and a
contingency fee. Annual operating costs include expenditures for’ labcr,
pàwer, chemicals, maintenance and supplies. Total yearly costs include
annual operating costs, depreciation and interest. Depreciation was
based on a 20 year depreciable life for the ollution controls. Interest
was based on a 1.0 percent rate which was then computed as 10 percent of
one half the total pollution control investment costs.
Total investment costs for pollution controls expressed as a percent of
book value of the.módel breweries fixed assets and the total annual cost
expressed as a percent of annual sales are depicted in Table V-4.
V-4
-------
Table V-3. Effluent control costs for model L reweries (1974 dollars)
.
Traat nt
BPT
.
Incr
émental BAT
•
NSPS
Investment
Annual
Operating
Total
Yearly
Investmen.t
Annual
Operating
Total
Yearly
:
Investment
Annual Total
Operating Yearly
•
Model
Alternative
Costs Costs Costs Costs
Costs Costs Costs Costs Costs
$1,000 —
Existing
Small-Older Rec. 1,868 395 582 60 8 14
Opt. 2,836 1,24? 1,526 61 9 15
Medium-Older Rec. 6,018 1,315 1,917 242 34 58
Opt. 10,602 4,969 6,029 242 35 59
Large-Older Rec. 13,539 2,543 3,897 484 70 118
Opt. 21,153 9,847 11,962 484 70 118
Modern Rec. 5,059 951 1,457 17]. 24 41
Opt 7,573 3,540 4,297 172 25 42
New Source
Small Rec. 2,231 430 653
Opt. 3,555 1,575 .1,930
Large RCc. 7,001 1,236 1 ,936
Opt. 11,654 5,226 6,391
-------
Table V-4. Inve tment costs and yearly costs expressed as a percent of model breweries’ investment and sales
.
BPT
BAT
NSPS
Total Investment
Total Yearly Costs
Total Investment
Total Yearly Costs
Total Investment
Total Yearly Costs
Treatment
as % of
as % of
.
as % of
as % of
as % of
as % of
Model Alternative
Book Value Annual Sales Book Value Annual Sales Book Value Annual Sales
Existing
Small-Older Rec. 25.1 3.1 25.9 3.2
Opt. 38.1 8.2 38.9 8.3
Medium-Older Rec. 17.8 2.5 18.6 2.6
Opt 31.4 7.9 32.2 8.0
Large-Older Rec. 17.8 2.5 18.5 2.6
Opt. 27.9 7.8 28.5 7.9
Modern Rec. 6.3 1.5 6.5 1.5
Opt. 9.4 4.4 9.6 4.5
New Source
Small Réc. 2.9
Opt. .4.6 3.7
Large Réc. 2.7
Opt. . 4.5 3.7
-------
Table V-5.
Itemized cost summary for malt beverages (older)
alternative .A 17-V (BPCTCA)
Small
Medium
Large
Investment Costs
Construction
L - nd
Engi•neering
Contingency
Total
.
.
1,245,110
56,310
124,510
124,510
1,550,440
•
.
4,039,220
147,270
403,920
403,920
4,994,330
•
.
9,139,450
268 ,22O
013,940
913,940
11,235,550
Yearly 0p ratingCosts
Labor
:po% er
Chemicals
.
. .
74,9.70
:. 137,290
. 31,290
74,970
762,680
127,11.0
.
74,970.
1,519,500
:251,690
Maintenance &
Supplies
Total
.
34,170
327,720
126,120
1,090,880
..
264,510
2,110,670
Total Yearly Costs
.
Yearly Operating
Cost
:
327,720
1,090,880
.
2,110,670
Yearly Investment
Cost Recovery
Depreciation
Total .
.
.
62,020
. 74,710
464,450
.
199,770
242,350
1,533,000
.
449,420
548,370
3,108,460
Source: Effluent Guidelines Division, Environmental Protection A ency.
Itemized cost summary for waste water treatment chain design efficiency...
97.0 percent BOO reduction.
Bi.
El..
C...
F...
H...
K.
Q..
R...
S...
V...
Control House
Pumoing Station
Screening & Grit Chamber
Equalization Basin
Acid Neutralization
Nitrogen Addition
Activated Sludge
Sludge Thickener
Aerobic Digestor
Vacuum Filtration
Holding Tank
Treatment Modules:
‘ 1-7
-------
Table V-6.
Itemized cost summary for malt beverages (older)
Alternative A 17-Il (BPCTCA-OPTION)
• Small Medium Large
Investment Costs
Cons tructi on
‘Land
Engineering
Contingency
PVC Liner
Total
Yearly Operating Costs
‘Labor
Power
Chemicals
Ilaintenance &
Supplies
PVC Liner
Total
1,837., 190
21,610
188,720
188,720
67,500
2,353,840
24,990
906,060
16,350
82,300
1,120
1,030,82.0
7 ,0 5 ,280
79,930
705,630
705,630
251,060
3,798,530
24 990
3,697 ,120
66,240
333,650
1,800
4,123,800
14,090,470
•156,4 0
1,409,050
1,409,050
489,500
17,554,480
24,990
7,350,250
130,810
664,230
i ,800
8 ,172,030
B...
El..
C...’
H..
L...
1 ,030,820
94,150.
116,610
1,?41 ,580
• Pumping Station
Screening & Grit Chamber
Equalization’ Basin
Acid Neutralization
Nitrogen Addition
Aerated Lagoon
Total Yearly Costs
Yearly Operating
Cost
‘Yearly Investment.
Cost Recov ry
Depreciation
Total
4,123,800
351,940
435,930
4,911 ,670
Source: Effluent Guideline’s Division, Environmental
8,172,080
702;180
869,900
9,744,160
Protection Agency.
•1temiz . d cost sunuiiary treatment chain design-efficiency...
97.0 percent BOO reduction.
Treatment Modules:
V-3
-------
Table V-7. Itemized cost summary for nialt beverages (older)
Alternative A 17-VI (BATEA)
Small
Medium
Large
Investment Costs
Construction
1,286,700
4,206,570
.
.9,474,150
Land
56,310
147,270
263,220
Engineering
Contingency
Totai
128,670
123,670
1,600,350
420,660
420,660
•5,195,160
•
947,410
947,410
11,637,190
Yearly Operating. Costs
Labor
Power .
:74,970
.193,800
74,970
783,890
74,970
1,571,910
Chemicals
31,290
127,110
251,690
Maintenance &
. .
.
Supplies .
Total
34,850
334,910
128,870
1,119,840
270,010
2,168,580
Total Yearly Costs
.
,
Yearly Operating
Cost .
.
334,910
1,119,840
.2,168,580
Yearly Investment
Cost’Recovery .
Depreciatio n
Total .
.
64,010
. 77,200
476,120
207,810
- 252,390
.1,580,040
465,490
568,450
3,202,520
Source: Effluent Guidelines Division, Environmental Protection -Agency.
Itemized cost summary for waste water treatment chain design efficiency...
98.5 percent BOD reduction.
Treatment Modules:
Bi. * Control House
B... Pumping Station
El.. Screening &. Grit Chamber
C... Equalization Basin
F... Acid Neutralization
H... Nitrogen-Addition
K... Activated Sludge
Q... Sludge Thickener
R... Aerobic Digestor
S... Vacuum Filtration
Y... Holding Tank
N... Dual Media Pressure Filtration
v-9
-------
Table V-8.
Itemized cost summary for malt beverages (t Jder)
Alternative A 17-IT (BATEA-OPTION)
Small Medium Large
Investment Costs
Constructi on
Land
Engineering
Contingency
PVC Liner
Total
1,928,780
21,610
192,880
192,880
67,600
2,403,750
7,223,620
79,930
722,360
722,360
251,060
8,999,330
14,425,160
I56 ,430
1,442,520
1,442,520
489,500
17,956,112
Yearly Operating Costs
Labor
Power
Chemicals
Maintenance &
SUpplies
PVC Liner
Total
24,990
912,570
16,350
82,980
1,120
1,033,010
24,990
3,723,330
66,240
336 ,39C
.1,800.
4,152,750
24,990
7,402,670
130,810
669,720
1,800
8,229,990
Total Yearly Costs
Yearly Operating
Cost
Yearly Investment
Cost l eco .very
Depreciation
Total.
1,038,010
96,150
19,11O.
1,253,270
4,152,750
359,970
445,970
4,958,690
8,229,990
718,240
389,980
9,838,210
B...
El..
C...
F...
H...
L...
N...
Pumping Station
Screening & Grit Chamber
Equalization Basin
Acid Neutralization
Nitrogen Addition
Aerated Lagoon
Dual Media. Pressure Filtration
Source:. Effluent Guidelines Division, EnvirOnmental Protection Agency.
.ltenvized cost summary for waste water treatment chain design efficiency.
98.5 percent BOO reduction.
Treatment Modules:
V-la
-------
BPT
Bi. . Control House
B... Pumping Station
El.. Screening & Grit Chamber
C... Equalization Basin
F.. ...Acid Neutralization
H...: Nitrogen Addition
K... Activated Sludge
Q. . . Sludge Thickener
R... Aerobic Digestor
S... Vacuum Filtration
V... Holding Tank
Control House
Pumoing Station
Screening & Grit Chamber
Equalization Basin
Acid Neutralization
Nitrogen AdditiOn
Activated Sludge
Sludge •Thickener
Aerobic Di.gestor
Vacuum Filtration
Holding Tank
Dual Media Pressure Filtration
Table V-9. Itemized cost summary
Alternative A 16-V (BPCTCA)
for malt beverages (existing modern)
and Alternative A 16-VI (BATEA)
BPT
.BAT
‘Investment Costs
Construction
Land
Engineering
Contingency .
Total
.
.
.
3,413,070
102,290
. 341,310
341,310
4,197,980
.
3,531 ,830
102 .;29C
153,150
353,150
4,340,120
.
Yearly Operating Costs
Labor
Power
Chemicals
.74,970
532,530
88,370
.
74,970
551,010
88,370
Maintenance &
Supplies
Total .
3
789,150
,.
.
95,220
809,570
Total Yearly Costs
Yearly Operating
Cost .
.
789,15 0
,
.
809 , 57O
..
Yearly Investment
Cost Recovery
Depreciation
Total
167,920
2Q4,7 0
1,161 85O
173,600
211,890
. 1,195,060
Source: Effluent Guidelihes Division, Environmental Protection Agency.
Itemized cost summary for waste water treatméntcha.in design efficiency...
97.4 percent BOD reduction.
Treatment ModUles: BAT
Bi.
B..
El..
C...
F.
H...
K...
1
R...
S.
V.
N..
v-li
-------
Table V-lO.
Alternative A.
Itemized cost summary for malt beverages (existing modern)
16-I l (BPCTCA-OPTION) and Alternative A 16- 11 1 (BATEA-OPTION)
BPT
BAT
Investment Costs
Construction
Land
Engineering
Contingency
PVC Liner
Total
5,040,830
55,560
504,080
504,080
180,420
6,284,970
5,159,290
‘55 ,560
515,930
515,930
180,420
6,427 ,130
Yearly Operating Costs
Labor
Power
Chemicals
Maintenance &
Supplies
PVC Liner
Total
24,990
2,630,470
44,960
236,070
2,937 ,910
24,990
2,648,950
44,960
238,020
1,420
2,958,340
Total Yearly Costs
Yearly Operating
Cost
Yearly Investment
Cost Recovery
Depreciation
Total
2,937 ,910
251 ,400
311 ,470
3,500,780
2,958,340
257 ,090
318,580.
3,534,010
Source: Effluent Guidelines Division, Environmental Protection Agency.
B...
El..
C...
F ..
H...
L...
BPT
Pumping Station
Screening & Grit Chamber
Equalization Basin
Acid Neutralization
Nitrogen Addition
Aerated Lagoon
BAT
B... Pumoing Station
El.. Screening & Grit Chamber
C... Equalization Basin
F... Acid Neutralization
H.. .Nitrogen Addition
L... Aerated Lagoon
N... Dual Media Pressure Filtra’n
itemize dcost sumary- for’ waste water
97.4 percent BO J reduction.
Treatment Nodules:
treatment chain design efficiency...
V-I 2
-------
Table V -il. Itemized cost summary for malt beverages (New Source)
Alternative A 18-XI (NSPS, Small) and A 16-XI (N PS, Large)
Small
Large
Investment Costs
Cons tructi on
Land
Engi neering
Contingency
Total
Bi..
B...
El..
F...
H
K...
Q...
R...
S.
Y.
N...
1 ,!192,560.00
60,170.00
149,260.00
149,260.00
1,851 ,250.00
74,970.00
212,730.00
35,390.00
:3367000
356,760.00
Control House
Pumping Station
Screening & Grit Chamber
Equalization BasiiI
Acid Neutralization
Nitrogen Addition
Activated Sludge
Sludge Thickener
Aerobic Digestor
Vacuum Filtration
Holding Tank
Dual Media Pressure Filtration
4,725,590.00
139,1 90.00
472 ,560.00
472,560.00
5,809,900.00
74,970.00
725 ,340. 00
115,690:00
109,680.00
I ,025 ,680.OO
Yearly Operating Costs
• Labor
‘Power
Chemicals
Maintenance &
Supplies
Total
Total Yearly Costs
• Yearly Operating
Cost
Yearly Investment
Cost Recovery
Depreciation
Total
356,760.00 1,025,680.00
74,050.00
89,550.00
520,360.00
Source: Effluent Guidelines Division,
Itemized cost summary for waste water
98.7 percent BOD reduction.
Treatment Modules:
232,400,00
28:3,540.00
1,541,620.00
Environmental Protection Agency.
treatment chain design efficiency.
V- 13
-------
Small
.
Large
.
Investment Costs
.
.
Construction
2,367:,720.0O
7,771 ,730.0O
Land
Engineering
26,010.00
236,770.00
81,190.00
777,170.00
Contingency
PVC Liner
236,770.00
83,340.00
777,1 7 . 00
264,34:0.00
Total
2,950,610.00
9,671 ,600.0O
•
Yearly Operating Costs
.
Labor
24,990.00
24,990.00
•
Power
Chemicals
1,162,790.00
la,630.00
3,920,130.00
59,090.00
Maintenance and Supplies
99,010.00
331 ,2•20.OO
PVC Liner
Total
1,260.00
1,306,680.00
1,410.00
4,336,840.00
Total Yearly Costs ;
Yearly Operating Cost
.
1,306,680.00
.
4,336,840.00
Yearly Investment Cost Recovery
118,020.00
386,860.00
Depreciation
Total
.
146 ,230.00
1,570,930.00
479,520.00
5,203,220.00
Source: Effluent Guidelines Division, Environmental Protection Agency
Itemized cost summary for waste water treatment chain design efficiency
98.7 percent BUD reduction
B.
El
C..
F...
H...
L....
N...
• Puniping StatiOn
Screening & Grit Chamber
Equalization Basin
Acid Neutral ization
Nitrogen. Addition
Aerated Lagoon
Dual Media Pressure Filtration
Table V-12. Itemized cost summary for malt beverages (New Source - Option)
Alternative A l8-X (NSPS-Small and A16-X (NSPS - Large)
Treatment Modules:
V-I 4
-------
VI ECONOMIC IMPACT ANALYSIS
The impacts considered in this analysis are as follows:
A. Price effects
B. Financial effects
C. Production effects
D. Other effects
The resulting direct impacts from the iniposition of effluent controls on
the Malt Beverage Industry for existing breweries are expected to be
negligable as all but three of the industry’s breweries discharge their
effluent to municipal treatment systems. The impacts on the three direct
dischargers are expected to be slight as according to EPA all the plants
presently meet the proposed BPT standards and one meets BAT. Thus the
potential direct impacts will primarilybe limited to those plants which
are yet to be constructed and will discharge their effluent to navigable
waters (hereafter referred to as New Source); While the direct impacts
are limited primarily to the new source breweries, there exi. t-s the
possibility that existing breweries may be indirec ly impacted due to the
imposition of effluent controls. These indirect impacts stem from exist-
ing breweries’ experiences of increasing changes formunicipal waste treat-
ment (described in Chapter II) which have instigatedsome breweries to
explore the alternative of constructing their own treatment system and
breaking their dependence on the municipal system. As municipal charges
increase, in some cases, this may become a viable alternative.
Thus this impact analysis will address itself to both the direct (new
source) and indirect (existing) impacts described above. These impacts
are analyzed for the model breweries described in Chapter III. Impacts
are based on the production and financial characteristics of the model
breweries and the pollution control costs as presented in Chapter V.
It should be noted that in ChapterV, two sets of control costs were.
described for each model ; the recommended treatment system and an optional
system. For purposes of this impact an ilysis, only the recommended.treat-
ment system will be utilized. This treatment alternative consists of an
activated sludge system and according to cost estimates furnished by the
EPA, is considerably less expensive than the optional aerated lagoon system.
A. Price Effects
1. Required Price., Increases
An implicit indication of the expected price effects o.f effluent controls
used in this report is the amount of sales price increase necessary to
..VI-I
-------
maintain a brewery’s profitability, after effluent control expenditures,
at a level the same as the same plant without the control expense. The
method of computation was described in Part I, Chapter II (Methodology),
Section F, under subsection 2 of this report. The ability of breweries
to pass on such price increases is evaluated in this section of the report.
The amounts of sales price increases necessary to offset the estimated
effluent control costs for the model breweries range from 0.8 percent to
3.4 percent and are shown in. Table VI-1. For the existing models, both
the required price increases for BPT and BAT are shown. For the new source
breweries, the required price increases to offset NSPS standards are shown.
Also shown are sensitivityranges of required price increases when con-
trol costs vary plus or minus 20 percent from,the original estimated cost.
2. E pected Price Increases
Although Table VI-1 illustrates what the model breweries would require to
offset expenditures for effluent. controls, it is doubtful breweries would
be able to pass on the additional.expense to customers in the form of
higher prices. This is due to the (1) ver.y limited number of direct dis-
chargers in the industry and (2) the market characteristics of the industry.
As discussed previously, all but three known breweries discharge directly
to municipal facilities. Of the three known direct dischargers, the
largest is already meeting BAT standards while the remaining two already
meet BPT standards.
As a result, if a direct discharger attempted to pass their added costs
forward, they would meet buyer resistance and the buyers could easil,y
switch to other brands.
Municipal charges have and are expected to.continue to increase. As a
result, the direct dischargers and new source breweries will be able to
pass on incremental cost increases equivalent to the new general price
equilibrium established by the municipal dischargers. If these end of-
pipe treatment costs extend the general price level, the direct dischargers
will have to absorb these added costs in the form of reduced earnings.
in some local situations, a brew ry may find it economically attracti’e to
switch from a municipal system to their own end-of-pipe system as a result
of increased municipal user charges or anticioated increases in user
charges. The price increase required will not be attributed to the pro-
posed Guidelines but would be the result of future municipal cost increases.
The extent of this impact is beyond the scope of this report.
The market characteristics of the Malt Beverage Industry may provide some
opportunities for impacted plants,. to’ pass on effluent control costs but.
these will be limited to those plants which by location or production
efficiency can establish a competition advantage over other breweries.
VI-2
-------
Table VI-l. The rialt Beverage Industry, Required Price Inc eases
Necessary to Offset Control Costs.
Barrels
Produced
REQUIRED
PRICE INCREASE
-Percent
Proposed Control Costs
Model Brewery Per Day
80%
100%
120%
•
PERCENT
EXISTING
Small-Older 2,700
BPT 1.7 2.2 2.9
BAT 1.7 2.2 2.9
Medium-Order 11,000
BPT 2.6 3.3 3.9
BAT 2.6 3.3 4.0
Large-Older 22,000
BPT 2.7 3.3 4.0
BAT 2.7 3.4 4.1
Màdern 14,000
BPT 1.6 2.0 2.3
BAT 1.6 2.0 2.4
NEW SOURCE
Small 7,500
•NSPS 2.7 3q4 4 i
Large 25,000
• NSPS • • 1.1 1.3 • 1.6
VI -3
-------
In other words, an impacted brewery which can produce and/or deliver its
malt beverages for lower prices than its comDetitors, may be able to
utilize its greater margin to absorb control costs and still remain com-
petitive.
However for those impacted breweries (either directly or indirectly) which
cannot achieve a competitive advantage, it is probable that such breweries
will not be able to ‘pass on the required price increases. As discussed in
earlier chapters of this report, the Malt Beverage Industry has experienced
relatively low returns and as shown below in Section B, Financial Effects,
the high costs of new source construction are not offset by significant
lower operatihg costs through improved , technology. This results in new
source breweries having the same to lower income ratios then existing brewer-
ies and negative net present values of cash flow when discounted at the
estimated industry after-tax cost of. capital (8.8 percent).
Therefore, price increases by new source breweries to offset the costs of
effluent controls and the high costs of construction are not expected to
occur. In the following analysis, no price change was assumed to occur
as a result of the entire industry increasing prices to offset effluent
controls and accordingly the economic viability of the breweries was based
on financial characteristics of the models without added revenue stemming
from aggregated effluent controls effluent on industry prices.
B. Financial Effects
Based on model brewery profiles described previously and costs of pollution
control provided by EPA, the following financial indicators were computed
under baseline (without pollution controls) and with pollution controls:
1. After-tax income
2. After-tax return on sales
3. After-tax return on invested capital
4. Cash flow and cash flow as a percent of invested capital
5. Net present value
The abov,e were .c.ompute.d according to the discounted cash flow. (DCF).and
return on investment (RJI) procedures outlined in the methodology.
Furthermore, a sensitivity analysis was performed using pollution control
cost. estimates at levels of 80 percent and 120 percent of the costs pro-
vided by EPA.
The results of the model brewery analysis of the proposed efflUent guide-
lines are summarized in Tables VI-2 and VI-3 for the existing and new
source models respectively. These results are discussed below,.
- VI-4
-------
Table VI-2.
Key Values of Impact Analysis for Malt Beverages: BPT arid BAT.
Percent of Proooséd’
Baseline . BPT .
Key Value Size Case 80% 100% 120%
Control
Costs
BAT
80%
100% 120%.
bb 1 / day
After Tax Income ($000)
S
1
2,700
11,000
152
1,388
-185
590
—301
391
-418
. 191
-19.6
566
-315.
361
-434
155
L
22,000
4,737
3,116
.,7ll
2,306
3,067
2,650
2,232
MD
14,000
4,074
3,468:
3,317
3,165 3,451
3,296
3,140
After Tax Return on Sales (%)
S
2;700
0.8
—1.0
-1.6
-2.2
-1.1
—1.7
—2.3
•
•
M
L
MD
11,000
22,000.
14,000
1.8
3.1
4.2
0.8
2.0
3.6
0.5
1.8
3 4
0.3
1.5
3•3
0.7
2.0
3•.5
0.5
1.7
0.2
1.5
3.2
After TaxReturn on mv.
Cap. (%)
S
N
.
2,700
11,000
1.7
3.5
-1.9
1.4
. -3.1
0.9
-4.2
0.4
-2.0
1.4
-3.2
0.9
-4.3
0.4
.
L
MD
22,000
14,000
56
. 4.7
3.4
3-9
2.9
3 7
2.5
.
3.4
2.9
2.4
.
Est. Cash Flow ($000)
S
N
L
.2,700
11,000
22,000
450
3,074 .
9,291
187
2,517
8,212
90
:2,378
7;942
-8
2,239
7,672
178
2,502
8,182
79
2,360
7,905
-21
2,217
7,627
.
MD
14,000
8,904
8,501
8,400
8,299
8,490
8,387
8,283
Cash Flow as % of mv. ’ Cap.
.
S
N
L .
MD
2,700
11,000
22,000
14,000
5.1
7.9
10.9
10.3
2.1
6.4
9.6.
9.8
1.0
6.1
9.3
9.7
-0.1 ‘
5.7
9.0
9.6
2.0
6.4
9.6 .
9.8
0.9
6.0
9..3
9.7
-0.2
5 7
9.0
9.6
Net..Present Values ($000)
.
S.•
N
L
MD
2,700
11,000
22,000
.14,000
..
9, 11
38,108
31,670
-2,157
628.’
19,752
24,808
-2,995
—1,593
15,163
23,093
-4,114
—3,813
10,574
21,378
-2,197
465
19,421
24,692
-3,07.1
-1,797
14,749
‘ 22,947
-4,204
—4,059
10,0.77
21,203
.
-------
Table VI-3. Key Values of Impact Analysis for
Malt Beverages: NSPS
.
Key Value
Size
Baseline
Case
Percent of Projected
Control Cast
80%
.
100% 120%
.
bbl/day
.
.
After Tax Income
($000)
L 25,000
S 7,500
9,495
2,582
8,690
1,894
8,489 8,287
1,723 1,551
•
•
After Tax Return on
.
.
Sales (%)
1 25,000
S 7,500
5.5
5.0
5.0
3.6
4.9 4.8
3.3 3.0
.
After Tax Return on
mv. Cap. (%)
1 25,000
S 7,500
3.5
3.2
3.2
2.3
3.1 3.0
2.1 1.9
•
Est. cash Flow
($O.00)
L 25,000
25,095
.
24 570
24,439 24,307
S 7,cOO
7,240
6,642
6,492 6,342
Cash Flow as % of
mv. Cap.
L 25,000
S 7,500
9.3
9.0
9.1
8.2
9.1 9.0
. 8.0 7.9
Net Present Values
.
.
($000)
.
L 25,000
S 7,500 .
-1.13,508
—36,719
-122,690
-43,709
-124,985 -127 ,280
—45,457 -47,204
VI -6
-------
I. After Tax Income
As shown in Table VI-2, the imposition of BPT standards severely reduces
the after-tax income in the existing small older brewery model from
$152,000 in the baseline case to. -$301 ,000 after controls. Thë.after-
tax income of the existing medium older brewery is reduced by nearly $1
million; the existing large older brewery by over $2 million. The after—
tax income for the existing modern brewery is reduced, but •not to the
critical levels as for the existing older breweries.
BAT standards further depress profits, however, the relative signifi-
cances of. these additional reductions are nominal compared to those
i.r curred by the BPT standards.
The imposition of NSPS on new source brewe.ries effects after-tax income in
that the standards reduce the small new source brewery’s profits by ‘33.3
percent and the large new ‘source brewery’s profits by 10.6 percent (Table VI-3).
2.. Return on Sales
The after-tax return on sales for the existing model breweries were also
shown in Table VI-2. Basically the returns follow the same general pattern
as after-tax income. As was explained in Chapter II, Financial ’Profile, ”
the Malt Beverage Industry has experienced a deterioration in earnings in
recent years. This deterioration is exemplified in that the baseline model
breweries’ after-tax return on sales are re.latively low. The imposition
of BPT standards with the following BAT standards contribute significantly
to the further deterioration of returns.
The NSPS do not significantly affect the after-tax return on ‘sales of
the large new source model as its after-tax return on sales decreases’ by
0.6 percent from 5.5 percent to 4.9 percent (Table VI-3). The new source
small brewery,. however, incurs impacts which reduce its after-tax return
on sales by 1.7 percent, from 5.0:.percent to 3.3 percent..
3. Return on Invested Capital
As shown in Tables VI-2 and VI-3 for the existing and new source models,
pre controls after_ ax returns on invested capital range’ from 1.7 to 5.6
percent for the existing models and from 3.2 to 3.5 for the new source
model breweries. As is the trend in most food related industries, the
return on invested capital is substantially lower for the small breweries
than for the medium, large and modern breweries.
VI-7
-------
After the imposition of BPT standards, the after-tax returns on invested
capital declined by 1.0 to 4.8 percent with the most significant impact
occurring on the small brewery. The additional requirement of BAT stan-
dards cause no further decline in the existing model returns except for
the small brewery which revealed its return on invested capital declined
by another 0.1 percent.
For the new source model breweries, the imposition of NSPS reduced the
small new source model brewery’s return by 34 percent from 3.2 percent to
2.1 percent. •The large new source plant declined slightly from 3.5 per-
cent in the baseline case to 3.1 percent in the after controls case.
4.’ Cash Flow
Estimated cash flows (after-tax income plus depreciation on total invested
capital for the model breweries) are shown in Tables VI-2 and VI-3 for
the existing, and new source models respectively. In the baseline case,
cash flows range from 5.1 to 10.9 percent for the. existing models and
9.0 to 9.3 for the new source models. For the ranges, the higher per-
centages correspond to the large existing and new source breweries and
the lower percents to the small models.
After the imposition of BPT, BAT and NSPS standards, all cash flows remain.
positive. However, the existing small model’s cash flow is reduced to
1.0 percent for BPT and 0.9 percent for BAT.
5. Net Present Values
The computed net present values (NPV) for ‘t’he existing model breweries
indicate that in,the baseline case, all NPV’s were positive. The imposi-
tion of BPT reduces the NPV’s such that the existing large and modern
remain positive, however the existing small and medium turn negative. This
suggests that the small and medium existing breweries would have difficulty
handling the cost ‘of effluent controls and may be forced to shut down,
particularly if a large debt financing for pollution control was necessary.
The imposition of BAT standards further ‘reduces the NPV, however, the
existing large, and modern sEill remain positive and thus are considered
still to be viable operations.
The NPV’s for the MSPS model breweries are negative both ,before and after
the imposition of controls (Table VI-3). ‘As discussed in Part I, Chapter
II, Methodology, large negative net present values would ‘cause most firms
to discard plans for building a new brewery. Since the NPV are negative
before controls are imposed, it is concluded that very few breweries,
classified as new source, would be built if it assumed the same character-
istics as those of the new source models. However, it should be not’ed
that the negative net present value indicates ‘that the associated brewery
VI-8
-------
would earn less than the estimated 8.8 percent industry cost of caoital.
Thus, a NSPS brewery may be built in the future provided the firm has been
well established in the industry, has or has expectations to capture a
major market share at profitable prices and has an excellent financial
performance record (e.g. lower cost of capital). Should a NSPS brewery
be built it can expect its NPV to decline due to the requirements for
pollution controls.
C. Production Effects
Due to the limited’ number of direct dischargers in the Malt Beverage
Industry, it is doubtful that the current levels of production achieved
by the existing breweries would be affected by the imposition of effluent
controls. However, while new source performance standards will not affect
current production levels, future growth in the industrycould be affected
by the imposed NSPS controls. This is because point source category firms
could be deterred from entry due to the differential impacts of waste treat-
ment requirements.
However, as described in the above financial description, future growth
from new sources is expected to be restrained by the high costs cf con-
struction not being offset by lower costs of production. In addition,
new sources may be further restrained by their limited ability to pass
through the additional costs of controls, assuming the rest of the industry
does not pass on any additional municipal charges.
This does not completely rule out the possibilities for new sources.
It is foreseeable that some operations, those primarily representing
established brands and which could be classified as optimal producers.
could construct and successfully operate a new brewery (in fact, two
such new breweries are scheduled for comoletion this year (1976)).
B. Other Effects
Other types of economic impact such as employment,, community and balance
of payments deficit effects are normally assessed when there are plant
closures due to pollution controls. However, these other effects are
not meaningful nor quantifiable in a report in which no closures are pro-
jected. Although employment is an important consideration to a potential
new firm and increases in employment and local business are important to
surrounding communities of a potential new plant, these effects are more
related to the decision to construct a new plant. Thus, in this report,
these related effectswere not pursued.
vr-9
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PART III
MALT
-------
PART III: SIC 2083 - THE MALT INDUSTRY
I. INDUSTRY STRUCTURE
The Census of Manufactures defines the Malt Industry as an industry com-
prised of establishments primarily engaged in manufacturing malt or malt
by-products from barley or other arains. The industry furnishes the
majority of its product to either the Malt Beverage Industry or the Distilled
Spirits Industry which utilize malt inthe production of alcoholic beverages.
At the p sent, the Malt Industry has only one known establishment which
i not connected to a municipal treatment system and this plant meets the
proposed BPT guidelines and is very close to meeting the proposed BAT
guidelines. As such, the Malt Industry will incur very few, if any,
immediate impacts due to the imposition of effluent controls. The potential
does exist, however, that plants which are yet to be constructed could be
impacted if they utilize their own treatment system and thus have to meet
the proposed new source performance standards (NSPS). In view of this,
this analysis will primarily concentrate on the economic characteristics
of the industry with some discussions pertaining to potelitial new source
impacts.
A. Characteristics of the Industry
The Malt Industry is generally highly competitive and, accordingly, industry
members do not readily release information regarding the operational and
financial data of their facilities. As a result, information concerning
the industry is limited to the traditional sources of information such as
the Census of Manufactures and periodic industrial reports. These sources
do have their limitations; however, when supplemented with the limited
information provided by the industry, they will provide an adequate
description of the industry.
1. Number and Size of Firms and Plants
The Census of Manufactures states that in 1972 there were 30 firms in the
Malt Industry opera ino some 40 establishments. Thus, in: 1972, 25 percent
of all establishments were owned or controlled by firms which operated
more thanone facility. This percentage has remained relativelyconstant
since 1963 at which time 29 firms operated 42 establishments.
According to Census data, the number of maltsters has remained relatively
constant with 46 establishments in 1958, 42 in 1963, 43 in 1967 and 40 in
1972. The number of establishments by employment size group are depicted
in Table I—i for the years 1963, 1967 and 1972. Also shown are the employ-
ment classes’ respective value of shipment and corresponding percentage of
I—i
-------
1963
:
1967
1972
Establishments Value of
Shipments
Establishments
Valueof
Shipments
Establishments
Value of Shipments
Number of
:
Percent
Million
Percent
Percent
1illion
Percent
Percent
Million
Percent
Employees
Number
of Total
Dollars
of Total
Number
of Total
Dollars
ofTotal
Number
of Total
Dollars
of Total
•
1—4
2
.
4.8
4
9.3
}
:
0.7
0.3
5
12.5
}
0.4
0.2
5-9
1
2.4 1
10.4
5.7
1
2.3
2.5
10-19
8
19.0
.
8
18.6
10.1
4.7
8
20.0
11.0
4.9
20—49
16
38.1
47.5
25.9
15
34.9
55.0
25.4
16
40.0
71.7
31.7
50—99
100-249
11
4
26.2
9.5
.71.4
54.2
38.9
29.5
11
4
25.6
9.3
81.9
68.6
37.9
31.7
6
4
15.0
10.0
55.7
87.4
24.6
38.6
250 T 499
500 - 999
1 ,000-2, 499
2,500 +
TOTAL
42
100.0
183.5
100.0
43
100.0
216.3 .
100.0
40
100.0
.225.2
100.0
Table I—i. The malt Industry, by employment size group, number of establishments
and value of shipments 1963-1972
rs,)
Source: . U.5. Department ofCornerce, Census of Manufactures , 1967 nd 1972.
-------
percentaae of the total. From this table, it is’evident the majority of
the maltsters are small (compared to other manufacturing industries) and
that the larqerma.ltsters account for a substantial portion. of the total
industry’s production.
2. Value of Shipments
Value of shipments and other receipts of the Malt Industry in 1972 totaled
$226.3 million. This included shipments of malt (primary products) valued
at $21.1..1 million, shipments of other products.(secondary products) valued
at $6 7 million, and miscellaneous receipts (mainlyresales) of $8.5
million.
Estimates o- the 1975 value of shipments for the industry are expected to
total $530.0 million, 50 percentabove the estimated shipments for 1974
and 134 percent above the 1972 value (Table 1-2). Historically, the value
of shipments increased by an average of 1.2 percent between the years 1958
to 1972, from $195.3 million in 1958 to $221.6 million in 1972. If the
estimates for 1973 through 1975 are included, this annual rate of change
increases to 6.9 percent per year. S
Shipments of malt (pri iary products) in 1972 represented 97 percent (specializa-
tion ratio) of the industry’s total product shipments (primary and secondary).
The industry specialization ratio in 1967. was also 97 percent. Secondary
products shipped by this industry in 1972 consisted mainly of malt beverages
($5 to $10 million).
Shipments of malt (primary products) from establishments classified in
industry 2083 in 1972 represented 99 percent (coverage ratio) of these
products valued at $212.8 million shipped by all industries. In 1967, the
coverage ratio was 100 percent.
3. Level of Integration
The. Malt Industry can be characterized.as containing varying levels of in-
tegration with forward integration being the most common. This trend for
forward integration is resultant of the large quantities of malt required
by breweries which has causeda few of the brewers to acquire their own
malt operation. As. such, while there were 39 malsters in 1972, some of
these were owned by the larger brewersand the maior proportion of their product
went to that brewers’ brewing operations.
4. Level of Diversification
The Census of Manufactures shows the rialt Industry with a very high specializa—
tion ratio of 97 percent in 1972. This indicates 97 percent of the sales of
establishments classified in SIC 2083 are in the primary SIC code. Thus,
the Malt Industry does not consist of highly diversified operations.
1—3
-------
Table 1-2.
The malt industry, value of shipments, 1958-1972
1958 195.3 -
• 1959 203.3. 4.1
1.960 205.5 1.1
.1961 207.5 1.0
• 1962 190.8 -8.0
1963 183.5 —3.8
1964 215.5 17.4
1965. 204.4. —5.2
1966 205.5 0.5
1967 216.3 • 5.3
1968 216.6 0.1
1969 221.6 2.3
1970 210.1 —5.2
197.1 217.5 • 35
1972. 226.2 4.0
19.73 .272.0 20.0
1974 408.0 • 500
1975 • 530..0 30.0
Source:: Census of Manufactures, for years 1958 to 1972,
U.S. Department of Commerce, estimates for 1973,
1974, and 1975, •U.S. Industrial Outlook.
Year
Value
of
Shipments
Percent.
Change
•
•
($Miliion)
(%)
•
-------
While the operations may not be diversified, establishment in the Malt
Industry may be owned or controlled by highly diversified conglomerates.
Often, the diversification of these conglomerates will be limited to some
aspect of the food processing industry and, as stated previously, some
malsters are owned by breweries.
. 5. Location of Maltsters
Maltsters are primarily concentratedin the north central regio n of the
United States as this area produces the majority äf the barley grown. In
1972, 30 of the 40 plants were located in this region with 15 plants being
in Wisconsin and 7 plants being in Minnesota.
B. Employment Characteristics
Total employment in the Malt Industry has decreased by over 29 percent
from 2,400 in 1958 to 1,700 employees in 1972 (Table 1-3). Production
workers during the same time. period represented approximately .75 percent
of the total employees and also decreased from 1,800 in 1958 to .1,300
in 1972.
Overall, the output per production worker has increased rather significantly
(at least in dollar terms), with the vahie of shipments per production
worker increasing by 60 percent between 1958 and 1972 and the value added
per worker increasing by 45 percent. Portions of this increase may be
attributable to inflation; however, the remaining portions are attributable
to the modernization and up-dating of already existing facilities and, to
some extent, the better utilization of theworkers.
The malt production worker can be basically classified as semi-skilled,
with much of. the labor being involved with monitoring of’equipment and
grain handling. The average annual hours worked by production workers
have remained relatively constant with the average being 1,923 hours in
1972. Hourly wages have nearly doubled since 1958, with the 1972 average
hourly rate being $5.92.
As would be expec ted, the majority of the employees are concentrated in
the larger size operations (Table 1-4) with nearly 60 percent of all
employees being employed by firms with over 50 employees.
C. Other Considerations
Only one plant in the Malt Industry is known to.discharoe waste water
other than to a municipal sewage system. For this reason, aggregate
effects of water pollution controls are expected to be small. However,
1-5
-------
Table 1-3. The Malt Industry, employment statistics 1958-1972
.
.
Value of
.
Shipments
Man-Hour
Wage per
Va
lueAdded
All Employees
Production Workers
per
Production
per
Production
Production
Worker
per
Production
Worker
.
.
Year
Number Payroll
Number Man—Hrs. Wages
Worker
Worker
Man-Hour
Man-Hour
(000) ($Mil.)
(000) (Mu.) ($Mil.)
($000)
Cs)
($)
1958
2.4 16.3
1.8 3.6 10:9
108.5
2,000
3.03
15.31
1959
2.5 17.2
1.8 3.6 11.5
112 9
2,000
3.19
14.25
1960
1961
2.7 19.2
2.5 18.5
2.0 4.0 13.1
1.8 3.5 12.2
102.8
, 115.3
2,000
1,944
3.28
3.4
10.00
9.11
1962
1963
2.3 17.1
1.9 15.1
1.7 3.3 11.6
1.5 3.0 10.8
112.2
122.3
1,941
2,000
3.52
3.60
14.73
14.67
1964
2.1 17.2
1.6 3.3 12.5
134.7
2,062
3.79’
17.67
1965
1.9 15.8
1.4 3.0, 11.6.
146.0’
2,143
3.87
16.87
196
1967
1.8 15.3
2.0 17.1
1.4 2.8 , 11.1
‘ 1.5 3.1 12.7
146.8
144.3
2,000
2,067
3.96
4.10
17.32
15.32
1968
2.0 18.1
1.5 3.1 13.3
144.4
2,067
4.29
17.42
1969
2.1 19.8
1.6 3.3 14.7
138.5
2,062
4.45
17.48
1970
1.9 19.4
1.4 3.0 14.7
150.1
2,143
4.90
19.27
1971
1.8 19.8
1.4 2.9 15.0
155.4
2,071
5.17
21.00
1972
1.7 20.0
1.3 2.5 14.8
174.1
1,923
5.92
22.00
Source: U.S.. Department of Commerce, Census of Manufactures .
-------
Table 1-4. The Malt Industry employment 1972
Percent Production Percent of
Employment Size All Employees of Total Workers Total
1-4
} 100 :5.9.
} 300 15.4.
10-19 100 5.9
20-49 500 29.4 : 400 30.8
50-99 400 23.5 300 23.1
100-249 600 . 35 3 400 30.8
TOTAL 1,700 . : 1,300 .100.0
Source: U.S. Department of Commerce, Census of Manufa ture ,1972
1—7
-------
aggregate impacts could be significant if other economic impacts
to be expected in the next two to eight years, such as would be imposed
by other Federal, State and local regulations are brought to bear upon
the industry. The increasing cost of energy of all types and the
possible limitations on natural gas consumption are also of concern.
These other economi.c impacts include but are not necessarily limited to
thefollowing: S
OSHA;
Air pollution controls;
Solid waste controls;.
Energy;
State and local waste water regulations; and,
Municipal system user charges.
1-8
-------
II. FINANCIAL PROFILE OF THE INDUSTRY
Within the limits of information available, this chapter will present.the
financial characteristics of the Malt Industry. Very’little.specific
data exists on the Malt Industry as malt data are usualLy combined with
data from the Malt Beverage Industry. To attemptto use these aggregated
data to reflect the Malt Industry would be misleading as the Malt Beverage
Industry’s value ofshipments is approximately 24 times the Malt Industry’s
shipment. Thus., the aggregated data reflect characteristics predominately
of the. breweries.’
A. Sales
Sales of malt, in terms. of theCensus value of shipment, fluctuated in the
1967 to 1971 period and then in ‘1973 and 1974 substanital increases Occurred
(Table Il—i).. However, when the value of shipments is adjusted by the
wholesale price index for malt, the resulting values reflect real dollars.
When viewed in. this context, the sales trend has been much more constant,
with annualsales averaging $221.6 million.
The 1972. Census of Manufactures ’ value of shipment was based on information
provided by 40 establishments. This gives the shipment for the average’
plant to be $5.7 million’(Table 11-2). This compares to an average of $5.0
million in 1967.
While the average malt pianthad shipments of $5.7 million in 1972 with 42
employees, the actual plants in the,, industry varied considerably in size..
Actual plants in 1972.ranged from very small operations with lessthan 10
employees and $66,670 to extremely large plants employing over 100
employees and having annual shipment of $21.85 million.
B. Distribution of Sales Dollar
Some slight changes have occurred in the distribution of the sales dollar
for the Malt Industry from 1967 to 1972. As can be seen below, these
changes were most significant for the raw material’s portion which ‘decreased
from 77.8 percent to 74.5 percent. This decrease was cOupled with a slight
increase in labor’s portion and a relatively large increase in the other
operating costs’ portion. ‘This may be partially explained by the fact
that energy c’osts are included in this latter category. ‘
1 1—i
-------
Table 11-1. The Malt Industry, annual ‘sales
‘
‘
‘ Malt
‘
“
Whoiesal,e
Adjusted
Value of
Price
Value of
Year
‘
Shipnient.s
($Mil.)
‘
‘
Index ,
11967=100)
,
Shipments
($Mil.)
1967
‘ 216.3
100.0
216.3
1968
“216.6
‘ 97.1 ,
223.1
1969
:
221.6
‘ 97.1,
228.2,
1970
‘
210.1
94.6
222.1
,
1971’
‘
217.5 .
‘ 98.5 ,
220.8
1972’
226.2.
, 94.2 .
240.1
.
1973
272.0
121.3
224.2
1974
408.0
‘ 206.2
197.9
Source: , U.S. Departnient, of ’Commerce and U.S. Department of Labor.
11—2
-------
Table 11-2.
Industry
Td’tal
42
1963
Per
Establishment
The Malt Th dustry, value of shipments, ‘value added, and employees
census years 1963, 1967 and 1972
____________ ____________ 1967 _________
Industry , Per , Industry
Total’
43 -- 40
I tern
Establishments
Value of Shipments
Value Added
‘Total Employees
Units
No.
$Mi 1.
$Mi 1.
1972
Per
Establishment
183.5
44.0
1,900
4.37
1.05
45
2 16.3
47.5
2,000
5.03
1.10
46
226’. 2
55.0
1,700
5.66
1.38
42
Source: U.S. Department of Commerce, Census of Manufactures , 1967 and 197 . ‘ ‘
-------
Distribution of Sales Dollars (Percent)
1967 1972
Sales 100.0 100.0
RawMaterials 77.8 74.5
Payroll 7.9 8.8
Other operating costs,
interest and profits 14.3 16.7
Census data since 1972 are not available, however according to industry
sources, the significance of raw material costs has changed and is estimated
•by some to approximate 85 percent of the cost of goods sold.
C. Earnings
No earnings data were available which isolated malt from the malt beyerage
portion of the Malt Industry.
D. Ab ’i1it tO Finance New Investment
The ‘ability of a firm to finance..new investment for pollution abatement is
a function of several critical financial and economic factors. In general
terms, new capital must come from one or more of the following sources:
(1) funds borrowed from outside sources, (2) equity capital through the
sale of common or preferred stock, (3) internally generated funds -- re-
tained earnings and the stream of funds attributed to depreciation of fixed
assets.
For each of the three major sources of new investment, the most critical
set of factors is the financial condition of the individual firm. For
debt financing, the firm’s credit rating, earnings record over a period of
years, stability of earnings, existing debt-equity ratio and the lender’s
confidence in management will be major considerations. New equity funds
t; rou .ghthe sale of securities will depend upon the firm’s future earnings
potential. The firm’s record, compared to others in its own industry and to
firms in other similar industries, will be a major determinant of the ease
with which new equity capital can be acquired. In the comparisons, the
investor will probably look at the trend of earnings for the past five or
so years.
Internally generated funds depend upon the margin of profitability and
the cash flow from operations. Also, in publicly held corporations, stock-
holders must be willing to forego dividends in order to make earnings.
available for reinvestment.
The condition of the firm s industry and. general economic conditions are,
also major considerations in attracting new capital. The industry will be
compared to other similar industries (i.e., other processing industries)
in terms of net profits on sales and on net worth, supply-demand relation-,
ships, trends in production and consumption, the state of technology,
11-4
-------
impact of government regulation, foreign trade and other significant
variables. Declining or depressed industries are not good prospects for
attracting new capital. At the same time, the overall condition of the
domestic and international economy can influence capital markets. A firm
is more likely to attract new capital during a boom period than during a
recession. On the other hand, the cost of new capital will usually be
higher during an expansionary period. Furthermore, the money markets
play a determining role in new financing..
Based on the previous discussion in thi.s chapter and Chapter I, it appears
that it will not be difficult for the majority of firms to acquire suffi-
cient new capital to finance the required investment for eff.luent controls.
In most instances, these plants are owned by large conglomerates with • de-
quate abilities to finance the new investments.
E. Cost of Capital - After Tax
RetUrn on invested capital is a fundamental notion in U.S. business. It
provides both a measure of actual performance of a firm as well as expected
performance. In this latter case, it is also called the cost of capital.
The cost of capital is defined as the weighted average of the cost of each.
type of capital employed by the firm, in general terms equities and interest
bearing liabilities. There is no m’ethodolOgy that yields the precise cost
of.capital, but it can be approximated within.rea.sonable bounds.
The cost of capital was determined for purposes of this analysis by esti-
mating performance measures of the industry. The weights of the two
respective types of capital for the Malt Industry were estimated at 23 percent
debt and 77 percent equity. The cost of debt was assumed to be 10.0 percent.
The cost of equity was determined ‘from the ratio of earnings to net worth
and estimated to be 9.8 percent. ,
To determine’ the weighted average ‘costbf capital, it is necessary to
adjust the before tax costs to after-tax costs (debt capital only in this
case). This is accomplished by multiplying the costs by one minus, the tax
rate (assumed to be 48 percent). These computations are shown below and
result in the estimated after-tax cost of capital being 8.8 percent.
Weighted ,Average After Tax Cost ‘of Capital
Before . Tax After Weighted
Item Weight , Tax Cost Rate Tax Cost Cost
Debt .23 ‘ 10.0 .48 5.2 1.2
Equity ‘ .77 ‘ — ‘ - 9.8 , 7.6
8.8
I 1—5
-------
III. MODEL PLANTS
The model plant described in this chapter represents the àperational and
financial characteristics of a plant which is likely to be built after the
promulgation of the guidelines and, hence, is called a NSPS (NewSource
Performance Standard) model plant. The model was not constructed to
describe existing plants which are direct dischargers.
The operating and financial data contained in this chapter pertain to.a
plant which is representative of actual plants in the industry and does
not reflect information pertaining to specific plants or firms. The data
were obtained from industry contacts, and published sources.
A. The Malting Process
Malsters can vary in the procedures they use to produce malt to differentiate
their product from each other (to:the extent that it is possible); but, yet,.
the basic process is the same. for most all pTants. The following describes
the basic steps which take place in the production of malt 1/.
Malt is a primary raw material for the processes •of brewing andldistilling.
Fermentation depends, upon the action of enzymes, and the purpose of malting
barley is to produce those enzymes which bring •about the eventual conversion
of starch into fermentable sugars. Essentially, the process of manufacturing
malt from bar1 yconsists of steeping, germinating, and kilning.
After preliminary cleaning and grading, barley is stored in grain, bins.
Differences in types of barley utilized relate primarily to kernel size,
two common designations being two-row .and six-row. Once the ‘proper type
of barley has been selected, it is conveyed to the malt house for steeping.
The barley is placed in large hopper-bottomed steep tanks where it is kept
submerged in cool water for 40 to 72 hours. The purpose of this process
is to impart moisture to the grain and to remove undesirable colors and
tannins. This is accomplished by changing the water in the steep tanks
three to four times while compressed air is bubbled through the mixture.
The wastewater discharged during these changes forms the principal part of
the total malt house load.
After steeping, the barley is transferred to germinating drums.or compart-
ments for a period of four to eight days. It is during this period that
the formation of enzymes occurs along with the creation of heat and carbon
dioxide. Temperature and humidity controlled air is forced through ‘the
malt while it is being turned. After a few days additional moisture is
1/ Development Document for Effluent Limitation Guidelines and ‘New Source’
Performance Standards, ’ Miscellaneous Foods and Beverages, U.S. Environ-
mental Protection Agency, March, 1975.
111—1
-------
added to accelerate germination, usually by spraying. The portion of this
water which is later drained from the germinating drums or compartments
forms the second part of the total wastewater discharge.
The malt is now ready for kilning. During this procedure, the malt is
conveyed to drying floors where it is kept for three to four days.
Furnaces under the floors .provide controlled temperature conditions to
dry.. the malt to the desired moisture content. The flOors are normally
situated vertically so that the malt may be dropped from level to level
while the temperature is increased. Upon completion of drying, the malt
is stored or shipped.
B. NSPS Model Malt Plant
Based on information provided in the Development Document, . the new source
model plant (that is, the plant which has yet to be built and will treat
its own effluent) was determined to consume approximately 16,000 bushels
of barley a day. Using. Census data to develop a factor for conversion to
annual production of malt, the model plant is estimated to produce
187,680,000 pounds of malt per year. This annual production was predicted
on an assumed conversion of 45.3 pounds of malt produced per bushel of
barley input and the plant operating 300 days per year. The basic descrip-
tive information concerning the operational characteristics as well as an
estimation of the plants’ financial profile are shown in Table 111-1. These
model plant profiles have primarily developed utilizing Census of Manu-
factures’ data and financial data do have limitations as they reflect con-
solidated data for both the Malt Beverage Industry and the Malt Industry.
I I 1—2
-------
Table 111—1.
New source model malt plant
Operational’ Information
Bushels barley per day
Days per year
Pounds mai.t per year
• Financial Profile
Sales (4.7t/lb)
Less
Material S
Labor
Other’
Total Costs
16,000
300
187,680,000
$000 )
19,331.0
14,498.3
1,720.5
572:.4, ,
16,791 .2
( Percent )
1’OO .0
75.0
8.9
3.0
86.9
Less,
Depreciation
Interest
Pre-tax Income
Income Tax
After-tax Income
Cash FlOw
Total Invested. Capital
Salvage Value
Returns
After-tax return on’ sales (percent)
After-tax return on investment (percent)
Cash Flow
Percent of Sales
Per—ent of Total Invested Capital
966.5
‘45,7.4
509.1
1 ,889.l
27,600
4,140
Cash Earnings
2,539.8 13.1
1 ,380.0
‘193:3
7.1
• 1.0
5.0
2.4
2.6
9.8
2.6
1.8
9.8
6.8
111-3
-------
IV. PRICING PATTERNS
The industry impact of increased processing costs associated with impo-
sition of requirements for effluent pollution controls on the Malt Industry
will be directly influenced by the ability of processors to pass pollution
control costs forward to the consumer in the form of higher prices for
finished products or backward to suppliers ‘in ternis of lower prices ‘for
raw materials and purchased services. , To the extent that such cost trans-
ference opportunities, are limited, the costs of effluent controls will
have to be absorbed by processors, profits will be reduced, and the ‘impact
on the industry will be more severe. The reversal of this situation would
tend to reduce the severity of the impact on the industry.
This chapter will examine those industry and product characteristics’ which
affect the ability of the Malt Industry to make the required pricing
adjustments.
A. Price Determination
The determination of prices for malt products involves ,the complex inter-
action of demand, the available supply and the returns sought by industry
members.
1. Demand
The demand for malt and malt products is based primarily on the quantities
required by,the breweries and the quantities which are exported. In1972,
brewers consumed nearly 3.5 billion pounds of barley. Total domestic pro.-
duction amounted to 4.5 billion pounds. Additionally, in 1972 , 26.5 million
pounds were imported to the United .States and 109.3 million pounds were
exported (Table TV-I). ‘ Thus, considering the imports and exports of malt,
•the largest purchasers of malt (by a substantial ‘amount) was the breweries.
As such, the demand for malt is predicted on demand for beer which’ has
shown a relatively steady rate of i’ricreas3 since 1960 (Table IV-2)..
Accordingly, it can be assumed that the demand for malt also has increased
at a relatively’ steady ,rate.
2. Supply
Malt production is primarily constrained by the supply of available barley
and the capacities of the malt plants. As maltsters, utilize only.a very
small portion of the total supply of barley, the constraint attributable
to availability of barley does not seem’ threatening. Thus, the real con-
straint on malt production is the capacity of the plants. According to
industry sources, historically, the Malt Industry has always been able to
meet th’e quantities.demanded in a timely fashion. Therefore, it can be .
assumed that ‘the supply of malt can usually meet demand and, thus, is not’
,considered a critical factor in the price determination process.
Iv- ’
-------
Table IV- ].. Imports and exports of malt, 1965-1974
Imports of Exports
Year Barley Malt of Malt
(Miflion.Pounds) . . (Million Pounds)
1965 49.2 71.2
1966 41.9 90.1
1967 . 48.6 62.9
1968 49.5. 65.9
1969 42.1 59.7
.1970 52.9 63.3
1971 26.5 78.4
1972 26.5 109.3
1973 29.6 126.4
1974 . 47.9 86.5
Source: U.S.. Department of Agriculture.
IV-2
-------
Table •IV-2. Consumption of beer, total and per capita
Taxable Withdrawals
Per Ca
pi
ta ”Consumntion ‘1/
•
1,000
Percentage Change
Percentage Change
Year
Barrels
from Previous Year
Gallons
from Previous Year
1960
88,928.9
---
15.4
---
1961
87,925.8
(i.1)
14.9
(3.2)
1962
90,693.3
3.1
15.1
‘1.3
1963
91,493.6.
0.9
15.0’
(0.7)
1964
96,247.4
5.2
15.6
4.0
1965 •. 100,305.7
4.2
16..0
.2.6
‘.1966
1.01,510.3
107,301.4
1.2
16.1
.0.6
1967
5.7
:16.8
4.3
1968
107,470.4
.0.2
16.7
. (0.6)
1969
111,866.6
‘ 4.1
17.2
, 3.0
1910
1971
122,550.2 ,
123,850.4
. 9.6
1.1
18J
18.6
,
.8 7 .
(0.5)
1972
130,740.6
5..6
19.5
‘ 4.8
.1973
133,960.5
2.5 ‘
, 19.8”
1.5
1974
142,3,12.0
‘ , ‘6.2
20.9
5.6
Source: United States
Brewers ‘Association
.1/ Based on total population regardless of age;
IV-3
-------
3. Market Structure
Malt is a highly undifferentiated product that is produced by only 30 firms.
In 1972, the largest four firms accounted for 48 percent of the industry’s
shipment. For the same year, the next four largest, accounted for an
additional 26 percent; thus, the 8 largest firmsaccounted for 74 percent
of the entire industry’s shipment. In addition, malt can be characterized
as a bulky commodit.y with a low per unit value and high transportation
costs. Furthermore, as mentioned previously; some malt plants are owned
by brewers, which are the largest purchaser of malt products. Because of
these facts, the Malt Industry can be characterized as oligopolistic with
a few plants furnishing malt. products to those brewers who do not have
their own malt plant.
In anoligopolistic industry, the pricing decision is subject to a greater
uncertainty because of interdependent reaction, i.e., if a price increase
does not succeed the firm may experience a substantial loss i.n sales,
prOfit, and prestige. Therefore, theoligopolistic firm is likely to
possess more discretion, and therefore to view the pricing decision in a
longer-term perspective and is less likely to attempt to equilibrate supply
and demand in the short run. When demand rises, more of the burden of
market adjustment will fall on rationingand backlogs of orders, particu-
larly since purchases have fewer alternative sources of supply. When
demand falls, more of the adjustment will be on lower production instead
•of cutting of price: 1/.
According to interview studies, acommon principle of long term pricing
appears to be to set price to earn a target rate of return on capital at
a standard volume of output 2/. Price is altered if the cost of produc ing
the standard output changes, either because of changes in prices of the
main inputs or because of technological progress. According to this
practice, for level of output at or above breakeven point, average direct
cOst per bushel of malt is estimated and a: given percentage of directcost
is added to direct cost to cover both fixed cost per unit of malt and the
desired target rate of return. The price based on this formula may be
called the normal price. The actual price of malt that a firm seeks to
charge in a given location :j5 thenormal price, plus the published freight
charge to the given customer location, minus any discounts or allowances.
The firm that ordinarily sets the price as price leader usually has acost
advantage based on location and scale and is usually large in terms of
local market share. Other firms that have less of a cost advantage and
produce lower volumes of output will charge an actual price close to that
1/ Eckstein, Otto and From,Gary, “The Price Equation,” The American
Economic Review , December, 1968.
2/ Kaplan, A.D.H., Dirlam, J.B., and Lazzilotti, R.R., Pricing is Big
Business - A Case: Approach , 1958.
IV-4
-------
of the actual price charged by the price leader. The normal price deter-
mined by the price leader in a given location is the price at which it
presumably maximizes its profits (or minimizes, its losses) 3/.
It should also be. noted that mal.sters not owned by breweries mUst price
their malt sold to breweries in ‘such a way that a brewer without malting
capacity will not be put at a disadvan.tage to the brewer who has maltirig
.capacity. Otherwise.breweries may be inclined to invest in a maltin.g
operation which could, in turn, hurt the independent .malsters.
B. ?rice Trends
There are very limited data concerning th.e pri.ce.trends of malt and. .m lt.
products. One indicatot’ of.price trends was found, the Wholesale Price
Index for malt. As can. be seen in Table IV-3, the index for malt prices
remained relatively stable between the years 1967 and .197?, with the
index.remaining between 90 and 100 for these years. In 1973,’.the malt
price index increased by nearly 29 percent and this increasing trend
continued into 1974. During 1974, the malt price index increased, steadily
month by month and by December 1974, the index was.113.4 percent above
the level it had been for the 1973 average. As also can be seen, in
Table IV-3, a major contributing factor to the malt price increase may
be the fact that barley prices increased also during .thé same period with
the Decemb r 1974 barley price being 77.6 percent abov’e’ its averá’gé 1973
price.
3/ Environmental Protection Agency, Economic Analysisof Proposed Effluent
— Guidelines Cement Industry , August, 1973.
IV-5
-------
le Price Index, selected products
Barley, No.. 3 or better
Malt’ , MinneaDolis Seasonai
1nci x’ P jce
(1967 = 100) ‘lDuSne
Table IV-3. Wholesa
1 .06
1.18
1.13
1 .44
2.75
4.07
1967
100.0
100.0
1968’
97.1
91.1
.
1969
1970
97.1
94.6
83.4
88.0
,
1971
98.5
91.6
1972
94.2
92.1
1973
121.3
138.7
,
.
1974
206.2
214.0
January
163. 2
199.6
February
March ‘
, 171.4
177 2
237.8
216..6
April
,190.6
131.6
May
204.3
176.6
June
204.2
193.6
July ‘,
,
204..2
189.0’
August ,
‘
204.2
239.5
September
221.4
196.2
October
237.4
,
259.0
November ,
237.4.
282.4
‘
December
‘
258.8
246.3
Source: U.S. Department of Labor,’. Bureau’ of Labor Statistics, and U.S. Department
of Agriculture, Feed SitUation .
IV-6
-------
V. EFFLUENT CONTROL COSTS
The effluent control system requirements and costs depicted in this
chapter were provided by the. Effluent Guideline Division of the En—
vironmental Protection Agency as p.rovided by the.technical contractor,
Environmental Science Engineering. The recommended treatment alterna-
tive for the NSPS model malt plant was the same as presented in the
Development Document . 1/ However, the associated investment and
annual operating costs were developed by the technical contractor in
accordance with the model plant’s production characteristics previously
described, in Chapter III.
A. Pollution Control Requirements
Three effluent control levels fOr point source categories (direct dis—
chargers) were originally considered:
BPT - Best Practical Control Technology Currently Available,
to be achieved by July, 1977 . .
BAT - Best Available Pollution Control Technology Economically
Available, to be achieved by July, 1983
NSPS - New Source Performance Standards are recomended to be
equa.l to thern BAT control level and to apply to any source
for which construction starts after the publication of..
the proposed regulations.
As was stated in C,hapter I of this report,theIvlàlt Industry presently
has only one known establishment which does notutilize a municipal
sewage system for effluent discharge and this plant meets the proposed
BPT guidelines and is very close to meeting the proposed BATguidel:ines.
Accordingly, only an NSPS model plant was developed and subsequently
cost data provided pertained only to the NSPS model.
The flow for the NSPS model malt plant was determined to be 685,000
gallons per day witha waste load of 615 mg/l biological oxygen demand
(BOD) and 104 mg/i suspended solids (SS).
The recommended effluent limitation guidelines for NSPS malt plants are
as follows (expressed in kg/metric ton of barley processed):
1/ Development Document for Effluent Limitation Guidelines and New Source
Performance Standards, Miscellaneous Foods and Beverages, PointSource
Category, Draft Report prepared by Environmental Science and Engineering,
Inc., for the US. Environmental Protection Agency.
-------
NSPS RECOMMENDED NSPS MALT GUIDELINES
Max. 30-day
Average Max. Day
BOD 0.110 0.270
SS 0.065 0.160
8. Discharge Status of the Industry
At the present, all known plants except one in the Malt Industry discharge
their effluent to municipal treatment facilities.
C. Pollution Control Costs
The cost estimate in 1972 dollars and the components of the recommended
treatment alternative (activated sludge) for the NSPS model maltplant
are shown •in Table V-l. Shown in Table V-2 are the costs for an optional
treatment alternative (aerated lagoon) which could be implemented if it
was determined desirable. From the information provided, total investment
and annual costs were modified so as to be consistent with the model plant
characteristics described in Chapter III. These modifications, however,
did not change the technical cost basis of the costs provided by the EPA.
Modifications made to the treatment alternatives’ costs for the NSPS Malt
plant consisted primarily of inflatinginvestment and annual costs from
1972 to 1974 dollars by use of the Engineering News Record Construction
Cost Index (1.205 times the EPA provided c’osts). The resulting treatment
costs in. 1974 dollars for both the recommended and optionaitreatment
alternatives are summarized below:
Annual Total
Investment Operating Yearly
Costs Costs Costs
Recommended S ’stem $ 918,000 $145,600 $237,400
Optional System $1,501,120 $568,540 $718,635
Investment costs depicted above include costs for construction, land,
engineering and a contingency fee. Annual operating costs include labor,
power, chemicals, maintenance and supplies. Total yearly costs include
annual qperating costs, depreciation and interest (based on 10 percent
of one half the total investment costs). For purposes of the impact
analysis, the depreciable life of the pollution control equipment was
determined to be 20’ years.
V- 2
-------
TABLE V -i
ITEMIZED tOST SUMMARY FUR. MAUI
(ALTERNATIVE A19-V)
- NSPS
ITEH!ZFO COST SLkM RY FOR WA5IE ATER TREATMEp ’T C HA lk.
DESIGN EFFTC IENCY,..97,5 PERCFF 1BOD RECUCTIO.N
TREATMENT PODULES
E1 .CO ’JTRCL bCLSE
B.. ,PUMPitQt STATiON:
C . . , EQUAL UATICN BAS I k
4...WnROGE.N ADDIflON
AC I I VA TED LUOGE
C,. ,SLL0GE THICMENER
R.,,AERCPIC CIGESTCR
Y...HOLCING TAN}(
U,,.SPRAY xflRLflhiOk
::3.,.puvprNE BIATIGN
N,. DUALfrED.! PRE83UREPILT A’4
INVESTMENT CCSISt
1.
2 .
4,
1 CIA U
CONSTRUCT TON
LAND
ENGINEtflXNG
ce r y Nc.E’Jcy
60 0 5€ 0 0 0
t i 1 1’! 0 . 0 0
o 0 O 0 . 0 0
oO Oeo.00
7b1830.0O
1/
1972 dollars
Source: .En ironmental Protection Agency
37480.00
68700 ,00
3030.00
11620.00
120C3 0.00
li ? 9830.oO
3ba70. •00
36030.00
18733 0.0.0
YEARLY OPERAT ING COSTSJ
1. LkBOP
a; PflER
3 tHEt iIC ,ALS
4, MAINTENANCflSL:PPLIES
TOTAL
ICT&L ‘t’EARY(
Costs; .
1. Y ARL CPEP&IING COGT
2. INVESTMENT
3, DEPRECIATION
1 0 1 st.
V- 3
-------
TABLE V-2
ITEMIZED COST SUMMARY FOR MALT .- NSPS OPTION
(ALTERNATIVE Al9-III)
.ITEN7ZED CU.&T 1it’P4AP Y FOR A TEV TEP IREATt E 4T CHtIN
)E G EFFICTENCY... PEPCE T ‘SOD F DUCTION
TRE, ’VE MODULES
B1. .CCN1 C1. I CLSE
B ,,PU PTN( STA1 !ON
C.,. ..EQU LIZATICN ItSIN
.,,NXTRQGENADCITIC .
L .,.AERA1ED LAGOON
B,,. . PU ’PING STATION
FDI4 P E 5LP F FILTF / .’N
cCNSTr uC?
LANt)
E NO I NE E F I l’i 0
CC N I l G E t •; c v
PVC LINER
:2 o 00
110. 0 00
.3030 .00
‘3 ‘i 710 00
00
ii7ij 20 0 00
J71 20 00
61 ° 00
583300.00
1/1972 dollars
Source: Environmental Protection Agency
INVEENY CCS r
1.
a.,
:3
‘I•
“.TC ’I L
991 0 0 0
t27 0 O0
‘ 9?70 00
99770 00
357B0 00
12 t 57 l0 00
YEARLY brt r ATINc CCSIS
1..
.. . POWER
3. CI ENICALS
Li. , . AINTENANCE 3URPL!ES
5. PVC LINER
ICIAL
TCTAL VE/ PLY CCS1S
., VEtJILY CR PA ’ING Ct CT
2.. YEIIRLY INVEC 4 EN?
• COST I ECCV .f ’
3.., r,E EcIA lION
V- 4
-------
Total investment costs for pollution control systems expressed as a
percent of the NSPS model plant. total investment and total yearly costs
expressed as a percent of annual sales are depicted below:
Total investment for
• pollution controls as
a percent of model
investment
Total yearly costs
fQr pollution con-
trols as a percent
of annual sales
Recommended. NSPS
Treatment Al ternative
Optional. NSPS
Treatment Al ternati ye
21.8
35.7
3.0
9.2
v—S
-------
VI. ECONOMIC IMPACT ANALYSIS
The impacts considered in this analysis are as follows:
A. Price ‘effects
B. Financial effects
C. Production, effects
0. Other’effects
The resulting impact from the imposition of effluent controls on the
Malt Industry for existing ‘rnalsters is expected to be negligible as all
but one;known.piant discharges their effluent to municipal sewage treat-.
ment systems. Thus, the impacts described herein will pertain only to
those plants which are yet to be constructed and will discharge their
effluent directly. to navigable waters (he’reafter referred to as New
Source). These impacts are:analyzed for the NSPS model plant described
in Chapter .111. Impacts are based on the production and financial char—
.acterist,ics of the NSPS model plant and pollution control costs as presented
in Chapter V.
It should be noted that in Chapter V two sets of control costs were
described for each model; the recommended treatment system andan optional
treatment system’. ‘ For purposes of’this impact analysis, only the’
recommended treatment system will be utilized. This treatment alternative
consists’of an activated sludge system and according to cost estimates,
furnished . by the EPA’is considerably less expensive than the optional’
aerated lagoon system.
A. Price Effects
1. Required Price Increase
An implicit indicator of the’ expected price effects of pollution controls’
used in this report is the amount of sales price increase necessary to
maintain a NSPS plant’s profitability, after pollutiOn control expenditures,
at a level the same as a similar plant without the pollution control
expense. The method of computation was discussed in Part ,I, Chapter II
(Methodology), Section F, under subsection 2 of this report. The ability
of a new plant to pass on such price increases is evaluated in this
section of the report.
‘The amount of sales price in’crease necessary to offset NSPS pollution
control costs for the model malt plant is depicted below. Als,o shown
are sensitivity ranges of required price increases when pollution control
costs vary plus or minus 20 percent from the estimated cost. ‘
Bushels Barl’ey Required Price Increase (%)
Per Day - 20% Estimate +20% .
NSPS Malt Plant , 16,000 1.2 . 1.5 ‘ ‘1.8
VI-1
-------
2. Expected Price Increases
Although the above illustrated price increases indicate what the NSPS
model plant would require to offset expenditures for pollution controls,
it is doubtful new malt plants would be able to pass on the additional
expense to customers in the form of higher prices. This is due to (1)
the discharge status of the Malt Industry and (2) financial effects of
building new point.source malt plants relative to the market characteristics
of the industry.
As stated above, it is unlikely new source malt plants will •be able to
pass on required price increases due to pollution controls due to, in
part, the discharge status of the industry.. As pointed out earlier,
all but one known malsters discharge processing waters to municipal
facilities. Although municipal charges have and are expected to continue
to increase, the charges have usually been and are expected to be lower
than private treatment costs. In general, new sources will only be able
to pass on required price increases due to. NSPS levels of control to the
extent increased municipal charges are passed on by a majority of finan-
cially viable malsters. However, should municipal charges become higher
than private costs of treatment, new sources would have a competitive
advantage and would have the opportunity to pass on the increased costs
of effluent controls assuming prices increased to offset the increasing
nv.inicipal charges. Although not quantifiable at this time, some industry
sourcesfeel that, especially in large t.rban areas, this.situation is likely
to happen in the near future.
The market characteristics of the Malt Industry may provide some capabilities
for new plants to pass on pollution control costs but these will be iimited
to only those plants built in an area: where the location of the plant
generates a competitive advantage. In other words, a plant built in an
area which is “malt deficient” may be able to furnish malt for lower prices
than those located oustide the area (primarily due to freight savings)
and accordingly that plants margin ma.y be ableto absorb pollution control
costs and still remain competitively advantaged.
But for those new plants locating in areas in whichcompetitic i (although
limited) prevails, it is probable that such plants will not be able to pass
on required price increases. As discussed in earlier chapters of this
report, the Malt Industry has experienced relatively low profit margins
and as shown below in Section B, Financial Effects, the high costs of new
plant construction are not offset by lower operating costs through improved
technology. This results in new point sources having the same to lower
income ratios than existing plants and negative net present values of cash
flow when discounted a.t the estimated industry after-tax cost of capital
(8.8 percent).
VI-2
-------
Therefore, based on •the low profit margin and market structure of the Malt
Industry, price increases by new point sources to’ offset pollution controls
and high costs of construction are not expected to occur. In the following
analysis, no price change was assumed to occur due to the entire industry
increasing prices to offset effluent controls and, accordingly, the economic
viability of the new source,plants was based on financial characteristics of
the model without added revenue stemming from aggregate pollution control
effects on industry prices.
B. Financial Effects
Based on NSPS model plant profiles described previously and costs of pollu-
tion controls provided by ‘EPA, the following financial indicators were
computed under baseline (without pollution controls) and with pollution
controls:
After tax income
After’ tax’ return on sales
After tax return on invested capital
Cash flow and cash flow as a percent of invested
capital
Net present value ,
The above were computed according to the discounted cash flow. (DCF) and
return on investment (ROl) procedures outlined i,n the methodology.
Furthermore a, sensitivity analysis was performed using pollution control
cost estimates at levels of 80 percent and 120 percent of the costs pro-
vided by EPA.
1,he results of the model plant analysis of the malt NSPS guidelines are
summarized in Table VI-1. After the imposition of effluent controls, after-
tax income, after-tax return on sales and after-tax return on invested
capital are expected to’ decline 22 to 24 percent. If. the pollution control
costs are 20 percent lower than estimated, the above mentioned after-tax
values of profitabiity would be reduced by only 17 to 20 percent instead
of the 22 to 24 percent range. If control costs are 20 percent higher than
estimated, after-tax values would decline an estimated 27 to 29 percent
from pre-control levels. Thus, it appears that NSPS pollution control in—
vestments and annual costs are high for the new source maister in relation
to-rather low profit levels prior to controls. Costs for NSPS controls are
expected to substantially reduce after-tax income, return on sales and
return on invested capital for potential new sources.
VI -3
-------
Table VI-1. Key values of impact.analysis for malt: NSPS
Percent Proposed Control Costs
Key Va1ue Baselihe 80% .100% 120%
After tax income ($000) 509 410 385 360
After tax return on sales (%) 2.6 2.1. 2.0 1.9
After tax return on mv. cap. (%) 1.8 1:5 1.4 1.3
Est. cash. flow ($000) 1,889 1,827 1,811 1,796
Cash flow, as % of in ‘cap. 6.8 ‘ 6.6 6.6 6.5
Net. present values ($000) —16,591 —17,732 -18,017 -18,302
VI-4
-------
In terms of the effect of NSPS controls on cash flow return on invested
capital, the percentage return declined from 6.8 percent for the baseline
case to 6.6 percent (a drop of 3 percent) for the after controls case.
When costs were varied ÷ 20 percent, the after control return varied only
slightly.
Net present values for the NSPS model malt plant are negative both before
and after the imposition of controls (Table VT—i). As discussed in Part I,
Chapter II, Methodology, large negative net present values would cause most
firms to discard plans for building a new plant. Since the estimated net
present value is negative before controls are imposed, it is concluded
that very few plants, classified as a new source, would be built. However,
it should be notea that the negative net present value indicates thatthe
associated plant would earn less than the estimated 8.8 percent industry
cost of capital. Thus, a NSPS plant may be built in the future provided
the firm has been well established in the industry, has or has expectations
to capture a major market share at profitable price levels and has an
excellent financial performance record (e.g. a lower cost of capital).
Should a NSPS plant be built, it can expect its net present value to decline
due to the requirement for pollution controls.
C.. ProductionEffects
Although new source performance standards will not affect current levels
of production, future growth in the industry could be seriously affected
by the imposed controls. Point source category firms are potentially
deterred from entry because of differential impacts of effluent treatment
requirements.
However, as indicated in the above financial description, future growth
from new sources is expected to be restrained by the high costs of con-
struction not being offset by lower costs of production achieved through
improved technology. Also a restraint is the inability of a new source to
pass through costs for controls to the consumer. This does not c mpletely
rule out th possibilities for new sources. It is foreseeable that some
questions, those which could be classified as optimal producers, could
construct and successfully operate a new plant. However growth for the
industry as a whole, is expccted from additions to or alternatives of
existing plants that are discharging effluent wastes to municipalities.
D. Other Effects
Other types of economic impact such as employment, community and balance
of payments deficit effects are normally assessed when there are plant
closures due to pollution controls. However, these other effects are not
meaningful nor quantifiable in a report assessing new sources. Although
employment is an important consideration to a potential new firm and in-
creases in employment and local business are important to surrounding
communities of a potential new plant, these effects are more related to
the decision to construct a new plant. Thus, in this report, these
related effects were not pursued.
VI -5
-------
number of ‘establ i shments
1
Establishments
Number of ‘. Percent ‘
Employees Number of Total
963
Value of
Million
Dollars
Shipments
Percent
of Total
Establishments
Percent
Number of Total
1967 ‘
Value of
Million
Dollars
Shipments
Percent
, of Total
‘
Establishments
‘ Percent,
‘Number of Total
1972’
Value Of
Million
Dollars
.
Shipments
Percent
of’Total
1,000-2,499
2,500 +
TOTAL
42 100.0
183.5 100.0
43 100.0
216.3 iqo.o
40 100.0
226.2 100.0
Table I—i. The malt industry, by employment size group,
and value of shipments 1963-1972
1
1-4
5-9
10-19
20-49
50-99
100- 249
250-499
5,00-999
4
1
2’
4.8
.
2.4
}
10.4
5.7
8
19.0
‘
16
38.1
47.5
25.9
ii
‘
26.2
.
71.4
.
38.9
4
9.5
54.2
‘
29.5
‘9.3
}
2.3 ,
0.7
‘
0.3
5 ‘
1
.
12.5
‘ }
2.5
0.4
.
0.2
8
15
18.6
34.9
10.1
55.0
4.7
25.4
8
16
‘
20.0
4O.o
11.0.
71.7’
4.9
31.7
11
? 5 6
9.3
81.9
68.6
.
37.9
31.7
6
4
15.0
10.0
55.7
‘ 87.4
24.6.
38.6
4
Source: Census of Manufactures
-------
PART IV
WINES, BRANDY’ AND BRANDY SPIRITS
-------
PART IV: SIC 2084, THE WINES, BRANDY AND BRANDY SPIRITS INDUSTRY
I. . INDUSTRY STRUCTURE
The Census of Manufactures defines those establishments classified under
SIC 2084, as establishments primarily engaged in the manufacturing of
wines, brandy and. brandy spirits. Also included are those establishments
which are bonded .storerooms and blend and bottle wines. The bask manu-
facturing process involves the fermentation of a, fruit (usually grapes)
to produce a wine which in turn is often matured, blended and finally
bottled. The industry is comprised of three basic types of operations
including wineries with stills, wineries without ‘stills and the bonded
storerooms mentioned previously. These operations are briefly described
below.
Wineries with stills - These operations produce table wines, sparkling
wines, dessert wines, bEverage brandy and win.e spirits. The beverage
brandy and wine, spirits are resultant of the distillation of wine and
are utilized in a variety of forms including mixing with other wines and
wine spirits for addition in the prodUction of dessert wines.
Wineries without stills - These wineries primarily produce table wines.
However, some of the operations do purchase wine spirits from wi ieries
with stills and blend the spirits with their wines to produce de.sert
wines.
Bonded storerooms’ - These operations utilize wines produced elsewhere’ to’
blend and bott e for eventual sale. While bonded storeroomsdo exist,
they generate little, if any, effluent and no known such operations dis-
charge directly to navigable waters. Subsequently, only a general descrip-
tion of these operations will be included in this analysis.
A.’ Characteristics of the Industry
As previously discussed, wineries may produce wines, brandies or brandy
spirits. Usually those operations with stills produce all of the above
beverages whereas wineries without stills produce predominately only table
wines. Some wineries witho it stills do ‘purchase ine spi,rits which
enables them to produce dessert wines, but since no signitificant additional
waste loads are added, these operations will not be’discussed separately.
‘The Wine Industry is generally highly competitive and, accordingly, industry
members do not readily release information regarding the operational data
of their facilities. As a result, information concerning, the industry
characteristics must be derived from traditional sources of information
such as the published reports of the Census of Manufactures , Internal
I—i
-------
Revenue Service, Bureau of Alcohol, Tobacco and Firearms (BATF) and the
Wine Institute. These sources do have their limitations; however, they
do provide an aggregated source of the general industry characteristics.
Finally, when possible, discussions with industry members were utilized
to fill the voids where published data are not available.
1. Number and Size of Firms and Plants
The Census of Manufactures states that in 1972 there were 183 firms in
the Wine Industry operating some 213 establishments. Thus, in 1972,
just over 14 percent of all establishments (30 wineries) were owned or
controlled by firms which operated more than one facility. This per-
centage has remained relatively constant since 1967 at which time 175
firms controlled 205 wineries.
According to the Census ‘data, the number of wineries has fluctuated over
the past years but still has remained between 205 and 239. In 1.958, the
Census indicates 239 establishments comprised the SIC .2084 industry. In
1963, this number had declined to 222, then in 1967, it declined to 205.
Finally, it increased between 1967. and 1972 to the 213 establishment level.
The number of establishments operating by employment size group are
depicted in Table I-i for the years 1963, 1967 and 1972. These data
aggregate both wineries,with stills and those without stills; however,
the data do provide indications of the distribution of establishments by
sizes. Also shown in Table I-i are, the employment classes’ respective
values of shipments and corresponding percentage of the total. From this
table it becomes evident that the majority ofthe wineries are concentrated
in the smaller size categories but the major portion of the industry’s
shipments are accounted for by a few large wineries.
The BATE indicates that as of June 30, 1974, there were 411 bonded
wineries authorized to operate. The BATE also indicated 44 tax paid
wine bottling houseswere authorized to operate. It should be noted
that while a winery may. be authorized to operate, it may not actually
be in operation. Furthermore, it should be noted that when most of the
wineries obtained their authorizations, they, consisted of small independent
operations. Now many of these smaller wineries have been consolidated
nto large operations, but they’maintained their original authOrizations.
Subsequently, one major winery may actually consist of a variety of ‘small
authorized wineries. This, explains the significant difference’s between
BATF data and the Census data.
While the preceding data source’s have identified the Census’ number of
establishments and the.number of wineries authorized to operate, a com-
prehensive list of winéries.in operation is available in the Directory
of the Wine Industry in North America 1/. ‘The Directory lists, •by state,
1/ The Hiaring Company, Wines and Vines , Volume 54, No. 12-A, 1973.
1—2
-------
Table I-i. The Wine and Brandy Industry by employment size group, number
and value of shipments 1963-1972
of establishments
.
• •. 1963 1967 • .
• establishments Value of Shipments 1/ Establishnier.ts Value ofShipments 1/
Number of Percent Million Percent ‘ Percent Million Percent.
Employees Number of Total Dollars of Total Number or Total Dollars of Total
1972
Establishments Value o ,f Shipments
1/
Percent Million Percent
Number of Total Dollars of Total
.1—4 73 32.9 3.1 ‘0.8 60 29.3 3.7 0.9
74 34.7 9.2 1.0
5—9 35 15.8 12.4’ 3.4 35 17.1 13.3 3.2
35 16.4 17.0 2.0
10-19 44 19.8 30.8 , 8.4 42 20.5 29.8 7.3
30 14.1 49.3 5.7
20-49 44 19.8’ 92.9 25.2 36 17.6 65:2 .15.9
34 16.0 79.4 9.2
50-99 ‘15 6.8 62.7 17.0 .15 7.3 58.5 14.3
18 8.5 103.7’ ‘ 12.0
100—249, 7 3.1 6 .4 18.6 13 6.3 112.1 27.3
15 7.0 192.7 22.3
250-499 • 3 • 1.4 • 3 : 1.4 .
4 1.9 116.2 13.4
} • 98.0 26.6. • 127.6 • • 3L1
500-999 1 0.4 1 0.5
.
2 0.9
• • } 297.4 34.4
1,000-2,499. - - - - - -
1 0.5
‘
2,500 +
- • - - - - . • -
•
TOTAL 222 100.0 • 368.2 100.0: 205 100.0 413.2 100.0 • ‘
213 • 100.0 • 864.9 100.0
1/ Conta ns extensive duplication because the products of some of the establishments are used as
materials by other establishments
• classified in the same industry.
Source: U.S. Department of Commerce, Census of Manufactures, 1967, ‘and 1972.
-------
‘the bonded wineries and when furnished, provides various information con-
cerninq the operation of the wineries. According to the Directory , there
were 369 bonded wineries, 75 distilled spirits plants which process wine
products and 33 tax—paid wine bottling houses as of December 1973.
As was the case with the’BATF data, the Directory lists all the bonded,
premises for each companyand accordingly while there were 369 ‘bonded
wineries, the actUal number of wineries in operation would be smaller.’
ATso, of the 75 distilled spirits plants which processed wine products,
several are actually distilleries which primarily distill grain. According
to the BATE, as of July, 1975, 52 distilled spirits plants were authorized
t’o.distill oni’y’fruit (i.e. grapes) and 9 plants were authorized to distill
both grain and fruit. As such, it will be assumed for purposes of this
analysis that winerieswith stills number 52.
2. Value of Shipments
Value of shipments and other receipts of the Wines, Brandy and Brandy
Spirits Industry in 1972 totaled $865.0 million. This included shipments
of wines, brandy and brandy spirits (primary products) valued at$815.5
million, shipments of other products (secondary products) valued at $15.1
million, and miscellaneous receipts (mainly resal’es) of $34.4 million.
Estimates of the 1975 value of shipments for the industry are expected to
total $1,182.0 million, 11.2 percent above the estimated shipments for
1974 and 36.6 percent above the 1972 value of shipments (Table 1-2).
Historically, the value, of shipments have increased by an average of 9.4
percent per year since 1958, from $264 million in 1958 to the estimated
$1,182 million in 1975. This rate of increase has been significantly
higher.after 1970,, with the average increase since 1970 being 15.8 percent.
Shipments ofwines, ‘brandy and ,brandy spirits (primary products) in 1972
represented,98 per’cent (specialization ratio) of the,industry’s total
product shipments. The industry specialization ratio in 1967 was ‘97 per-
cent. Secondary products shipped by the industry in 1972 consisted’ mainly
of flavoring extrac,ts and syrups ($12.7 million).
3. Level of Integration
The Wine ‘industry is comprised of firms which are ‘associated with a wide
range of levels of integration. In terms of forward integration, most
firms do not integrate any further than their sale’s to distributors.
Some firms ‘may maintain thei’r own distributorships, but these are usually
limited to dis,tributorships for’export markets.
Most ‘wineries maintain ‘some degree of’ backward integration in that they
own some vineyards. However, it is not unusual for some wineries ‘to own
only very fewacres of grapes and these wineries purchase the additional
1-4
-------
Table 1-2. The Wine and Brandy Industry, value of shipments 1958-1972
• Percentage
Change
VáiU.e of
Shi pilients
(T Million)
264
282
*279
*304
*338:
368
385
396
401
410
446
493
591
747
865
941
1,063
1,182
Limited reliability (high standard errors)
Source: Bureau of the Census, Bureau of Labor Statistics, BOC.
Year
• 1958
1959
1960
1961
1.962
1963
1964
1965
.196 6
1967
1968.
1969
1970
1971
1972
1973
1974
1975
6.8
—1.1
go
11.2
8.9
4.6
2.9
1.3
2.2
8.8
10.5
19.9
26 • 4
15.8
8.8
13.0
11.2
1—5
-------
required grapes from local growers. Also, it is not uncommon for wineries
to purchase bulk wine, brandy or brandy spirits from other wineries to
blend with their own wines.
Principally, those operations which only blend and bottle wines do not
have the opportunity for backward integration unless the operation is
owned by a firm which also operates a winery. As mentioned above, wineries
usually grow part of the grapes required; however, most wineries purchase
bottles and labels.
4. Number of Products
The Wine IndUstry generates numerous products most all of which are in
the form of wines, brandy or brandy spirits. Most wine products could
he categorized as table wines, dessert wines, champagne, brandy, vermouth
or fruit wines. The industry also produces various forms of grape juice.
For each of the above categories, wineries may have several different
labels usually varying with the variety of grapes used.
5. Level of Diversification
The Census of Manufactures shows theWines, Brandy and Brandy Spirits
Industry with a very high specialization ratio of 98 percent in 1972.
As stated previously, this indicates that 98 percent of the sales of the
establishments classified in industry SIC 2084 are in the primary SIC code.
The typical winery is not diversified as governmental restrictions limit
the facility s possibilities as well as the fact that the processes and
equipment are specialized,’non-interchangeable and do not lend themselves
to the production of other products.
It should be noted, however, that some of the establishments in the
industry are o .ned by highly diversified conglomerates. The diversi-
fication of these congidmerates includes a variety of operations often,
but not always,in the food industry. The acquisition of the winery
by the conglomerate was usually resultant of the selling of a one-time
family operation.
6. Location of Wineries
i. s can bee seen in Table 1-3, the majority of the wineries, distilleries
producing brandy spirits.and tax—paid wine bottling houses are located
in California. Of the 369 listed in the Wines and Vines Directory, 221
(60 percent) are in California. Of the 75 brandy distilleries, 58 (77
percent) are in California and of the 33 tax-paid wine bottling houses,
8 (24 percent) are also located in California.
The next most concentrated area for wineries is the state of New York.
with 29 establishments. Following New York is Ohio with 23 wineries.
I -6
-------
-
1 —
5 1
221 . 8
2 1
Connecticut .2
Florida 1
Georgia 1
Idaho 2
5
Indiana I
Iowa 6 1
Kansas - 1
Louis iana I . — 5
Majne . - .2 -
Maryland 3 -
Massachusetts 1 3
Michigan. 2
Minnesota 1 -
Missouri 7 1
New Hampshire 1 -
New Jersey 10 2
New Mexico 5 2
New York 29 -
Ohio 23 . —
Oklahoma .‘ 2
Or egori . 10
Pennsylvania 6
South Carolina
Tennessee
Texas . 1
Vermont 1
Virgini.a 4
Washington . .
- Wisconsin 5
TOTAL . 33
Table 1-3.
The Wine Industry, location of facilities
.
. - - -
.
Distilled
Spirits
Plants Tax-Paid
.
Associated With
the-
Wine
State
. Bonded -. Wineries
.
Wine
Industry
Bottling House
Alabama
Alas ka
Arkansas
California
Colorado
Number of Establishments
58
1
3
1
2
2
2
2
75
1
1
1
369
Source: Wines and Vines, Directory, 1974.
1—7
-------
According to industry sources, all wineries with stills (distilled spirits
plants) are located in California. Those remainina distilled spirits
plants indicated on Table 1-3 are assumed to be distilleries which are
authorized todistill fruit but, yet, do not produce significant quanti-
ties. Most likely, these distilleries utilize grain for their operation
the majority of the time and, thus, would be included in Part V of this
report, The Distilled Spirits Industry.
The industry itself makes distinctions between eastern and western wines;
however, basically, the same processes are utilized in both areas to pro-
duce wine. Some slight differences may be caused by the fact that a dif-
ferent variety of grapeis associated with each area. The western wineries
predominately use a V. vinifera varieties while the eastern wineries use
a V. labrusca varieties. There are significant differences in the climatic
requirements for eacn of the different varieties and this will be a
major factor in the level of effect. of effluent controls on the respective
geographic areas. This will be discussed in greater detail later in
this report.
7. Age of Plants and Level of Technology
Within the Wine Industry, there exists a wide variety of ‘winery ages’
varying from several generations old to those which were just recently
built. While many of the ;ineries are relatively old (many were in
operation prior to prohibition in 1920) throughout their useful life,
new equipment has been added or used to replace that which is worn cut
or technologically obsolete; As a result, most wineries in the industry
represent a combination •of both old and new equipment. Furthermore, it.
can be generally assumed that the newer the winery and its equipment,
the more technologically advanced it is. Finally, it is not uncommon for
wineries: which are expanding to use some equipment from wineries which
have c1os d.
There are no known measures of the ages of wineries and their equipment.
However, for purposes of this report, it is assumed that all operations
are about the same age. There may be a slight tendency for the smaller
operations to be older as can be seen in Table 1-4. This table utilizes
IRS data and depicts, for variously, sized operations, the firms accumulated
depreciation expressed as a percent of its total depreciable assets’. As
can be seen in the table, those firms with less than $500,000 in total
assets tend to be 60 percent depreciated while those firms with more than
$500,000 in total assets tend to be depreciated between 40 and 50 percent.
Thus, the larger operations have less depreciated assets than the smaller
operations and as such can be assumed to have newer facilities and equip-
ment.
‘ 8. Plant Efficiency
Wineries vary significantly in terms of efficiency. Primarily the
differences’ among wineries’ efficiency is dependent upon the technical
level with which the facility operates. Furthermore, the age and condi-
:t ’ 0n of ‘the equipment will significantly influence the overall efficiency.
1-8
-------
to
Table 1-4. Alcoholic Beverages, except malt l’iquOr and malt, accumulated depreciation as a percent of
total depreciable asset ; by total asset size
Size Of Total Assets ($1,000)
Fiscal
Year
100.- 250- 500- 1,000- 5,000 . 10,000- 25,000- 50,000-. 100,000— 250,000-
0-100 250 500- . 1,000 5,000 10,000 25,000 50,000 100,000 250,000 or More
.
---Percent : -
1968-69
93 63 .-- 78 50 44 . 45 35 0 44 48.
1969-70
7 70 75 17 55 41 45 34 44 43 50
1970-71
- - 69 59 46 48 44 53 35 44 44 . 51
1971-72
81 34 40 4i .53 39 53 37 44 44 51
Average
60 59 •58 46 . 52 42 49 35 46 . 44 50
Source:
Department of the Treasury, Internal Revenue Service, Sourc Book of Statistics of Income , annual.
-------
of the winery. Those with the old and neglected equipment will, undoub-
tedly encounter many more hours of down-time due to mechanical failures.
Finally, it is evident that the larger wineries have a greater potential
for operating efficiently as they will usually operate more days per
year and have the newer, highly automated’equipment thus allowing their
•output per employee to be higher.
B. Employment Characteristics
Total employment in the Wine Industry has increased by almost 58 percent
since 1958 when 5,900 people were employed to 1972 when 9,300 people were
employed (Table 1-5). Production workers represent approximately 60
percent of total employees in •1972, and increased in number from 4,300 in
1958 to 5,600 in 1972. It should be noted that the production workers’
proportion has decreased from over 70 percent of all employees in 1958
to 60 percent in 1972. This decline may be resUltant of the increased
production required of wineries which, in turn, ‘has transformed many
wineries from small regionalized ‘family operations ‘to larqe national
businesses . Thus, wineries’ managements have grown and at the same, time
the labors’ productivity increased which resulted in more total employees,
higher production and proportionately fewer required laborers.,
Overall the productivity of the production workers has increased signifi-
cantly since 1960. The value added and the value of shipments per produc-
tion worker have more than doubled. Some of this increase is attributable
to inflation; however, a good portion is explained by the installation
of automated equipment (especially the presses and the bottling lines)
and the better utilization of those employed.
The winery production worker can be classified as predominantly union
and semi-skilled. Much of the labor involves the monitoring of either
the presses and associated equipment or the bottling operations. The
average annual hours worked per production worker have remained relatively
constant with the average being 2,107 hours in 1972. Hourly wages have
nearly doubled since 1958 from $2.06 in 1958 to $4 08 in 1972. ‘Corresponding
tothe wage increase, the value added per worker also, ‘has doubled durin,g
the same time period.
It should be noted that while most of the workers are employed full-time,
some wineries do not operate on a year around basis. ‘ In fact, some of
the smaller wineries may operate only 3 to 4 months of the year. Wineries
normally . press grapes for only 4 to 10 weeks each year. Those employed to
operate ,the’ presses are often utilized elsewhere in the winery (maintenance
of the’ bottling lines) the rest of the year;. however,’ some wineries do
not ,ha,ve the volume to utilize all its employees. ‘ For many. small wineries
located in rural areas, the workers have a supplemental source of income,
• often in some aspect of agriculture.
1-10
-------
Table 1-5. The Wine and Brandy Industry, employment statistics 1958-1972
.‘
All Employees
.
‘Production Workers
Value of
‘Shipments
per Production
Man-Hours
•per
Production
Wage per.
•‘ Production
.. Worker
Value added
per Production
Worker
.
Year’
Number Payroll
Number
Man-Hours Wages
Worker
Worker
‘Man-Hours
Man-Hours
(000) ($Mil.)
(000)
(Mil.) ($Mil.T
‘ ($000)
,
($)
($)
1958
5.9’
29.0
4.3
8.6
17.7
61.4
‘
2,000
2.06
13.28
1959;
5.3
28.8
3.7
7.5
16.4
76.1
2,027
2.19
14.27
1960*
5.3 ‘
29.6
3.7
7 3
16.6
75.5
1,973
2.27
14.52
1961*
.1962*
5.2
5.4
31.6
33.5
3.5
3.7
7.3
7.8
‘
17.2
18.4
87.0
91.3
,
.
2,086
2,108
2.36
2.36
16.55
16.49
.
‘ 1963
1964
‘ 6.1
6.4
35.1
39.9
4.2
4.5
‘
8.4
8.9 ‘
20.5
23.2’’
87.7
85.6
2,000
1,978
2.44
2.61
16.35
17.88
1965
6.4
41.8
4.2,
8.5
23.2
94.3
2,024
,
2.73
19.61
1966 ‘
1967
6.5
6.8
44.5
47.3
‘
4.2
4.3
8.5
8.6
‘23.8
25.1’
95.4
95.4 ,
,
2,024.
2 ,000
2.80
2.92
‘
22.’75
22.88
.1968
6.7 ‘
50.1
4.2
8.5
26.8
106.1
2,024
3.15
23.27
1969
1970
7.0
8.6
56.4
70.9
‘
4.5
5.4
8.9
10.9
30.5’
36.7
109.5
109.4
‘
.
1,978
2,018
3.43
3.37
27.57
23.70
‘.1971
:1972,
10.3 ‘
9.3
85.6
91.5
6.3
5..6
,
11.7’
11.8
‘
42.4
48.1
118.6
154.5
1,857
2,107
‘3.62
4.08
32.20
34.57.
* Figures for
these years have ‘limited reliability.
Source: U.S.
Department of ‘Commerce, Census of Manufactures. ’
-------
As can be seen in Table 1-6, the majority of the employees are concentrated
in the larger sized operations with 67.7 percent of all employees and 66.1
percent of the production workers being employed by establishments with more
than 100 employees.
C. Segment Proportions of the Total Industry
While the preceding sections of this chapter have been concerned with
establishment data for the overall W-ine Industry, it is useful to segment
the industry according to winery types and their respective potential
impacts due to the imposition of effluent controls.
Wineries can be categorized into three different operational categories
and two different, location categories. As’mentioned previously, there
are the eastern wineries and the western wineries. Furthermore, these
can be either bonded wineries, bonded wineries with stills or tax— tid
wine bottling houses. As the location of the wineries will have signif—
i an.t influence over possible impacts, distinctions .bet een eastern and
western wineries will be made first.
Information from ‘industry sources and published ‘reports indicate that
western wineries will incur little impact due to the imposition of effluent
controls on the ‘Wine Industry. This is due to the fact that very little
effluent is generated and that which is generated is ei ther discharged
to a ‘municipal system or applied to the land such that none reaches water-
ways. Those western wineries without stills which do not discharge to
municipal systems usually collect the effluent in evaporation’ checks,
add ammonia to upgrade the pH (from 3.2 to 6.0), and then what has not yet
evaporatedis utilized for irrigation. It should be noted that the cli-
matic conditions for’the western wineries are such that a major portion of
the effluent ev,aporates in evaporation checks or can be disposed of to lagoons.
‘Those western wineries with’stills have the same wastewaters except that
they also generate wastewaters associated with stillage. There has been
considerable research done on the effects ‘of utilizing land application
as a form of disposing of stillage wastes. According to industry sources,
those wineries with stills not discharging to municipal systems already
meet the proposed guidelines. This is particularly evident in that in
California, where nearly all such wineries are located, the State water
quality standards are as stringent, if not more, as those proposed for the
guidelines. ‘
In view of the above, the determination was’ made that western wineries
(especially those in California) will not be impacted due to the imposition
of effluent controls. As such, the major emphasis of the impact aspects
of this report will be concerned with t,he eastern wineries.
1-12
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Table 1-6. The Wine and Brandy Industry employment-1972
Employment Size
All
Employees
Percent
of Total
Production
Workers
.
Percent
1-4
100
1.1
50
0.9
5-9
200
2.1
150
2.6
10-19
400
4.3
300
5.4
20-49
1,000
10.8
600
10.7
50-99
1,300
14.0.
800
14.3
1O0-249
2,400
25.8
1,400
25.0
250-499
1,200
12.9
. 80O
i4 3
00- 99
1,000-2,499 .
2,700
9,300
29.0
100.0
1,500
.5,600
•
: 6
100.0
SOu ce: .LJ1 S. D partrnent of Conimerce, ,Census of Manufactures, 1972.
1-13
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Of the three operational cateciories of wineries, wineries without stills
will be the only type which will incur any potential impacts, The
wineries with stills are almost entirely located in California and,
thus, are assumed to already meet guidelines. The tax-paid wine bottling
houses generate negligible effluent and subsequently have also been
eliminated from any detailed impact analysis.
Therefore, the major emphasis of this impact analysis will concern the
eastern wineries which do..not have stills. In total, there
are 148 wineries which will be subject to the impact analysis. (Note
only the• Western wineries located in California have been eliminated;
those in Alaska; Oregon, andWashingtori may be subject to impacts.) Of
these, approximately 84 can be classified as small, 33 can be classified
as medium and 31 as large.
D. Significant Impacts on the Industry
Because of the structure and competitiveness of the Wine’Industry, pollution
abatement standards when imposed on wineries discharging to surface waters
and user charges assessed to those discharging to municipal sewers can
have serious consequences on the industry itself. The magnitude of this
impact will, of course, depend on the level of investment required to meet
the specific standards. The smaller third -- and to some extent the
middle third -- of the witneries impacted are expected to be seriously
impacted. They may not be able to recover the cost of installing and
operating abatement facilities or paying user charges unless they have
access to lower cost facilities,expand,or mergc. The specific winery
impacts will of course depend on many factors such as capital availability,
size of operation, profitability of the winery, location and availability
of low cOst treatment strategies.
It is recognized that the irnpactof substantially increased user charges,
now and in the future, to wineries discharging to or planning to discharge
to municipal sewers is extremely critical to the industry, local business
communities and to consumers. However, the scope of the economic impacts
in this report pertain to those discha ging directly to navigable surface
waters..
1. Capacity of Low Cost Producers Relative to High Cost Producers
The capacity of low cost wineries connected to municipal sewers or
discharging directly relative to high cost wineries in the same position
is one of the more important factors in considering the impact of pollution
abatement costs imposed upon the industry. In the Wine Industry, the largest
fourth of the wineries produce approximately 9t percent of the total oroduction
volume. The middle two-fourths of the wineries produce about 9 percent,
and the smallest fourth bottle only 1 percent of the total volume. Due to
economies of scale, the larger wineries are alread9 expected to have a
definite cost advantage. The imposition of high pollution abatement costs
nn the smallest fourth of the wineries discharging directly and to a
large extent the middle two-fourths, are expected to result
1-14
-------
in further disadvantages of these low volume wineries. If these small
wineries are forced to shut down (unless low’cost abatement procedures
can be utilized), the low cost-high volume wineries in the industry will
most likely offset possible losses in capacity through expansion by acqui-
‘sition or plant expansion assuming firms can acquire the necessary capital
or by increasing the utilization of their existing facilities.
2. Factor Dislocation Within the Industry
Differential impacts from pollution abatement controls are expected within
the Wine I:ndustry, both in terms of type of fi:m and in regional location
of affected wineries.’ :The impacts expected and reasons for associated
dislocations are as follows.
a. Types of Firms and Location
As explained earlier, the Wine Industry is comprised of ‘many firms (multi!
single plant) differing in winery operations,’ size (rate per hour), capacity
and utilization of capacity, level of technology (new/old) and other factors.
Many of these factors were considered in the preliminary analyses ‘and one”
of the most critical measures in terms ,of assessing a plant’s. ability to
nthstand the impact of internalized pollution abatement costs is its overall
throughput size.
Marginal Firms - Within the industry, marginal firms are typically the
“small” firms. This is particularly true in terms of small firm’s ability
to financially withstand projected high capital investment requirements
of pollution abatement measures’. Such wineries often lack capacity to
pay out such investments (at the levels given). Many small.firms also
lack the capital-acquiring ‘ability of larger firms.
Within this framework, marginal firms faced with the decision to,either
curtail ,production or shutdown would most likely shut down. However,
pollution abatement investment costs can be an incentive t,o expand
production, riotlower it, in order to lower per unit costs for those
wineries having or able to install self-contained disposal facilities.
Winery closures are also expected to result where obsolescence ‘together
with rising operational and required regulatory capital needs cause total
costs of operation’ to be so high that continued operation is economically
unfeas’ible. For single winery firm closures, unemployment and loss of
market for local suppliers associated with the closing winery are expected
tb result. For some closed wineries that belong to multi-Winery firms,
various proportions of production and employees will shift to other wineries
belonging to: the firm; due to immobility some unemployment will occur, with
a corresponding loss of payroll and. local business. Other closed wineries
that belong to multi-winery firms may not be able to shift production
and are expected to have the same effects as the single winery firm
closures.
1-15
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Locational Impacts - As was discussed previously, the impact due to effluent
controls will definitely vary according to the location of the winery. Aside
from the obvious differences between western and eastern wineries, there
will exist some differences within the regions of the eastern portion.
Thés.e will primarily be attributable to varying climatic conditions which
could influence the type of treatment system required to meet guidelines.
It is also recognized that differences in state water quality standards and
the possibility of non-uniformity of enforcement within and between states
is another important factor in the impact on wineries. Even though this
problem is recognized, the impact of requl atory variability is not included
in this report, due to lack of quantitative and qualitative information.
3. Reasons for Dislocations
Reasons for the above type of firm and location-dependent expected dislo-
cations within the industry.have bean generally described. A summary in
terms of profitability and capital attainment is appropriate.
Profitability - Profitability of firms, but particularly the smaller,
inefficient and undercapitalized firms, will be. affected by pollution
abatement measures. While average incremental costs for pollution abate-
ment may eventually be passed through to consumers, the smaller firms are
expected to have much higher than average unit costs of abatement and
to drop out during the period necessary to achieve any consumer price
adjustments.
Economies of scale in pollution control are apparent, and this is to the
relative disadvantage of smaller firms. As previously suggested,some of
the wineries discharging direct might be forced out of the industry.
This would have ‘a limited desirable impact on •the remaining firms in that
pollution control costs could be spread over a larger volume. Thus,
the level of profitability of the surviving plants might be affected
less on the average.
In—plant modifications and operational changes which will reduce effluent
loads may or may not improve the profitability of those wineries which can
take advantage of them. In-plant modification costs and, savings must be
assessed and justified by individual wineries.
Capital Availability - Capital within the industry is obtained primarily
from . commercial sources outside the industry and from the investment ’of
profits. Additional capital requirements for financing pollution abate-
ment measures will principally be sought from such sources.
In this case, ability to obtain additional capital is expected to be:
determined by an individual firm’s projections of net returns with an
expanded investment program. Consequently, capital availability is
expected to be directly related to profitability--and the smaller, in-
efficient wineries will have difficulty raising the needed long and short
term capital to stay in business. In this sense, inability to obtain
capital will contribute to the, shutting down of marginal wineries.
1-16
-------
Firms which are able to pass through incremental cost of pollution abate-
ment and maintain positive profitability will be able to acquire capital
for increasing capacity--plant expansion,acquisition, etc. Currently,
pass throughs of rapidly increasing, and larger-than-normal proportions
of costs are difficult to expedite. Costs are rising rapidly and
are disproportionately large due to a nearly simultaneous inflation of
operational costs (labor, materials, raw material) with new investment
requirements imposed by regulatory bodies (FEA, OSHA, EPA). These increased
costs are difficult to pass through due to the recession wherin consumers
•are tending to resist any price increases through a lowering of consumption
to basic needs. Thus, plans cf expansion th ’oUgh acquired capital.wil1.
tend to bé carried out to the degree incremental pollution abatement,
energy, safety and inventory costs can be passed through to consumers.
The ability of firms to obtain capital will also depend on the state of
the economy and the amount of money available for lending. With a large
amount of available funds, many industries and firms will.be encouraged to
borrow funds. Competition forfunds among industries is dependent upon
the money supply and relative profitability of individual firms.
4. Narrowing the Study Scope
The preceding has attempted todescribe an overall picture of the Wine
Industry. In the remainder of this analysis, efforts will be madeto con-
centrate on those wineries which could be subject to potential impacts
due to the imposition of effluent controls. This will be accomplished
utilizing representative model wineries to estirnateimpacts and extending
these impacts by association to the wider spectrum of wineries which cor-
respond to the model wineries.
1-17
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II. FINANCIAL PROFILE OF THE INDUSTRY
Firms in the Wine Industry are primarily either family or closely held
corporations or divisions or subdivisions of large, often multi-plant
operations. As a result, financial information relating’to a:.si.ngle
winery is difficult to obtain. However, by relating information avài—
lable frOm a variety of sources, a picture of the Wine Industry can be
attempted. Information used to develop financial profiles was integrated
from several sources, including the Census of Manufactures, Annual Survey
of Manufactures andassociated published indus ry.operational and
financial statistics.
A. Sales and Taxes
For 1974, the Wine Industry’s value of shipments amounted to$1,063.O
million (Table I l-i)., This compares to $590.9 million in 197.0 and $279.3
million in 1960. While the above data reflect the value of the industry’s
shipments, Standard and Poor’s 1/ estimate consumers expenditures for all
wines (domestic and imported) to be $2.6 billion in 1974. This was up
about 8 percent from the $2.4 billion estimated in 1973. According to
Standard and Poor’s, mostof the 1974 increase in sales.was due to higher
prices, as 1974 represented the smallest rate of volume growth (1.5
percent for all wines) experienced in recen years. For 1973 the rate
was 3 percent and from 1969 to 1972 the rate of volume growth fluctuated
between 10 and 16 percent.
Wineries, besides generating annual sales, also generate substantial tax
revenues.forthe federal, staI e and local governments. In 1973 the federal
tax revenues amounted to $192.6 million or approximately 20 percent of the
total value of shipments (Table 1 1-1). The federal taxesare collected
at a rate of 17 cents per wine gallon fOr still wines of less than 14
percent of alcohol by volume, 67 cents per wine gallon for wines Over 14
and less than 21 percent, $2.25 per wine gallon for wines over 21 but less
than 24 percent, $3.40per wine gallon for champagne and other. sparkling
wines and $2.40 per wine gallon for artifi .ially carbon ted wines. State
and local taxes on wines vary and as such no attempt to.describe these
taxes will be made.
‘Standardand Poor’s, Industry Surveys - Liquor , October 16, 1975 (Section
2).
‘I —i
-------
Table 11—1.
The Wine Industry, annual value ol shipments, production, consumption.
Domestic Wine
Enter.ing U.S.
Per Capita
Federal
.
Year
Total Value
of Shipments
Gross Domestic .
Wine Producti ’onl/
Distribution
Channels
Consumption
of Wine /
Wine Tax
Collections
($ Million)
(Million Wine Gallon)
.
(Million wine
gallons)
(Wine Gallons)
.
($ Million)
1960 279.3 166 5 152.6 1.51 100.4
‘1961 304.5 169.5 159.5 1.57 97.8,
‘1962 337.7 183.6 154.0 1.52 99.9
1963 368.3. . 194.1 161.5 1.58 103.7
1964 385.1 193.0 170.1 1.64 110.2
1965 396.2 219.5 173.4 1.66 112.4
1966 400.8 193.9 173.2 1.65 112.6
‘ .1967 410.2 206.1 184.0 1.74 122.5
1968 445.7 214.5 191.4 1.79 127.3
1969 492.8 270.1 210.9 1.95 157.4
1970 590.9 255.9 , 237.3 2.17 163.3
1971 747.3 361.9 269.1 2.43 177.3
1972 865.0 318.1 289.9 2.64 181.2
1973, 941.0 33 J.1 ‘ 292.0 -2.68 192.6
1974 1,063.0 353.5 298.0 ‘ 2.65 N.A.
- -‘Gross wine production is quantity of wine removed fror fermenters plus ‘increasés.after fermentation
by amelioration, sweetening and addition of wine spirits, less withdrawals for.’distillation. Excludes
distilling material’ produced. . . , ‘
population of age 21 years and over including persons living in areas where sales of alcoholic
beverages, are prohibited. ‘
Sources:.Bureau of Census, the Wine Institute and the’ Bureau ofAlcohol, Tobacco and Firearms.
-------
In terms of domestic production of wines, the industry has experienced
a tremendous growth beginning in 1969. Prior to 1969 the industry showed
moderate growth from 166.5 million wine gallons in 1960 to 214.5 million
wine gallons in 1968. In 1969 the gross domestic wine production increased
to 270.1 million wine gallons and in 1974., there were 353.5 million wine
gallons produced (Table IL-i). ‘ ‘
:‘Another measure of production which is perhaps more indicative of the
industry’s sales is the quantity ofdomestic wine which enters the U.S.
distribution cha n’els. This i based on the fact that many wines are
aged for varying periods prior to their release for sale and as such the
annual production may be distributed over a period of years. For 1974,
the quantity of domestic wines entering U.S. distribution channels totaled
298.0 million wine gallons. This quantity has shown a steadily, increasing
trend and has increased ‘from 152.6 million wine gallons in 1960 to 237.3
million wine gallons in 1970 to the 1974 quantity.
The 1972 Census of Manufactures’ estimate of value of shipments for the
industry’was based on information provided by 213 establishments. This
gives the shipments for the average winery to be $4.06 million (Table 11—2),
compared to $2.0 million in 1967.
In 1972,. according to Census data, the average winery ‘had ‘shipments of Just
•ove’r $4 million and 44 employees, while the actual wineries in the industry
varied consid rably. Actual wineries ranged from small operations with less
than 5 employees and annual shipments value.d at $124,000 to extremely large
operations employing over 500 employees and, annual shipments of nearly
$100 million.
B. Distribution of Sales Dollar
Some slight changes have occurred in’the distribution of the sales dOllar
for the Wine Industry from 1967 to 1972. These changes are most signif-
icant for the raw materials portion; its share of the sales dollar ‘has
increased from 57.5 percent to 62.0 percent (se below). This increase ‘Was
coupled with proportionate decreases in payroll and o’ther operating costc.
Distribution of Sales Dollars ( Percent)
1967 ‘ “ 1Y72
Total Sales 100.0 100.0
Raw materials 57.5 62.0
Payroll ‘ 11.5 10.6
Other operating costs, interest, ‘ ‘ ‘
taxes and profits 31.0 27.4
I I -3
-------
Table 11—2. The. Wine and Brandy Industry, value of shipments, value added and employees, census years 1963, 1967
and 1972.
Item
•
Units
.
1963
1967
.
1972
Industry
Total
Per
Establishment
Industry
Total
Per
Establishment
Industry
Total
Per
Establishment
Establishments
No.
222
—
205
-
213
-
Value of Shipment
($ Mu.
)
368.2
1.66
410.2
2.Oft
864.9
4.06
Value added
($ •Mil.
)
137.3
0.62
196.8
0.96
407.9
1.92
Total Employees
No.
6,100
27
6,800
33
9,300
44
Source: U.S. Department of Commerce, Census of Manufactures .
-------
This change in the distribution may be attributable to rather significant
increases in the costs of raw materials, proportionately higher than
increases in labor costs and other expenses. Raw materials utilized
by wineries consist of grapes, purchased wines for blending, glass con-
tai’ners and other supplies and materials. The, majority of this increase
may be explained by the substantial increases in the prices of .grapes
which wineries purchase. (As an example, Table 11-3 depicts average
prices paid to New York State growers for grapes.) However, increases
also have been experienced in the ‘prices of glass containers as well as
the additional supplies utilized by the wineries.
C. Earnings
According to Standard and Poor’s, the Wine Industry has recently exper-
ienced a decline in earnings. Up to 1973, the industry achieved
impressive earnings progres’s which was primarily the result of volume
growth. With wine consumption having grown 10 percent or more in the
four years prior to 1973, offsetting price increases in recognition of
higher costs were implemented without noticeable consumer resistance.
However, in 1973 and on through 1975 the industry experienced ,a sharp
reduction in the rate of consumption growth. This stagnation was par-”
tially associated with relatively large increases in food costs, parti-
cularly in 1973,and general acceleration in inflation which lowered
consumers’ real incomes. Aside from lowering consumers’ income, inflation
also accelerated increases in costs s’uch as those for bottles, paper
packaging and transportation.
‘The outlook for the Wine Industry ‘at the present is somewhat unstable
due to the unpredictability of the economic environment. However, Standard
and Poor’s indicate there is good reason to believe that consumer demand
will again strengthen, particularly since the consumer category associated
.with wine,drinkers (adults between the age of 25 and 44 years /) should
increase in number by about 29 percent during the next ten years. .Even
if demand for wine. does.strengthen, the overall effect on the industry’s
earnings’will still be dependent on the effects of inflation on wineries’
raw materials.
The aggregated earnings for the Wine Industry and th,e Distilled Spirits
Industry indicate that between the years 1968 and 1971 the aggregated
Alcoholic Beverage Industry (excluding malt and malt beverages) has, not
f’aired very well. According to the Internal Revenue Service data
(Table 11-4), the average net profits before taxes has declined from
3.7 percent of net sales in fiscal year 1968-69 to a low of 1.8 percent
in 1970-71. In 1972, the latest year for which data are available, the
percentage increased to 2.0 percent. While these data do reflect
- 1 Newsweek , National Wine Survey, January, 1975.
‘I-S
-------
• Table.II-3. Grapes: Average price paid to New York State growers by wineries and
processing plants, by::variety, 1967-1974
Variety
.
Year Purchased
.
. .
,
1967
, 1968
1969
1970
1971
1972
1973
1974
.
Concord
101
.
123
158
Dollars
per ton
.
i70 ’
211 ’
213-i”
156 .
139
Niagra
122
127
176
179
178
.
187
1981”
237 ’
Catawba
176
181
237
239
243
245’
.259
300. ?!
Delaware
198 .
202
241’
245
‘ 154
259
294
360
Elvira
130
134
172
‘ 173
172
172
‘‘172
210
Ives
200
215
370
370
370
370
370
400
Dutchess
200
?15
305
305
305
305’
335
430
Isabella
‘183
191
305
305
305
305
305
315
French Hybrids
172
182
255
227
239
240
245
309
- -‘ 1 Revised.
. ? “Prel iminary ,
‘Pre1imihary Concord price based onpayments in full. It does not include plants paying
advances only.
Source: USJA, SRS, in cooperation with New York. Crop Reporting, Service, Survey ‘of
Wineries and’Grape Processing Plants,. New York 1974, Release No.’ 2, January
1975.
I 1-6
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Table 11-4. The alch•3lic beverage, industry, except malt liquors and malt, net profit before taxes, by asset size,
1969—1972..
‘
s of Assets ($000)
‘ ‘
Fiscal
Year
Under 100 — 250 - 500 - 1,000 - 5,000 - 10,000 - 25,000’- 50,000 — 100,000. - 250,000 — Total
100 250 500 1,000 5,000 10,000 25,000 ‘50,000 100,000 250,000 or more Industry
‘ Percent of Net Sales
1968-69
5.7 -0.6 - —5.8 0.0 3.7
6.8
8. 4.5 4.0 2.6 3.7
1969-70
1.7 3.8 ‘-30.9’ -3.9 4.7 5.6
3.3
7.3 5.4 4.1 0.7 2.1
1971 71
- . 3.0 -36.3 -Q.2 2.6’ 5.6
‘2.2
6.6 4.5 3.1 0.6 1.8
1 7i-72
-2.7 3.8 3 7 -5.2 ‘ 4.2 . ‘ 4.4
5.1
4.1 5.8 3.8. 0.4 , 2.9’
So” ’ ce: Department of Treasur y, Internal Revenue Service, Source. Book of Statistics of’ Income , Annual.
-------
somewhat narrow margins it should be noted that they represent the aggre-
gated industries and not the Wine Industry alone.
Table 11-4 also indicates profits by the size of the operation; As
would be expected, the smalleroperations. generally were associated with
the lower and unstable profits and the larger firms maintained reasonably
steady and higher profits.
D. Ability to Finance New Investment
The ability of a firm to finance new investments for pollution abatement
is a function of several critical financial and economic factors. In
general terms, new capital must come from one or more of the following
sources: (1) funds borrowed from outside sources; (2) equity capital
generated through the sale of common or preferred stock; (3) internally
generated funds -- retained earnings and the streamof funds attributed
to depreciation of fixed assets.
For each of the three major sources of new investment, the most critical
set of factors is the financial condition of the individual firm. For debt
financing, the firm’s credit rating, earnings record over a period of
years,-stability of earnings,. existing. debt-equity ratio and the lenders’
confidence in management will be major considerations. New equity funds
through the sale of securities will depend upon the firm’s future earnings.
as anticipated by investors, which in turn will reflect past earnings
The firm’s record, compared to others in its own industry and to firms
in other similar industries, will be a major determinant of the ease
with which new equity capital can be acquired. In the comparisons,
the investor will probably look at the trend of earnings for the past
five years.
Internally generated funds depend upon the margin of profitability and the
cash flow from operations. Also, in publicly held corporations, stockholders
must be willing tO forego dividends in order to make earnings available
for reinvestment.
The condition of the firm’s industry and general economic corditions are
also major considerations in attracting new capital. The industry will be
compared to other similar industries (i.e., other beverage industries)
in: terms of net profits on sales and on net worth, supply-demand relation-
ships, trends in production •and consumption, the state of technology,
impactof government regulation, foreign trade and other significant
variables. Declining or depressed industries are not good prospects for
attracting new capital. At the same time, the overall condition of the
domestic and international economy can influence capital markets. A firm
is more likely to attract new capital during a boom period than during
a recession. On the other hand, the cost of new capital will usually be
higher during an expansionary period. Furthermore, the money markets play
a determining role in new financing.
11-8
-------
These general guidelines can be applied to the Wine Industry by looking
at general economic data and industry performance over the recent past.
1. General Industry Situation
As was depicted in Table 11-4, the Alcoholic Beverage Industry has
experienced a declining trend in its profits during the past few years.
However, Standard and Poor’s have projected that the industryhas goód
earnings potential from the increasing number of adults in the wine
drinking age group.
Total assets and liabilities of the alcoholic beverage industry are shown
in Table 11-5 for the years 1968-1969 through 1971-72. From the table,
it is apparent that the industry’s fixed assets represent approximately
42 percent of all assets and that citrrent assets represent approximatejy
58 percent. Also, it is apparent that of the total liabilities, long
term debt represents approximately 26 percent, current liabilities
represent 30 percent and net wc•rth represents 44 percent.
2. Expenditures for Plant and Equipment
New expenditures. as reported by the Annual Survey of Manufactures and
the Census have increased from $5.1 million in 1960 to $44.4 million
in 1972 (Table 11-6). The yearly expenditures have fluctuated from
year to year, but overall have been increasing.
A closer look at the $44.7 million spent as capital expenditures in
1972 (depicted below) reveals $11.7 million were spentfor new structures
and addition to plants, $32.0 million for new machinery and equipment
and the remainder, $0.7 million, was spent to .purchase used plants
and equipment.
As also depicted below, comparable data for 1967 reveal that the ind.ustry
utilized a greater portion of its capitalexpenditures for new machin ry
and equiprnent,and a smaller portion for new structures and additions to
existing plants and for used plants. and equipment. This can be.
interpreted to suggest that the industry—is moving toward the upgrading
of existing facilities instead of the construction of new facilities.
Expenditures for Plants and Equipment
1967 1972
$ Million Percent . $ Million Percent
Total 10.6 100.0 44.4 10O.O
New Structures & Additions
to plants 3.5 33.0 11.7 26.3
New Machinery & Equipment 6.8 64.2 32.0 72.1
Used Plants and Equipment 0.3 2.8 .0.7 1.6
11-9
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Table 11-5. The alcoholic, beverage industry, except malt liquor and malt,,assets and liabilities, 1969-1972
1968—69
1969—70
197
0—71
:
1971—72
($ Mu.)
(Percent) ($ Nil.)
(Percent) ($ Nil.)
(Percent)
($ Mu.)
(Percent)
Liability & Equity
Long Term Debt
Current Liabilities
Net Worth
Total Liabilities
and Equity
Assets
Current Assets
Fixed Assets
Total Assets
1,683.3
1,352.0
3 , p.35. 3
690.2
757.6
1,587.4
3,035.3
55
45
100
23
25
52.
100
3,207.5
2,288.1
5,495.7
1,488.4
1,756.7
2,250.5
5,495.6
• 58 3,418.4
42 2,343.8
100 5,762.2
58
42
100
27
32
41
100
3,278.1
2,380.8
5,658.9
1,464.8
1,785.9
2 ,408. 2
5,658.9
59
41
100
28
28
44
100
26
32
42,
100
1,592.2
1,629.8
2,540.1
5,762.2
Source: Department of Treasury, Internal Revenue Service, Source Book of Statistics of Income , annual.
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196O
19611
1962
.1963
1.964
1965
1966
1967.
1968
1969
1970
.1971
1972
* Limited reliability.
Capital
Expend i.tur.
( $ Million )
*5.1
*5 .7
*10.0
73
*113
11
ii.
11.8
•10.3
14.0
15.8
*352
40.4
44.4
Source: U.S. Department of Commerce, Census of Manufactures .
Table .11-6. The Wine and Brandy Industry, Capital
Expenditure 1960 through 1972
Year
11—11
-------
3.. Capital Availability
In summary, it would appear that the Wine Industry can be categorized into
two types of financial positions in terms of the availability of capital
to utilize for expenditures on pollution controls. First, there are the
large diversified firms who have experienced reasonably steady profits
and through diversification have been able to maintain adequat2 cash
flows. For these firms the acquisition of additional capital for pollution
controls may be of concern but. should not be a major problem.
The other financial •position will be encountered by the smaller firms
who do not have the available sources from which additional capital can
be readily generated; These firms will primarily have to rely on inter-
nally generated capital (if available) or.attempt to borrow it. Depending
on the firm’s potential and the industry’s outlook, some of the smaller
firms may.encounter significant problems in obtaining capital.
E. Cost of Capital - After Tax
Return on invested capital is a fundamental notion in the U.S. business.
It provides both a measure of actual performance of a firm as well as expected
performance. In this latter case, it is.also called the cost of capital.
The cost of capital is defined as the weighted average of the cost of
each type of capital employed by the firm, in general terms equities and
interest bearing liabilities. There is no methodology that yields the
precise cost of capital, but it can be approximated within reasonable
bounds.
The cost of capital was determined for purposes of this analysis by esti-
mating performance measures of the industry. The weights of the two res-
pective types of capital for the Wine Industry were estimated at 37 percent
debt and 63 percent equity. The cost of debt was assumed to be 10.0
percent. The cost of equity was determined from the ratio of earnings
to net worth and estimated to be 9.5 percent.
To deterr ine the weighted average cost of capital, it is necessary to
adjust the before tax costs to after tax costs (debt capital only in this
case). This is accomplished bymultipl.ying the costs by one minus the tax
rate (assumed to be 48 percent). These computations are shown below and
result in the estimated after-tax cost of capital being 7.9.percent.
Weighted Average After-Tax Cost of Capital
Before Tax After Weighted
Item Weight . Tax Cost Rate Tax Cost Cost
Debt .37 10.0 .48 5.2 1.9
Equity .63 - 9.5 . 6.0
11-12
-------
III. MODEL PLANTS
The Wine Industry is comprised of many wineries which utilize slight
variations of a bas.ic process to produce differentiated typesof
wines As stated previously, the industry consists of establishments
primarily engaged in the manufacturing of wines, brandy or brandy spirits
utilizing processes involving fermentation, maturing, blending and
bottling. As this chapter is concerned with the development of economic
model plants representative of those wineries which potentially could be
effected by the imposition of’effluent controls, the primary emphasis
of this chapter will be those wineries without stills located primarily
in the Thst. This determination has been made since the western wineries
•(California) utilize land application for the release’ of their effluent,
and according to the’ Development Document, ’ no effluent is discharged to
navigable waters. Wineries with stills have also been excluded from
further.analysis as these are all located in California and the above
situation applies. Finally, those establishements which blend and’
bottle wines and brandy have also been excluded as. they generate little’
effluent and none are known which discharge to navigable. waters.
A. Types of Plants
Those establishments without stills can typically be categorized’ into
two different types of wineries. FIrst, and perhaps the most common, are
those which manufacture only table wines, util.izing only wines produced
at the facility. The second category is characterized by those wineries which
produce not only table wines but also purchase brandy and wine spirits
to produce dessert or fortified wines. While these latter winériesdo
exist, their initial processes and effluent characteristics are not sif-
nificantly different from those’ wineries which produce only table wines.
As such, the model wineries developed represent those wineries which
produce table wines only.
The winery produces wine product,s utilizing six basic steps. These
steps include: (1) destemming and crushing; (2) fermenting;. (3), pressing;
(4) clarification; (5) maturation; and (6) bottling. Each of these steps
will be discussed briefly. ,
1. Destemming ‘and crushing — After picking, grapes are transported to the’
winery in’ large containers or trucks which after their arrival are sampled
and.weighed. These then are dumped intothe destemmer/crusher’which
separates the grape from the stem and crushes the grape, There are
several different types of destemmer/crushers but basically the end
result is the same. (It should be noted the Garolla type removesthe
leaves and sterns from the grapes and thus only the crushed grapes’ are
transferred to the fermenters.”
2. Fermentation - The juice, seedsand skins, now known as “must , are
then pumped to the fermentation vats where small amounts of sulfur
dioxide are added to inhibit the growth of wild yeast and then a pure
yeast starter is added. The fermentation process begins in which the
grape sugars are converted into nearly equal parts of ‘alcohol and carbon
II I—’l
-------
dioxide. When the fermenting must has attained the desired amount of
color and tannin, then it is drawn off the pomace as “free—run” juice
and pumped to a finishing tank where fermentation may be processed to
completion. Usually within about six weeks after crushing the final fer-
mentation is complete.
Slight differences do exist between the fermentation practices utilized
by western and eastern wineries. The above description typifies the
western practice. In the east, however, most wines are produced by
“hot pressing.” In this process, pulp from the stemmer-crusher is
heated to about 1400 F and held for 30 to 60 minutes. During this
holding period, the pigment or coloring matter is extracted from the
skins. The heated pulp is then pressed, the juice cooled and fermented.
Finally to produce white wines, both in the east and west, the pulp from
the’ stemmer-crusher is pressed and only the juice fermented.
3. Pressing - The pressing operation is utilized to extract any remaining
liquid from the pornace once the “free-run” wine has been removed. The
resditing “press-run” may be used for ‘the production of less expensive
wines o’ itñiay be recombined with the original free-run. The remaining
pressed pomace is usually hauled and spread on the vineyards or is dried,
and sold as livestock feed.
4. Clarification - Once completely fermented, the liquid now called wine,
is decanted or “racked” off the sediment of yeast pulp and tartarates known
as lees. This procedure may take place three or four times. During this
time the wine usually also proceeds through a series of clarification
processes which consist of a variety of filtration systems.
5. Maturation - The aging process varies in length.and consists primarily
of the wine’ being placed in wooden, stainless steel or concrete containers
‘which Usually are kept at low temperatures. This reduced temperature is
necessary to hasten the precipitation of tartarates which otherwise
might be deposited after the wine has been bottled. As the cost of
refrigeration is expensive the use of ion exchange resins as an alternative
process to aging has come into limited practice. ‘ In this ‘process potassium and
calcium ions are replaced with sodium or hydrogen ions.
6. Bottling - Most wineries find it more practical to bottle their own
wines, although wine may be shipped in tank cars to plants where the only
operation is bottling. The bottles are filled and corked under sterile
conditions. There is little spillage involved except in the case of
breakage. The wine is ‘inspected for clarity prior to labeling and casing,
and this operation for the most part, is entirely automated.
111—2
-------
B. Sizes of Wineries
Th.e value of shipments of the Wine Industry in l972was $865 million
according to the Census. This gives an average for the 213 establish-
ments of $4.1 million. This figure, however, is misleading as it reflects
the:average of all wineries (East and West) as well as all wineries regard-
less of whether or not theyoperate a still.
According to the Wines and Vines Directory in 1974, there were 369 wineries
comprising the Wine Industry. Of these, 221 were located in California
which have been eliminated from this discussion and thus in l974there
were 148 wineries which would fall under the scope of this analysis.
The criterion for defining the size of the model wineries is the average
annual quantity of wine produced at he winery. Three sizes of existing
model wineries .‘ere developed , being labeled, small, medium and large and
two new source wineries, medium and large.
The model wineries are depicted in TableIII-l. For the models, the
annual quantity of wine produced was 27,200 wine gallons for the sñiall
winery, 194,000 gallons for the medium model winery and 2,511,000 wine
gallons for the large winery. The annual quantities of wines produced
for the new source wineries correspond •to the sizes of the medium and
large existing wineries. Other relevant infbrmation concerning the
winery models are also shown on Table 111-1.
The financial profiles for eachof the model wineries are :hown in
Table 111-2. These profiles were derived from information available
from a variet.y of sources including, the Census of Manufactures, Wines and
Vines , Internal Revenue Service and the Bureau of Alcohol, Tobacco and Firearms.
C. Investment
The estimated book value and salvage value for each model winery are
shown in Table 111-3. Alsoshown are current assets, current liabilities
and net working capital.
1. Book Value of Investment
The estimates of book value of assets were developed from data available
from published sources as well as limited data from industry sources.
The estimates were computdd utilizing a derived estimate of asset value
per gallon of wine produced. The values per wine gallon were $6.50, $4.00
and $2.50 for the small, medium and large existing model wineries, respec-
tively. The value for both the new source models were estimated to be $8.50
per gallon of wine produced.
2. Salvage Value
‘The salvage value of wineries will vary widely from facility to facility,
depending upon the’ age of the equipment and its condition, the age of the
plant and its condition and the lOcation of the facilities. In some
situations, the salvage value of old, obsolete, wineries will be equal to
site value plus the scrap value of the equipment.
111—3
-------
Large
model wineries, descriptive information
Existing New Source
Medium Medium Large
Table 111-1. The Wine Industry,
Size
Small
Annual Production (wine
gallons)•
27,200
.
194,000
2,511,400
194,000
2,511,400
Fermenting Capacity (wine
gallons)
.
11,600
.
59,800
500,000
59,800
500,000
Days Crushing per Year
‘50
60
60
60
60
Hours Crushing per Day
12
12
18
12
18
Number of Corresponding
Establishments
84
:
33
31
- ‘-
.
--
111-4
-------
The Wine Industry, model wineri
Table 111-2.
es financial profiles
.
Existing
.
N w Source
.
Small Medium
Large
Medium
Large
Annual Production
(l;000 wine gallons)
27 .2
194.0
2,511.4
:
194.0
2,511.4
Sales ($3.00/gal.)
81.6
582.0
7,534.2
582.0
7,534.2
•
Costs
.
.
.
Materials
44.9
335.8
4,502.5
291.0
3,767.1
Labor
18.8
87.3
•
828.8
50.0
... 480.8
Other
•
.8.8
81.0
994.5
49.0
503.0
Total Costs
72.5
504.1
6,325.8
390.0
4,750.9
Cash Earnings
9.1
77.9
1,208.4
192.0
2,783.3
.
Less
.
.
:• Depreciation
5.3
34.9
.376.7
98.9
1,427.2
Interest .
0.8
5.8
75.3
•5.8
75 3
Pre-Tax Income
Income Tax :.•
3.0 .
0.7
37.2
ll..4
756.4
3.56.6 .
87.3
354
l,?80.8
608.3
After-Tax Income
2.3
25.8
399.8
51.9
672.5
Cash Flow
7.6
60.7
.776.5
150.8
2,099.7
111-5
-------
Table 111—3. Ihe Wine Industry, esti;nated capital costs for model wineries
I-
:
Existing New Source,.
.
Small Medium. Large Medium Large
Book Salvage Book. Salvage Book Salvage Book Salvage Book Salvage
.
($1,000)
Total Fixed Assets
176.8 35.4 ?76.0 155.2 6,278.5 1,225.7 1,649.0 399.8 21,346.9 4,269.4
Current Assets
81...6 81.6 517.6 517.6 4,187.8 4,187.8 436.5 436.5 5,650.6 5,650..6
Current Liabilities
4 .3 45.3 323.5 323.5 2,991.3 2,991.3 272.8 272.8 4,036.2 4,036.2
Net Working Capital
36.3 36.3 194.1 194.1 1,196.5 1,196.5 163.7 163.7 1,614.4 1,614.4 ,
Total Invested Capital
213.1 71.7 970.1 349.3 7,475.0 2,422.2 1,812.7 5 63.5 21,910.4 5,883.8
.
-------
There is a market for certain types of used machinery and equipment,
however, this is limited primarily to modification of existing operations
as virtually all new wineries begin with all new equipment. As no data
are available on actual salvage values for wineries arid only a limited
market exists forused equipment, it is difficult to estimate; the sal-
vage value of plants closed due to the added costs of effluent controls.
For purposes of this analysis, the estimated salvage value has been
determined based on 20 percent of the book value of the winery’s assets.
3. Operating Capital
Current assets,, current liabilities nd net working capital were also
shown in Table 111-3. Current assets were estimated to represent 100
percent of sales for’ the small winery model, 90 percent for’ the medium
sized model, 55 percent for the large model and 75 percent for the NSPS
models. ‘
Current liabilities’ were estimated utilizing a current ratio (current
assets divided by current liabilities) of 1.8 for the small model, 1.6
for. the medium models and 1.4 for the large model wineries.
D.. Model Winery Capacity and’ Utilization
As wineries vary from one to another, t,here appears.to be ‘no industry
rule ‘by which the model wineries’ capacity or utilization can be estab-.
lished. The limiting factors for most wineries are the capacity of the
fermentation and wine storage as well as the availabi1ity of grapes.
With the recent gain ‘in popularity of wines, ‘the industry has experienced
rather significant increases in the overall capacity ‘of. wine which can be
stored. This storage capacity still can be,a limiting ‘factor s ‘was the
case in 1975 when the industry experienced an unusually large grape crop.
This large crop caused the grape price to drop and accordingly most
wineries utilized all available storage to take advantage of the cheaper
grapes.
While the 1975 grape situation may be out of the ordinary, it is fare—
seen by some industry memb. rs that wineries’ will continue to expand
(primarily in storage capacity). This expansion is in expectation of
future increased demand.
In’ view of the’recent industry situation, it was determined that the
model wineries would operate at near capacity levels with the primary’ linli—
tation being storage capacity.
111—7
-------
The Wine Industry can be characterized as having a highly.seaSoflal production
with the ripening of the grape being the, primary factor.
In terms of seasonal sales, as can be seen in Table 111-4, the months of
September and October represented 64 percent of the industry’s yearly still
wine withdrawals. The major reason for these large monthly withdrawals is
that the largest months for wine sales are November and December, the holiday
season. Thus, the high withdrawal rate for September and October reflects
shipment from wineries to wholesalers and retailers in preparation for the
peak holiday months.
E. Cost Structure of Model Plan s
The cost structures for the model wineries were shown in Table 111-2.
Major items are discussed below.
1. Materials
The majority of the model’s expenditures for.materials isattributable
to the purchasing of grapes. In 1972, grapes represented 33 percent of
the industry’s materials consumed. According to the Census, the next
most significant material purchased was wines to be used for blending.
Following purchased wines, the industry’s major purchases were for glass
containers and all other materials, containers and supplies;
2. Labor
Labor represented one of the more difficult, costs to estimate as wiheries
are highly seasonal and accordingly many wineries (especially the smaller
ones) do not employ their people throughout the year. Many employees
wii.,1 work only 3 or 4 months per year during the peak season. These
part-time inoividuals are often women however some are men.
3.. Supplies and Other Costs
This cost classification includes miscellaneous other costs as well as costs
for fuels and indirect costs (i.e., administrative costs).
4. Depreciation and Interest
Depreciation was derived from IRS data and determined to be, expressed as
a percent of the book value of assets, 3.percent for the small winery,
4.5 percent for the medium model and 6.0 percent for the large existing.
as well as the new source wineries. These varying percentages are based on
the assumption tha.t most wineries data back prior to prohibition (1919 to
1933)’and although wineries have updated, there has been a trend for the
larger wineries to modernize at a greater rate than the smaller wineries.
Thus the portion of assets depreciable would vary.
Interest was estimated to be one percent of the annual ‘sales.
1.11-8
-------
Table 111-4. The Wine Industry, monthly withdrawals
of still wihes, FY 1974
•Month Total Still Wine Withdrawals
(Million Wine Gallons)
July 3 .4
August 28.
September 146.; 7
• October 153.0
November
December 30.6
January 11.9
February 11..
March 4.8
April 9.6
May
• June 11.3
Source: Department of the Treasury, Bureau of
Alcohol, Tobacco and Firearms, Summary
Statistics , 1974.
IIt•-9
-------
5. Total Costs
Material costs for the existing wineries ranged from 55 percent of total
sales for the small winery to 60 percent for the large model winery.. Labor
represented the. greatest percentage for the small winery, being 23 percent.
Labor for the medium winery represented 15 percent of the sales dollar and
for the large winery model, labor represented 11 percent. Finally, the ex-
pen.sés for supplies and other costs ranged from 10.8 percent for the small
model to 13.9 and l3.2for the medium and large winery models, respectively.
Thus for the model wineries, total costs for the small model were estimated
to represent 88.8 percent of its sales dollar. For the medium and large
model wineries, total costs were estimated to be 86.6 and84.2 percent,
respeôti vely. .
The costs for the new source winery models •differed in that they were assumed
to operate on a more efficient utilization rate with fewer employees. This
was based on the assumption that these new wineries would have the latest
equipment and utilize the most up-to-date techniques.
F. Annual Profits
After-tax income, return’Dn sales, both pre-tax and after-tax, and return
on total invested..capital for the various sized model wineries are depicted
in Table.III—5. It should be noted that the model wineries were based on
average 1973-74 conditions as no later published sources of information
were available.
C. AnnualCash Flows
Estimated annual cash flows for the different sizes of models wineries
are shown in Table 111-6. Cash flow as calculated represents the sum
of after-tax income plus depreciation. In the table it is shown in
absolute dollars, as a percent of sales, and as a percent of total in-
vested capital.
As a percent of salesthe existing models’ cash flows range from a low of 9.3
percent to a high of 10.4 percent, or about 10 percent for all three
model s. .
Cash flows as a percent of total invested capital for the models reveal
a larger range; increasing as the size of the model wineries increase.
111-10
-------
Table 111-5. The Wine Ind stry,n t income, returns on sales and
investments for model wineries
Size of
Model Winery
After-tax
Income
Return on Total
Returndn.Sa1e . Invested Cápi. al
Pre-tax After-tax Pre-tax After-tax
.
Existing
(Dollars)
:
Percent,
‘
Small
2,300
3.7 2.8 ‘ 1.4 1.1
Medium
25,800
,
6.4 4.4 3.8 2.7
Large
‘399,800
.
10.0 5.3 10.1 5.3
.
New ’.Source
S
Medium
51,900
15.0 8.9 4.8 2.9
‘Large
672,500
17.0 ‘ ‘8.9 ‘5.8 3.1
it I—U
-------
Table FII-6. The Wine industry, annual cash flows for the model wineries
Cash Flow
Annual Cash Flow as a percent
• Size of. Cash as a percent of’Total Invested
Model Winery Flow of sales Capital
• • (Dollars) (Percent) (Percent)
Existing
Small 7,600 9.3 • 3.4
Medium 60,700 10.4 6.3
Large 776,500 • • 10.3 10.4
New Source :
Medi um 150,800 • 25.9 8.3
Large 2,099,700 27.9 9.6
111—12
-------
IV. PRICING PATTERNS
Historically the price of wine has shown a relatively constantannual
increase. This increase is attributable to several factors with .the
more significant being increased ingredient costs and increased consumer
demand.
A. Price Determination
The determination of prices for winesinvolves a complex interaction
of consumer demand and attitudes,the available supply and government
taxes. While the supply and taxes influence the overall determination
c f prices, consumer demands and attitudes dorninatethe actual price
determination process.
1. Consumer Demand and Attitude
Consumer demand can be defined as the quantity of wine consumers are willing
to purchase at the current level of prices. Historicailywiné.demand
(consumption) has increased since 1960 at an annual average rate of 5.1
percent. This increase, however, has not been steady as the annual rate
of increase has fluctuated between a low of minus 3.1 percent in 1962
to a high of .13.4 percent in ‘1971 (Table IV-1). During the most recent
six years, the àveragè annual. increase has. been much higher than for the
preceding years, with an average increase. for 1969 to 1974 of 7.8 percent. This
recent rateof increase would have been even higher if consumption had
notdrastically’stabilized in 1973 and 1974.
These trends are reinforced when the wine per capita consumption is
viewed (Also in Table IV-1). The per capita quantity of wine consumed
has increased from 1.508 wine gallons in 1960 to 2.647 wine gallons in
1974, with. an average annual increase of 4.2 percent. In addition, the
average annual inc-ease ‘for the 1969 to 1.974 period was larger, being
6.8 percent.
Thus, it appears the demand for wine has, increased rather steadily during
the pastfifteen years with a significant increase between 1969 and 1972.
This recent increase i’s primarily explained by an increased popularity
by consumers for wines. The sudden drop in the rate of increase after
1972 has coincided with the sharp rise in food costs in 1973 which caused
consumers to cut back spending for non-essentials. In 1974, the further
reduction in wine purchases’ reflected acceleration in inflation,’which,
lowered consumers real incomes even further.
‘V-i
-------
Table IV-1. The Wine Industry, consumption since 1960.
Wine
Percentage
Perëentage
Entering
Change from
Change from
Year
Distribution
Channels 1 !
(1,000 wine
gallons)
.
Previous
Year.
(Percent)
. . . .. .
•
Per Capita
Consumption !
(Wine: gallons)
.
Previous
Year
(Percent)
.1960
152,616
-
1.508
-
1961
159,479
+4.5
1.568
+4.0
1962
154,041
-3.1
1.521
-3.0
1963
161,549
+4.9
1.575
+3.6
1964
170,069
+5.3
1.639
+3.9
1965
173,391
+2.0
1.655
+i.6
1966
173,197
—0.1
: 1.650
—0.3
1967
184,027 .
+5..3
1.738
1.793
+5.3
1968
.191,447
+4 .0
+3.2
.1969
210,936
+10.2
1.946
+8.5
1970
237,327
+12.5
2.169
+11.5.
.
1971
269,065
+13.4
2.432
+12.1
1972
289,942
+7.8
2.638,
+8.5
1973
292,041
+1.0
2.676
+1.4
1974
298,009
+2.0
2.647
-1.1
- -“Répresents all U.S. producedwines entering distribution channels in
the U.S ,
1’For population of age 21 years and over including persons living in
areas where sales of alcoholic beverages are prohibited.
Sources: Wine Advisory Board, Economic Research Report No. E -29, Wine
Industry Statistical Report, Part II , 1974.
IV-2
-------
Demand for individual brands and wine types is predominantly dependent
upon consumers’ preferences and attitudes. Competition between brands
is often based on the price of a particular brand in relation to its
image in the consumer’s mind. Generally consumers can be classified as
brand conscious within a given price range. That is, they seek what
they consider the best brand for their money. Furthermore, consumers
are sometimes reluctant to try new brands and usually purchase brands
with which they are familiar.
With tht increase in consumption of wine, consumers have caused the
distribution of the wine market to change. As can be seen in Table IV-2,
the percentage table wine represents of total wines consumed has incr eased
from 31.1 percent of the market in 1960 to 52.7 percent in 1974. While
this increase has not caused the annual quantity of other wines to decrease
it has caused the other wines’ percentage of the total wine market to drop.
The wine type most seriously impacted by the increased table wine share
are the dessert wines, which have decreased their market share from 56.6
percent in 1960 to 21.3 percent in 1974.
2. Supply of Wines
The supply of wine is constrained by the annual production of grapes and
the capacities of the wineries in terms of their fermentation and storage
facilities. Most wines do require a maturation period and this too can
act as a constraint on the available supply of wine.
Until 1973, the industry had been operating at near capacity levels in
efforts to meet the increasing consumer demands. Now many wineries have
constructed additional facilities which should expand their capability
to produce wires. These additional facilities, the slight decrease
in demand and bumper grape crops have enabled wineries to again establish
inventories such that they can meet the demanded quantities.
3. Market Structure
The markets in which wineries must sell range from highly competitive open
markets to restricted ‘control state” markets. In addition regardless of
the market, wineri s are subject to numerous controls and regulations by the
Federal government as well as by the states.
As of 1974, there were 18 states which were classified as control or mono-
poly states in terms of the distribution of distilled spirits and wines.
These states are Alabama, Idaho, Iowa, Maine, Michigan, Mississippi,
Montana, New Hampshire, North Carolina, Ohio, Oregon, Pennsylvania, Utah,
Vermont, Washington, West Virginia and Wyoming. In these states, commissions
have been set up which purchase alcoholic beverages from distillers,
importers, or vintners either directly or through brokers to sell to state-
owned package stores or to bars, taverns or restaurants. In 11 of the
monopoly •states wine is sold in grocery stores.
-------
Table IV-2.
U.S. produced wine entering distribution channels in the
U.S.. by type of wine.
.
Year
.
Table. Dessert Vermouth
•
Sparkling
Other Speci l
Natural Wines Total
Percent
of Total
1960
31.1 5.6 2.6
2.2
7.5 100.0
1961.
1962
31.8 55.1 2.7
33.6 52.5 2.7
2.3
2.5
8.1 100.0
8 8 100.0
1963
34.8 51.8. 2.6
2.6
8.1. 100.0
1964
36.3 49.4 2.8
3.1
8.4 100.0
1965
37..6 47.1 2.8
3.6
9.0 100.0
1966
1967
39.4 44.5 2.8
41.6 42.1 2.9
4.3
4.8
9.0 100.0
8.7 100.0
1968
43.2 40.7 2.6
5.4:
8.1 100.0
1969
46.0 35.7 2.4
6.5
9.4 100.0
1970
47.5 30.1 2.2
8.6
11.7 100.0
1971
48.4 26.4 1.8
8.2
.15.2 100.0
1972
47.0 24.2 1.8
7.0
20.0 100.0
1973 .
50.0 22.7 1.8.
6.5
19.0 100.0
1974
52.7 21.3 1.8
6.0
18.1. 100.0
Source: Wine Advisory Borad, Wine Industry Statistical Report, Part II ,
Economic Research Report No. ER-29, 1974.
IV-4
-------
The remaining 32 states plus the District of Columbia are classified
as open states. which allow wholesale dealers to purchase wines and
spirits. These wholesale dealers in turn sell to licensed outlets, bars,
taverns and restaurants.
Thus, wineries must operate in markets where they must be competitive
as well as meet requirements imposed by individual states and counties.
Furthermore, wineries must rely on their own national advertising or
advertising by distributors or retail outlets’ (where permitted) to
promote the purchase of their partici lar brands.
B. Price Trends
The prices of wines have historically remained relatively stable until
1970. The whOlesale price index for all wines increased from 92.2 in
1960 to .108.1 in 1970 (Table IV-3). However, after 1970 the prices of
wines experienced sigiificant increases, increasing from a wholesale price
index of 108.1 in 1970 to 147.4 in 1974. These price trends are in part
explained by rather significant increases in grape prices, which have
increased by as much as 100 to 200 percent (Table IV-3).
These upward trends in wine prices have been acceptableto consumers as
their demand increases coincided with the price increases. However,
beginning in 1973 and carrying over to 1974., consumers began to shrink
away from wines and accordingly the relatively high rate of consUmption
growth slowed.
According to Standardand Poor’s, the upward price •trend appears to have
ended in 1975 and the implication for volume should be favorable. After
rising 9.3 percent in 1.974, wholesale prices for table wines increased by
3.0 percent thrOugh May, 1975, and should not exceed 5.0 percent for
the entire year. This slowdown in the pr9ce trend is resultant of large
grape crops in the past two years which have increased wine inventories
and now wineries are in a. more favorable position in terms of their
inventory stocks and thus are less affected by chort-run variations in
costs.
IV-5
-------
Table IV -3. The Wine Industry, wholesale price index for selected products.
Year .
. Red
All. Wines Table. Wine
Desser.t Wine
CalifOrnia . New York
Wine Grapesl! AlJ. .Grapes. J
1967 = 100.0
1960
92.2 91.2
92.7
1961
•92.8 93.2
9.25
1962
99.0 97.5
99.8
196.3
98.7 96.9
99.7
1964
97.0 96.2
97.5 .
.
1965
1966
99.8 99.1
100.1
77.8 99.1
98.5 97.8
98.7
90.8 1.03.6
1967 100.0 100.0.
100.0
100.0 100.0
1968
103.3 103.3.
103.2
114.5 118.8
1969
104.3 105.4
103.6
129.6 156.3
1970
108.1 107.5.
108.4
190.0 150.9
1971
117.2 110.6
121.1
223.8 . 142.9
1972
1973
. 125.3 127.3
133.7 137.1
124.0
131.5
357.5 . 166.1
. 333.3 .197.3
1974
147.4 155.6
142.4
235.1 209.8
1 ”Average grape price received by grower.
Source: U.S. Department of Labor,.Bureau of Labor Statistics and U.S. Depart-
ment of Agriculture, Statistical Reporting Service.
IV-6
-------
Finally, it should be noted, that while the wine wholesale price index
• ‘has increased during recent years, winerieS have also marketed large
quantities of lower priced wines. Instead of lowering the priceof a
particular type wine, wineries have recently begun to introduce a
lower pri.ced wine and to gear their marketing campaign toward the
younger more price conscious consumer. This has resulted in a signifi-
cant increase in the number of wines marketed and is consid.ered wineries’
major tool in maintaining their market share.
IV-7
-------
V. EFFLUENT CONTROL COSTS
The effluent control system requirements and, costs depicted in this
.chapter were provided by the Effluent Guidelines Division o.f the Environ-
mental Protection Agency as provided by the technical contractor, Environ-
mental Science Engineering. The recommended and optional treatment alter-
natives for the model wineries were’the. same as presented in th.e Development .
Document.I/ However, the associated investment and “annual costs have been
revised by the technical contractor to reflect the model wineries production
characteristics previously d scribed in Chaptcr III. .. “
A. Pollution Control ‘Requirements
• Three effluent control levels for point source categories (direct dischargers)
were originally considered: ‘ ‘
BPT - ‘ Best Practicable Control Technology Currently
Available, to be achieved by July, 1977.,
BAT - Best Available Control Technology Economically
Achievable, to be achieved by July, 1.983,.
NSPS - New Source Performance Standard’s are’recomn ended to
be equal to the BAT control level and to’apply’to any
source ‘for which construction starts after the publi-
cation of the oroposed regulations.
Raw waste loads for the existing model wineries as well as the new source,
wineries are depicted in Table V-i.’ From this table it’ can be seen that
variations in flow in gallons per day do’ ‘exist, however, the concentration
expressed in milligrams per liter (mg/i) of wastewater, of..biologicai
oxygen demand (BOD) and suspended solid•s (SS) are constant regardless of,,
winery size. The concentration of fats, oils and grease (FOG) are not
present. The recommended effluent limitation guidelines for ,the model
wineries as proposed in the Development Document are shown in Table V-2.
- -“Development Document for Effluent Limitation Guidelines and New Source
‘ Performance Standards, Miscellaneous Foods and Beverages , Point ‘Source
Category, Draft. Report prepared by Environmental Science and Engineering,
Inc. for the U.S. Environmental Protection Agency.
V-i
-------
Table V-i. Raw, waste loads ‘for model wineries.
Model.
Production.
Flow .
BOD ‘ ‘
SS
FOG
‘
Wine gallons
per year ‘
gallons ‘
per day
,
mg/i
mg/i
‘
mg/i
.
Existing
‘Small
Medium
27,200
194,000
.
, 657 ‘
4,670
‘
2,337
2,337
.
, 759
759 ‘
N.A.
N.A.
‘
Large
2,511,400 ‘‘ ‘
72,600 ‘
2,337 ‘
759
N.A.
‘
New Source
‘
‘
Medium
194,00Q
3,733
2,645 ‘
404
N.A.
Large
2,511,400
51,700
2,645 ‘ ‘
404
N.A.
‘Source: Effluent Guidelines Division, Environmental Protection Agency.
V-2
-------
Table V-2. Recommended efflyent limitation guidelines for the
Wine .Industry
BPT
BAT
.NSPS.
.
.
•
---- kg/Kkg Grapes
crushed
---—---
BOD
Max
30-dày
ave.
0.280
:
0.380
.
0.230
Max
Day
.
0.830
,
1. 160
•
0.690
ss
•
Max
30-day
ave.
0.410
0.054
0.031
Max
Day
L200
0.160
0.093
Source: Development Document , Environmental Protection Agency.
V-3
-------
B. Current Status of the Industry
As was explained in Chapter I of this report, the Wine Industry can be
divided into two separate •categories based on geographical location;
the western wiheries and’the eastern wineries. Furthermore, as also
described in Chapter I ., the western wineries were exempted frc’m consi-
deration in the impact analysis as it has been determined that the treat-
ment methods practiced by western wineries not connected to municipal
sewage systems resulted in no effluent reaching navigable waters (e.g.,
land application).
During this emphasis, the discharge status of the eastern wineries was
established through the util ization of.a survey of eastern wineries
conducted by the technical contractor. The survey was completed by 99
eastern wineries and of these only one was found to be a direct dis-
charger. Of the remaining wineries contacted, 42 discharged to munic-
ipal systems, 27 utilized septic tanks, 15 used settling ponds and 14
used spray irrigation or open drainage. These methods of treatment
have been determined to be satisfactory by the EPA and thus the im-
positiOn of effluent controls on existing wineries will benegligible.
Accordingly only the impacts on new source wineries were considered.
C. Pollution Control Costs
The costs estimates, in 1972 dollars, and the components of the recommended
and optional (if considered possible) treatment alternatives for the model
wineries are shown in Table V-5 and Table \!-6. From the information
provided, total investment and annual costs were inflated so as to be
consistent with the costs associated.with the models. Investment and
annual costs were inflated from 1972 to 1974 dollars by the use of the
Engineering News Record Construction Cost Index (1.205 times the provided
EPA costs.). The resulting treatment costs in. 1974 dollars for both the
recommended and optional treatment alternatives are summarized in
Table V-3. ‘
Investment costs include, costs for construction, land, engineering and a
contingency fee. ‘ Annual ‘operating costs include expenditures for labor,
power, chemicals,. maintenance and supplies. Total yearly costs include
annual operating costs,, depreciation and interest. Depreciation was
based on a 20 year depreciable Ufe for the pollution controls for
the large new source model and 10 yearsfor the medium model. Interest
was based ona 10 percent rate which was then computed as 10 percent of
one half’ the total pollution control investment costs.
Total investment costs’ for pollution controls expressed as a percent of
book value of the model wineries fixed assets and the total annual costs
•expressed as a percent of annual sales are depicted in Table V-4.
V-4
-------
Table V-3. Effluent control costs for winery models
(1974 Dollars)
.
.
NSPS.
.
.
Annual
Total
Treatment
Investment
Operat ing
Yearly
Model
Alternative
costs
Costs
Costs
Medium
•
Recommended
41.5
2.2
6.3
Large
Recommended
482.2
82.4
131.6
.
Optional
310.3
71.3
102.3
V-5
-------
TabTh V-4. Investment costs and yearly costs expressed as percentage
of model wineries investments and sales
Model
.
Treatment
Alternative
Total Investme
as % of
Book Value
nt
•
Total Yearly Costs
as % of
Annual Sales
Medium
.
Recommended
2.5
Li
Large
Recommended
Optional
2.3
1.5
1.7
1.4
V-6
-------
Investment: Costs
Construction
Land
Engineering
Con tingency
Total
Ye3rly Operating Cos ts
Labor
Power
Chemical s
Maintenance & Supplies
Total
Total Yearly Costs
Yearly Operating Cost
Yearly Investment Cost
Recovery
Depreciation
Total
Treatment Alternative
Treatment Modules:
Treatment chain design
efficiency (%BOD
reduction)
26,800
2,320
2,680
2,680
34,480
1 ,250
0
0
540
1 ,790
100.O
304,390
.34,930
30,440
30,440
40O,2OO
A20-XI
Bl. .Control House
B.. Pumping Station
C. .EqualizationBasin
F. .Acid Neutralization
H. .Nitrogeri Addition
I..Phosphorus Addition
K. .Activated Sludge
Q. .Slude Thickener
R. .Aerobic Digestor
Y. .Holdin.g Tank
U.. Spray Irrigation.
N.. Dual Media Pressure
N.. Dual Media Pressure
97.8
Table V-5. Itemized cost summary for wineries, alternative (NSPS)
Medium Large
J( ‘?U
20,620
4,060
6,200
68,360
• 68,360
16,010
. 18,260
102,630
1 ,790
1 ,379
1
I
4777•
A2 0-IV
Septic
Tank
System
Fi 1 trati on
Fi 1 tration
Source: Effluent Guidelines Division, Environmental Protection Agency
V-7
-------
Table V- 6. Itemized cost summary for wineries, alternative
A20-X (NSPS-option)
Investment Costs
Construction
Land
Engineering
Contingency
PVC Liner
Total
Yearly Operating Costs
Labor
Power
Chemicals
I4aintenance &
Supplie
PVC Liner
.1 - -I -
o a
Total Yearly Costs
Yearly Operating
• Cos t
Yearly Investment
Cost Recovery
Depreci ati on
Total
Source: Effluent Guidelines Division,
Itemized cost summary for waste water
9.&. percent BOO reduction..
BI. . .Control House
B.... Pumping Station
C.. ..Equalization Basin
F... .Acid Neutralization
H... J4itrogen Addition
I.... Phosphorus Addition
L. .. . Aerated Lagoon
N....Oual Media Pressure
N....Dual Media Pressure
Filtration.
Filtration
59,180
10,300
12,700
82,180
. Medium Lar e
No Option Considered
208,550
,3,490
20,860
20,860
3,770
257 ,530
12,490
38,1.90
4,060
4,300
140
59 180
Treatment Modul es:
Environmental Protection Agency.
treatment chain design efficiency...
-------
VI. ECONOMIC IMPACT ANALYSIS
The impacts considered in this analysis are as follows:
A. Price effects
B. Financial effects
C. Production effects
D. Other effects
The resulting impacts from the imposition of effluent controls on the.
Wine Industry forexisting wineries are expected to be negligible. This
determination is based on the information exempting the western wineries
discussed in Chapter I of this report and the results of a recent survey
of the eastern wineries conducted by the technical contractor as described
in Chapter V. The survey, concluded that there were very few wineries
which could be classified as direct dischargers to navigable waters and
thus fall under the requirements of effluent guidelines. Therefore,
the impacts described herein will pertain only to those wineries which
are yet to be constructed and will discharge their effluent directly
to navigable waters (hereafter referred to as New Source). These impacts..
are analyzed for the NSPS model wineries described in Chapter III. Impacts
are based on the production arid financial characteristics of the NSPS
models and the NSPS pollution control costs as presented in ChapterV.
Itshould b’e noted that in Chapter V, for each model, two sets of control
costs were presented, the recommended treatment system and an optional
treatment system. For purposes of this impact analysis, only the recom—
mended treatment systemwill be utilized, with the optional system’s
costs being provided only for informational purposes.
A. Price Effects
1. Required Price Increases
Animplicit indicator of the expected price effects of pollution controls
used in this report is the amount of sales price increase necessary to
maintain a NSPS plant’s profitability, after effluent control expenditure,
at a level the same as a similar plant without the control expense. The
methodology of computation was discussed in Part I, Chapter II (Methodology),
Section F, under subsection 2 of this report. The ability of a new plant
to pass on such price increases is evaluated in this section of the report.
Vt-i
-------
The amount of sales price increases necessary to offset NSPS pollution
control costs for the model. wineries are depicted below. Also shown are
sensitivity ranges of required price increases when pollution control costs
vary plus or minus 20 percent from the estimated control costs.
NSPS . Annual Production Required Price Increase (%)
Model Winery ( Wine Gallons) — 20% Estimate +20%
Medium 194,000 1.1 1.4 1.7
Large 2,511,000 . . . 2,0 . 2.’
2. Expected Price increases
Although the above illustrated price increases indicate what the NSPS model
wineries would require to offset expenditures for effluent controls, it is
doubtful new wineries would be able to pass on the additional expense to
customers in the form of higher prices. This is due to (1) the discharge
status”of’ the’ wine industry, and (2) financial effects of building, new
point source wineries relative ‘to the market characteristics of the .industry.
As stated above, itis unlikely .new source wineries will be able to pass
on required price increases due to effluent controls due to, in part, the
discharge status of the remaining existing industry. .As pointed out earlier,
the potential impacts attributable to effluent controls on the existing
:ineries have been determined negligible due to their present discharge
method’. Subsequently, the abilities of new source wineries to recoup
their control expenditures are limited as any such increase would be
necessary’ only by the, new source winery and if their prices are increased,
the wineries :i1l deteriorate their competitive places within the wire
markets. ‘ .
However, if the Wine Industry as a whole experiences increased costs for
their treatment (e.g.,higher municipal treatment’ charges and/or higher
expenditures for operation and maintenance, of private treatment systems),
then the new source wineries may be able to pass on their required
price increase to the extent that th.e rest of the industry increases prices.
This situation,, at the present, is not projectable, and if it should iccur,
the ability of new sources to pass on all the required costs will be limited
to the extent by which increases are required by the industry as a whole.
The market. characteristics of the Wine Industry may provide some oppor-
tunities for new source wineries to pass on effluent control costs but
these will be limited to those wineries which by location or production
v i - a
-------
efficiency can establish a competitive advantage o.ver other wineries. In
other words, new source wineries which can produce and/or deliver its
wine products at lower costs then its competitors, may be able to utilize
its greater margin to absorb control costs and still remain in competition.
However, for these new source wineries which do not achieve a competition
advantage, it is probable that such wineries will not be able to pass on
the required price increase. As discussed in earlier chapters of this
report, the Wine Industry has not experienced high rates of return and
as shown below in Section B, Financial Effects, the high costs of new
source construction are not offset by significant lower operating c3sts
through improved technology. This results in ;ew source,wii erieshaving
the same to’ lower income ratios than exsting wineries and negative net
present values of cash flow when discounted at the estimated industry after-,
tax cost of capital (7.9 percent).
Therefore, price increases by new source wineries to offset effluent
controls and the high costs of construction are not expected to occur.
In the’following analysis. no price change was assumed to occur as a
result of the entire.industry increasing prices tooffset effluent con-
trols and accordingly the economic viability of the wineries was based
on financial characteristics of the models without added revenue stemming
from aggregated effluent’control effects on industry prices.
B. Financial Effects
Based on NSPS model plant profiles described previously and’ costs of
pollution controls provided by EPA, the following financial indicators
were computed under baseline (without pollution controls) and with pollution
controls:
- After tax income
- After tax return on sales
- After tax return on invested capital
— Cash flow and cash flow as a percent of invested capital
— Net present value
‘The above were computed according to the discounted cash flow (DCF) and
return on investment (ROl) procedures outlined in the methodology.
Furthermore, a sensitivity analysis was performed using pollution control
cost eztimates at levels of 80 percent and 120 percent of the costs pro-
vided by EPA.
The results of the NSPS model winery analyses are summarized in Table VI-1.
After the imposition of effluent controls, after-tax income, after-tax
return on sales and after-tax return on invested capital all decline only
slightly for the medium NSPS winery model. For the large NSPS model these
VI-3
-------
Table ’VI-l. Key values of impact analysis for wineries: NSPS
.
Key Value
‘
Size
Baseline
Percent Proposed Control Costs
80%
100%
120%
1,000 gallons
.
•
per year
After Tax Income ($000)
M 194
52
49
49 ‘
‘ 48
L 2,511
673
618
605
591
,
After Tax’ Return on Sales (%)
M 194 ‘
8.9
8.5
8.
8.2
•
L , 2.511
8.9
8.2,
8.0
7.8
After Tax Return on Invested
‘
Capital (%)
‘
M 194
L 2,511 ,
,
2.9
3.1
‘ 2.7
2.8
2.6
2.7
2.6
‘ 2.7
Estimated Cash Flow. ($000)
M 194 ,
151
‘
, 150
150’
149
‘
L 2,511
2,100
2,065
2,0.65
2,047
‘
Cash Flow as % of Invested
‘
Capital
,
M 194
L ‘2,511
8.3
9.6
8.3
9.4
8.3
‘ 9.4
8.2
‘ 9.3.
Net Present Values ($000)
‘
M 194
L 2,511’
—8,493
.
-829 ,
-9,131
-838 ,
-9,291
846
-9,450
VI -4
-------
profitability indicators are reduced by 10 to 16 percent. If the control
costs varied by plus or minus 20 percent, the indicators of profitability
would vary accordingly in their respective decreases.
In terms of the effect of NSPS controls on cash flow return on invested
capital, the percentage remains constant at 8.3 percent for the medium
NSPS model and declines from 9.6 percent to 9.4 percent for the large
NSPS model. When. control costs were varied by 20 percent, the cash flow
.return varied only slightly for the winery models.
Net present values for the NSPS model wineriesare negative both before
andafter the imposition of controls (Table VI-1). As discussed in Part 1,
Chapter II,Methodology,.large negative net present values would cause
most firms to discard plans for building a new winery. Since the esti—
mated net present values are negative before controls are imposed, it
is concluded that very few wineries classified as a new source, would
be built. However, it should be noted that the negati’. net present
value indicates that the associated winery would earn less than the esti-
mated 7.9 percent of industry cost of capital. Thus, a NSPS winery may be
built in the future provided the firm has been well established in the
industry, or has expectations to capture a major market share at prcfitable
price levels and has an excellent financial performance record (e.g.,
a lower cost of capital). Should a NSPS.winerj be built, it can expect
its net present value to decline due to the requirement for pollution
controls.
C. Production Effects
Although new source performance standards will not affect current levels
of production, future growth in the industry could be sériouslyaffected
by the imposed contrOls. Point source category firms are potentially
deterred from entry because of differential impacts of effluent treat-
ment requirements.
However, as indicated in the abovefinancial description, future growth
from new sources is expected to be restrained by the high costs of construc-
tion not being offset by lower costs of production achieved through improved
technology. Also, a restraint is tie inability of a new source to pass
through costs for controls to the consumer. This does not completely
rule out the possibilities for new sources. It is foreseeable that some
operations, those which could be classified as optimal producers, could
construct and successfully operate a new winery. However, growth for the
industry as a whole, is expected from additions to or alterations of
existing plants that are discharging effluent wastes to other than navi-
gable waters.
VI-5
-------
D. Other Effects
Other types of economic impact such as employment, community and balance
of payments deficit effects are normally assessed when there are plant
closures due to pollutioncontrols. However, these other effects are not
meaningful nor quantifiable in a report assessing new sources. Although
employment is an important consideration to a potential new firm and
increases in employment and local business are important to surrounding
communities of a potential new plant, these effects are more related to
the decision to construct a new plant. Thus, in this report, these related
effects were not pursued.
VI 6
-------
PART V
DISTILLED SPIRITS
-------
PART V : SIC 2085. THE DISTILLED SPIRITS INDUSTRY
I. INDUSTRY STRUCTURE
The Census of Manufactures defines the Distilled Spirits Industry (SIC
2085) as an industry comprised of establishments primarily engaged in
manufacturing alcoholic liquors by distillation and rectification, and
in manufacturing cordials and alcoholic cocktails by blending processes or
by mixing liquors and other ingredients. Thus, the distilled spirits
industry consists of those establishments which produce alcoholic beverages
by distillation and rectification as well as those establishments which do
not utilize a distillation process. but yet do rect fy and/or blend liquors
to produce alcoholic beverages. This interpretation differs from that of.
the Development Document in that the Census definition includes those
establi hments that, do not distill but do rectify and/or hl3nd in SIC 2085
and not in SIC 5182 as t 1 e Development Document did. rhis was resultant
of the fact that the Census definition implies rectifiers and blenders
do fall within SIC 2085 and also the fact that the Census defihition of
SIC 5182 states that establishments in SIC 5182 are those which are pri-
marily engaged in the wholesale distr:bution of distilled spirits. There-
fore, SIC 5182 will not be discussed in this report; however, the. establish—
ments included in the Development Document under SIC 5182 will be discussed
in SIC 2085.
The overall industry consists primarily of establishments which are engaged’.
in distilling, rectifying, blending or bottling or any cOmbination of these
to produce a variety of alcoholic beverages including whiskey, vodka, gin,
rum, cordials and liqueurs. Those establishments which utilize a still
usually use grain, fruit and/or molasses ‘to produce the alcohol spirits
It should be noted that distilleries utilizing only fruit are primarily
engaged in the production of brandy which is not considered a product of
establishments in SIC 2085. Establishments producing brandy are classified
in SIC 2084, Wines, Brandy and Brandy Spirits, and are discussed in Part
IV of thi report.
This analysis will be primarily concerned with those establishments which
utilize some form of distillation process. ‘Establishments which rectify,’
blend or bottle will also be discussed; however, as the Development Document
states, little effluent: is generated by these establishments and no known
plants discharge effluent to navigable waters; the discussion of these oper-
ations is limited to only a general industrydescription.
1—1
-------
A. Characteristics of the Industry
As previously discussed, the Distilled Spirits Industry consists of estab-
lishments which distill grain, fruit and/or molasses to produce alcoholic
spirits which in turn are rectified, blended and/or bottled either by the
same distillery or another estab ishment. The industry can be basically
classified into three categories: (1) those which distill grain or some
combination Of ingredients including grain to produce the common types of
beverages such as whiskey, vodka and gin; (2) those which distill molasses
to produce rum; and (3) those which purchase distdled spirits for possible
rectification, blending or bottling. It should be noted that the first
two, categories may also contain the functions of the third category but
the third category does not have stills, which the first two do have.
Those establishments which operate within the Distilled Spirits Industry,
but do not utilize a still, will be ‘discussed throughout this report.
However, due to their limited wastes problems, the discussion will ,be
primarily áonfined to a description of the characteristics of the estab-
lishments.
The Distilled Spirits Industry is generally highly competitive and
accordingly, industry members do not readily release information regarding
the operational data of their plants.. As a result, information concerning
the industry characteristics must be derived from traditional sources of
information such as published reports of the Census of Manufactures,
Internal Revenue Service, Bureau of Alcohol Tobaccos and Firearms (BATE)
and the Distilled Spirits Council of the United States (DISCUS). These
sources do have their limitations; however, they do provide an aggregated
source of th general industry characteristics. Finally, when possible,
discussions with industry members were utilized to fill the voids where
published data are not available.
1. Number and Size of Firms and Plants
The Census of Manufactures states that in 1972 there were 76 firms in the
Distilled Spirits Industry operating some 121 individual establishm•:nts.
Thus in 1972 .just over 37 percent of all establishments (45 lants) were
owned or controlled by firms which operated more than one plant. This
percentage has remained relatively constant since 1967 at which time 70
firms owned or controlled 112 establishments.
1-2
-------
According to the Census data, the number of distilled spirits plants
has remained relatively constant durin’g’the past years. In 1958, the
Census indicates 122 establishments comprised the SIC 2085 industry.
In 1963, this number declined to 107, then in 1967, it increased to 112
establishments. In 1972, the Census indicated there were 121 establish—
ments.
The BATF agrees with the Census data for 1972 in that there were 121
facilities operating. For 1974, BATE indicates 120 plants operated.
BATF also maintains a list of all plants which are authorized to operate
•in the distilled spirits industry. However, as it is common in the in-
dustry for plants to “shut down” for periods of years and then reopen,
the nu: iber of plants authorized does not necessarily.agree with number of
plants operating. In that this analysis is concerned ith all plants
which could operate in the industry, it will be assumed that the total
number of plants authorized represents the number of plants in the in-
dustry. It should’ be noted, however, that much of the historical data
available reflect. those plants which did operate, and as such these data
will also be used in conjunction with the analysis of the industry. Dis-
tinctions, when necessary, will be made concerning the, application’ of the
data and the number of plants. The distilleries which are. authorized to,
operate as of July 1, 1975 are listed in Exhibit I-i. Rectifiers auth-
orized are listed in Exhibit 1—2.
The number of establishments operating by employment size group is de-
picted in Table I-i for the years 1963, 1967 and 1972. These data aggre-
gate both distillery operations and rectifiers however, the data do pro-
vide indications of the distribut-ion of establishments’ sizes. Also shown
in Table I-i are the employment classes’ value of shipments and
the, corresponding ‘percentage’of the total. From this table, it becomes ap-
parent that a major portion of the establishments are concentrated in the
larger.’size categories and accordingly, these larger categories represent
the greater share of the industry’s value of shipments. , It should also be
noted that the number of establishments comprising most of the categories
have increased in number since 1963.
2. Value of Shipments
Value of shipments and other receipts of the distilled liquor industry in
1972 totaled $1,797.9 million. This included shipments of distilled
liquor, except br ndy, (primary products) valued at $l,542.5’niillion,’
shipments of other products (secondary products) valued at $34.9 million,
and miscellaneous receipts (mainly resales) of $220.5 million.
Estimates of the 1975 value of shipments for the industry are expected to
total $1,932 million, 3.4 percent above estimated shipments of $1,868
million in 1974, and 7.5 percent above the shipments in 1972. Historically,
the value of shipments have increased by an average of 3.8 percent per year
since 1958, from $941 million in 1958 to the estimated $1,932 million in
1975 (Table 1-2).
1-3
-------
Exhibit I—i. Distilled spirits plants authorized to. operate, July 1, 1974.
TYPE OF OPERMION
Lndiana
13. Lawrenceburg
14.Lawrenceburg
Iowa
15.Muscat lne
16.Cl inton
Kansas
llAtchlson
The American Distilling. Co.
Heublein 1 Inc.
Novitiate of Los Gatos
San Martin Vineyards Co.
Heublin, Inc.
Todhunter Interñat’l. Inc.*. )(
Jacquin-Flórida Dist. Co.* X
The American Cistilling Co. X
Hiram t4alker & Sons, Inc. X
Joseph E. Seagram 8 Sons
Schenley Distillers, Inc.
Grain Processing Corp X
Fleischniann Distilling Corp. X
x
x
x
x x
.750 20360
X 1,600 20353
1,700 20853
800 20350
x .• 850 20463
280 20851
* Rum
Source:
continued...
State and City
Distillery
Dlstlfler
Industrial
1
Distiller
Beverage
Grain
2..
Distiller
Beverage
Fruit
3
Distiller
Bevaraye
Rum
4
Brnded
Whse.
Industrial
5
Bonded
Whse.
Beverage
6
Rectifier
and
Uott er
7
5otUer——
Non—
Reotifier
‘ .B
Bottler——
In-
Bond
9
California
I, Union City
2. Menlo Par
3. Los Gatos
4. San Martin
Connecticut
5. Hartford
P pr 1 da
Lake Alfred
Auburndale
Georgia
8. Albany
9. Atlanta
10.Atl anta
Illinois
11 .Pekin
12. Peoria
Denaturer-
Denatesrer Rum
10 11
Bottler
Industrial
12
Number
Employees
.
Primary.
SIC
,
Viking Distillery Inc.
Fulton Distillery Inc.
Colony Distilling Inc.
x x
x
x
125 20851
X 160 20353
50 20340
X 900 20353
50 . 20853
x
x
x . x
x x x
x x . x
x .. x.
IL :X X X
x x x IL. x
x .x, . x ..
x x IL
x
x.
X X; X X
x. x. x x. x
X. X. X
x
x
, .x
x.
x
Midwest Solvents Co., Inc. X
x
x
x
x
Department of Treasury, Bureau of Alcohol, Tobacco and Firearms, Distilled Spirits Plants .
-------
Exhibit I-i. Distiile.d spirits plants authorized to operate, July 1, 1974 (continued)
TYPE OF OPCRATIOI
Schenley Distillers, Inc.
Schenley Distillers, Inc.
National 01st. & Chemical
James B. Beam Distilling
Joseph E. Seagram & Sons
Fleischmann Distilling
Barton Brands, Ltd.
James B. Beam Distilling
Old Grand Dad Distillery
Joseph E. Seagram & Sons
Old Fitzgerald Distillery
National 01st. Chemical
Joseph E. Seagram & Sons
Glenniore Distilleries Co.
Old Crow Distillery Co.
Old Taylor Distillery Co.
heaven Hill Distilleries
Joseph E. Seanram & Sons
Old Boone Distillery Co.
tlillett Distillinn Co.
Makers Mark Distilling Co.
riedley Distilling Co.
Austin, Nichols Distilling Co.
•Ben F. Medley & Co.
Joseph E. Seagram & Sons
Hoffman Distilling Co.
Schenley Distillers, Inc.
T.W. Samuels Distillery Inc.
James B. Beam Distilling
Gleliniore Distilleries Co.
Brown-Farnian Distillers
Brown-Farman Distil rs
x
x
x
x
x
x
x.
x
x
x
x
x
x
x
x
x
x.
x.
x.
x
x
x
x
x
x
x
x.
x
x
x
x
x
x
x
x
x
x
x
x
x
x
x
x
x
x
x
x
x
x
x
• •. x.
• ‘S
X ‘X
x. x.
;X
x
x•
; . X X•
x
x
233**
70
250
1,000
335
233**
234
275
600
3 OO
40
46
200
37
33
500
150
600
150
1 ,200
State and City
Distillery
Distiller
Xndustrial
1
Distiller
evera a
Grain
2
Dtst ller Distiller
aevera9e &everage
Fruit - Rum
•: 3’ :4
Bonded
Whse.
Industrial
5 .
Bonded
Whse.
Baveraga
6
Rectifier
and
Bottler
7
Bottler.—
i ion-
RecLiflar
0
8ottler.—
n—
Bond
9
x
O aMtgrar-
Denaturar Rum
10 11
x i :.‘
Bottler Number Primary
Industrial Employees SIC
‘12
ck
18. Louisville
19. Louisville
20.Louisvil le
21. Bardstown
22. Lawrenceburg
23. Owensboro
24. Bardstown
25. Beam
26. Frank fort
27. Cynthia na
23.Shiveley
29.t.ouisvi lle
•3O.Hodgenville
31 :Owensboro
32.FrankfOrt
33 Frankfort
34.BardstO wfl
35.Lóuisville
36 fleadowl awn
37.BardstoWn
38 Loretto
• 3g•Owensboro
•4 Lawrenceburg
41 Stan1ey
42 .Fa i r field
• 43 Lawrencebur9
44 Fraflkfort
45.Deatsvil le
45 Clermont
47 LOUiSVil le
48.LOuiSVille
49 LOuiSVi lie
• X X
x
x
• •- x
400 • 20351
1,000 : 20353
65 20353
125 20353
450 20853
x
,x
x
** Three-plant average was derived from a total given of
20853
20853
20853
20353
20853
20853
20853
20853
20853
20353
20853
20853
20853
20853.
20853
20353
20853
20353
20853
20353
700 employees for, three operations
continued...
* Source:
U,
Department Of Treasu y’. , Bureau of Alcohol, Tobacco and Firearms, Distilled Spirits Plants .
-------
Exhibit I-i. Distilled spirits plants authorized to operate, July 1, 1974 (continued)
State and City Distillery
Maryland
50.Baltimore Joseph E. Seagram & Sons
51.Lansdowne Majestic Distilling Co.
M sachusetts
So. Boston Felton & Sons, Inc.* X
Missouri
53.Weston McCormick Distilling Co.
hew Jersey
Linden Distillers Company Limited
New York
55.Peeksk.i ll Fleischmann Distilling Corp.
Ohio
TCincinnat1 Mational Dist. & Chemical
Pennsylvania
57.Philadelphla Continental Distilling
53.Philadelphia Publicker Industries
59.Schaefferstown Pennco Distillers, Inc.
60.Philadelphia Publicker Industries
Tennessee
61.Lynchburg Jack Daniel Distillery
62.Tu llhor a Tennessee Dickle Distilling
Virginia
63.Sunset Hills A. Smith Bowman Disti.llery
*Rum
Source: Department of Treasury, Bureau •of Alcohol, Tobacco and Firearms, Distilled Spirits Plants .
TYPE OF OPERP.TtON
Distiller Distiller Distiller Bonded Bonded Rectifier Bottler—— Bottler—.
Distiller Beverage Beveraçe Beverage Whse. Whse. . and Non. In—
Industrial Grain Fruit . . Rum Industrial Beverage Bottler Rectifier Bond Denaturer
1 2 3 4. 5 .6 7 .8 0 10
Denaturer.
Rum
11
Bottler Number
Industrial Employees
12
Pr1mar
SIC
X
•
X
X
X
.
‘
.
.
650
20853
X
.
.
. . . X
X
X
.
100
20853
.
X
•
.
X . .
X . X
X
.X
X
X .
60
. 20860
I
.X
X
X
.
X
.
75
20853
. . X
. X
X .
300
20651
X
X
X
500
20997
.x
. . .
X . X
X
.
X .
1,400
20&53
•
X
X
X.
X
X
X
X
X
X
X
.
X X
X X
. X
. .
X .
.
.
.
X
400 .
100
25
20853
20853
.20851
x
x
•
x
...x
•
..
x
•x•
.x
•• . I
X
X
X
X
300
20&53
X
.:
.
X..
X
..
100
20853
.
X
.
X
X
X
. .
•
50
20853
continued...
-------
Exhibit .1—2. Distilled Spirits Plants authorized to operate (Rectifiers only) as of July 1, 1975
California
1- Fres no
2-So San Francisco
3-San Francisco
4-San Francisco
5-Los Angeles
6-San Francisco
7-No Hollywood
8-San Francisco
4 —4 9-San Jose
10-Sumniyvale
11-Los Angeles
12..Cornpton
13-So San Francisco
14—Los Angeles
15-Los Angeles
16-El Segundo
17—Newark
18-Burl ingame
19-Vernon
20-Union City
21-Cerritos
22—Union City
Florida
23—Jacksonville
Schenley Distiller, Inc.
E. Martinoni Co.
Chas. Segales & Co.
Lewis—Westco & Co.
L. Hirsch & Son
Terminal Liquors Ltd.
Bohenian Dist Co.
P. Torre & Co.
Franklin Distillers Products, Ltd.
A. Giurlani & Bros.
Trojan Dist. Co., Ltd..
Associated Liquor Products, Ltd.
Joseph E... Seagrams & Sons, Inc.
hOC Distributors, Inc.
Maison Chambly
Barton Brands
Janich Bros., Inc.
Hiram Walker & Sons, Inc.
Royal Himmel Di illing Co.
Distillers Co., Ltd.
Tri—L Dist., Inc.
Premium Products, Inc.
Castelton Beverage Corp
x
x
x
x
x.
x
x
x
x
x
x
x
Continued...
. . .
.
.
.
. .
Authorized Operation
.
.
Bonded .
•WHSE
Bonded
. WHSE
.
Rectifier
. . .
Bottler
.. . . .
Bottler - .
. .. .
Denaturer—
.
Bottler
State & City
Rectifier. &
,
.
Bottler .
Industrial
(5)
Beverage
. (6)
Bottler
(7)
Non—Rectifier
(8)
In Bond Denaturer
(9) (10)
Rum
(11).
Industrial
(12)
.
.
I I
x
x
x
x
x
x
x
x
x
x
x
x
x
x
x
x
x.
x
x
x
x
x
x
x
x
x.
Source: Dept. of the rreasi’ry., Bureauóf Alcohol, Tobbacco and Firearms, Distilled Spirits Plants Authorized to Operate , ATF p 5,110.1. (7—75).
-------
Exhibit I—2 (Continued)
Hawaii
24-Honolulu
25-Honolulu
Illinois
26-Peoria
27-Chicago
23-Chicago
29-Lemont
30-Pla infield
31-Pla infield
Kentucky
32-Loul sville
33-Frankfort
34—Louisville
Louisiana
35—New Orleans
Aloha Liquerurs, Inc.
Hawaiian Distillers
Sazerac Co., Inc.
x
x
x
x x
x
x.
x.
x
Maine
36-Lewiston
37 —Lewis ton
Whiterock Distillers Inc.
White Rock Distillers Inc.
x x
x x
Maryland
38-Baltimore
39-Baltimore
40-Baltimore
.
:
.
State & City
.
.
.
.
Rectifier.&
.
Bottler
.
•
.
Authorized Operation
Bonded
WHSE
‘Iniustrial
(5)
Bonded
WHSE
Beverage
(6)
Rectifier
Bottler
(7)
.
Bottler Bottler
Non-Rectifier in Bond
(8) (9)
•
Denaturer
(10)
Denaturer—
Rum
(11)
Bottler
Industrial
(12)
‘
x
Laird Distilling Co.
Consolidated Distilled Products, Inc.
Mar-Salle Chicago Co.
Continental Distilling Sales Co.
Fleischrnann Distilling Corp.
Distillers Co., Ltd..
Double Springs Distillers inc.
Double Springs Distillers Inc.
National Distillers & Chemical Corp.
K
x
x
x
x
x
x
x
Joseph E. Seagrarns & Sons, Inc. X
Overbrook EggNog Corp. X
Montebello Brands, Inc. X continued...
Source Dept of the Treasury, Bureau of Alcohol, Tobbacco and Firearms, Distilled Spirits Plants Authorized to Operate , ATF P 5.110 1 (7—75)
-------
41-Baltimore
Massachusetts
42-Boston
43-Cambridge
44-Boston
45-tlewton
46-Boston
Mi c jg h
47-Allen Park
48—Detroit
49-Troy
Minnesota
50-Mi nneapol I S
51-Long Praire
MississjQpj
52-V Ic ks burg
Missouri
53-St. Louis
54-St. Louis
55-St. Louis
Montana
56-Columbus
57-Helena
Standard Distill .rs Products, Inc.
Blanchard Importing &Dist. Co., Inc.
Federal Distillers, Inc.
NI. S. Walker, Inc.
S. S. Pierce Co.
Mr. Boston Distiller Corp.
Heublein, Inc.
Mohawk Liquer Corp.
United Esrands Inc.
Ed. Phillips & Sons,. Inc.
Minnesota Distillers Inc.
Southern Distilling Co.
J. F. Conrad Grocer Co.
Southern Cornbort Corp.
-David Sherman Corp.
JoueDe Co.
Alpha Industries.Inc.
x.
x x
x
Exhibit 11—2 (Continued)
State & City
.
Rectifier &
.
.
Bottler
.
Bonded
WHSE
Industrial.
(5)
Authorized Operatl n
:
.
Bonded
WHSE
Beverage
(6)
Rectifier
Bottler
(7)
.
Bottler
Non-Rectifier
(8)
Bottler
-in Bond
(9)
.
Denaturer
(10)
Denaturer—
Rum
(11)
BotUer
Industr1a
(12)
x
.x
x
x
.
-)(
x
.x
x
.x.
x
x• x x
x
x
x.
x
x
x
x
x
x
x
x
x
x
x.
x
x
x
x
Continued..
p 5,11O.1 (7—75 .
the Treasury 1 Bureau of Alcohol, Tobbacco and F1rea ms, Distilled Spirits Plants Authorized to Operate , ATF
Source - Dept. of
-------
New Hampshire
52-Manchester
New Jersey
59-Clifton
60-Jersey City
6 1—Crooswicks
62—Dayton
63-LawrencevlUe
64—Newark
65—Teterbcro
66-Lawrencevllle_
New Mexico
67—Albuquerque
New York
68-Brooklyn
69-Woodside
Ohio
70-Cleveland
71-Cleveland
Jenkins Spirits Corp, Ltd.
Black Prince Distillery, mc.
William Grant & Sons Inc.
Whitehall Distillers Products, Inc.
Fieischmann Distill ig Corp.
Cointreau Ltd.
Duggan’s Distillers Products Corp.
Julius Wille Sons & Co., Inc.
Medley Distilling Co.
Quality Import Co.
Dock Warehousing & Bottling Center
Distillerie Stock USA, Ltd.
Bóuvet Import & Liqueur Co., Inc.
Paramount Distillers, Inc.
x
I C
x
x
x
x.
x
x
x
x
IC
x
Oregon
72-Hood River
Hood River Distillers Inc.
x x
.contlnued...
Source Dept of the Treasury, Bureau of Alcohol, Tobbacco and Firearms, Distilled Spirits Plants Authorized to Operate , ATF p 5,110 1 (7.75)
Exhibit ‘1-2 (Continued)
.
State & City
.
.
Rectifier & Bottler
S •
S
Bonded
WHSE
Industrial
(5)
•
Authorized Operat:loñ
Bonded
WHSE
Beverage
.( )
Rectifier
Bottler.
(7 )
.
Bottler
Non—Rectifier
.. (8)
Bottler
in ‘nd
(9)
.
Denaturer’
(10)
:
Denaturer—.
Rum
(11)
Bottler
Industrial
(12)
IC.
x.
IC
x
-------
Exhibit 1—2 (Continued)
State & City
.
.
Rectif ler& Bottler
. .
.
Authorized Operation
.
:
-
Bonded
. WHSE.
Industrial
(5)
Bonded
WHSE
Beverage
(6)
•
Rectifier
Bottler
(7)
. :
Bottler
Non-Rectifier
(8)
Bottler
.°n Bond
(9)
Dènaturer
(10)
•.
Dénaturer—
Rum
(11)
Bottler
Industrial
(12)
Pennsylvania
73-Schenley
74-Linfield
75-Philadelphia
76-Philadelphia
77-Philadelphia
,
Schenley Distillers Inc. :
Continental ’Distil ’ling Corp. .
Distillers Products Sales Corp.
Charles Jacquin et cit, Inc.
Kasser Distillers Pr ducts Corp.
.
X
X
•
..
X
X
X
X
X
X
X
X
X
.
X
X
.
X
X.
X
Virginia
78-Colonial Heights
. .
American Distilling Co.
.
X
. .
X •.
. X -
.
•
.
Washington -
79-Seattle
James A. Robertson Co.
X
X
Wisconsin
80-Milwaukee
. .
Ainbor Distilled Products Inc.
X
.
X
Source: Dept. of the Treasury,.Bureau of Alcohol, Tobbacco and Firearms, Distilled Spirits Plants Authorized to’ Operate , ATE P 5,110.1 (7—75).
-------
Table I—i. Th ’ Distilled Spirits Industry., by employment siz. qroup, number of
establishments and value of Shipments 1963-1972,
.
1963
1967
. . 1972
Number of
•
Establishments
Value of
Shipments
Establishments
Value of S
hipments ‘
Establishments
Value of Shipments
Million
Dollars
Percent
Million
Dollars
Million
Dollars
Percent
Employees
Number Percent
Number Percent
Percent Number Percent
1-4
7 6.5
1.6
0.1
10 9.0
2.4
0.2 14 11.6
1.6
0.1
5-9
6 5.6
2.6
0.2
3 2.7
*
* 5 4.1
4.5
0.3
10-19
5 4.7
6.5
0.6
4 3.6.
5.3
0.4 6 5.0
‘
7.3
0.4
20-49
50-99
33 30.8.
18 16.8
56.0
80.5
,5.1
7.4
25 22.3
23 20.5
71.1
120.1
5.2
27 22.3
8.8 26 21.5
69.8
174.2
3.9
. 9,7
100-249
17 15.9
186.9
17.2
23 , 20.5
263.8
19.3 19 15.7
330.9
18.4
250-499
9 8.4
210.1
19:3
13 11.6
280.0
20.5 16 . 1.3.2
615.7
34.2
‘500 or more
12 11.2
546.2
50.1 .
11 9.8
621.6
4.5.6 8 6.6
593.9
33.0
TOTAL
107 100.0
1,090.5
100.0
112 100.0
1,364.2
‘.100.0 .121 100.0
1,797.9
100.0
* To prevent disclosure of individual data, the value of shipments for this size group has been aggregated into .the
next smaller size group.
Source: U. S. Department of Commerce, Bureau of Census, Census of Manufactures , 1963, 1967, 1972.
-------
Table 1-2. The dis till.ed liquor industry, value.of shipments
1958-1975
Val ue of Percentage.
Year Shipmentsl/ Change
(Mill ion (Percent)
Dollars)
1958 941.3 —
1959 959.2 1.9
1960 927.1 -3.3
1961 937.9 :1.2
1962. 946.0 0.9
1963 1,090.5 15.3
1964 1,133.8 4.0
1965 1,288.2 13.6
1966 1,331.6 3.4
1967 1,364.2 2.4
1968 1,515.1. 11.1
1969 1,668.7 10.1
1970 1,757.5 5?3
1971 1, 47.5 5. l
1972 1,797.9 2.7
1973 ! 1,814.0 0.9
1974.? ! 1,868.0 3.0
1975.?.! 1,932.0 3.4
- —‘ 1 Figures are for value of production rather than va ue of
shi prnerit.
.?!Estimated
Source: U.S. Departmeritof Commerce, Bureau of Census, Bureauof
Labor Statistics .
1-13
-------
Shipments of distilled liquor, except brandy, (primary products) in 1972
represented 98 percent (specialization ratio) of the industries total
product shipments (primary and secondary.). The industry specialization
ratio in. 1967 was also 98 percent. Secondary products shipped by this
industry in 1972 consisted mainly of wines, brandy and brandy spirits
($25.7 million).
Shipments of distilled liquor, except brandy, from establishments classified
in .industry 2085 in 1g72 represented 99 percent (coverage ratio) of .these
products valued at $1,557.2 million shipped by all industries. In 1967,
the coverage ratio was 98 .percent. . Other industries shipping distilled
liquor, except brandy, consisted mainly of industry 2046, Wet Corn Milling
($10 to $20 million).
Finally, it was also not.possible to determine what portion of the industry’s
valueof shipments were attributable to those establishments with dis-
tilieri.es or to. those without (i.e., to segregate distilleries from those
whi.ch rectify and bottle only).
3. Level of Integration
The Distilled Spirits Industry, is comprised of firms which are associated
with a wide range of levels of integration. In terms of forward integra-
tion, most firms do not integrate any further than their sales to dis-
tributors. Some firms may operate their own distributorships, but these
are usually limited to distributorships for export markets.
In terms of backward integration, the depth of he integration ranges
from almost complete backward integration . (owning sources of the major
materials consumed) to that of a firm which purchases all its materials.
Principally, those operations which only rectify, blend and bottle distilled
spir.its do not have the opportunity for backward integration unless the
operation is owned by a firm which also operates a distillery. The
distillery, on the other hand, often will purchase most of the raw
materials but will rectify, blend and bottle its own product. Distilleries
usually purchase grains, labels and bo:ties. The l&cger firms often have
their own barrell marking faciLty.
1-14
-------
4. Number of Products
The basic products produced by the distilled industry include: whiskey,
bourbon, rye, vodka, gin, rum, spirits, cordials., liqueurs and cocktails.
From these basic products, operation.s will blend and manipulate the
beverages toproduce a wide number of various labels, each with their
own distinctive characteristics. The number of products varies from
plant to plant, with some plants only producing four or five sizes of
one label to those which produce numerous sizes of many labels. Some
grain distilleries also dry their spent grains for sale as feed supple-
ments.
5. Level of Diversification
The Census of Manufactures shows the Distilled Spirits Industry with a
very high specialization ratio of 98 percent in 1972. As stated pre-
viously, this indicates that 98 percent of sales of the establishments
classified in SIC 2085 are in the primary SIC code. The typical facility
is not diversified as the governmental restrictions limit the facility’s
possibilities as well as the fact that the processes and equipment are
specilized, non-interchangeable and donot lend themselves to application
to other products.
It shoul.d be noted, however, that a majority.of the estab1i.s hments in. the.
industry are owned by highly diversified/’conglomerates. The diversification
of these conglomerates includes a variety of operations often, but not always,
in the food processing industry. The acquisi tion of the distilled spirits
operations by the conglomerate was usually resultant of the selling of a
one-time family operation. .
6. Location of Plants
As can be seen in Exhibits? l and 1-2, the majority of the distilleries
are located in Kentucky and the majority of. the rectifiers are located
in California. For the 63 distilleries, the state of Kentucky accounts
for 32 plants (51 percent). California and Pennsylvania follow :Kentucky
with four distilleries each. Thus three states account for 63 percent
of all U.S. distilleries. .
For the 80 ihde endent rectifIers, California accounts for 22 plants.
(28 percent). New Jersey follows with 8 plants, Illinois then follows
with 6 plants and Massachusetts and Pennsylvania are next with 5. plants
.each. In total, the above 5 states account for 46 of the industry’s 80
plant:;. This represents 58 percent of the industry’s plants.
When both rectifiers and distillers are aggregated, the South appears to
contain the heaviest concentration ofplants as well as generating the
major portion of the industry’s total value of shipments (Table 1-3).
The North Central region is next and has slightly increased its share
of the total shipments since 1967. The South has, accordingly shown a
slight decrease in its share.
1-15
-------
Table I 3.: ’Location of Distilleries (SIC 2085) by primary state and region, 1967 and 1972
Northeast Region
New England Division
Massachusetts
Cônnecticu,t
Middle Atlantic Division
New York
New Jersey
Pennsylvania
North Certral Region
West North Central Division
Missouri
Kansas
South Region
South Atlantic Division
‘Maryland
East South Central Division
Kentucky
Tennessee
26 21.5
8.3
3.3’
2.5
13.2
0.s
6.6
5.8
22 18.2
• 41.1
*
*
*
*
*
7.7
2.1
*
10 8.9
4 3.6
3 2.7
48 .42.9
8 7.1
5 4.5
* 17 15.2 *
* 16 14.3
* ‘ 12 10.7
1972
Total Industry Million
Number Percent Dollars
Value of Shipments
1967
value or snipments
Total Industry Mi1li on
Percent Number ‘Percent Dollars Percent
10
4
3
16
1
8,
7
27 . 24.1.
*
*
139.3
*
‘37.8
*
0 i
East North Central Division’,
.Ohio
Indiana.
Illinois
Michigan
656.9 36.5
615.8
*
*
234.1
*
17 15.2
.3’ 2.7
7 6.3
7, 6.3
20 17.9’
15 13.4
4 . .3.6
2 1.8
6 5.4
2 1.8
34.3
*
*
13.0
*
17. 14.0
4 3.3
2 1.7
.7 5.8
3 2.5
5 4.1
3 ‘ 2.5
‘1 0.8
56 46.3
14 11.6
5 4.1
40 33.1
35 ‘ 28.9
3’ 2.5
2.3 5 4.5
1 0.9
* *
* *
* *
* *
* *
*
*
99.6 7.3
465.1 34.1
443.5 32.5
* *
* *
190.6 .14.0
* • *
?1.6 1.6
* *
588.2 ‘ 43.1
* *
* *
* *
448.7 32.9
* *
*
*
*
41.9
*
*
753.7
*
*
*
*
*
West Region
Pacific Division
California
UNITED STATES
* 39 , 34.8’
* ‘ 36 32.1
* 3 2.7
17 14.0 ‘ *
16 13.2 *
12 9.9 *
121 100.0 1,797.9 100.0
* Data withheld to avoid disclosing figures for Individual companies.
*
*
112 100.0 1,364.2 100.0
Source: Department of Commerce, Bureau of Census, Census of’Manufactures .
-------
7. Age of Plants and Level of Technology
Within the Distilled Spirits Industry, there exists a wide variety of
plant ages varying from several generations old to those which were
just recently built. While many of. the plants ‘are relatively old (many
distilleries were built after the repeal of.prohibition in 1933) through-
out their useful life new equipment has been added or used to replace that
which is worn out or technologically obsolete. As a result, most plants
in the industry represent ‘a combination of both old and new equipment.
Furthermore, it can be generally assumed that the newer the plant and
its equipment, the more technologically advance the plant is. Finally, it
is not uncommon for plants which, are expanding to use equipment from
plants which have closed. This is particularly true for the stills and
the associated equipment. Bottling equipment, on the other hand,.has
advanced, in recent years and accordingly, the older bottling lines have.
been scraped and new ones installed.
There are no known measure of the ages of plants in the distilled
spirits industry. However, for purposes of this report, it is assumed
‘that all operations are about the same age. There may, be a slight
tendency for the smaller operations to be older as can be seen ‘in
Table 1-4. This table utilizes IRS data and depicts, for variously
sized operations, the firms accumulated depreciation expressed asa
percent of its total depreciable assets. As can be seen in the table,
those’firms with less than $500,000 in tota.l assets tend to be 60
percent depreciated while those firms with more than’$500,000 in ‘total
assets tend to be depreciated between 40 and 50 percent. Thus the
larger operations have less depreciated assets than the smaller operations
and as such can be assumed to have newer facilities and. equ’ipment.
8. Plant Efficiency
Distilled spirits plants ‘vary significantly between each other in terms
of plant efficiency. Primarily the differnce between plants’ efficiency
is dependent upon the technical level with which the plant operates.
Furthermore, the age and the condition of the equipment will signifi-
cantly influence the efficiency of the ‘plant. Those plants with old
and neglected equipment will undoubtedly encounter many rore hours of
down-time due to mechanical failures. Finally, it is evident that the
larger plants have a greater potential for ‘operating efficiently as
they will usually operate more days per year and have the newer, highly
automated equipment thus allowing their output per employee to be higher.
1—17
-------
Table 1-4. Alcoholic Beverages, except malt liquor and malt, accumulated depreciation as a percent of
total depreciable assets; by total asset size
• . Size of Total Assets ($1,000)
Fiscal 100-. “50- 500- . ,000- 5,000- 10,000- 25,000- 50,0.00- 100,000- 250,000 -
Year 0-100 250 500 1,000 5,000 10,000 25,000 50,000 100,000 • 250,090 or More
Percent
1968-69. • 93 63 -- 78 50 44 45 35 50 44 48
1969—70 7 70 75 17 55 41 4 s 34 44 43 50
1970-71 —- 69 46 48 44 53 35 44 44 51
-a
03
• 197.1-72 81 34 40 41 53 • 39 53 37 44 44 51
Average 60 59 58 46 52 42 49 35 46 • 44 50
Source: Department of the Treasury, Internal Revenue Service, Source Book of. Statistics of Income , annual.
-------
B. Employment Characteristics
Total employment in t,he Distilled Spirits Industry has decreased by’ over
10 percent from 20,500 employees’ in 1958 to 18,400 employees in 1972
(Table 1-5). Production workers represent approximately 80 percent
o’f total employees, and during the above period decreased in numbers
from 16,600 in 1958 to 14,500 in 1972.
Overall, the productivity of the production workers has increased sig -.
nificantly since 1960. Since’ then both the value added nd the value of
shipments per production worker have more thandou,bled. Some of this
increase is attributable to inflation, however a good portion’is explained.
by the installation of automated equipment (especially in the bottliñg
lines) as well as the better Utilization of those employed.
The distilled spirits’ production worker’can be classified as predominantly
union and semi-skilled. Much of the labor involves the monitorinq of
either the stills and associated’ equipment or the bottling operations.
The average annual hours worked per production worker h ’ve remained
relatively constant with the average being 1972 hours in 1972. Since 1958,
hourly wages have doubled, from $2.30 in 1958 to $4.63in 1972’;
Corresponding’ to the wage increase, the value added, per worker also has
doubled during the same time’ period.
It should be noted that while many of the workers employed are full-time,
some distilleries do not operate on a year-round basis. In fact some
plants may shut down for a year or more. Oftena distillery will shut
down its distillation Operation and attemptto utilize its people
in the maintenence or bottling, operations, however some plants cannot
utilize all its employees. ‘As such, especially in distilleries located
in rural areas, the worker will h’ave a supplement source of income which
usually is agriculturally—related.
As can be seen in Table 1-6, the majority’ of the employees are concen-’
trated in the larger sized operations with 68 percent of all employees and
‘70 percent of the production workers being employed by firms wi,th 250
or more employees.
C. Segment Portions of the Total Industry
While the preceding sections of this chapter have be,en concerned with
establishment data for the Distilled Spirits Industry, concern is also
warranted about the different types of operations within the overall
i n dust ry.
1-19
-------
Table .1-5.
The Distilled Spirits Industry, employment statistics, 1958 to 1972
N)
.
All Employees
Production Workers
Value of
Shipments
Man-Hours
Per
Wage Per
Production
Value Added
Per Production
.
—
Per Production
Production
Worker
Worker
..
Year
Number
Payroll
Number
Man-Hrs
Wages
Worker
Worker
Man-Hours
Man-Hours
(000)
($Mil.)
(000)
(Mu.)
($Mil.)
($000)
($)
($)
1958
20.5
102.6
16.6
32.2
73.9
56.7
1,937
2.30
14.23
1959
20.3
106.8
16.3.
33.1
78.2
58.8
2,029
2.37
14.74
1960
20.2
110.0
15.9
33.5
79.1
58.3
2,106
2.36
13.84
1961
19.0
110.3
14.9
31.3
78.0
62.9
2,105
2.49
14.83
1962
18.7
113.3
14.5
30.6
80A
65.2
2,113
2.63
15.18
1963
18.0
110.2
14.3
28.1
80.2
76.3
1,962
2.85
22.17
1964
1965
17.8
18.9
115.6
125.7
14.2
14.9
28.0
29.7
84.’
91.4
79.8
86.5
1,972
1,986
3.01
3.08
23.61
24.01
1966
19.0
130.0
t5 2
30.1
94.5
87.6
1,974
2,047
3.14 .
24.04
1967
19.4
141.6
15.6
31.9
104.0
87.4
3.26
23.13
1968
20.0
152.4
15.9
32.3
110.9
95.3
2,031
3.43
26.13
1969
20.5
164.3
16.4
33.3 .
120.1
101.8
2,024
3.62
27.88
1970
20.5
171.0 16.3
31.4
125.6
107.8
1,926
4.00
23.25
1971
19.2
177.8
15.1
29.7
129.8
122.4
1,967
4.37
32.30
1972
18.4
183.1
14.5
28.6
132.5
. 12.4.0
1,972
4.63
35.80
Source: U. S. Department of Commerce, Census of Manufactures , 1972.
-------
Table 1-6. The DistilledSpirits Industry, employees by
establishment size, 1972
Employment All Percent of Production. Percent: of
Size Employees Tota1 Workers Total
0-19 100 0.5 100 0.7
20-49 900 4 :9 700 4.9
50-99 1,800 9.7 1,200 8.3
100-249 3,100 16.8 2,300
250-499 5,600 30.3 .4 500 31.3
500-2,499 7,000 37.8 5,600 38.9
TOTAL, 18,500 100.0 14,400 100.0
Source: U. S. Department ofCornerce, Census of Manufactures , 1972.
1-21
-------
Those operatiDnsc1as ified within the DistiTled Spirits Industry are
primarily of two distinctively different operations. First, there are
those which purchase distilled alcohol and rectify, blend and/or bottle
it to produce the desired beverage. As mentioned previously in this
chapter, there are 80 such operations authorized to operate in the
United States and of these authorized plants there are no known plants
which are considered direct dischargers. As such the major portion of
the remainder of this report will be concentrated on the other type of
ciperation.
The second type of distilled spirits operations are those which have a
still and produce distilled spirits fOr either further processing which
leads to bottling or for sale to a rectifier and/or bottler. As pre-
viously mentioned, there are -63 authorized distilleries which can
operate in the United States. These plantswere listed in Exhibit I-i
and from this exhibit it becomes evident that there are two basic types
of distillation operations.
First and perhaps the more commonly thought of distillation operations
are those which utilize grain to produce whiskeys’and grain spirits.
In total, there are 60 of these operations in the U.S. Of these opera-
tions approximately 24 can be classified as small, 31 as medium and 5
as large.
The second type of distillery utilizes molasses instead of grain.and
prlmarily produces rum. There are 3 of these operations with 2 in
Florida and one in Massachusetts. One of the plants is considered small,
however the other two plants are relatively large.
D. Significant Inipacts on the Industry
Because of the structure and competitiveness of the Distilled Spirits
jndustry, pollution abatement standards when imposed on plants discharging
to surface waters and municipal’ sewers can have serious consequences on
the industry itself. The magnitude ‘of this impact will, of course,
depend on the level of investment required to meet the specific standards.
The ‘smaller third--and to some extend the middle third--of the plants dis-’
charging directly are expected to be seriously impacted. They may not
be able to recover the cost of installing and operating abatement
facilities unless they have access to lower cost facilities, expand
or merge. The specific plant impacts will depend on many factors,
such as’ capital. availability, size of plant, profitability of the
plant, location and availability of low cost treatment strategies.
1—22
-------
It is recognized that the impact of substantially increased user charges,
now and in the future, to plants discharge to or planning to discharge
to municipal sewers is extremely critical to the industry, local business
communities and to consumers. However, the scope and the economic impacts
analyzed in this report pertain to those plants directly discharging to
naviqable surface waters.
1. Capacity of Low Cost Producers Relative to High Cost Producers
The capacity of low cost distillers •connected to municipal sewers and/or
directly discharging relative to high cost distillers in the’same position
is one of the more important factors in considering the impact of .pollution
abatement costs imposed upon the industry. In the Distill d Spirits
Industry, the largest fourth of the pLnts produce approximately’ 73
percent of the total volume. The middletwo-fourttsof the plants pro-
duce about 24 percent, and the smallest fourth produce onJy 3:Perc t of
the total volume. Due to economies of scale, the larger.plants are
already expected to have a definite cost advantaqe. The imposition of
hi.gh pollution abatement costs on the smallest fourth of the plants dis—
charging directly or to municipalities, and to a large exteit the.,middle
two-fourths, are expecte i to result in further disadvantages of these low
volume’ plants. If these small plants are forced .O shut:down (unless
low cost abatement procedures can be utilitzed),the low cost-high
volume plants in the industry will most likely offset possible losses
in’ capacit.y through expansion (ãcquis 4 tion, plant expansion) orby increasing
the t l zat on of their existing distilleries
2. Factor Dislocation Within the’ Industry
Differential impacts from pollution abatement controls are expected
within the Distilled Spirits Industry, both in terms of type of firm
‘and in regional location of affected plants. The impacts expected
iand reasons for associated dislocations are discussed below.
a. Types of Firms and Location
As explóined earlier, the Distilled Spirits Industry is comprised of
many firms (multi/single plant) differing in plant operations, size
(rate per hour), capacity and utilization of capacity, level of tech—.
noloqy (new/old) and other factors. Many of these factors were ‘con-
sidered in the preliminary analyses and one of the most critical
measures in terms, of assessing a plant’s ability to withstand t,he
impact of internalized pollution abatement costs is its overall through-
put size.
Marginal Firms - Within the industry, marginal’ firms are typically the
“small” and single plant firms. This is particularly true in. terms of
small firm’s ability to financially withstand projected high capital
investment requirements of pollution abatement measures. Such plants
often simply lack capacity to pay out such investments (at the levels
given). Many single plant firms also lack the capital-acquiring ability
of larger multip’lant firms. ‘
I’-23
-------
Within this framework, marginal firms faced with the decision to either
curtail production or. shutdown would most likely shut down. However,
pollution abatement investment costs can be an incentive to expand pro-
duction, not lower it, in order to lower per unit costs for those plants
having or able to install self-contained disposal facilities.
Plant closures are also expected to result where obsolescence together
with rising operational costs and required regulatory capital needs cause
total costs of operation to be so high that continued operat on is economically
unfeasibie. For single plant firm closures, unemployment and loss of market
for local suppliers associated with the closing plant are expected to re-
sult. For some closed plants that belong to multiplant firms, various pro-
portions of production and employees will shift to other plants belonging
to the firm; some unemployment, due to immobility, with a corresponding
ios,s of payroll and local business will occur. Other closed plants that
belong to multiplant firms may not be able to shift’production and are ex-
pected to have the same, effects as the single plant firm closures.
Locational Impacts - Only general patterns of location of plants by
size category have been assessed in this phase of the study, but from
this alone, itis believed that only slight regional differences ir
impact will occur following standard adoption of pollution abatement
controls. It is recognized that differences in state water quality
standardsand the possibility of non-uniformity of enforcement within
and between states is another important factor in the impact on distilled
spirits plants. Even ‘though this problem is recognized, the impact of
regulato’ry variability is not included in this report as the necessary data
is not readily available.
3. Reasons for Dislocations
Reasons for the ‘.bove type of firm and expected dislocations within the
industry have been generally described. summary in terms of profitability
and capital attainment is appropriate,.
Profitability - Profitability of firms, but particularly the smaller,
inefficient and undercapitalized firms, will be affected by pollution
,abatement measures. While average incremental costs for pollution abate-
ment “ may eventually be passed through to consumers, the smaller firms
.are.expected to have much hi her than average per unit costs of abatement
and to d;’op out during the period necessary to achieve any consumer price
adjustments.
Economies of scale in pollution control are apparent, and this is to the
relative disadvantage of smallerfirms. As previously suggested, many of
the plants discharging direct or to municipalities might be forced out of
the industry. This would have a limited desirable impact on the remaining
firms in that pollution control costs could be spread over a larger volume.
Thus, the level of profitability of the surviving plants might be affected
less on the average.
1-24
-------
In-plant modifications and operational chanqes which will reduce effluent
loads may or may not improve the profitability of those plants which can
take advantage of them. In-plant modification costs and savings must be
assessed and justified by individual plants.
Capital Availability - Capital within the industry is obtained primarily
from commercial sources outside the industry and from the investment of
profits;. Additional capital requirements for financing pollution abate-
ment measures will be sought principally from such sources.
In this case, ability to obtain additional capital is expected.to be
determthed by an individual firm’s projections of net returns with an
expanded investment program. Consequently, capital availability is
expected to be directly related to profitability--and the smaller,
inefficient plants will have difficulty raising the needed long and
short term capital to stay in business. In this sense, inability to
obtain capital will contribute to the shutting down of marginal
plants.
Firms which are able to pass through incremental cost of pollution
abatement costs and maintain positive profitability will be able to
acquire capital for increasing capacity--plant expansion, acquisition,
etc. Currently, pass throughs of rapidly increasing and larger-than-
ndrmal proportions of costs are difficult to expedite. Costs
are rising rapidly and are disproportionately large due. to a’ nearly
simultaneous inflation of ope ’ational costs (labor, materials, raw
rnaterial.)with new investment requirements imposed by regulatory bodies
(FEA, FDA, OSHA, EPA). These increased costs are difficult to pass
through due to the recession wherein consumers are tending to resist
any price increases through a lowering of consumption to basic needs.
Thus, plans of expansion through acquired capital will tend to be
carried out to the degree incremental pollution :abatement, energy, drug,
safety and inventory costs can be Dassed through to consumers. , . ‘ -
The ability of firms to obtain capital will also depend on the state of
the economy and the amount of money available for lending. With a large
amount of available funds, many industries and firms will be encouraged
to borrow’funds. Competition for funds among industries is dependent
upon the money supply and relative profitability of individualfirms.
4. Narrowing the Study Scope
The preceding ‘has attempted to describe an overall picture of the
Distilled Spirits Industry. In the remainder of this analysis, efforts
will be made to.concentra’te on those distilleries which could be subject
to potential impacts due to the imposition of effluent controls. This.
will be accomplished utilizing representative model distilleries to
estimate impacts and extending these impacts by association to the wider
spectrum of plants which correspond to the model distilleries.
1-25
-------
II. FINANCIAL PROFILE OF THE INDUSTRY
Firms in the Distilled Spirits Industry are primarily either family or
closely held. corporations or divisions or subsidiaries of large, often
multi-plant operations. As a result, financial information relating to
a single plant is difficult to obtain. However, by relating information
available from a variety of sources, a picture of the distilled spirits
industry can be attempted. Information used to develop financial profiles
was integrated from several sources, including, the Census of Manufactures,
the Annual Survey of Manufactures, Distilled Spirits Council of the United
States and associated industry operational and financial statistics.
A. Sales and Taxes
For 1974, the Distillad Spirits Industry value of shipments amounted to
$1,868 million (Table 11-1). This comparesto $1 ,757.5 million in 1970
and $927 million in 1960. The increase in shipments has been’resultan.t
of inflation, increasing per capita’consumption and an increased: population
becoming of the ’ 1ega1 drinking’ age.
Besides generating annual sales, distilled spirits plants also generate
substantial tax revenues for the federal, state and local governments.
In 1974, these tax revenues amounted.to over $6.1 billion, which is over
three times t e value of the industry’s shipments (Table li—i) ,. The ‘1974
revenues represented an increase of 3.8 percent over the collectioos of
1973. Over .5 percent of the total public revenue received from distilled
spirits in 1974 represented returns from the Federal excise’ tax on distilled
spirits collected at a rate of $10.50 per tax gallon (one fluid gallon of
100 proof spirits). The remaining portion is attributable to various state
and local, taxes.
The. above, mentioned taxes apply to distilled spirits produced in the
United States or imported from other countries. For those spirits imported,
the Federal government is paid the same amount as for spirits produced in
the United States, $10.50 per gallon.
In terms of domestic production of. distilled. spirits, the industry has
shown a tendency for the annual quantity to flu tuate near 200 million
tax gallons (a tax gallon represents one liquid gallon of 100 proof
beverage). For 1974, the annual quantity was 162 million tax gallons.
Another measure of pràduction which is perhaps more indicative of”the
industry’s sales is the quantity of distilled spirits which is bottled.
This is based on the fact that the distilled spirits produced, for the
most part, are not immediately bottled for sale. Instead, the spirits
are stored in barrells and aged from one to several years. Two of,the
more common products which are exceptions to this are vodka and gin
II —•I
-------
I-
Table 11-1. The Distilled Spirits Industry, annual value of shipments, production, consumption and public
revenues generated, 1950-1974
Year
.
Total Value of
Shipments
:
Production of
Distilled Spirits
•
Domestic Bottled
Output of
Distilled Spirits
Appar nt
Per Capita
Consumption
Public Revenues
from alcoholic
beverages
(Dollars)
(Tax Gallons)
(Wine Gallons)
(Wine Gallons)
(Dollars)
1950
962,491,000
324,981,128
181,594,617
1.26
2,230,000,000
1951
942,489,000
322,175,789
176,062,385 ‘
1.26
2,275,000,000
1952
765,047,000
148,720,145
163,489,521
1.18
2,430,700,000
1953
1954
901,843,000
754,643,000
166,182,730
184,522,919
177,391,900
169,724,880
‘1.23
1.18
2,568,000,000
2,471,400,000
1955
783,427,000
213,458,552
179,404,992
1.21’
2,601,156,000
1956
858,072,000
222,177,471
196,995,663
1.29
2,863,417,000
‘1957
867,176,000
227,300,208
183,606,943
1.25
2,671,182,000
1958
941,300,000
237,223,165
188,976,257
1.24
2,782,647,000
1959 .
959,200,000
184,159,327
200,943,890
1.28
2,979,134,000
1960.
927,100,000
186,933,686
. 203,301,932
1.31
3,090,068,000
1961
937,900,000
. 184,186,200
211,306,968
1.32
3,247,058,000
1962
946,000,000
154,844,466
219,750,226
1.37
3,425,000,000
1963
1,090,500,000
150,060,265
223,921,486
1.37 ‘
3,518,672,000
1964
1,133,800,000
162,938,351
243,144,949
‘1.44
3,737,090,000
1965
.1,288,200,000
185,063,827
252,708,417
1.52’
3,921,064,000
1966
1,331,600,000
191,142,244
271,468,262
1.58
4,023,139,000
1967
1,364,200,000
211,765,585
286,006,801
1.64
4,411,075,000
1968
1,515,100,000 .
238,329,051 .
292,758,238
1.73
4,606,251,000
1969
1,668,700,000
230,054,089
311,291,951
1.80
5,207,451,000
1970
1,757,500,000
212,291,449
313,009,120
1.82 ..
5,268,533,000
1,971
1,847,500,000
. 183,274;484
325,576,423
1.85
5,462,614,000
1972
1,797,900,000
183,791,389 .
337,758,559
1.88
5,608,094,000
..
1973
1,814,000,000
183,069,499
339,541,847
1.92
5,906,390,000
1974
1,868,000,000
162,169,830
354,863,627
1.96
6,129,019,000
Sources:
Bureau of the Census and Distilled Spirits Council of the
United States.
. .
-------
which require no aging. However, for most of the products aging ,is con-
sidered an integral part of the prodUct development and, in most cases,
is required bylaw. The annual quantity of distilled spirits bOttled
in 1974 was 354.9 million wine gallons (a fluid gallon). The quantity
bottled has maintained a steady rate of increase from 181.6 million wine
gallons in 1950 to the 1974 quantity of 354.9 million gallons,.
The 1972 Census of Manufactures estimate of value of shipments ‘for the
industry was based on information provided by 121 establishments.’ This,
gives the shipments, for the’ average plant to be $14,858,700 (Table 11-2).
This compares to’ an average of $12,180,400 in 1967.
‘While the average plant had shipments of’ nearly $15 million in197? with
152 employees, the actual plants varied’considerably in size. Actual
plants ranged in size from small operations of less than 10 employees
with’ annual shipments of $320,000 ’to large operations employing over 500
employees with annual ship ient of $74.2’ million.
B. Distribution of Sales:Dolla,r
Relatively little change has occurred in the distribution of the sales
dollar for the Distilled Spirits Industry from 1967 to 1972. Some
changes can undoubtedly be attributed to disproportional price,increases
but as can’b’e seen below, the basic distribution has not b’een significantly
changed. ‘ ‘
Distribution of Sales Dollar:’(P’ercent)
1967 1972
Total Sales 100 0 100.0
Raw Materials 46.9 43.4
Payroll 10.4 , 10.2
Other operating costs, interest,
t,axes and profits 42.7 46.4
I 1-3’
-------
Table 11-2. The Distilled Spirits Industry, value of shi•prrients, value added and employees, 1967,
1972 and 1.974.
•
•
1967
.
Industry To tal
1972
1974
Per
Establishment Industry’
Total
•
Estab
Per
lishment
Industry
Total .
Per
Establish.
Number of es.tab1ish nents 112 121 120
Value of shipments ‘ $1,364.2 million $12,180,357’ $1,797.9 niillion $14,858,678. $1,868.0 million $15,566,667
Value added $ 736.7 million $ 6,577,678 , $1,023.9 niillion $ 8,461,983 NA
Total employees 19,400 173 18 400. ‘152 16,300 136
Source: Dept. of Commerce, Bureau of Census, Census of Manufactures , 1972 and the 1975 Industrial Outlook .
-------
The price of grain and molasses, major raw material inputs, have.experienced
significant increases in the past two years. While these increas;es are.
not reflected in the 1967 and 1972 periods, they will undoubtedly contribute
to a redistribution of the raw materials portion of the sales dollar.
Between 1967 and 1972, the cost of raw materials increased from. $639.3
million to $780.4 million with a correspondingdecrease in the percentage
of the sales dollar from 46.9 percent in 1967 to 43.4 percent.in 1972.
Thus, between 1967 and 1972, the significance of raw matehals actually
d crëased.
The number of employees declined from 19,400 in 1967 to 18,400 in 19.72.
During this period, average àhnual wages increased from $7,299 in 1967 to
$9,951 in 1972. However, during this period, industry payroll as a percent
of sales declined from 10.4 percent to .10.2 percent.
Th 3 other operating costs, interest, taxes and profits i icreased from. 42.7
percent in 1967 to 46.4 percent in 1972. This increase is attributed to
•the increased interest cost particularly due to the interest -rate applying tothe
distilleries’ relatively large inventories (resultant fromaging require-
ments) as well as increased taxes.
C Earnings
According to Standard and Poors Industry Survey 1/, the Distilled Spirits
Industry has experienced four consecutive years of subpar growth particu-
larly with respect to consumption growth. Despite this, the leadinq
distilleries have established excellent records of consistent, thOugh
moderate, earnings growth. Standai’d and Poor states further that this is
all the more remarkable when viewed against the background of almost
stable prices for distilled spirits during a period of moderate high rates
of cost inflation. The retail price of straight and blended whiskies
during the five year period through 1973 period rose a modest 8 percent,
compared with an increase in the cost of living of almost 30 percent. A
principal reason for this price trend has been the diversification of most
leading distillers, priricipallyin wine but also in such activities as.oil
and gas production uhere, though faster volume growth or better realization,
slimmer profits of the basic ‘distillin business have been obscured.
1/ Standard and Poors Industry Survey , Liquor-Current Analysis, April 5,
1975 (Section 3).
11-5
-------
While the above data indicate a relatively good return for the major diversified
operations, the industry as a’whole has not faired very well. According
to the Internal Revenue Service data (Table ‘11-3), the average net profits before
taxes has declined from 3.7 percent of net sales in fiscal year 1968-69
to a low of 1.8 percent in 1970-71. In 1972, the latest year for which
data -are available, the percentage increased to 2.0 percent. This deteriora-
tion in recent years ‘can be attributable to a variety of factors some of
which were mentioned above. The slight improvement in profits in 1971-72
may be associated with the diversification of firms as well as the fact
that in the whiskey segment, proofs were reduced usually without a pro-
portionate decrease in price.
Table 11-3 also indicates the profits by the size of the operation. , As
would be expected, the smaller-operations generally were associated’ with
the lower and unstable profits and the larger ‘firms maintained reasonably
steady respectable profits.
9. Ability, to Finance New Investment
The ability of a firm’ to finance new investmen’ts for pollution abatement’
is a function of several critical financial and economic factors. In
general terms, new capital must comefrom or e’ or more of the following
sources: (1) funds borrowed from, outside sources; (2) equity capital
generated through the sale of common or preferred stock; (3) internally
generated funds--retained earnings and the stream of’funds attributed to
depreciation of fixed assets.
For each of the three major sources of new investment, the most critical
set of factors is the financial condition of the individual firm. For debt
financing, the firm’s credit rating, earnings record over a period of
years, stability of earnings, existing debt-equity ratio and the lenders’
confidence in management will be major conside ’ations. New equity funds
through the sale of securities will depend upon the firm’s future earnings
as anticipated by investors, which in turn will ref’lect past earnings
records, The firm’s record, compared to others in its own’industry ‘and to
firms mother similar industries, will be a major determinant of the ease
with which new equity capital can be acquired. In the ‘comparisons, the
investor will probably look at the trend of earnings for the’past five’
years.
Internally generated funds depend upon the margin of profitability a’nd the
cash flow’from operations. Also,’ in publicly held corporations, ‘stock-
holders must be willing to forego dividends in Order to make earnings
available for reinvestment.
11-6
-------
Table 11-3. The alcholic beverag industry, e cept malt liquors and malt, net profit before taxes, by asset size,
1969-1972.
___________________________ Size_of_Assets__($000) _____________________________________
Fiscal Under 100 - 250 - 500 - 1,000 - 5,000 - 10,000 - 25,000 - 50,0 0U - 100,000 - 250,000 — Total
Year 100 250 500 1,000 5,000 10,000 25,000. 50,000 100,000 250,000 or more. Industry
Percent of Net Sales
1968-69 5.7 -0.6 - 5.8 0.0 3.7 6.8 8.5 4.5 4.0 2.6 3.7
1969’70 1.7 3.8 -30.9 3.9 4.7 5.6 3.3 7.3 5.4 4.1 0.7 2.1
-1971-71 - 3.0 -36.3 -0.2 2.6 5.6 2.2 6.6 4.5 3.1 0.6 1.8
1971 72 -2.7 3.8 3.7 -5.2 4.2 4.4 5.1 4.1 5.8 3.8 0.4 2.0
Source: Department of Treasury, Internal Revenue Service, Source Book of Statistics of Income , Annual.
-------
The, condition of the firm’s industry and general economic conditions are
also major considerations in attracting new capital. The industry will be
compared to other similar industries (i.e., other beverage industries)
in terms of net profits on sales and on net worth, supply-demand relation-
ships, trends in production and consumption, the state of technology,
impact of government regulation, foreign trade and other significant
variables. Declining or depressed industries are not good prospects for
attracting new capital. At the same time, the overall condition of the
domestic and international economy can influence capital market . A
firm is more likely to attract new capital during a boom period than during
a recession. On the other hand, the cost of new capital will usually be
higher during an expansionary period. Furthermore, the money markets
play a determining role in new financing.
These general guidelines can he applied to the Distilled Spirits Industry
by looking at general economic data and industry performance over the
recent past.
1. General Industry Situation
As. was depicted in Table 11-3, the distilled spirits industry has
‘experienced a declining trend in its profits during the past few years..
However, Standard and Poors have projected that the industry has good
earnings potential from expanding sales of American spirits abroad.
Unfortunately, these type of solutions to improving profits are usually
only available to the larger operations and as such firms of limited
size or funds may continue to experience reduced profits.
Total assets and liabilities of the industry are shown in Table 11-4
for the years’ 1968-69 through 1971-72. From the table, it is appareilt
that the industry fixed assets represent approximately 42 percent of
all assets and that current assets represen approximately 58 percent.
Also, it’ is apparent that of the total liabilities, long term debt
represents approximately 26 percent, current liabilities represent. 30
percent and net worth represents 44 percent.
2. Expenditures for Plant and Equipment
,New expenditures as reported Ly the Annual Survey of Manufactures and
the Censu have increased from $15.9 million in 1960 to $33.4 million
in ‘1972 (Table 11-5). The yearly expenditures have fluctuated from
year to year, but overall has been increasing. .
A closer look at the $33.4 million spent as capital expenditures in
1972 (depicted below) reveals $7.1 million were spent for new structures
and additives to plants, $25.7 million for new machinery and equipment
and the remainder, $0.6 million, being spent to purchase used plants
and equipment.
11-8
-------
Table 11-1. The alcoholic beverage industry, except malt liquor and malt, assets and liabilities,
1969-1972
1968—69
($ Mil.) (Percent)
($
‘ 1969-70
Mu..). (Percent)
1970-71’
($ Mil.) (Percent)
1,971—72
($ MU.) (Percent)
of Income, annual.
Assets
Current Assets
1,683.3
55
3,207.5
58
3,278.1
58
3,418.4
59
Fixed Assets
1,352.0
45
2,288.1
42
2,380.8
42
2,343.8
41
Total Assets
3,035.3
‘
100
5,495.7
.
100
5,658.9
100
5,762.2
100
.‘Liability’& Equity
Long Term Debt.
‘Current Liabilities
Net, Worth .
Total Liabilities
‘
690.2
757.6
1,587.4
3,035.3
23’
25
52
100
.1,488.4
1,756.7
2,250.5
5,495.6
27
32
41
100
1,464.8
1,785.9
2,408.2
.5,658.9
26
32
42
100
•
1,592.2’
1,629.8
2,540.1
5,762.2
‘‘
28
‘ 28
44
100
.
,_
°
and Equity
.
Source: Department of Treasury, Internal Revenue Service,
Source Book àf Statistics
-------
Distilled spirits industry, capital expendi-
tures, 1960”through 1972.
1960
1961
1962
1963
1964
1965
1966
1967
1968
1969
1970
1971
1972
Source: Department of Commerce, Bureau of Census.
Table 11-5.
Year -
Capital
Expendi tures
• ($ Million)
15.9
14.5
19.8
15.5
13.5
23.4
32.2
27.0
44.0. • -
38.6
28.9
28.6
33.4
- h- _ b
-------
As also depicted •below, comparable data for 1967 reveal that the industry
utilized a greater portion of its capital expenditures for new machinery
and equipment and also used plants and equipment and a smaller portion
for new structures and additions to existing plants. This can be inter-
preted to suggest. that the industry is moving toward the upgradi.ng of
existing facilities instead of the construction of new facilities.
Expenditures for Plants and Equipment
1967 . 1972
$ Million P rcent . $ Million Percent
:rotal . . 27.1 100.0 33.4. 100.0
New Structures & Additions
to Plants 9.6 35.4 7.1 21.3
New Machinery & Equipment 17.4 64.2 25.7 . 76.9
Used Plants and Equipment . 0.1 0.4 0.6 1.8
3. Capital Availability
In summary, it... would appear the Distilled Spirits Industry can be
categorized into two types of financial positions in terms of the avail-
ability of capital to utilize for expenditures on pollution controls.
First, there are the larqe diversified firms who have experienced
reasonably steady profits and through diversification have been able
to maintain adequate cash flqws. For these firms the acquisition of
additional capital for pollution controls may be of conëern but should not
be a major problem. .
The other financial position will be encountered by the smaller firms
who do not have the available sources from which.additional capital can
be readily generated. These firms will primarily have to rely in—
ternally generated capital (if available.) or attempt to borrow it.
Depending on the firms’ potential and the industry’s outlook, some of.
the smaller firms may encounter significant problems in obtaining capital.
. . . Cost of Capital - After Tax
Return on invested capital is a fundamental notion in U.S. business. It
provides both a measure of actual performance of a firm as well as expected
performance. In this latter case, it is also called the cost of capital.
Thecostof capital isdefined as the weighted average of the cost of each
type of capital .employed by the firm, in general terms equities and interest
bearing liabilities. .There is no methodology that yields the preci.se cost
of capital, but it can be approximated within reasonable bounds.
Il—il
-------
The cost of capital was determined for purposes of this analysis by
estimating performance measures of the industry. The weights of the
two: respective types of capital for the Distilled Spirits Industry were
estimated at 37 percent debt at 63 percent equity. The cost of debt was
assumed to be 10.0 percent. The cost of equity was determined from the
ratio of earnings to net worth and estimated to be 9.5 percent.
To determine the weighted average cost of capital, it is necessary to
adjust the before tax costs to after-tax costs (debt capital only in tbis
case). This is accomplished by multiplying the costs by one minus the tax
rate (assumed to be 48 percent). These computations are shown below and
result in the estimated after-tax cost of capital being 7.9 percent.
Weighted Average After Tax Cost of Capital.
Before Tax. After Weighted.
Item Weight Tax Cost Rate Tax Cost Cost
Debt .37 10.0 .48 5.2 1.9
Equity .63. . 9.5 6.0
7.9
11-12
-------
III. MODEL PLANTS
The distilled spirits industry consists of distillers using’several
different manufacturing processes to produce a wide variety of alcoholic
beverages. As stated in previous sections, the industry is comprised of
establishments primarily engaged in manufacturing alcoholic beverages by
distillation and rectification, andin manufacturing cordials and alco-
holic cocktails by blending processes or by mixing liquors and other
ingredients. As this chapter is concerned with the development of
economic model plants representative of those plants in the industry
which potentially could be •affected by the imposition of effluent
controls, the primary emphasis of this chapter will be those operations
with grain disti’-leries. This determination was made since the rectifying,
blending id botti i rig operations have little, if any, effi uent and the
fact that the Development Document states that no known rectifying, blend-
ing and bottling plants discharge effluent into navigable waters. Molasses
distilleries were also.eliminated from inclusion in this chapter a EE i P
ingto EP4 th e wol es eijWer discharge o rn nicipal
systems or have already met BAT standards.
A. Types of Plants
Those establishments which utilize the distillation operation in their
production of alcoholic beverages can basically be classified into two
categories: (1) those which distill grain or some combination of ingre-
dients including grain to produce the more common types of beverages such
as whiskey, vodka, gin and cordial; and (2) those which distill citrus
molasses to produce principally rum. As mentioned above this latter •type
will be omitted from further analysis as it is anticipated impacts on
molasses distilleries will be nominal, if any.
The typical grain-based distillery produces its distilled spirit products
utilizing six basic stepsl!. These steps include: (1) Grain handling
and milling; (2) Mashing; (3) Fermentation; (4) Distillation; (5) Maturation;
and (6) Packaging. Each of these steps will be discussed briefly.
1. Grain handling and milling - Dist illeries utilize premium cereal
grains and supplement these to meet their own standards. Once received,
the grains are stored prior to their milling. The milling operation breaks
the outer cellulose protective ‘ ia1l around the kernal and exposes more
starch surface to the action of the cooking and conversion proces3.
2. Mashing - Mashing is a relatively simple operation, involving cooking
(gelatinization of starch) and conversion (saccharification) changing
starch.to grain sugar (maltose). For the cooking operation two types
of cookers are used, the batch or the continuous system. Once cooked,
the grain is cooled and conversion is accomplished by the addition of
barley malt meal. Once converted the mash is pumped to the fermenters.
111—1
-------
3. Fermentation - Beverage alcohol fermentation involves the conversion
of fermentable grain sugars (largely maltose), produced by the action of
malt enzymes (amylases) on gelatinized starch, into nearly equal parts of
ethyl alcohol and carbon dioxide. The fermentation of grain mash is
initiated by the innoculation of the set mash with 2-3 percent by volume
of ripe yeast prepared separately The degree of conversion, agitation
of the mash and the temperature directly affect the fermentation rate.
Fermented mash set at a concentration of 38 gallons of mash per bushel
of grain will be fermented to completion in 2 to 5 days depending on
•the set and control temperatures. Fermentation will usually result in
an alcohol concentration of approximately 7 percent by volume.
4. Distillation — Distillation involves the separation, selection and
concentration of the alcoholic products of yeast fermentation from the
fermented grain mash (distiller’s beer). This is accomplished utilizing
a system which will vary from distillery to distillery. Some of the most.
comnion.systems used in the United States are: the continuous whiskey
separating column with or without an auxiliary doubler unit for the
production of straight whiskies; the continuous multi-column, complex
system used for the production of grain neutral spirits; and the batch
rectifying and kettle unit,. used primarily in the production of grain
neutral spirits which are subsequently stored in barrels for maturation
purposes. .
The basic column system consists of a cylindrical shell which is divided into
sections separated by 14 to 21 perforatcdplates. The plates are normally
22 to 24 inches apart. The perforations are usually 3/8 to 1/2 inches in
diameter and take up about 10 percent of the plate area. The fermented
mash is intro&iced near the top of the column and passes downward plate
by plate while steam is introduced at the bottom of the column and rises
to the top. As the mash continues downwardthe steam evaporates the alco-
hol from it and carries it to the top.
The residual mash finally .reaches the base where it is either discharged
or stored for eventual condensation. The vapors leaving the top of the
column are condensed and form the product. The raw product will then be
subjected to additional columns in which undesirable odors or tastes ;nay
be removed. Then the product is temporarily stored prior to ts placement
in barrels for maturation.
It should be noted that the majority of the wastewaters subject to potential
discharge are.generated during the distillation phase. Some of the smaller
distillers do not attempt to recover spent grain and their normal course
of action is to screen the courser materials for sale as wet spent grains
and to discharge their remaining effluent to a municipal system or to their
treatment system (if they have one). The other distilleries attempt to
recover spent grai.n utilizing grain dryers which convert the wet grains
into marketable supplemental livestock feed. The most significant source
of wastewater within the feed recovery system is the.condensate from the
grain dryers..
111-2.
-------
5. Maturation - The maturation phase of the production of alcoholic
beverages involves the storage ‘bf the beverage spirits in new, white oak
barrels, whose staves and heading are charred. The ‘duration of maturation
depends on the time it takes a particular whiskey to attain the desiráb1e
ripeness. During maturation, the barrels are stored in bonded warehouses
where conditions are such to opt imize the necessary reactions. For most
aged beverages, there is a niinimumperiod for maturation defined by law.
It should be noted that the relatively new product, light whiskey, can be
aged in used barrels whereas most all other whiskeys require new barrels.
Furthermore, it should be noted that some alcoholic beverages do not.require
aging; vodka for example. These latter beverages can be bottled directly
following their production.
6. Packaging - Besides interindustry shipments utilizing bulk containers,
the majority of the distilled spirits are bottled. Since thc bottling of
distilled spirits is done under Federal Government supervision and the
product then distributed to the various states in compliance with their
laws and regulation, the packaging operation must consider many factors
iOt involved in ordinary glass packaging. First, the product represents
a high value, because it does include tie Federal tax ($10.50 per gallon’)
at the time of bottling. Second, in addition to the, problems involved, with
the various bottle sizes and cases, the distiller must apply to ’’each ‘bottle
a stamp indicating that the federal tax has been paid and for shipments
to 10’ ‘different states, also ‘apply bottle stamps which indicate identi
fication or state tax payment. Third, since this is a’ licensed industry,
in addition to the normal record-keeping for everyday operation, federal
and individual states require many records which require incorporation
to their system of control.
The most common packaging operation utilizes a straight line system with a
line speed of’120 to 200 bottles per minute. In brief the operation
involves: (a) ,the removal of matured beveragespirits from bonded ware-
houses; (b) the emptying of the barrels and the tax determination.; (c) fil-
tering and reduction in proof of the product with distilled or deionized
water; (d) the preparation of blended whiskeys where str iight whiskies and
grain neutral spirits are combined; (e) the new, empty bottles are uncased,
then the sterile bottles proceed through a pneumatic cleanser to remove
any foreign particles. The bottles continue on through a gravity-vacuum
type fiter, capper, labeler, strip-stamp machine, a ‘case packer and a case
sealer; (f) each case is then registered, dated and consignee’s name stamped,
before ,the case proceeds to the truck, rail car or to the distillery’s
warehouse.
111-3
-------
B. Sizes of Plants
The value of. shipments of the Distilled. Spirits Industry in 1972 was
$1,797 9 million according to the Census. This gives an average for the
121 establishments of $14,860,000. This figure, however, is misleading
as it reflects the average of distilleries and rectifiers,the latter
which ’have béen.eliminated from the detaile,d discussion.
According to the BATF, as of July 1975 there were 60 plants authorized to
distill grain spirits. The criteria for defining size of model grain dis-
tilleries is the average daily quantity of bushels of grain used. Three
sizes of model grain distilleries were developed, small , medium, and
large. The small distillery model was determined not to operate a grain
recovery system. Instead it sells its spent grains wet. The medium and
large, grain models were determined to operate grain recovery systems.
The model plants are depicted in Table Ill-i. For the existing model
grain distilleries, the daily quantities of bushels consumed were 1,000
•for’’the small model, 5,000 bushels for the medium distillery model and
15,000 bushels for the large model. For the New Source Performance
Standard (NSPS)’models, thé,daily quantities of grain consumed were
5,000 bushels for the medium NS’PS model and 15,000 bushels for the large
NSPS model.’
I,f the’ model plant data depicted ‘on Table 111-1 are multiplied by the number
of corresponding p ants and summed, the aggregated totals indicate a pro-
duction quantity which exceeds the industry’s historical figures. This is
resultant of the fact that most distilleries do not operate at full capacity
or if they do, they do not operate throughout the year. Thus, it’ can’be said
the industry has a significant potential to increase output if the need arises.
The financial profiles for each of the grain d stjllery model plants are
‘sho.wn”in Table 111-2.
C. Investments
The estimated book value and salvage value for each model plant are shown
in Table 111-3 for t’he grain distillery models. Also shown are current
assets, current liabilities and net working capital.
111-4
-------
Table 111-1. Model diStilleries, descriptive information
.
Existing
‘
•
New
Source —
Large
Small
Medium
..
Large
‘Medium
GRAIN DISTILLERIES
.
‘
Bushels per day
Days distillation per year
•
1,000
150
5,000
200
15,000
240
5,000
‘ . 240
15,000
240
Proof gallon’s per year
Average employees
Number of corresponding establishments
750,000
100
24
5,000,000
455 ‘
31
15,000,009’
.1,250
‘‘‘5’
6,000,000
340
- — .
15,000,000
1,150
——
‘ - 4
U - ,
-------
Table 111—2.. The model grain distii leries, financial profiles
.
Small
Existing . New Source
Medium Large Medium Large
Bushels per day
Days operation per year
Proof gallons per year
Revenue
Sales ($2.89/proof gallon)
Dried grain ___________ __________ __________ __________
Total Revenue
Costs
Ingredients
Labor
Supplies and Other Costs _________ _____ __________ __________ __________
Total Costs
Cash Earnings
Less
Depreciation
Interest (1% of sales)
.Pre-Tax Income
After-Tax Income 21, .•24 546,760 2,551,586 906,188 2,821,660
1,c1O
5,000
15,000
240
750,000
$2,167,500
150 200
5,000,000. 18,000,000
5,000 15,000
240
240
6,000,000 18,000,000
$17,340,000
1,264,000
18,604,000
3,540,000
3,944,000
8 , 778,930
16,262,930
2,167,500
442,500
725,000
921,700
.2,089,200
7.8,300
27,900
21,700
28,700
7,276
$14,450,000
1,053,360
15,503,360
2,950,000
4,512,400
6,722,500
14,184,900
1,318,460
135,000
• 144,500
1,038,9.60
492 ,200
$52,020,000
3,792,096
55,812,096
10,620,000
13,340,000
24,736,876
48,696 ,876
$52,020,000
3, 792 , 096
55,812 ,096
10,620,000
14,384,000
25,002,000
50,006,000
5,806 ,096
391,500
520,200
4,894,396
2,342,810
Income Tax
2,341,070 7,115,220
437,500
173,400
1,181,250
520,200
1,730,170 5,413,770
823,982 2,592,110
Cash Flow
$49,324 $681,760 $2,943,086
$1.343,688 $4,002,910
-------
1. Book Value of Investment
The estimatesof book value of assets for the grain distillery models were
developed from data available from Moody’s Industrial Manual as well as data
from industry •sources. The estimates were computed utilizing a derived
estimate of the value per proof gallonof the capacity of the model dis-
tilleries. These annual proof gallon capacities were determined utilizing
the daily milling capacity and a 300 day work schedule. The values per prr of
gallon for the existing models Were $0.31, $0.30 and $0.29, for the small,
medium and large model distilleries, respectively. For the NSPS models, the
estimated investment values per proof ga1lon were $1.00 for the medium NSPS
model and $0.75 for the”NSPS large model.
2. Salvage Value
The salvage value of distilleries wifl vary widely from plant to plant,
depending upon the age of the plant and its condition, the age of the
equipment and its condition and the location of the plant. In some instances
the salvage value of old, obsülete plants will, be equal to site value plus
the scrap value of the equipment.
There is a market for certain types of used machinery and equipment.,
however, this is limited primarily to modification of existing oper-
ations as virtually all new plants begin with’ ll •new equipment.
As no data are avaiiable,on actual’ salvage values’ br distilleries and only
a limited market exists for used equipment, it is diffi cu1t to estimate, the
sal vage value Of p1 ant closed due to the added costs of effi u,en.t con rol S.
‘For purposes of analysis, the estimated salvage value has been determined
based on 30 percent of the book value of the distillery’s assets.
3. Operating’ Capital
Current assets, current liabilities and net working capital were also
shown in Table 111-3. Current assets were estimated to be percenta es
of sales which varied according to the size of the distillery. For the
grain distilling models in this analysis, current assets for the small.
distillery were es,timated to be 35 percent of sales; for the mediumdis-
tilleries, 45 percent; and for the large distilleries 55 percent.
Current liabilities were estimated utilizing a current ratio (current
assets divided by current liabilities), of 1.8 for the small grain model,
1.6 for the medium grain mOdels and 1.4 for the’ large model grain dis-
tilleries.
‘111—7
-------
Table 111—3. The distilled pirits i idustry, estimated capital costs for n odel grain distilleries
Existing
New Sour e
Small Medium Large . Medium. Large
Book Salvage Book Salvage Book:. Salvage Book Salvage Book Salvage
-
- ($1
,00.O)
Total Fixed Assets
465.0 l3 9.5. 2,250.0 675.0 6,250..0
1,957.5 6,250.0 1,875.0 16,875.0 5,062.5
Current. Assets
758.6 7:i8.6 6,502.5 6,502.5 28,611.1
28,611.1 7,803.0 7,803.0 . 28,611.1 28,611.1
Current Liabilities .
421.4 . 42 .4 4,064.1 4,064.1 20,436.5
20,436.5 4,876.9 4,876.9 20,436.5 20,436.5
Net Working Capital
337.2 337.2 2,438.4 2,438.4 8,174.6
8,174.6 2,926.1 2,926.1 8,174.6 8,174.6
Total Invested Capital
802.2 476.7 4,688.4 3,113.4 14,424.6
10,132.1 9,176.1 4,801.1 25,049.6 13,237.1
-------
•D. Model Plant Capacity and Utilization
As distilleries vary from one to another, there appears to be no industry
rule by which the model plants’’capacity or utilization can be established.
The limiting factor for a distillery’s capacity is usually the capacity of
the distillation system. However, as few operations operate on ‘a year
around basis; the industry can be characterized as one with additional
output capabilities.
Commonly,distilleries will operate their colunns 20 to 24 iioursp’er day.,
six or seven days per week, for anywhere from 100 to 300 days per year.
For purposes of the grain distilleries model plant development, it was
assumed the models would operate 20 hours per day with the small model
operating 150 days per year, •the medium model 200 days per year and the.
large model operating 240 days per year. Both grain. NSPS models were
assumed to operate 240 days per year. The remainder of the year the plant
would continue.to bottle its previously. di.stilled’beverages.
When distilling, the model plants were assumed to maintain a reasonably
high utilization rate; approximately 85 to 90 percent of their: capacity.
This relatively high utilization rate was based on the fact that ittakes
a considerable amount of fuel to fire up the stills and thus when the
stills are operating, most plants attempt to maintain near capacity operations.
The grain based distilled spirits industry does,, experience a slight seasonal
trend in the distillation of the various beverages.. As can be sëenin
Table 111-4, the months between September and December represent slightly
higher monthly production figures than for the. remainder of the year.
This slight seasonality may be attributable to several factors, two of
which may be climatic conditions and the fact that the fall months repre-
sent that period of the year when corn is usually harvested, thus corn
prices are generally.lower. . .
E. Cost Structure of Model Plants
The cost structures for the model plants were shown in Table 111-2. Major
items are discussed below. .
1. Ingredient Costs
.The major portion of the ingredient costs for the grain distillery models
are attributable to the necessary grains of which corn constitutes the
major expenditure.. For purposes of this analysis Number 2, yellow corn
was used at an average price of $2.95 per bushel.
111-9 .
-------
Table 111-4. The Distilled Spirits Industry, monthly’ production of
distilled.spirits; FY 1974
Month Total Distilled, Spirits 1/
(1,000 ‘proof gallons)
July ‘ 63,900.7
August. 69,115.6
September 73,067.9
October , ‘ 78,814.4
November 77,935.5’
December 71,873.1
January 6,435.1
February 63,772.9.
March . ‘ 60,178.1
April 70,077.7
May , 69,708.3
June 56,697.8
‘ 1 iRepresents net production of whiske ’, brandy, run ., gin, vodka, and
-. ‘alcohol and spirits at distilled spirits plants. ‘
SOurce: Department of Treasury, Bureau of Alcohol, Tobacco and Firearms,
Summary Statistics , 1974. ‘
11 1-10
-------
2. Labor Costs
Laborrepresents the single most expensive costs in the operation of grain
based distilleries. All the model grain distilleries were assumed to pro-
duce finished bottled alcoholic beverages with the bottling operation con-
tinuing the majority of the. year. The small, existing model distillery was
assumed to have 100 employees of which 25 were employed year around and 75
were employed for one-half of the normal operating year. The medium existing
model distillery was assumed to utilize 255 full time employees with an
additioral 200 employees working two-thirds of the normal year. The large
xisting distillery model was assumed to have 1,240. employees, all of which
worked on a full-time basis. For the NSPS models, all employees were
assumed to operate throughout the year with the medium NSPS model employing
340 employees and the large NSPS model employing 1,150 employees. For all
model grain distilleries, the average earnings for a full-time employee were
determined to be $11,600.
. Supplies and Other Costs
This cost classification includes costs for bottles, barrels, fuels and
other miscellaneous direct and indirect costs.
4. Depreciation and Interest
Depreciation was derived from. IRS data and determined to he expressed as
a percent of book valu,e of assets, 6 percen’t for all the existing model
grain distilleries. Whil.e it is acknowledged that distilleries in opera-
tion today vary with respect to the, age of ‘the facilities, the constant
depreciation rate for’all distillery sizes was predicted on the assurnp—
tion that most distilleries incurred the majority of their respective
investments following the close of prohibition (1933). The NSPS grain
distillery models utilize a depreciation rate of 7 percent.
Interest was estimated to be one percent of the sales dollar.
5. Total Costs
For the existing grain distillery models, ingredient costs ranged from
19.0 percent of the sale.s dollar fc r the medium and, large distilleries
to 20.4 percent for the small distillery. Labor,cos,ts represented the
greatest percentage ‘for the small distillery, being 33.4 percent.. Labor
for the medium distillery represented 29.1 percent of the sales dollar and
for the large distillery model, labor represented 25.8 percent. Finally,
the expense for supplies and other costs was re atively equal proportionately
for each of the models, being between 42 and 45 percent.
‘‘I—Il
-------
Thus for the existing model grain distilleries, total costs for the small
model were estimated to represent 96.4 percent of its sales dollars. For
the medium and large distilleries, total costs were estimated. to be.9l.5
percent and 89.6 percent respectively.. For the NSPS’ models, total costs
represented 87.4 percent of sales for the medium NSPS model and 87.3 percent
‘for the large NSPS model.
F. Annual Profits
After-tax income, return on sales, both pre-tax and after—tax, and return
on total. invested capital for the various sized”model distilleries are
shown in Table 111-5.
It should be noted that the model distilleries were based on average 1973/74
conditions as no later published sources of information were available. Some
questions may arise concerning the return on total invested capital
especially for the mediUm and large model distilleries. While these per-
centages do seem higher than other industry returns, review of the 1971/72
(the latest available) IRS data reveals that the model distilleries
‘returns are within the alcoholic beverage industries’ average. These IRS
data aredepicted ‘below. .
Size of Assets Net Income to Net Worth
($000) (p -’C y ) -
< 100 36.6
130-2.50 6.1
250-500. 7.2
‘500-1,000 5.2
1,000-5,000 15.7
5,000-10,000 ‘ 8.6
.1O.,. .0 ,00-25 ,flOO 11 .8
25,000-50,000 15.2
-5O cJ3’OOQ 7.8
100,000-250,000 6.5
250,000 or more , 3.5
Industry average 5.4,
G. Annual Cash Flows
Estimated annual cash flows for the different sizes.of model distilleries
are shown in Table 111-6. Cash flow as calculated represents the sum of
after—tax income plus depreciation. 1n the table’ it is shown in absolute
dollars. as well as a percent of sales and as a percent of total invested
capital. ‘ ‘
111-12
-------
Table 111-5. The Distilled Spirits Industry, net income, returns on sales
and investments for model distilleries.
Si.ze of
Model Distillery
..
After-tax
‘Income
Return on total
Return’ on ‘Sales invested capital
‘ Pre-tax After-tax ‘. Pre-tax After-tax
‘
(Dollars)
Percent
Existing Grain
.
‘
Small
21,424
1.3 1.0 3.6 2.7
Medium
7,48,560
6.7 3.5 22.2 11.7
Large
3,278,080 ‘ ,
8.8 4.6 ‘, 33.9 17.7
NSPS- Grain
Medium ‘
906,188 ‘
9.3 4.9 , 18.9 9.9
Large
2,821,660 ,
9.7 5.1 21.6 ll.3
111-13
-------
Table 111-6. The Distilled Spirits Industry, annual cash flows
for model distilleries.
.
Size of
Model Distillery
Annual
cash
flow
.
Cash Flow
as a percent
of sales
of
Cash Flow
as a percent
Total Invested
capital
. . .
Existing Grain
(Dollars)
49,324
•
(Percent)
2.3
(Percent)
6.1
Small
Medium.
681,760
4.4
14.5
Large .
2,943,086
5.3
20.4
NSPS - Grain
.
1,343,688
7.2
14.6
Medium
Large .
4,002,910
. 7.?
16.0
111-14
-------
As a percent of sales, cash flows for the exisdng grain models’ ranged from
a low of 2.3 percent to a high of 5.3 percent. The percentage for the NSPS
models was 7.2.percent. The higher cash flow percentages for the. larger
and NSPS distilleries may be attributable to revenues generated from the
sale of dehydrated spent grains which according to most industry soUrces,
is a profitable venture if the volume is sufficient.
Cash flows as a percent of total in.ve te.d. capital’ for th e. piode l ’gr isn
distilleries reveal a relatively large range, increasing as th size
of the distillery increases. This may be attri’butable of profits
generated by dehydrating spend grains for the larger distilleries.
All factors considered, the smallermodel distillery maintains anun—
favorable competitive cash flow position in relation to the larger djs—
tillery models.
111—15
-------
IV. PRICING PATTERNS
Prices for distilled spirits have remained relatively stable during
recent years in spite of significant price increases for many of the inputs
utilized by the industry. A major factor in this stability of prices
may be attributed to the keen competition between different brands as
well as the competition between the different types of distilled pro-
ducts..
A. Price Determination .
The determination of prices for distilled ‘spirits involves a complex
interaction of consumer demands and attitudes, the available supply and
‘governmental taxes. While the supply and taxes influence the overall deter-
mination of prices, ‘consu :er demands and attitudes dominate the. actual
price determination process.
1. Consumer Demand and Attitudes
Consumer demand can be defined as the quantity of alcoholic beverages
consumers are willing to purchase.at the current level of prices.. His-
torically, alcoholic spirits’ demand (consumption) has increased since
1960 at an annual average rate o 4.0 percent. This increase, however,
has not been steady; as the annual rate of increase has fluctuated
between 2.3 and 7.2 percent (TableIV-1). Furthermore, during the most
rec’ent five years, the average annual increase has been much lowerthan
‘for the preceding 10 years with an average increase’for1970 to 1974 of 2.7
percent.
These trends are reinforced when the distilled spirits per capita con-
sumption are. viewed (TableIV-1). The per capita quantity of distilled
spirits consumed has increased from 1.31 wine gallons. in 1960 to 1.96
gallons in 1974, an average annual increase of 2.8 percent. The average
increase for the 1970 to 1974 period was over one percent less, being,
1.7 percent. . . .
Thus, it appears that while demand has increased for distilled spirits
since 1960, i.t has increased at a lower rate in recent years. This may
be partially explained by the significant increase., in the popuiari•ty
of wines which to some extent have been substituted’for distilled spirits.
Demand for individual brands and beverage type is.predbmi’nantly depéndent.upon
consumers’ preferences’ and attitudes. Competition between brands is often
based on the price of a particular brand in relation to its image in the
consumer’s mind. Generally, the consumers can be classified”as brand
IV-l
-------
TablelV-1. The distilled spirits industry, consumption since 1960.
‘
‘
Percentage
‘
‘Percentage,
‘
Distilled
Change from
Per Capita ‘
Change from
‘
Year
. Spi’rits COnsumed
Previous Year
Consumption
. Previous Year
‘
,;(Wjr e Gallons)
(Percent)
,
(Wine Gallon)’
(Percent)
1960.
234,71,4,557 .
—
1.31
‘ —
1961
1962
241,449,065
. 253,700,966
.
. 2.8
4.8
, 1.32
1.37
0.8
3.6
‘1963
258,979,291
2.8
1.37 ‘
0.0
1964
271,861,906
4.7
1.44
4.9
1965.
292,987,572 ‘
7.2
1.52
5.3
1966’
‘ 307,756,120
4.8
1.58
3.8
1967’
323,498,937.
4.9
1.64
3.7
1968
1969
344,067,256
361,682,0.18
6.0 .
‘ 4.9
1.73
1.80
5.2
3.9
,
1970
370,138,126 ‘
2.3
‘ 1.82
1.1’
1971
381,150,495
. 2.9
1.85
‘ 1.6
1972 ,
1973. ,
391,937,351
402 364,705
2.8
2.6
1.88
. 1.92
.1.6.
2.1
1974
413,497,553 .
,
2.7
1.96
2.0
‘
Source: Distilled ’Spirits Council of the United States, 1974 Annual Statistical
Review . . ‘ ‘
IV-2
-------
conscious within a given price range. That is, they seek what they
consider the best ‘brand’ for their money. Furthermore, once consumers
become associated with a particular brand, they are reluctant to change.
According to one industry source, if a consumer’s real income.drops,he
(or she) may decide to purchase a less expensive brand. If this occurs,
after a few months, the consumer usually returns to his original brand.
Historically, consumers also have been reluctant to change the type
of spirits they drink. This however has changed in the past few years
as clear spirits (gin, vodka, rum and tequila) have made siqnificant
increases in their market share. Table P1-2 depicts the domestic bottled
output of the major spirit types and their portion of the total domes-
tically bottled output. From the table it can be seen that whiskey’s
proportion has declined significantly from 78.3 percent ofthe total
output in 1955 to 51.0 percent in 1974. Increased consumption of
vodka has been the primary reason for the decline of whiskey’s portion.
Vodka bottled output during the same period increased from only 3.9
percent in 1955 to 22.1 percent in 1974. Thus of the 27.3 percent drop
in whiskey’s portion of the market, vodka has ac ’co’rnted for 18.2 percent.
Gains in cordials and other spirits account for the majority of the
remainder of whiskey’s percentage drop, with brandy’s increase in its market
share next. Gin, which has shown a relatively stable position over the
years, dropped slightly in its portion in recent years. Rum, which in,
1955 represented only 0.3 percent of the total output has increased by 6
times to its current portion of 1.8 percent.
2. Supplyof Distilled Spirits
The production of distilled spirits from the majority of the spirit types
must be ‘initiated one to several years prior to the date of the projected
consumption. To protect themselves against a situation where demand
exceeds the available supply,. distilleries often maintain higher than
required inventories. As a result, most aged beverages often are one to
several years older than the minimum ag required by law. As it. appears
the inventories require adjustments, the adjustments are made which results
in little if any immediate ‘effect on the supply.
This has been evidenced in recent years when the demand for distilled
spirits did not meat the earlier projections. This resulted in excess
inventpries in bonded warehouses and subsequently during the past two
years, distilleries have not been producing their usual quantities of
spirits. .
3. Market Structure
The markets in which distilleries must sell range from highly competitive
open markets to restricted “control states” markets. In addition,
regardless of the market, distilleries are subject to numerous additional
controls and regulations by the Federal government as well as by the
states. .
IV 3
-------
•
Total Distilled
.
.
.
Spirits’
Whiskey
Brandy
Rum
‘ Gin
Vodka
Cordials,
etc.
Year
%of
Quantity Total
•
Quantity
%of
Total
.
Quantity
%of
Tota
Quantity
%of
Total
.
Quantity
%of %of
Total Quantity Total
.
Quantity
%of
Total
(000)
(000)
(000)
‘
(000)
( ‘ ; o)
(000). ‘
(000)
1955
179,405 100.0
‘140,450
78.3
3,726
2.1
663
0.3
20,447
11.4 ‘ 6,968 ‘ 3.9
7,151
4.0
1956
‘196,995 100.0
151,612
77.0
3,943
2.0
629
, . 0.3
20,942
10.6 11,875 6.0
7,994
4.1
1957
183,607 100.0
134,609
73.3
4,401
2.4
649
0.4
?0,550
11.2 14,829 8.1
8,569
4.E
1958
188,977 100.0
140,304
74.2
4,645
2.5
749
0.4
19,633
10.4 ‘15,103 8.0
8,545
4.5
1959
200,944 100.0
145,894
72.6
4,835
2.4
798
0.4
21,839
10.9 17,738 8.8
‘ 9,840
4.9
1960
203,302 100.0
145,114
71.4
‘5,300
2.6
804
0.4
22,001
10.8’ 19,406 9.5
10,677
5.3
1961
211,307 100.0
147,541.
69.8
.5,760
2.7
904
0.4
23,601
11.2 20,977 10.0
12,251
5.9
1962
219,750 100.0
150,693
68.6
6,202
2.8
1,041
0.5
24,823
11.3 23,026 10.5
13,965
6.3
1963
223,921 100.0
150,814
67.4
. 6,982
3.1
1,067
0.5
25,799
11.5 24,944 11.1
14,315
6.4
1964 .
243,145 100.0
160,895
65.2
7,594
3.1
1,541
0.6
28,957
11.9 28,162 11.6
15,995
6.6 .
,
1965
252,708 100.0
163,055
64.5
8,264
3.3
1,615
.0.7
29,628
11.7 31,157 12.3
18,980
7.5
1966
1967
271,468 100.0
286,007 100.0
173,290
179,7:2
63.8
6.8
9,288
10,058
3.4
3.5
1,710
1,983
0.6
0.7
31,633
33,055
11.7 34,704 12.8
11.6’ 38,620 13.5
20,843
22,569
7.7
7.9
1968 ‘
1969
292,758, 100.0
311,292 100.0
181,214
192,816
, 61.9
61.9
‘ 10,335
11,479
‘3.5
.‘ 3.7
‘ 2,181
2,399
0.7
0.8,
33,265
34,971
11.4 . 41,297 14.1
11.2 45,298 ‘ 14.6
24,466
24,328
8.4
7.8
1970 ‘
313,009 100.0
190,510
60.9
11,795
3.8
2,909
‘ 0.9
35,122
11.2 50,172 16.0
22,500
7.2
1971
325,575 100.0
191,729
58.9
12,677
3.9
2,793
0.8’
36,528
11.2 56,495 17.4
25,354
7.8
1972
337,758 100.0
193,335
57.2
13,046
3.9
4,325
1.3
36,735
10.9 62,845 18.6
27,473
8.1
1973
1974’
339,542 100.0
354,864 100.0
181,933
180,91
53.6.
51.0’
14,215
13,875
4.2
3.9
4,397
6,448
1.3
1.8
36,952
37,175
10.9’ ‘70,412 20.7
10.5 78,447 22.1
31,632
‘ 37,999
9 3
10.7
Table ,IV—2. Domestic bottled output of distilled spirits, by spirit type.
(in 000 wine gallons)
-4
- .
Source: Distilled Spirits Council of the United States,’ 4nnua] Statistical Review 1974 .
-------
As of 1974, there were 18 states which wereclassified as control or
monopoly states in terms of the distribution of distilled spirits.
These states are Alabama, Idaho, Iowa, Maine, Michigan, Mississippi,
Montana, New Hampshire, North Carolina, Ohio, Oregon, Pennsylvania,
Utah, Vermont, Washington, West Virginia, and Wyoming. In these states,
commissions have been set up which purchase alcoholic beverages from
distillers, importers, or vintners either directly or through brokers.
The remaining 32 states plus the District of Columbia, are classified
as open states which allow wholesale dealers to purchase the spirits.
These wholesale dealers in turn sell to licens.’ d retail out ets, bars,
taverns, -and restaurants. For the cont -ol or monopoly sta s the state
commissions sell the spirits to state-owned package storesY or to bars,
taverns or restaurants.
In addition to the above classifications several individual states main-
tain a variety of restrictions as to how alcoholic beverages can be sold.
These restrictions may apply to the package sale of spirits or to the
sale of liquor-by-the-drirk, in bars, taverns, or restaurants.
Thus, the distilleries must operate in markets where they must be corn-
petitive as well as meet requirements imposed by individua3 states and
counties. Furthermore, distilleries m.’st rely on their oWn national
advertising or advertising by distributors or retail outlets (where
permitted) to promote the purchase of their particular brands. Therefore,
the distilleries are somewhat limited as to what they can do to actively.
seek additional purchases of their brands. ..
Finally, it should also be noted •that many distilleries.export relatively
large quantities of their;products to foreign markets and subsequently
must also maintain competitiveness in these markets.
B. Price Trends
The prices of distilled spirits have remained relatively stable in
recent years with the wholesale price index for straight bourbon whiskey
increasing only 2.0 percent from 1970 to 1974 and the index-for blend
whiskey spirit increasing by only 5.7 percent for the same period.;
(Table IV-3). This stable trend has been somewhat surprising considering
the wholesale price index for corn (principle raw material for grain
spirits increased by 162.1 percent.
North Carolina, country-owned stores; in Wyoming and Mississippi,
licensed package stores; in Michigan and West Virginia, designated
distributors.
‘V-s
-------
Table’ IV-3. The distilled spirits industry, wholesale price index for
selected products
‘
.
Whiskey, Whiskey,
Corn,
Straight Spirit ‘
No. 2,.
Bourbon ‘ Blend ,
Chicago
‘
‘
1976 100
1970
‘ 101.6 ‘ 105.1 ‘
106.4
1931
101.6 108.1
107.8
1972
‘
101.9 106.9
100.8
1973
103.6 108.0
172.3
1974
103.6 111.1
.248.0
January
103.6 108.0
225.3
February
103.6 108.0
234.8
March
103.6 108.0
231.9
April
103.6 108.0
204.8
May ‘
103.6 108.0
208.2
‘
June
103.6 108.0
222.5
July
103.6 108.0
245.6
August
103.6 114.3
290.2
September
103.6 115.3
269.6
October ,
103.6 ‘ 115.3
.103.6 116.3
291.2
November
275.2
December
103.6 116.3
276.3
Source: U. S.. Department of Labor, Bureau of Labor Statistics, Wholesale
• Price Index.
I\’-6
-------
One practice distillers have utilized in maintaining these constant.
prices has been that of lowering the proof of the spirits usually from
86 to 80 proof. This allows distillers to produce a larger quantity of
finished liquor from the aged spirits. Also the consumer trend for
purchasing larger bottle sizes has undoubtedly been helpful in holding
down the unit costs of the contents.
Finally prices have been ’elatively stable as the Federal excise tax
.‘isually constitutes more than 50 percent of the average distillers’
price to the wholesalers or state commission. Since the tax has not’.
increased from $10.50 per tax gallon which was set in 1951, this elim-
inates better than 50 percent of the distiller’s sc lling price fromthe
usual reasons for price increases. Furthermore, consideration for the
excise tax portion of the’distillers price allows the distiller to
increase his portion of the price with ‘the resulting FOB price being
raised by approximately one-half of the,actual percentage increase.
Prices of distilled spirits do not always reflect the distillers costs.
Often firms will produce more than one brand (label) of a particular
product and price the brands 1 ifferentiy to appeal to different consumer
characteristics. Thus, some spirits are priced higher, not because
they are decidedly more expensive to produce, but rather because at the
‘higher price, the spirt may fall into a particular price category which
may offer a greater sales potential.
As an example, utilizing a Midwestern state with state ‘controlled retail
prices, the price of one firm’s lowest priced 6 year old, 86 proof blended
whiskey is $4.37 per fifth. For the ‘same firm, but a different label,
their more expensive line costs $5.40 per fifth. For the same firm,
vodka prices range from $4.12 to $4.52 per 80 proof fifth.
With this pricing mechanism, distillers are somewhat flexible in their
determination of product prices, however, it should be noted that’ this
flexibility is highly influenced by the competitive environment in which
the distiller must op’erate.
IV-7
-------
V. EFFLUENT CONTROL COSTS
The effluent control system -equirements and costs depicted in this
chapter were provided by the Effluent Guidelines Division of. the Environ-
mental Protection Agency as provided by the technical contr actor,
Environmental Science Engineering. The recommended and optional
treatment alternatives for the model distilled spirits plants were. the
same as presented in the Development Document 1/. However, the associated
investment and annual costs have been revised by the technical contractor
to reflect the model plants’ production. characteristics previously de-
scribed in Chapter III. . . .
A. Po lution ontrol _ Requirements .
Three effluent control levels for point source categories (direct dis-
chargers) were orginallv .consi Iered:
BPT - Best Practicable Control Technology Currently Available.,
to be achieved by July, 1977.
BAT - Best Available Control Technology Economically Achievable,
to be achieved by July, 1983.
NSPS - New Source Performance Standards are recommended to be
equal. to the BAT control level and to apply to any source
for which construction starts after the publication of
the proposed regulations.
Raw waste loads for he existing and new source model distili ries are
depicted in Table V-i. As can be seen in this table, the wasteloads
for the distillery models vary between model sizes.
The recommended effluent limitation guidelines for themodel distilled
spirits plants as pro osed in the Development Document are shown in
Table V-2.
1/ Development Document for Effluent Limitation Guidelines and New Source
Performance Standards, Miscellaneous Foods and Beverages, Point Source
Category, Draft Report prepared by Environmental Science and Engineering,
Inc. for the U.S. Environmental Protection Agency.
V- i
-------
Table V 1. Raw waste loads for model distilled spirits plants
Model Production Flow BOD S FOG
Bu./day Gal mg/i mg/i mg/I
Grain Di ti11eries
Small 1,000 12,000 210. 160 N.A.
Medium 5,000 219,000 902 648 N.A.
Large 15,000 650,000 930 650 N.A.
S $urc : Efflueht Guid 1 ines i i ion, Environm2ntal Prote tion Age c ’.
V-2
-------
Table V -2. Recormmended effluent limitation guidelines for the
Distilled Spirits Industry
•
‘BOD
SS
Max. 30
Max. 30
Models
Day Ave.. Max. Day
•,
Day AVe Max. Day
•
Grain Distillers
.
-Kg/KKg
Grain
Mashed
.
Small
BPT
0.054 0.140.
0.072 0.180
“BAT
0.027 0.062
0.036 . 0.090
M2dium
.
.
BPT
BAT
NSPS
0.260 0.650
0.130 .0.320
0.130 0.320
r
•
0.320 0.800
0.160 0.400
O .16O 0.400
•
.
.
Large
.
BPT
0.260 0.650
0.320 0. 800
BAT
0.130 0.320
0.160 ‘; ‘0.400
NSPS
0.130 , 0.320
0.160 0.400
V-3
-------
B. Discharge Status of the Industry
The discharge status of the Distilled Spirits Industry as furnished by
the EPA is shown below.
Currently, there are r8: grain distilleries which are known to be pre-
sently discharging effluent to n•vigable waters. Of the 18 grain dis-
tilleries, all have some form of treatment in place, 12 meet the pro-
posed BPT standards and one meets the proposed BAT standards. The
treatment systems of the 12 distilleries meeting BPT include:
2 distilleries with trickling filters and clarifiers
• 4 distilleries with aerated lagoons and stabilizing ponds
• 5 distilleries with activated sludge systems
• 1 distillery with rotating biological discs.
The distillery presently meeting BAT standards utilizes spray irrigation
system and the 5 remaining grain distilleries, those which do not meet
BPT standards but do have some form of treatment, all presently utilize
aerated lagoon treatment systems.
Also there are two molasses distilleries in operation in the United
States which are direct dischargers. Both were determined by the EPA
to meet the proposed, standards. Therefore no control costs or impact
analyses are included in this report.
C. Pollution Control Costs
The cost estimates, in 1972 dollars, arid he components ‘of the recomiriended
and optional (if considered desirable) treatment alternatives for the
model plants are sho in in Tables V-5 through Table V-9. From the infor-
mation provided, total investment and annual costs. were inflated so as to
be consistent with the costs associated with the models. Investment and
annual costs were inflated from 1972 to 1974 dollars by the use of the
Engineering News Record Construction Cost, Index ( .1.205.tinies the provided
EPA costs). The resulting treatment costs in 1974 dollars for both tI ”
recommended and optional treatment alternatives are summarized in Table
V-3.
Investment costs include costs for construction, land, engineering and
a contingency fee. Annual operating costs include expenditures for
labor,. power, chemicals, maintenance and supplies. Total yearly costs
include annual operating costs, depreciation and interest. Depreciation
was based on a 20 year depreciable life for ‘the pollution controls.
Interest was based on a 10 percent rate which was then computed as 10
percent of one-half the total pollution control investment costs.
V -4
-------
Total investment costs for pollution controls expressed as a percent of
book value of the. model distilled spirits plants fixed assets andthe
total annual costs expressed as a percent of annual sales are depicted
in TableV-4. ..
V-5
-------
Table V—3. Effluent contrcl costs for model distilleries (1974 dollars)
Treat’nent
Al ternativé
B T
Annual Total
Investment Operating Yearly Investment
Costs Costs Costs Costs
Increm ntal BAT NSPS
Annual iota.] Annual Total
Operating Yearly Investment Cp rating Yearly
Ccsts Costs Costs Costs Costs
i,OOO
Model
0 .
Grain Distillers
Small
Pec
i49
17
32
18
3
5
--
—-
--
.
Opt
--
.
--
--
--
- -
- -
--
--
—-
Medium
Rec
Opt
564
648
99
2O
155
273
•
35
35
5
6
9
10
599
633
104
214
164
282
Large
•
Rec
Opt
1,011
1,484
179
594
280
742
54
54
8
8
13
13
1,065
1,538
187
602
293
755
-------
Table V-4. Investment and total yearly costs expressed s a percent’ of model plants’ book
investments nd annual sales
.
“: BPT ‘• ‘ BAT ‘ 1SPS
Total 1nvest ent Total YearTy Costs To:al investment. Total Year’y. Costs Total investment otai Y.ear y Ccsts
Treatment
Model Alternative
‘
as % of. as % of as %‘of as % of as% of as of
Book Value Ar. iual Sales ‘ Book Value ‘ Annual Sales Bock Value Annual Sales
(%)
•
Grain Distillers
.
Small ‘ Rec
32.0 . 1.5 35.9 1.7 ‘ —— — —
opt
-- - - -- -- - - . — -
.
Medium .Re
25.1 Lb ‘ 26.6 ‘ 1.1 .9.6 0.9
opt .
23.8 -. 1.8 ‘ 30.4 1.8 10.9 ‘ 1.5
Large Rec
16.2 ‘‘ 0.5 ‘ 17.0 0.5 . 6.3’ 0.5
Opt
23.7 1.3 24.6 1.4 . 9.1 , 1.4
-------
Investment Costs
• Consti’uction
Land
Engineering
Contingency
PVC Liner
Total
Yearly Operating Costs
Labor
Power
Chémi cal s.
Maintenance &
— Supplies
PVC Liner
r’ -
Total Yearly Costs
Yearly Operating
Cost•
Yearly Investment
Cost Recovery
Depreciation
Total
97,630
2,780
9,760
9,760
3,500
123,430
6,2 .O
3,010
30.
.4,580
30
.I . nr
• .J 1L1
110,140
2,780
•I1 ,O10
11,010
3,500
138,440
6,250
4,250
30
6,450
30
17 r. lr
I I ,U I _i
17,010
.5 ,54O
6,780
29,330
Itemized cost summary for waste water
5.7percent GOD reduction.
Treatment Modules:
B.. .Pumping Station
H.. .Nitrogen Addition
1...Phosphorus Addition
L...Aerated Lagoon
BAT
• B. . .Pumping Station
H. . .Nftrogen Addition
1.. .Phosphorus Addition
L. . .Aerated Lagoon
I L. .Dual Media Pressure Filtra’n
Table V-5. Itemized cost summary for distilled spirits (small grain)
alternative A23-II (BPCTCA) and alternative A23—III (BATEA)
BPT
BAT
13,900
4,040.
6,030
24,870
Source: Effluent Guidelines Division, Environmental Protection Agency.
treatment chain desIgn efficiency...
V-8
-------
Table V-6. Itemized cost summary for distilleries (grain) (medium and
large) alternative A22-VI (BPCTCA)
Medium
.
Large.,
‘
Investment Costs
.
ConstructiOn
362,200
660,510
Land
Engineering
Contingency
Total
33,820
36,220
36,220
468,460
46,65.0
66,050
66,050
839,260
37,480
83,060
12,700
•
•
Yearly Operating Costs
Labor
Power
Chemicals
•
37,480
29,190
5,230
• tiaintenance &
Supplies
Total
9,b60
81,760
15,130
148,370
Total Yearly Costs
• Yearly Operating
Cost
“
81,760
148,370
Yearly Investment
Cost Recovery
Depreciation
Total
18,740
21,730
122,230
33,570
39,630
221 570
.
Source: Effluent Guidelines Division, Environmental Protection Agency.
Itemized cost summary for waste water treatment chain design efficiency...
95.7 percent BOD reduction.
Treatmen.t Modules:
Bl .Control House
B.. .Pumping Station
C. .Equalization Basin
II.. .Nitrogen Addition
I.. .Phosphorus Addition
K.. .Activated Sludge
Q.. .Sluclcje Thickener
R.. .Aerobic Digestor
S.. .Vacuum Filtration
Y...HOlding ,Tank
SI-. 9
-------
Table V-7.
Itemized cost summary for distilleries (grain) (medium and
large) alternative A22—II (BPCTCA-option)
Mcdi urn
Large
Investment Costs
Construction
Land
431 670
6:100
983,780
12,990
Engineering
Cont4n d cy
PVC Liner
Total
43170
43170
13:530
537,640
98,380
98,380
37,790
1,231,320
Yearly Operating Costs
Labor
Power
Chemic 1s
12,490:
142,690
2,420
:
12,490
433,i20
6,950
&
Supplies S
Tot-
‘
‘ 390
540
172, 3O
38,420
1,590
492,770
Iota.] Yearly Costs
Ye r1y Operating
Cost
172,530
492,770
Year1 ’ Investment
Cost Recovery
Depreciation
Total
:
2 l,5 O
26:580
220,620
.
49,250
60,920
602,940
Source: Effluent Guidelines Division, Environmental Protection Agency.
itemized cost summary for waste water
95.7 percent BOD reduction.
Treatment Modul es:
Bi . .Control House
B. . .Puniping Station
C. . .Equalization Basin
F l. ..Nitrogen Addition
I . .Phosphorus Addi ti on
L...Aerated Lagoon
treatment chain design efficiency.
v-io
-------
Table V-8.
Itemized cost summary for distilleries (Grain)
al ternati ye A22-V III (BATEA/NSPS)
Medium
•
Large
.
Investment Costs
..
:
Construction
386,310.
697,970
Land .
33,820
46,650
Engineering
Contingency .
Total
38,630
38,630.
497,39.0
.
•
69,800
69,800
884,220
Yearly Operating Costs
Labor
.
:37,480
37,480
Power
.Chem cals
33,480
5,230
. 88,880
12 .700
Maintenance &
1.0,240
15,750
Supplie
Total
86,430
;
154,810
Total Yearly Costs
Yearly D erating
.86,430
-
i54, iU
Cost
Yearly Investment
• Cost ecovery
Depreciation
Total •
19,900
23,18.0
129,510
.
.35,370
41,880
232,060
.
Source: Effluent Guidelines Division, Environmental Prot ction Agency.
Itenii zed cos t. s ummary for. waste. water
97.8 percent BUD reduction.
Treatment Modules:
treatment chain design efficiency...
81. . Control House
B.. .Pumping Station
C.. .Equalizati.oñ Basin
H;. . Nitrogen Addition
I.. .Phosphorus Addition
K.. .Activated Sludge
G.. .Sludqe Thickener
R. . .Aeorbic Digestor
S.. .Vacuum Filtration
y .Holding Tank
N. . . Dual Media Pressure
Fi 1 trátion
V-il
-------
Table V—9. Itemized cost suniraary for distilleries (G airi)
alternative A22-III (BATEA/NSPS-option)
.
Medium
Large
lnvestnient C sts
Construction
Land
Engineering
Contingency
PVC. Liner
Total
.
.
45r 730
‘
45c8 0
45580
13,530
566,570
•
1,021,230
12 990
102:120
102,120
37,790
1,276,250
.
Yearly Operating Costs
Labor
Power
Chemicals
Maintenance &
• Sup plies
PVC IJner
Total
•
12,490
146,980
2,420
14,760
540
177,190
:
•
12,490
439,140
.
30,040
1,590
499,210
.
Total Yearly osts
Yearly •0per tiny
Cost
Yearly Investment
Cost Reco ry
Depreciation.
Total
.
•
.
177
‘ .
. •.
22 6
28,020
227,870
•
•
49.9,210
.
:
51,050
63,160
613,420
.
Source: Effluent Guidelines Division, Environmenta1 Protection Agency.
itemized cost summary for waste water treatment chain design efNc ency.
97.3 percent BOO reduction.
Treatment i1oduies.:
Bi. .Control House
B...Pumping. Station
C...Equalization Basin
U.. .Nitroqen I\ddition
I. ..Phosphorus Addition
U.. .Aerated Lagoon
N . .Dual Media Pressure Filtration
V -12
-------
VI. ECONOMIC IMPACT ANALYSIS
The imposition of effluent controls on the Distilled Spirits Industry
• will have, to some degree, both direct and indirect impacts on the in-
dustry, on consumers, on its suppliers and on communities in which im-
pacted distilleries are located. An analysis was made of the grain dis-
tilleries for. specific effluent control levels, in both quantitative and
qualitative terms., of the impacts which are e.xpected.
The following types of impacts have been analyzed:
A. Price effects
B. Financial effects
C. Production effects
D. Employment and community effects
E. . Other effects
The resultant industry impacts discussed herein are concerned with those
existing distilleries which presently discharge wastewaters to navigable
waters and those distilleries which are yet to be constructed and who
will discharge effluent wastes directly to navigable waters (hereafter
referred to as new source distilleries). Currently, there are 18 grain
distilleries which are known to be presently discharging effluent to
navigable waters. Of the 18 grain distillerie , all have some fOrm of
treatment in place, 12 meet the proposed.BPT standards and one meets
the proposed BAT standards. The treatment sy.stems of the 12 distilleries
meeting BPT include:
2 distilleries with trickling filters and clarifiers
4 distilleries with aerated lagoon. arid stabilizing ponas
5 distilleries with activated sludge systems
1 distillery with rotating biological discs.
Thus the imposition of effluent controls on these distilleries will . ‘equire
the installation of additional treatment equipment such that they cap meet
proposed BAT standards. . .• . .
The distillery presently meeting BAT standards utilizes a spray irrigation
system and is considered not to incur additional expenses due to the im-
position of effluent controls;
The S remaining grain distilleries, those which do not meet BPT standards
but do have some form of treatment, all presently utilize aerated lagoon
treatment systems. These distilleries will incur expenses to upgrade
their systems to meet proposed BPT standards as well as additional ex-
penses to meet BAT standards. . .
VI-l
-------
With regard to the sizes of the above described grain distilleries, of
the 5 not meeting BPT standards, 3 are considered to correspond to the
mediUm model and 2 to the small model. The sizes of the distilleries
meeting BPT but not the BAT standards inclue 8 distilleries which cor-
respond to the small model and 4 distilleries which correspondto the
medium model.
There are also two molasses distilleries located in the U.S. that are
known to be direct dischargers. These operati.ons presently meet standards
and thus were not considered in this impact chapter.
Thus, this impact analysis will address the potential impacts resulting
from the imposition of effluent controls on existing grain distilleries
which alrpady have part of the required treatment systems in place and
on new source distilleries. These impacts are analyzed for the model
grain distilleries described in Chapter I I I, with the impacts being
based on the production and financial characteristics of the models
and the effluent control costs as presented in Chapter V.
It should be noted that in Chapter V, two sets of control costs were
described for each model ; the recommended treatment system and an optional
system. For purposes of this impact analysis, only the recommended treat-
ment system will be utilized, with the optional systems’ costs being
furnished only for informational purposes.
A. Price Effects
1.. Required Price Increases
An ithplicit indicator of the expected price effects of effluent controls
used in this report is the amount of sales price increase necessary to
maintain a distillerys profitability, after effluent control expenditures,
at the sane level as the distillery without the control expense. The
method ofcomputation was described. in Part I, Chapter li (Methodology),
Section F, under subsection 2 of this report. The ability of distilleries
to pass on such price increases is evaluated in this section of the report.
The amounts of sale price increases necessary to offset estimated effluent.
control costs for the model diztilleries range from 0.6 percent.to 2 . 2
rcent an are shown ir 1 Table VI-l. For the existing model distilleries,
both the required price increases for BPT and BAT are shown. However, it
should be noted, these figures reflect the required price increases necessary
to offset control costs for a distillery without any of the required equip-
ment already i i i place. As all the known direct discharging grain distilleries
already have some form of treatment in place, they would not required the
full amount of the price increases depicted in Table VI-l. To determine
what the actual required price increases would be for these distilleries
would require a case by case analysis and unfortunately this was not
possible due to the limited data available concerning these distilleries.
Accordingly the price increases depicted in Table VI-l will be used.
However the use of these increases will be qualified to indicate that they.
represent distilleries with no controls already in place.
Finally, also shown.in Table VI-l, for the new source distilleries, are
therequired price increases necessary to offset the costs of the NSPS
standards..
VI-2
-------
Table VI-1. TheDistilled Spirits Industry, required price increases
necessary to offset effluent control :costs.
Model
Daily
Capacity
Requir d Price In
-20 Estimate
crea
+20
..
‘
Existing Grain Distilleries
Small
BPT
:Bu. Milled
1,000
‘
.
1.6 2.0
.
.
2.4
BAT.
1.7’ 2.2
2.7
‘Medium
5,000
BPT
‘
1.0 1.3
1.5
BAT
•
1.1 1.3
1.6
Large
BPT
BAT
‘
15,00.0
‘
0.5 0.6
0.50.7
0.8
0.8
New Source Grain Distilleries
5,000
‘
0.9 ‘ 1.1
1.4
Medium ‘
Large
15,000
0.5 0.7,
0.8
VI-3
-------
2. ‘Ex 1 pected Price Increases
While Table VI-l illustrates what the model distilleries would require
to offset expenditures for effluent controls, it is doubtful those dis-
tilleries which require additional controls would be able to pass on the
additional expense to customers in the form of higher prices. This is
due to (1) the discharge status of the Distilled Spirits Industry and
(2) the competitive and market characteristics of the industry.
As discussed earlier, of the 60 grain distilleries authorized to operate,
only 18 discharge their effluent to other than municipal treatment facili-
ties. Furthermore of these 18 direct dischargers, 12 already meet the
proposed BPT s’Eandards and one distillery already meets the BAT’ standards.
The 5 graindistiiier’iês not meeting BPT standards already have aerate d
lagoons in place and thus while these facilities will require some addi-
tional’ expense to meet the BPT standards, it will not be the same magni-
tude as indicated in Table VI-l. The 42 grain distilleries which dis-
charge their wastewaters to municipal systems are not expected to incur
any additional costs due to the imposition of BPT or BAT standards,
however, it is realized that these distilleries have incurred and ‘are
expected to continue to incure, increases in their user charges for munic-
ipal treatment. Thus, due to the limited industry-wide impact of effluent
controls, ‘it is do ubtful that direct discharging grain distilleries will be
able to. pass on required price increases in excess of an equivalent to the
general level Of increases in the municipal charges experienced by the
remainder of the industry.
However, should municipal charges become higher than private treatment’
costs, then impacted and new source distilleries would have a competitive
adv’antage and have the opportunity to pass on increased costs of efflUent
controls assuming the’ industry as a whole increases prices to affect the
increased municipal charqes. Although not quantifiable at this time,
some indus try sources feel that this situation could happen in the future.
The market characteristics of the Distilled Spirits Industry may pro-
vide some opportunities for impacted and new source distilleries to
pass’ on effluent control costs but these will be limited to those dis-
tilleries which by location or production efficiency can establish a
competitive advantage over other distilleries. In other words, a new
source or ‘ mpacted di’stiilery which can produce and/or deliver its dis-
til ed spirits’ for lower prices than its competitors, may be able to
utilize its greater margin to absorb control costs and still remain
competitive. As shown below in Section B, Financial Effects, the costs
- of new source construction are partially offset by lower operating costs
through improved:technology which.results in new point sources. having
slightly higher income ratios than other existing distilleries; thus,
these operations may be able to absorb’ the cos’ts of controls.
VI-4
-------
However, for those impacted distilleries which cannot achieve a compdti,-
tive advantage, it isprobable that such distilleries will not be able
to pass on the required price increases because of the generally high
competition, low profit margin and excess capacity of the industry, and
too, for the newsource distilleries, the Mgh costs of new construction.
As discussed in earlier chapters of this.report, the Distilled Spirits
Industry has experienced relatively low profit margin and has excess
capacity as evidenced by distilleries operating only part of the year,
and plant closures relative to an increasing output (increasing population
and per capita consumption).
Therefore price increases, by impacted distilleries to offset the costs of
effluent rontrols are not expected to occur. In the following analysis,
nr price change was assumed to occur as a result of the entire industry.
increasing prices to offset effluent controls and accordingly, the ec i—.
onlic viability of the distilleries are based on financial characteristics
of the models without added revenue stemming from aggregated effluent con-
trol effects on industry prices.
B. Financial Effects
Based on model distillery profiles described ‘previously and costs of pollu-
tion control provided by EPA, tie following financial indicators were com-
puted under baseline (without pollution controls’) and with pollution .oritrols:
1. After tax income
2. After-tax return on sales.
3. After tax return on inv sted ‘capital
4. Cash flow and cash flow as a percent of invested capital
5. Net present value
The above were computed according to the discounted cash flow (DCF) and
return on’ investment (ROT) procedures outlined in the methodology.
Furthermore a sensitivity analysis was performed using pollution contrQl
cost estimates at levels of 80 percent and 120’ percent of the costs pro-
vided by EPA.
The results of the rr3de1 distillery analysis of the proposed effluent
guidelines are summarized in Table VI-2 for the existing grain models
and Table VI-3 for the new source grain distillery models. These re-
suits are discussed below. It should.be noted that the impacts depicted
below reflect the effects of distilleries having to install controls
assuming they have no controls already in place. As all known direct
discharging grain distilleries have some form of controls already in
place, the actual industry impacts will no doubt be less severe than
those depicted below.
VI-5
-------
Table VI-2.
key values of impact analysis for model. grain distilleries:
.
Key Value.
.
Model
Size
— Percent
Baseline BPT
Case 80 100
of
Proposed
Control
Costs
.
•
BAT
. 120
80
100
120
BPT and BAT
(percent)
After Tax Income ($000)
S
.21
3
-3
—9
0
-8
-15
N
547
82
466
450
479
462
444
•
L
2,552
2,435
2,405
2,376
•
2,429
2,399
2,368
After tax Return on Sales (%)
After Tax Return on Invested
Capital (%)
Estimated Cash Flow ($000)
Cash.Flow as a Percent of
Invested Capital
Net Present Values ($000)
S
1.0
0.1
-0.1
-0.4
0.0
-0.4
-0.7
N
3.5
3.1
•
3.0
2.9
3.1
3.0
2.9
L
4.6
4.4
4.3
4.3
.
4.4
•
4.3.
4.2
S
2.7
0.3
-0.3
-.1.0
0.0
-0.9
-1.7
N
11.7
9.8
9.4
9.0
9.7
9.3
8.8
L
17.7
.
16.4.
16.1
15.8
..
16.4
16.0
15.7
S
N
L
.49
682
2,943
36
€40
2,867
32
629
2,848
27
619
2,829
34
638
2,863
28
627
2,843
S
M
L
.23
61 5
2,823
S
. 6.1
4.5
4.0
3.4
. 4.2
3.5
. 2.8
N
14.5
13.6
13.4
13.2
13.6
13.4
13.1
.L
20.4 .
19.9:.
19.7
19.6
19.8
: 19.7
P19.6
—50
—213
3,793
3,034
?0,407
13,044
-254 .
—304
—227
—275
—332
2,845
. 2,65
3,009
2,814
. 2,618
18,703
18,362
19,002
18,651
18,300
-------
Table VI-3. Key va .lues.of impact analysis for new source model grain
distilleries: NSPS
Key Value
Model
Size
Baseline
Case
Percent of
Proposed Control Costs
80
100 120
..
..
.
(percent) -- - -
After Tax Income ($000.) M
L
906
2,822
838
2,700
821 804
2,669 2,639
•
M
L
After Tax Return on
Sales (%)
.
4.9
5.1
.
4.5
4.8
.
..4.4 . 4.3
4.8. 4.7
After Tax Return on
.
.
Invested Capital (%)
N
9.9
8.9
. 8.7 8.4
•
L
11.3
10.6
10.4 10.3
Estimated Cash flow
($000)
M
1,344
1,299
1,288 1,277
.
L
4,003
3,923
3,903 3,883
.
Cash Flow as Percent of
•
. .
Invested Capital
N
14.6
14.2
14.0 1.3.9
.
L
16.0
15.7
15.6 15.5
Net,Present Values
($000)
. .
. .
.:
M
1,854
1,054
854
.
L
:8,844 .
7,413
7,055 6,697.
vI-7.:
-------
1. After. Tax Income
Pi r. c.I— - ’ . . T—L1 UT L _._ - r . , ,
i- isuvvi iii lULl I e vi— . , u ’e lilipus I L. Wit u Dr I S arioaras on tne siiia 1 yra iii
di til1ery without any controls already in place reduces the after tax in-
come from $21 ,000 in the baseline case to -$3,000 after the installation
of the controls. The after tax income of the existing niedium grain dis-
tillery is reduced by $81,000 and the existing large grain distillery by
$147,000. As stated, previously,. since grain distilleries already have
som2 controls in place, it is probable that the actual after ta incoies
Will not be decreased by the magnitude indicated above. Thus it is possible
the small grain distillery, after the imposition of controls, will be able.
to maintain a positive after tax income.
BAT standards further depress the profits of the distillery models.
However, the relative significa ces of these additional reductions are
nominal compared to those incurred by BPT standards.
The imposition of NSPS on new source distilleries effect after tax income
in that the standards reduce the medium new source grain distillery model’s
profits. by 9.4 percent and the large new source grain distillery model’s
profits by 5.4 •percent (Table VI-3).
2. Ré.turn on Sales
The,after tax return on sales for the existing distill.eries were also
shown in Table VI-2 for the grain models. Basically the returns follow
the same general pattern as after tax income. As was explained in. Chapter
II, Financial Profi1e, the Distilled Spirits Industry has experienced a
deterioration in earnings during recent years. This deterioration is
exemplified in that the baseline model distilleries’ after tax returns
on sales are relatively low. The imposition nf BPT standards with the
following 3AT standards contribute to a further deterioration of returns.
This is especially evident for the small grain distillery.
The NSPS.do not significantly effect the after tax return on sales of
the new source grain models as the medium new source model’s return
decreases by 0.5 percent from 4.9 to 4.4 percent and the large new
source model’s return decreas.es by 0.3 percent from 5.1 to 4.8 percent
(Table VI- ). .
3. Return on Invested Capital
As shown in Tables VI-2 and VI-3 for the existing and new source grain
distillery models, pre-controls after tax returns on invested capital
range from 2.7 to 17.7 percent for the existing grain models and from
9.9 to 11.3 percent for the new source models. As is the trend for
most food or beverage related industries, the return on invested capital
is substantially lower for the small distilleries than for the larger
operations.
VI-8
-------
After the imposition of BPT standards, the after tax returns on invested
capital for the grain models decline by 1.6 to 3.0 percent. with theniost
significant impact occurring on the small grain model. The additional
requirements of BAT standards result in a further reduction inireturns
with the grain models declining by an additional 0.6, 0.1 and 0.1 percent
for the small, medium and large models respectively.
For the new source model distilleries, the impositi.on of NSPS results in
a reduction of the medium new source grain model’s.return by 1.2 percent
and 0.9 percent for the large new source grain model.
4. Cash Flow
Estimated cash flows (after tax income plus depreciation on total invested
capital for the model distilleries) are shown in Table VI-2 for the exist-
ing models and Table ‘ 11-3. for the new source models. In the baseline case,
cash flows range from 6.1 to 20.4 percent for the existing grain models.
The new source baseline cash flows range from 14.4 to 16.0 percent for
the new source medium and large grain models respectively. . For the ranges,
the higher percentages correspond to the larger operatiens and the lower
percent to the small models.
Aft rtheimposition of BPT, BAT and NSPS guidelines, all cash flows remain
positive. However, review of the model’s after tax income reveals that
the existing small and new source medium grain distillery models generate
negative incomes. Thus, while all the model’s cash flows are pOsitive.
the small existing and medium new source grain models may not be able
to remain operative. .
5. Net Present Values
The computed net present values (NPV) for themodel distilleries indicate
in the baseline case, all the existing models, except the small distilleries
as well as both new source grain models achieve positive NPV’s. The small
existing grain model generates a negative NPV. As discussed in Part I,
Chapter II.(Methodology), a negative net present value would cause most
firms to cease operations or to scrap plans for building new distilleries.
Since for the small existing distillerymodel its NPV is negative in the
baseline case, it could be concluded that very few small distilleries
would be in operation. However, it should be noted that a negative NPV
indicate the associated distillery would earn less than the estimated 7.9
percent industry cost of capital. Thus such distilleries may remain in
operation provided the firm has been well established in the industry,
has expectation to capture a major market share at profitable prices
and has’ an excellent financial performance record (e.g. lower cost of
debt capital).
‘11-9
-------
The imposition of BPT controls on the existing model distilleries result
in all the models’ NPV’s beinq decreased, however, it should be noted,
all existinq models which maintained positive NPV’s in the baseline case
remain positive. The requirements to meet BAT standards result in fur-
ther declines in the NPV’s. but no changes in the signs of the values occur.,
The NSPS guidelines, when imposed on the new source models, result in the
models’ NPV’s to decline. The medium new source grain models’ NPV is
reduced by $1,000,000 after installation of NSPS controls from $1,854,000
to $854,000. The large new source grain model’s NPV is reduced from
$8,844,000 to $7,055,000 or a reduction of 20 percent.
C. Production Effects
BPT guideline requirements are not expected to significantly effect grain
distilleries’ production. This was based on the fact that all but 5 grain
distillerics currently are capable of meeting the proposed BPT standards
and that the 5 distilleries which do not meet the standards, all have
aerated lagoons presently in place. Thus for the grain distilleries, only
5 operations will require expenditures to meet BPT and these will be limited
to the expenses associated with establishing some form of equalization
treatment. Accordingly, it is anticipated no plant closures will be
incurred by the grain distilleries due to BPT requirements.
With regards to grain distilleries meeting the proposed BAT standards,
it is also anticipated that no plant closures will occur. This deter-
mination is based on the fact that of the 17 grain distilleries which are
not presently meeting BAT standards, all have sc ie treatment currently in
practice (12 meet BPT) and the incremental costs of achieving BAT levels
from BPT levels are nominal, with the incremental annual costs ranging
from$3,000 to $8,000 (See Table V-3 in the previous chapter).
The effects on new source grain distilleries of NSPS requirements,’ results
in the new source distilleries returns being reduced. However, the size
of these reductions are not of such magnitude that it could be anticipated
that the NSPS requirements would restri ’t entry to the grain distillery
industry. Accordingly, no production effects are projected.
D. Employment •and Community Effects
The imposition of effluent controls on the grain distilling industry, is
not ‘expected to affect employment within the industry aside from creating
a few job opportunities ‘for persons to operate the treatment systems.
Also the effects on grain distilleries’ communities are expected to be
negligible. ‘
VI-lO
-------
PART VI
SOFT DRINKS
-------
PART VI: SIC 2086 THE SOFT DRINK INDUSTRY
I. INDUSTRY STRUCTURE
The Census of Manufactures defines the soft drink industry (SIC 2086) as
those establishments primarily engaged in manufacturing soft drinks
(nonalcoholic beverages) and carbonated wätérs.. These consist mainly
of independent franchised bottlers who purchase beverage bases, concen-
trateor syrup, and bottle soft drinks. Establishments primarily pro-
ducing beverage bases, flavoring extracts and flavorin.g syrups are
classified in SIC 2087 and are discussed in Part Vilof this volume.
A. Characteristics of the Soft Drink Industr’ ’
The soft drink industry consists cf a variety of types of firms and plant
ownership ranging from family-owned, to corporations to divisions of larger
comglomerates. As a result, information regarding the operating charac-
teristicsof soft drink firms and plants is closely held or else combined
with operating statements of large corporations where meaningful segregation
is not possible.
• Information regarding the characteristics of the firms in this industry must
accordingly be derived from traditional sources such as the Census of
Manufactures and the published reports of the Internal Revenue Service.
These sources do have their limitations; however, they do provide some
insight as to the characteristics of firms in the soft drink industry.
While limited data are available for 1975 for some of the characteristics,
most data available in detail are reflective of 1972;
A more convenient, readily available, and in some cases a more meaningful
summary is derived by segmenting the industry by plant characteristics
rather than by fir; characteristics. This approach is perhaps more
meaningful in that operating decisions are usually based on individual
plant data as opposed to firm data. As such the following sections will
describe both the plant as well as th.e firm characteristics of the soft
drink industry.
1. Number and Size of Firms and Plants .
According to the Census of Manufactures in 1972, there were 2,273 firms
in the softdrink bottling and/or canning industry operating some 2,687
individual establishments. Thus, the majority of the firms operate only
one plant.
I—i
-------
Considering that there were 3,400 establishments in 1967 with’ 3,057 firms
it is.evident that the multi-plant firms have increased their concentration
and the independent single-plant operations have declined.
This trend is further evidenced when statistics. from the National Soft
Drink Association’s 1973 State Soft Drink Profile are reviewed. Ac’cording
to the NSDA, in 1973 there were 2,468 soft drink plants with 1,585 of
these plants being single plant firms. The remaining 883 plants were
owned by 480 multi-plant firms. Thus, for 1973, 36 percent of all
soft drink plants were owned by firms which operated more than one
plant. Also, according to NSDA, there were 2,065 firms operating.
soft drink plants’ in ‘1973. This compares to 2,273 firms forl972
as compiled by the Bureau of Census.
The majority o.f the soft drink bottlers leaving the industry are tne
smaller sized operations as can be seen in Table I-i. The percentage of
establishments with less than 20 employees has decreased from 60.8 per-
cent’ ,of all establishments in 1963 to 50.2 percent in 1967 and finally
to, 42.1 percent in 1972. Accordingly, the percentage of all establish-’’
ménts with more than 50 employees has increased from 12.7 percent in’ 1963
to nearly. 27 percent in 1972.
The number of establishments engaged in bottling and/or canning of soft
drinks has declined significantly in recent years. In’ 1958, the Census
of Manufactures.indicated 4,394 establishments comprised the soft drink
industry; by 1972, this number had dropped 39 percent to 2,687 establish-
ments. ‘ According to the National Soft Drink Association, the number of
establishments has continued to decline wi i their 1973 estimate indicatinq
2,,468 establishments.and their 1975 estimate indicating 2,317 establish-
ments in the industry.
The number of establishments by employment size group re depicted in
Table I-i for the years 1963, 1967 and 1972. Also shown in this’ table
are the .employment classes’ -espective value of shipments and the
corresponding percentaye of the totals. From this table,’it becomes
evident that while a majority of the establishments have less than 50
employees (87’.3 percent in 1963 and 73.1 percent in 1972), the major
portions of the industry’s value of shipments are accounted for by those
establishments with over 50 employees (56.0 perc’ent in 1967 ,and 83.0
percent in 1972). Furthermore, the industry has been experiencing an
exodus of the small sized establishments and an increase in the number
of the larger sized plants. Part of this trend can be explained by the
fact that some of the smaller establishments have expanded their operation,
thus, resulting in their inclusion in a larger employment size group. How-
ever, in terms of actual numbers, those establishments with less than 50
employees declined by 1,443 plants between 1963 and 1972 while those
establishments with more than 50 employees increased by only 225 plants.
1—2
-------
Table I-i.
The Soft Drink Industry by employment size group, ‘number of establishments,’
and value of shipments, 1963-1972
1963 ‘
“ 1967
. 1972
Value of
Value of
‘ .
Value of
Establishments
Shipments
Establishments
Shipments
Establishments
; Shipments
Number of
Million
Million
Million
Employees
Number Percent
Dollars Percent
Number Percent
Dollars Percent
Number Percent
Dollars Percent
1-4
770 19.7
28.5 1.3
719 21.1
37.8 1.2 •,
.448 16.7
35.8: 0.6.
5-9 ‘
10-19
601 1 .4
, 1,004 25.7
72.5 3.3
258.8 1L7
330 ‘ 9.7 .
660 19.4
49.1 1.6
‘ 211.0’ 6.6
265 , 9.9
418 15.5
74 4 1.4
?27 6 4.2
20-49
1,033 26.5
61 .1 , 27.7
1,031 30.4
733.8 23.1
‘834 31.0
‘1,143.1 20.8
50-99
3d8 7.9
453.1 20.5
386 11.4
699.2 22.0
417 15.5
1,263.9 ‘, 23.0
100-249 ,
159 ‘ : 4.1
535.2 . 24.2
231 6.8
‘ 960.0 30.3
247 9.2
1,765.3 . 32.2
250 or more
30 0.7
250.5 11.3
43 , 1.2
482.2 15.2
58 2.2
976.2 17.8
‘
TOTAL
3,905 100.0
2,2109 100.0
3,400 .100.0
3,173.2 100.0’
2,687 100.0
5,486.4’ 100.0’
Source: U. S. Department of Cbmmerce, Bureauof the Census, Census of Manufactures , 1967, 1972.
-------
2. Value of Shipments
Value of shipments and other receipts .of the Bottled and Canned Soft
Drink Industry in 1972 totaled $5,486.4 million. This includes ship-
ments of bottled and canned soft drinks (primary products) valued at
$4,657.4 million, shipments of other products (secondary products) valued
at $81.1 million and miscellaneous receipts (mainly .resales) of $747.9
million.
Estimates of the value of shipments for the Bottled and Canned •Soft
Drink Industry is expected to total $7.2 billion in 1975, 10 percent
above estimated shipments of $6.5 billi;on in 1974, and 31 percent above
the shipments in 1972. Historically, the value of shipments have in-
creased by an average of 9.5 percent per year since 1958., from $1.5
billion in 1958 to an estimated $7.2 billion in’1975 (Table 1-2).
Shipments of bottled and canned soft drinks (primary products) in 1972
represented98 percent (specialization ratio)of the industry’s total
products. shipments (primary and secondary products). The industry
specialization ratio in 196.7 was al so 98.percent. Seconda ’y products
shipped by. this industry in 1972 consisted mainly of flavoring extracts
and syrups ($20 to $50 million), canned fruit and vegetables ($10.3
million) and metal cans ($10 to $20 million).
Shipments of bottled and canned soft drinks (primary products) from
establishments classified in industry 2086 in 1972 represented 97 percent
coverage ratio) of these products valued at $4,807.2 million shipped
by all indUstries. In 1967, the coverage ratio was 96 percent. Other
industries shipping bottled and canned soft drinks consisted primarily
of the fluid milk industry (SIC 2026); the flavoring extracts and syrups
industry (SIC .2087); the fruit and vegetable canning industry (SIC 2033)
and the frozen fruit and vegetable industry (SIC 2037).
3. Level of Integration
Soft drink bottlers could be considered to be integrated forward as most
bottlers own and operate vending machines which sell the manufactured
.:soft drinks. However,.aside from their. franchise arrangement with
the national brands, most bottlers are not highly integrated backward.
It should be noted, however, that several bottlingand canning plants are
owned by the national franchisers (formula owners) and these plants may
be considered to have some backward integration.
Bottlers may also be integrated forward in that they serve as distributors
within. a geographic arCa. Bottlers usually also act as the supplier to
otherdistributors who do not operate bottling facilities.
1-4
-------
• •. Year
Table 1-2. The Soft Drink Industry, value of
shipments, .1958-1.975
.
.
Percentage
. Change
(Percent)
Value of
Shipments
(Million
• . dollars)
1 ,558
1 ,71 4
1,806
1.,911
2,031
2,211
2,409
.2 505
•2 ,735
3., 173
3,554
4,064
4,631
5,047
5,486.
.5935
6,529
7,200
1958
1.959
1960
1961
1962
1963
1964
1965
1966
1967
1968
1969
1970
1971
1972.
1973*
1974*
1975*
Source: Bureau of the Census, Bureau
* Estimated.
id .0
5.4
5.8
:6.3
8.9
9.0
4.0
16. 0
12 .0
14.4
14.9
9.0
8.7
• 8.2
10.0
i0. 3
of Labor Statistics, .BDC.
1—5
-------
4. Number of Products
The soft drink industry shipments of bottled and canned soft drinks
represented 98 percent of the industries total shipments. Thus, the
number of products handled by the typical bottler and/or canner are
primarily limited to different varieties and sizes of soft drinks.
5. Level of Diversification
The Census of Manufactures shows the soft drink industry with a very
high specialization ratio of 98 percent in 1972. As stated in the pre-
.ceding section, this indicates that 98 percent of sales are in the primary
SIC code.. The typical production unit is not diversified beca.use the
processes and equipment are specialized and non-interchangeable and do not
lend themselves to application to other products. Hence, most plants
have confined production to a very limited range of products.
There are in existence some fruit or vegetable canning operations which
contract with soft drink firms to can soft drinks during their off season.
The number of these canners is not known, and it is doubtful if there are
many.
6. Location of Plants
The locations of.soft drink plants tend to be associated with concentrated
population areas and warmer climate areas (Table 1-3.). Furthermore, it
is evident that for most states, plants tend to locate in cities where
often there will be another soft drink plant. This can be interpreted to
imply that plants within a state tend to concentrate in major cities of
that state with the remaining plants. probably dispersed throughout the
state in a regionalized fashion.
7. Age of the Plants and Level of Technology
The level of technology is difficult to a sess in the soft drink industry.
Many of the plants are relatively old; but, throughout their useful life,.
new equipment has been added or used to replace that which is old or tech-
nologically obsolete. As a result, most plants in the industry represent
á’combination of old and new equipment. Generally, the newer equipment
installed represents a higher level of technology than the old. However,
in the short run, considerably fewer plants than in the past are expected
to update their facilities in the face of obsolescence, inflation, recession,
and added investments required by governmental regulatory bodies.
There are no known measures of ages of plants in the soft drink industry.
However, for purposes of this report, it was assumed that the smaller
operations tend to be older than the larger plants. This assumption’is
predicated upon the fact that according to IRS data, the percentage that
accumulated depreciation represents of total depreciable assets decreases
as’the size of the firms increase (Table 1-4). Thus,’ the larger soft ‘
drink plants have less depreciated assets than the smaller plants and as
such can be assumed be have newer equipment and facilities.
1-6
-------
Source: National Soft Drink Association.
1—7
Table 1-3.
Soft drink manufacturing industry statistics by state, 1973
Soft
Drink
Plants with
Less than 50
Plants with
50-99
Plants
More
with
than
Soft
Drink
Cities with
Soft Drink
State
Plants
Employees
Employees
200 Employees
Firms
Plants
Alabama
55
29
14
12
49
30
Alaska
4
3
0
.1
4
3.
Arizona
Arkansas
California
Colorado
Connecticut
Delaware
Florida
Georgia
Hawaii
.
24
42
129
32
44
6
73
79
13
17
27
86 .
25
37
5.
41
.53
10
5
13
23
3
4
1
.20
15.
0
.
,
2
2
20
4
3
0
12
11
3
22. .
35
97
28
42
6
52
11
8
.26
67
14
30
4
.31
51
5
Idaho
Illinois
14
82
6
56
8
14
0
12
14. .
71
7
46
Indiana. .
Iowa
Kansas
Kentucky .
Louisiana
Maine .
Maryland
Massachusetts
Michigan
Minnes3ta
Nississip i
Missouri.
Montana
Nebraska
Nevada
New Hampshire
New •lersey
New Mexico
New York
North Carolina
North IJakota
Ohio
Oklahoma
Oregon
Pennsylvania
Rhode Island .
South Carolina
South Dakota
Tennessee
Texas
Utah
Vermon
Virginia
Washin.gtan
West Virginia
Wisconsin
Wyoming
66
29
31
52
47
21
37
71
66
50
48 .
62
20
27
11
10
68
23-
152
88
11
86 .
43
32
176 .
14
40.
10
63
164
21
6
53
29
38 .
94
6
43 16
12 12
20 6
38 8
30 . 9
18 2
23 8
47 16
46 8
38 7
30 14
48 . 7
19 1
22 4
10 1
7 3
48 . 11
20 3
107 30
. 49 25
11 . 0
48 15
. 6
28 2
147 22
13 1
28 . 10
8 2
42 12
103 41
18 . 2
6 0
24 13
20 6
27 10
75 15
5
.
,
.
7
5
5
. 6 .
8
1
6
8
12
5
4
7
0
1
0
0 .
9 .
0
15
14
0
23
5
2
7
0
8
0
9
20
1
-0
16
. 3
1
4
Q
. 53.
23
.25 .
39
.. 38
20
. 31
68
59
35
42
54 ..
19
25
11 .
9.
61
. 21 .
120
64
9
. 5 - .
36
27
159
14
36
9
50
137 .
19
6
40
28
33.
89 .
5
43
18
19
33
27
15
20
48
39
32
34
. .33 ..
14
17.
5
.9
41
. 15
. 45
9
36
.24
. 18
. 104
7
30
7 1
33
86
. 10
3
30
16
24
63
4
.
,
.
.
TOTALS
2,468 1,705
459
•304 2,065 1,413
-------
‘-4
Table 1—4. The soft drink industry, accumulated depreciation as a percent of total depreciable
assets, by total asset size
Size of Total Assets ($1,000)
Fiscal 100- 250- 500- 1,000- 5,000-. 10,000- 25,000- 50,000- 100,000- 250,000
Year 0-100 250 500 1,000 5,000 10,000’. 25,000 50,000 100,000 250,000 + “.
Percent
1968-69 66 ‘ 59 55 60 52 41 46 44 -- -- 40
196,9-70 ‘70 61 56 52 48 47 44 . 47 33 -- 38
1970-71 68 63 5b’ 51 47 47 45 . 46 -- 38
1971-72 74 60 63 56 52 53 47 48 46 30 41
Average 69.5 60.7 57.7 54.5 . 50.7 47.0 46!0 46.0 ‘41.7 3b 39.2
Source: Dept. of the Treasury, Internal Revenue Service, Corporation Source Book of Statistics of Income .
-------
8. Plant Efficiency
By the historic standards of the industry, productivity of the soft drink
industry has increased steadily. Output per production worker has increased
from 85.4 in 1960 (based on an index where 1967. 100) to 141.4 in 1973.
This can be interpreted to mean that the average output per production
worker has increased by 65.6 percent in the last .13 years. This ‘increase
in output per worker is attributable to the industry trend for larger more
highly automated operations which result in higher plant operating efficiency.
B. Employment Characteristics
Total employment in the soft drink industry has increased over 25 percent
from 97,100 employees in 1958 to 121,800 employees in 1972 .(Table 1—5).
Production workers represent approximately 40 percent of total employees,
and during the above period increased in numbers from 39,500 to 45,900.
The relatively low proportion of production workers in the industry is
explained by the industry’s high requirement for driver-5alésrnen who sell
and distribute each operation’s products and are not considered as pro-
duction workers.
Overall, the productivity of the production workers has increased signif-
icantly since 1960. Since then, the output per production worker. ha.s
more than doubled while the value of shipments ‘oer worker has tripled.
Much of this increased productivity, is attributable to technological
advances,particularly the improvements in the operating speed of the
bottling lines.
The soft drink production workers can be classified as semi-skilled.
Much of the labor involves the monitoring of bottling equipment. Average
hours worked by production worker have remained relatively stable and
totaled 2,013 hours in 1972. Hourly wages have.steadily increased and
have doubled since 1960 to an hourly rate of $3.24 per hour in 1972. Cor-
respondingto the wage increase, the value added per production employee
also more than doubled.
AccOrding to the National Soft .Drink Association, there were 123,427 employees
in the.. soft drink industry in 1973. Broken down into state figures, the
states with the higher number of employees are concentrated in the more densely
populated states (Table 1-6). The leading five states are: 1—Texas,2-
California, 3-Ohio, 4-New York, and’ 5-Pennsylvania.
1-9
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Table 1—5. The Soft Drink Industry, Emp1oym nt Statistics 1958 to 19711/,
1972 I
1 ’Source:
VSource:
1 ’Source:
U.S. Department of Commerce, Annual Survey of Manufactures , 1971.
U.S. Department of Commerce, Census of Manufactures , 1972.
National Soft Drink Association, Statistical Profile, 1974 .
All
Employees
Production
.
Workers
Value Of
shipments
per production
worker
Man hours
per
Production
worker
Wage per
production
worker
Man-hour
Value added
per production
worker
Man hour
Year
No.
Payroll
No. Man-Hrs.
Wages
(000) ($ Mu.)
(000) (Mn.)
($ Mil.)
($000)
($)
($)
1958
1959
1960
1961
1962
1963
1964
1965
1966
1967
1968
1969
1970
19.1
1972
97.1
100.0
103.3
104.1
105.4
106.. 9
111.1
113.9
117.7
123.3
124.1
128.5
128.8
121.1
121.8
405.6
433.6
465.5
485.4:
515.3
537.7
582.6
614.4
667.1
726.7
767.4
833.5
915.9
959.4
989.5
39.5
40.2
41.1
40.9
41.4
40.9
41.0
42.1
43.7
46.6
47.7
49.3
49.6
45.. 9
45.9
80. 0
83.7
89.4
895
92.9
86. 9
89.2
90. 1
93.8
95.3
96 5
97.8
103.9
94.2
92.4
131.4
135.8
14.4.3
149.2
158.3
164.7
172.8
182.7
201.1
219.3
234.1
257.4
79.5
282.0
298.9
39. 5
42.6
.43•9
46..7
49.1
54.1
58.8
59,5
62.:6
68,1
74.5
82.4
93 4
110.0
iig.5
2,025
2,082
2,175
2,188
2,244
2,125
2,176
2,140
2,146
2,045
2,023
1,984
2,095
2,052
‘2,013
1.64
1.62
1.61
1.67
1.70
1.90
1.94.
‘2.0 ’3
2.14
2. 3’0
2. 4:3
2. 63
2.69
2.99
3.24
Output per
producti on
worker /
(mil. 8 oz
equiv.)
.86
89
97
1.06
1.14
1.20
1.29
1.27
1.40
1.42
1.50.
1.75
1.85
10.78
11.40
.11.25
11.85
12.14
14.20
15.56
15.24
15.68
17.62
18.67
19.86
20.42
23.59
25.46
-------
Table 1-6. The soft drink industryemployment statistics’
by state, 1973
.
.
;Stat.e
.
Total
Employees
:
:. Total
Sta ’te ‘. Employees
----Continued
Alabama
3,129
Nebraska 803
Alaska
Arizona
240
1,104
Nevada. 120
New Hampshire .. 3.93
Arkansas
1,946
‘New Jersey 2,483
California
7,613
New Mexico 693
Colorado
.
2,031
N w Yärk 6,405
Connecticut
1,421
North’Carolina 5,412
Delaware
. 138
North Dakota 259
Florida
4,386.
Ohio 6,595
Georgia
4,806
Oklahoma 2,255
Hawaii
Idaho
•
569
. 298
Oregon . 921
Pennsylvania 5,660
Illinois
“ 5 € O
Rhode Island 381
Indiana
3,521
South Caroli: a 2,722
Iowa
Kansas
1,556
1,523
South Dakota 322
Tennessee 4,117
Kentucky
.2,843
Texas 9,875
Louisiana
Maine .
3,108
‘ 484
Utah. 735
Vermont ’,. 155
Maryland
2,313
Virginia 3,841
Massachusetts
2,398
Washington 1,375
‘
Michigan
4,460
West Virginia 1,405
Minnesota
2,217
Wisconsin ., . 2,700
Mississippi
Missouri
‘2,231
3,341
Wyoming ‘:. 1.13
.
‘Montana
401
TOTAL ‘ 123,427
•
Source: National Soft Drink Association, State Profiles , 1973.
I—li
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As can be seen below, the majority of the soft drink industry’s employees
are employed in medium to large size operations with those firms employing
between 20 and 249 employees maintaining some 75 percent of the total
number of employees.
1972--Soft Drink Industry Employment
Emp oyment Size All Employees •Percent of Total
1-4 800 0.7
S-9 1,800 1.5’
10-19 6,000 4.9
20-49 26,300 21.6
50-99 28,200 23.1
100-249 37,000 30.4
250-499 15,600 12.8
500-2,499 6,100 ‘ 5.0
TOTAL 121,800 100.0
C. Segment Proportions of Total Industry .
While the preceding sections of this chapter have been concerned with
establishment data for the. soft drink industry, concern also is warranted
about the different types of soft drink establisiments. Unfortunately,
data are limited in this area and, as such, much of the following is
based on discussion with indu try contacts.
Soft drink operations can be classified in three different classifications.
First, the traditional type of operation consists of.plants which only
bottle soft drinks, for sale to their customers. Second, due to changing
consumer demands, the above traditional plants may have been modified such
that they are also able to can soft drinks. Finally, there are those operations
which only can soft drinks. This. last type of operation may can only.
its own bran 1s or it may also do contract canning of other private
label brands (typically local or regional brands). Furthermore, some
soft drink canners may actually be a fruit and/or vegetable canner, who
can soft drinks during the off season.
For purposes of this analysis, those operations which bottle soft drinks
and those which both bottle and can. soft drinks are considered to be very
closely related .in terms of operating characteristics. The primary
differences being that the canning operation will require a separate pro-
duction line and does not require the bottle wash. Typ cal1y, operations
which do both bottling and canning will tend to be t.he large.r more modern
fa cii. i t i e s. . .
1—12
-------
The operations which only can are also determined to be the larger sized
establishments and have, been estimated to number 225 plants in 1973.
D. Significant Impacts on. the Industry
Because of the structure and competitiveness of the soft drink industry,
pollution abatement.standards when imposed on plants discharging”to
surface waters and municipal sewers can have serious consequences on the
industry itself. The magnitude of this impact will, of course, depend on
the level of inves tment required to meet the specific standards. The
smaller third--and to some extent the middle third--of the plants. are
expected to be seriously’ impacted. The,y may not be able to recover the
cost of installing and operating abatement facilities unless they have
access to lower cost facilities, expand or merge. The specific plant
impacts will,: of course, depend on many factors such as capital avail-
ability, size of plant, profitability of the piant, location and avail—
ability of low cost•treatment.strategies.
It is recognized that the impact of substantially increased user charges,
now and in the future, to plants discharging to or planning to discharge
‘to municipal sewers is extremely critical to the industry, local business
communities and to consumers. However, the scope and the economic impacts
‘ in this ‘report pertain to those plants directly discharging to navigable
surface waters and plants that are constructed after the promulgation of
the guidelines which will be direct dischargers.
1. Capacity of Low Cost ProducersRelative .to High Cost Producers
The capacity of low cost bottlers, discharging to municipal sewers.and/or
directly discharging relative to high .cost bottlers in the same position
is one of the more important factors in considering the impact of pollution
abatement costs imposed upon the industry. In the soft drink industry,
the largest fourth of the plants bottle approximately 73 percent of the
total volume. The middle two-fourths of the plants bottle about 25 percent
and the smallest-fourth bottle only ’2 percent of the total. Due to
economies of scale, the larger plants are already expected’ to have a
definite ‘cost advantage. The imposition of high pollution abatement costs
on the, smallest-fourth of the plants ‘discharging directly ‘
and to a large extent the middle two-fourths, are expected to result in
further disadvantages to these low volume plants. If these small plants
are forced to shut down (unless low costabatement procedures can be
utilized), the low cost-high volume plants in the industry will most
likely offset possible losses in production through expansion (acquisition)
plant expansion and new construction, assuming firms can .acquire the
• necessary capital. .
1/ Environmental Protection Agency, Guidelines Division.
1-13
-------
2. Factor Dislocation Within the Industry
Differential impacts from pollution abatement controls are expected within
the soft drink industry, both in terms of type of firm and in the regional
locationof affected plants. The impacts expected and reasons for associated
dislocations are discussed in the following.
a. Types of Firms and Location
As explained earlier, the soft drink industry is comprised of many firms
(multi/single plant) differing in plant types (canning, bottling), size
(rate .per hour), capacity and utilization of capacity, level of technology
(new/old) and other factors. Many of these factors were considered in the
preliminary, analyses and one of the most critical measures in terms of
assessing a plant’s ability to withstand the. impact of internalized pollu-
tion abatement costs is its overall through-put size.
Marginal Firms - Within the soft drink industry, marginal firms are
typically the “small” and single plant firms. This is particularly
true in.terms of a small firm’s ability to financially withstand .pro—
jected high capital investment requirements of pollution abatement
measures. Such plants often simply lack the capacity to pay-out such
investments (at the levels,given). Many single plant firms also lack
the capital-acquiring ability of larger multiplant firms.
Within this framework, marginal firms faced with the decision to either
curtail employment or shutdown would most likely shut down. However,
pollution abatement investment costs can be an incentive to expand produc-
tion, not lower it, in order to lower per unit costs for those plants having
or able to install self-contained disposal facilities. This, however, may
be limited due, to the firm’s geographic market limitations.
Other plant closures of almost any.size are expected to result where.
obsolescence together with rising operational and required regulatory
capital needs cause total costs of operation to be so high, that continued
operation is economically unfeasible. For single plant firm closures, un-
employment and loss of market for local suppliers associated with the
closing’ plant are alsO expected to result. For some closed plants that belong
tornultiplant firms, Various proportions of production and employees will
shift to other piants.belOnging’ to the firm; some unemployment, due to
immobility will occur, with a corresponding loss of payroll and local
business. Other closed plants that belong to multiplant firms may not
be able to shift production and are expected to have the same effects
as the single plant firm closures.
As previously mentioned, downward. trends in the number of soft drink plants
are occurring. Pollution abatement controls are expected to accelerate
this downward trend in. the number of firms in the industry.
1-14
-------
Locational Impacts - Only general patterns of location of plants by size
category have been assessed in this phase of the study, but from this alone,
it is believed that slight regional differences in impact will occur
following standard adoption of pollution abatement controls. It is recog—
nized. that differences from state to state in Water Quality Standards
and the possibility of non-uniformity of enforcement within and between
states is another important factor in the impact on soft drink’plants. Even
though this problem is recognized, the impact of regulatory variability is
not included in this report, due to lack of quantitative or qualitative information.
3. Reasons for Disloca-t.ions
Rea;ons for the above’ type of firm and location-dependent expected dislo-
cations within the industry have been generally described. ‘ A summary in
terms of profitabili,ty and capital attainment is appropriate.
Profitability - Profitability of firms will be ‘affected by pollution
abatement measures, particularly for the smaller, inefficient and under-
capitalized firms.; While.average incremental costs for pollution abate-
ment may eventually be passed through to consumers, the smaller firms are
expected to have much higher than average per unit costs of abatement and
to drop out prior to any product price adjustments which may occur.
Economies of scale in pollution control are apparent tO the relative
disadvantaqe of smaller firms.. , As previously suggested, many of the,,
plants discharging directly might be’ forced out ‘of the industry.. This
would have’a limited desirable impact on the ‘remaining firms in that
pollution control costs could.be spread over a larger volume. Thus,
the level of profitability of the surviving plants might be affected
less on the average.
In-plant modifications and operational changes which will reduce effluent
loads may or may not improve the prbfitability of those plants which’ can
take advantage of them. In-plant. modification costs and savings must be
assessed and justified by individual plants.
Capital Availability - Capital within.the soft drink industry is obtained
primarily from commercial sources outside the industry and ,from ,the invest-
ment of profits. Adc 1 itional capital requirements for financing pollution
abatement measures will also principally be sought from such sources.
In this case, ability to obtain additional capital is expected,to be
determined by an individual firm’s projections of net returns with an
expanded investment program. Consequently, capital availability is
expected to be directly related to,profitability--and the smaller, in-
efficient plants will have difficulty raising the needed long and short
term capital to stay in business. In this sense,, inability to obtain
capital will contribute to the shutting down of marginal processing plants.
1-15
-------
Firms which are able to pass through incremental cost of pollution abate-
ment costs and maintain positive profitability will be able to acquire
capiltal for increasing capacity--plant expansion, acquisition, etc. Cur-
rently, pass throughs of rapidly increasing and larger-than-normal propor-
tions of costs are difficult to expedite. Costs are rising rapidly
and are disproportionately large due to a nearly simultaneous inflation
of operational costs (labor, materials, raw nateriaflwith new investment
requirements imposed by regulatory bodies (FEA, FDA, OSHA, EPA). These
increased costs are difficult to pass through due to the recession wherein
consumers are tending to resist any price increases through a lowering of
consumption to basic needs. Thus, plans of expansion through acquired
capital will tend to’,be carried-ou.t to the..degree i.ncremental pollution
abatement., energy, safe.ty and inventory costs can be passed through
to consumers.
The ability of firms to obtain capital will alsà depend on the state Of
the economy and the amount of money available for lending. With a large
amount of available funds, many industries and firms will be encouraged
to borrow funds. Competition for funds among industries is dependent
t pon the money supply and relative profitability of individual firms.
4. Narrowing the StudyScope
The preceding narràtivé attempted to describe an overall picture of the sOft
drink industry. In the remainder of this analysis, efforts will be made
to concentrate on those plants which could be subject to potential
impacts due to the imposition of effluent controls. This will be accom-
pushed utilizing representative model plants to estimate impacts and
extending these impacts by association to the wider spectrum of plants
which correspond to the model plant.
1-16
-------
II. FINANCIAL PROFILE OF THE INDUSTRY
Firms in the soft drink industry are primarily either family or closely
held corporations or divisions or subsidiaries of large, often multi—
operation firms. As a result, financial information relating to a single
plant firm is difficult to obtain. However, by relating information
available from a variety of sources, a picture of the soft drink industry
can be attempted. Information used to develop financial profiles was
integrated, from several sources including the Census of Manufactures
the Annual Survey of Manufactures, National Soft Drink Association and
associated industry operation and financial statistics..
A. Sales
Total sales of the soft drink industry were estimated to be $7.8 billion
in 1974 (Table 11-1). This compares to $4.8 billion in 1970.and $1.7
billion in 1960. The increase in total sales has resulted ’from both
an expansion of production facilities, an increase in per capita consumption,
and an increase in theoverail price level. During the past.two decades,
the total soft drink production ha.s increased from 1.18 billion 192-ounce
cases in 1954 to 3.80 billion cases in 1974, an increase of over 200
percent.
The .1972 Census of ManufactUres estimate of the value of shipments for.
the soft drink industry (SIC 2086) was $5,486.4 million for 2,687 plants.
This gives the shipments for the average plant to be $2,041,830. This
compares to $933,290 in 1967 (Table 11-2). Utilizingdata from the
Nati.onal Soft Drink Association, shipments for the average plant were
$2,521,520 in 1973.
While the average plant had sales of over $2.0 million in 1972 with 45
employees, the actual plants varied considerably i.n size. Actual plants
ranged in size from small operations employing one to four employees with
annual shipments of less than $80,000 to large operations employing over
500 employees with annual ‘shipments of nearly $26.4 ’.million.
B. Distribution of Sales Dollars
Distinct changes have occurred in the distribution o.f the sales dollar
from 1967 to 1972. Some changes can be attributed to price effects, but
some undoubtedly reflect the changes resulting from increased capital
expenditures. The price of sugar, a major raw material input, has ex—
perienced significant increases in the past two years and while these in-
creases are not reflected in the 1967 to 1972 period, it will undoubtedly
I I—i
-------
Table 11-1. The soft drink industry, estimated annual. sales,
production and consumption, 1950-1974
Year
Total Value $
(Wholesale)
Total Cases
(192 ounce)
Per Capita
(8 oz. containers)
.
1950
876
,532,600
1,001,751,474
158.0
19.51
939
,442,500
1,043,825,000
162.7
1952
1,019,295,000
.
1,132,550,000
.
174.0
1953
1,089
,513,000
1,177,852,000
177.5
1954
1,166
,605,000
1,176,674,000
174.2
1955
1,252
,276,000
.
1,264,925,000
184.2
1956
1,308
,000,000
1,321,214,000
188.9
1957
1,347,241,500
1,360,850,000
189.2
1958
1,427,463,500
1,359,489,000
186.4
1959
1,633
,015,900
1,484,560,000
.
199.8
1960 1
1,698
,025,600
1,476,544,000
192.0
1961
1,829,083,200
1,524,236,000
198.3
1962
2,001,016,800
1,667,514,000. .
213..4
1963
2,341,189,000
.
1,800,915,000
227.4
1964
2,533
,167,,000
1,948,590,000
242.9
1965
2,735
,567,000
2,104,282 000
259.1
1966
3,175,980,000
.
2,352,587,000
. 287.0
1967
3,458
,632,000
2,470,452,000
.
298.1
1968 .
4,165,552,000
.
2,777,035,000
331.6
1969
4,369,664,000
.
2,913,110,000
.
3444
1970 .
4,799,784,000
3,096,635,000
362.8.
1971
5,346
,960,000
3,353,615,000
388.1
1972
5,683,820,000
3,541,417,000 .
406.4
1973
6,223,156,500
3,771,610,000
429.6
1974
7,827,131,000
3,798,011,000
429.4
Source:
National Soft Drink Association, Survey of 1974 Sales .
I 1—2
-------
Table 11-2. The Soft Drink Industry, Value of Shiprn nts, Value add d and employees 1967, 1972, and 1973
Source: Depa trner Commerce, Bureau of Census, Census of Manufactures , 1967 and 1972.
1973, National Soft Drink Association, 1973 U.S. Soft Drink Profiles.
19 7
1972
.
1973
.
Trdu ry
Total
.
Per
Establishment
Industry
Total
•
Per
Establishment
Industry
Total
-
Per
Estabiish ient
NUmber of establishments
3,400
-
2,687
-
2,468
—
Value of Shipments
$3,173.2
mill ion
$933,000
$5,433.4
million
$2,042,000
$6,223.1
million
$2,522,000
Value Added
$1 ,679.4
million
$494,000
$2,352.1
million
$ 875,000
$2,787.0
million
$1,129,000
Total employees S
123,300
36
121,800
45
123,427
•
50
-------
contribute to a further redistribution of the raw materials porti’on of
the sales dollar. Between 1967 and 1972, the costs of raw materials
increased from $1,506.0 million to $3,146.0 million with a corresponding
increase in the percentage of the sales dollar from 47.5 percent in 1967
to 57.3 percent in 1972.
The number of employees declined from 123,300 in 1967 to 121,800 in 1972.
During this period,” average’ annual wages increased from $5,893.76 in 1967
to $8,123.97 in 1972. However, during this period, industry pajroll as a
percent of sales declined from 22.9 percent in 1967 to 18.0 percentin
1972.
Other operating costs, taxes and profits declined from 29.6 percent of the
sales dollar in 1967 to 24.7 p,ercent in 1972. This distribution of the
total sales dollar derived fr rn the Census of Manufactures for 1967
and 1972 is shown below. Also shown, for informational purposes, are
the similar data for ‘1973 derived from U.S. Soft Drink Profile , developed
by the National Soft Drink’ Association.
Distribution of Sales, Dollar (Percent)
1967 1972’ . 1973
Total Sales 100.0 ‘ 100.0 100.0
Raw Materials ‘ 47.5 57.3 55.2
Payroll 22.9 18.0 , 15.8
Other operating costs,
taxes and profits 29.6 24.7 29.0
C. Earnings
According to Standard and Poor’s Industry Surveys , the soft drink industry
‘has historically ‘been categorized by strong growth in sales and earnings,
and at rates superior to industry in general. The major factors of the
industry: Coca-ColaCo. ,‘ Coca-Cola Bottling Co. ‘of New York; Dr. Pepper;
Pepsico and Royal Crown Cola, have, as a group, boosted their sales by an
average of 13 percent per year in the five years through 1973 and their
earning’s by an average rate ‘of 12.5 percent per year. This compares. with
growth rate’s of 8’percent and 7.7 percent, respectively, for industry in
general. Soft drink producers were also more profitable, returning $7.49
for $100 in sales while.general industry returns were $5.98 for each $100
in salesl/ . ‘ ‘
1/ Standard and Poor s Industry Surveys , Soft Drinks - Current Analysis,
February 27, 1975, Volume 143, No. 9, Section 1.
11-4’
-------
While the above data indicate a relatively good return for themajor
soft drink producers, when the industry on the whole is considered, the
return on sales is respectable but, yet, not as good as indicated above.
According to Internal Revenue Service data, the net profit before taxes
has declined from 6.1 percentof net sales in fiscal year 1969 to 4.2
percent in fiscal year 1972 (Table 11-3). This deterioration in recent
years in soft drink profits has been reflective of increased costs associ-
ated with the shift from returnable bottles to •the less profitable di’s-
posabl.e containers. Also, the industry has experienced.an increased
competitive environment which, in turn, has increased outlays for advertising,
increased freight charges, increased packaging charges, ‘and in the more.
recent years, increased sugar costs..
Table II- also indicates the profits by the size of operation. As woUld
be expected in a production line operation, the smaller operations reveal
significantly lower returns than do the larger operations.
In a 1973 survey’of soft drink bottlers, the National Soft Drink Associ-
ation indicated that of the 83 respond.ing plants, 10 percent reported a
net operating loss and 7 percent reported net operating income over 15
percent of sales. The survey results are summarized below.
Ne.t Ooeratinq Income Number of Reporting Units . Percent
( Percent ‘ f net sales )
Less than 0 8 10
0 - 3.99. 16 19
4.00 - 6.99 23 28
7.00 - 10.99 18 22
11.00 - 14.99 12 14
15.00 or higher 6 . . 7
83 100.0
D. Ability to Finance New Investment
The ability of a firm to finance new investment for pollution abatement
is a function of several critical financial and economic factors. . In
general terms, new capital must come from one or more of the’ following
sources: (1) funds borrowed from outside sources; (2) equity..capital enerated
through the sale of common or preferred stock; (3).. internally’generated
funds--retained earnings and the stream of funds attribUted to depreciation
of fixed assets.
11—5
-------
Table 11—3; The Soft Drink Industry, Net profit before tax, by
asset. size ,1969-1972
Size of Assets ($000)
Fiscal Under 100- .500- 1,000- .5,000- 10,000- 25,000
Year 500 1,000 5,000 10,000 25,000 and Over . Total
-Percent of Net Sales
1968-69 —5.9 2.9 7.0 4.6 . 1.3 8.5 8.6 6.1
1969-70 -3.6 2.5 3.6 3.8 3.9 4.6 6.5 4.8
1970-71 2.4 3.6 2.9 2.8 4.1 . 4.4 5.8 4.5
1971-72 -3.0 . 1.6 3.1. . 2.9 4.2 6.3 5.3 . 4.2
Source: Dept. of Treasury, Internal Revenue Service,. Source Book of Statistics
of Income ; Annual.
11-6
-------
For each of the three major sources of new investment, the most critical
set of factors is the financial condition of the individual firm. For debt
financing, the firm’s credit rating, earnings record over a period of
years, stability of earnings, existing debt-equity ratio and the lenders’
confidence in management will be major considerations. New equity funds
through the sale of securities will depend upon’the firm’s future earnings
as anticipated by investors, which in turn will reflect past earnings
records. The firm’s record, compared to others in its own industry.and
to firms in other similar industries., will be a major determinant of the
ease with which new equity capital can be acquired. In the comparisons,
the investor will probably look at the trend of earnings for the past five
years.
Internally generated funds depend upon the margin of’profitabiiity and
the cash r,iow i-rom operations. Also, in publicly held corporations,
stockholders must be willing to forego dividends in order to make earnings
available for reinvestment.
The condition of the firm’s industry and general economic conditions are
also major considerations in attracting new capital. The ind!jstry will be
compared to other similar industries (i.e., other processing industries)
in terms of net profits on’ sales and on net worth, supply-demand relation-.’
ships, ‘trends in production ‘and consumption, the state of technology,
impact of government regulation, foreign trade and other significant
variables. Declining or depressed indu3tries are not good prospects for
attracting new capital. At the same time, the overall’ condition of the.:
domestic and international economy can influence capital markets.. A
firm is more likely to attract new capital c uring a boom period than during’
a recession. On the other hand, the cost of new capital will ‘usually be
higher during an expansionary’period. Furthermore, the’money markets play
a determining role in new financing.
These general guidelines can be applied to the soft drink industry by
looking at general economic data and industry performance over the recent
past.
1. General Industry Situation
The sof’t drink industry has maintained a pre—tax profit on sales above 4
percent over the recent few years (Table 11-3). While there ha,s beena
downward trend in the profit margins, it is believed that the strong con-
sumer demand will help to stabilize the downward trend.
Total assets and liabilities of the industry are shown in Table 11-4 for
the years’ 1968-69 through 1971-72. From the table; it can be determined
that the ‘industry’s fixed assets represent approximately 60 percent of
all assets. Furthermore’, it can be determined that of the total liabili-
ties, long term debt represents approximately 21 percent, current liabili—
ties represent 26 percent and net worth represents approximately 53 percent.
11-7
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Table 11-4. The. SOft Drink Industry
1968—69
.
1969—70
1970—71
. .1971—7
2
($ mu.)
%‘
($ mu.’):
%
($ mu.)
%
($ mu.).
%
ASSETS
.
.Current .Assets .
1,313.8
40
1,540.2
40
1,527.0
37
.
1,766.7
38
Fixed Assets
1,980.1
60
2,315.2
60
‘‘
2,598.0
63
2,889.3
62
Total Assets
3,293.9 .
100
3,8.55.4
100
4,125.0
100
4,656.0 .
100
LIABILITIES & EQUITY
,
Long Term Debt
689.3
21
812.9
21
884.5
21
1,076.1
23
Current Liabilities ..
807.2
24
1,0:15.6
26
1,113.8
27
1,195.9
26
Net Worth
1,797.4 ,
55.
2,026.,9
53
2,126.7
52
2,387.0
51
Total Liabilities &
.
.
.
.
.
Equity .
3,293.9
100
3,855.4
100
4,125.0
100
.
4,656.0.
10,0
-4
4.
co
Source: Dept. of Treasury, Internal
Revenue Series, Source Book of Statistics of Income , annual.
-------
2. Expenditures for Plant and Equipment
New expenditures as reported by the Annual Survey of Manufactur and the
Census have increased from $76.4 million in 1960 to $219.3 million in 1972.
There were two drops in the increasing trend in 1968 and 1971; however,
overall, the trend has been upward (Table 11-5).
A closer, look at the $219.3 million spent as capital expenditures in 1972
shows ‘$36 million being spent for new, structures and additions to:’p,lants,
$171.9 million for new machinery and equipment, with the remaining $11.4
million being used to purchase used plants and equipment.
As depicted below, comparable ‘uata for 1967 reveal that the industry.
utilized a’ greater portion of its capital expenditures for new machinery
and equipment and used plants and equipment and a smaller portion for
new structures and additions to plants. This can be interpreted to sug-
gest that theindustryis moving more toward upgrading existing operations
instead of building new facilities.
Expenditures fo ’ Plant and Equipment
1967 1972
$ Million ‘ Percent $ Million Percent
Total ‘ 175.1 100.0 219.3 100.0’
New Structures. & Additions
to Plant . . 40.6 23.2 36.0 ‘ 16.4
New Machinery.& Equipment •‘ 127.5 72.8’ 171.9 78.4
Used Plant &.Equipment 7.0 4.0 11.4 5.2
3. Capital Availability
In summary, it would appea’r that the industry, •has been able to maintain a
reasonably profitable position during the past few years and has’ concentrated
on up-dating the production facilities to reap ,the benefits of the obviously
present economies-of-scales.
The soft drink industry is comprised of a variety of ownership arrange-
ments with an increasing trend toward multi-plant firms. Many of the
firms are divisions of large corporations being either’a diversified
corporation or a major soft drink company. Souráes of capital for the
divisions are usually internal while’the single independent plant must
often rely on outside sources.
II -9
-------
Table 11-5. The softdrink industry, capital
expenditures 1960 through 1972
Capital
Year Expenditures
($ Million)
1960 76.4
1961 69.4
1962 81.4
1963 100.8
1964 110.8
1965 111.0
1966. 151:1
1967 175.1
• 1968 139.9
1969 154.8
1970 185.1
1971 • 168.0
1972 219.3..
Source: Dept. of Commerce, Bureau of the Census.
• I•I-10
-------
According to Standard and Poor , the soft drink industry has historically
been categorized by strong growth in sales and earnings, and at rates
superior to industry in general 1/. Predicated on this, as well as the
general financial soundness of the industry, it is doubtful that the
acquisition of capital for purposes of pollution control shoul.d present
any.major problems for the vast majority of the industry.
E. Cost of Capital - After Tax .
Return on invested capital is a fundamental notion in U.S. business. It
provides both a measure of actual performance of a firm as well as expected
performance. In this latter case, it is also called the cost of capital.
Th e cost of capital is defined as the weighted average of the cost of each
type of capital employed by the firm, in general terms equities’and in-
terest bearing liabilities. There is no methodology that yield’s the
precise cost of capital , but it can, be approximated within reasonbale bounds.
The cost of capital was determined’for purposes of this ana1y is by esti-
mating perforamnce measures of the industry. The weights of the two
respective types, of capital for the Soft Drink Industry were estimated
at 44 percent debt and 56 percent equity. The cost of debt was ass imed
to ‘be 10.0 percent. The cost of equity was determined from the ratio of
earnings to net worth and estimated to be 9.3 percent.
To determine the weighted average cost of c pital, it i’s necessary to adjust
the before tax costs to after-tax costs, (debt capital only in this case).
This is accomplished by multiplying the costs by ‘one minus the tax rate.
(assumed to be 48 percent). These computations are shown below and result
in the estimated after-tax cost of capital being 9.3 percent.
Weighted Average After Tax Cost of Capital
Before Tax After Weighted
Item Weight Tax Cost . , Rate Tax Cost . , Cost
Debt .44 ‘ 10.0 .48 ., .5.2 ,. 2.3
Equity .56 ‘ — - 9.3 5.2
7.5
1/ Standard and Poor’s Industry Surveys , Soft Drinks - Cur’rent Analysis,
— February 27., 1975, Volume 143., No. 9, ‘Section 1.
II —”
-------
III. MODEL PLANTS
A. Types of Plants
Within the soft drink industry, there are basically three types of plants,
thosewhich bottle only, those which can only,and those which both bottle
and can. While other variations of plant operations exist, such as syrup
plants, it is’believéd that the above three classifications of plants are
representative of most the industry.
The plant which bottles and/or cans soft drinks is ultimately concei ned
with combining treated water with finished syrup to form a.f nal product.
The finished syrup received in bulk will already have been flavored,
colored, acidified and sweetened. The syrup is prepared from a proprietary
formula at a franchise owner bulk syrup plant. In some cases, the form of
the syrup will vary and for a few independent plants, raw materials may be
purchased directly from members of the flavor and extract industry and
mixe.d at the bottling facilities.
The processes involved are basically similar for either the bottling or
canning lines. Both operations require the treatment of oncoming city
water to condition it so that it meets the desired specifications. Both
operations also utilize bulk storage tanks for the storage of syrup prior
to its use in the mixing operation which takes place in separate mixing
tanks. These tanks are cleaned between flavor changes and this generates
a portion of the plant’s waste water.
Three types of containers are associated with the package production of
soft drinks and these are cans, non-returnable bottles and returnable
bottles. The cans and non-returnable bottles are normally only rinsed
with city water to eliminate particles that may have accumulated during
storage. The returnable bottles may contain leftover materials’ and these
are removed automatically in a bottle washer. ‘ These machines wash, clean,
sterilize and rinse all returnable’ bottles. Also, though not specifically
addressed, plants usually produce bulk soft drinks (pre-mix or post-mix)
and these are packaged in returnable stainless steel pressurized ca’nn’isters
which require washing when returned. Both washing processes are ‘considered
to be the, major contributors to the plant’s waste water load and contain
the major portion of the plant’s pollutants.
Finished syrup from the storage tanks or mixing tanks is then combined
with treated water and is fed to the highly automated filler which feeds
the so t drink into the container. In some cases, the syrup is first
placed in,to the containers which are then filled with carbonated water.
I.n either case, the container is immediately crowned.or capped and is
passed through a warm water rinse before inspection, possible labeling,
casing and shipment or storage. Wastes from container filling result from
hI—i
-------
filler spillage, lost product associated with flavor changing (which
requires line flushing) and corresponding clean-up. In a bottling line,
‘there is little or no spillage associated with the filling. In a canning
line, there is considerable more spillage durinn filling due to the
speed of the line and the nature of the container.
The model plants utilized in this analysis are reoresentat.ive of those
planits which only bottle soft drinks and those which both ‘can and bottle
soft drinks.
B. Sizes, of Plants
The value of shipments of the soft drink industry in 197.2 was $5,486.4
million according to the Census. This gives an average for the 2,687
establishments of $2,041,830. Using the averane price of $1.64 per 192
fluid ounce case results in 1,245,000 cases of soft drink’s: per establish-
mentin ‘1972. “‘ ‘
The’criteria for :lefining size of model plants is average. annua.l produc-
tion’ in terms of 192 ounce case equivalents. Four size.s of existing
model soft drink olants were developed, small, medium, large and extra-
l:ärge. The small, medium and most’of the large olants were determined
to process bottled soft drinks only.’ The remaining large and all of the
extra-large plants were considered to’ both bottle and can soft drinks.
Also developed were two additional models which will be used to represent
new source plants those which are yet to be constructed and will dis-
charge directly. These two models correspond to the large and extra-large
existing models. The annual production of the Email plant was determined
to be 105,000 cases, the medium plant 720,000 cases, the large plant
3,000,000 cases, and the extra-large plant 11,000,000 cases. Other
relevant information concerning the model plants are depicted below.
Model Plants
Existing ‘ New Source
Small . Medium Large X-Large . Large , , X-Large
Annual Production
(192 ozcases)(000) 105 , 720 3,000 11,000 3,000 11,000
Gross Sales
($1.70/case) (000) $178.5 ‘ $1,224 $5,100 $18,700 $5,100 $18,700
Average’ Employees 4 26 ‘ 98 . 374 . 79 289
No. of Corresponding
Establishments 596 1,108 706 58
If the above model plant data are multiplied b.y the number of represented.
plants, and summed, they provide some ,indication of how well the model
plants, when aggregated, represent the industry. The,se computations are
summarized below: ‘ ‘. , ‘
111-2
-------
Model Plant National Soft Drink
Data Association Data, 1973
Number of Employees 122,072 123,427
Number of Cases Produced
‘(24-8 oz equivalents) 3,617,000,000 3,772,000,000
Gross Sales $6,272,700,000 $6,223,000,000
The financial profiles for each of the model plants are shown in Table 111-1.
C. Investment
The estimated book vaThe and salvage value for each model plant ,are shown
in Table ‘111-2. In addition, current assets, cur rent liabilities and net
working capital are’ shown.
1. Book Value of’ Investment
The estimates of book value of as’sets were developed from Internal Revenue
Service data obtained from their Corporation Source Book of Statistics of
Income . The IRS data, classified by various sizes Of total assets for the
soft drink industry, enabled the model plants to be related to historical
data for similarly sized firms. The actual estimates of book values were
obtained: by computing from the IRS data, a sales to book ‘value ‘of asset’s
ratio and applying this to the predetermined model plant sale’s.
2. Salvage Value
The salvage value of soft drink plants will vary widely. from plant to plant,
depending, upon the age of the’ plant and its condition, the age of the
equipment and its condition, and the ‘location of plant. In some instances.,
the salvage value of old,, obsolete plants’ will be equal to site value plus
the scrap value of the equipment. If the buildings are remodeled or re-
furbished for other uses such asa warehouse, the salvage value of the’
building may be considerably higher.
There is a market for used machinery and equipment, however, .this
is limited primarily to modification of present operating lines as virtually
all new plants begin with all new equipment.
Since n data are available on actual salvage values for soft drink plants
and only a limited market existsfor’used equipment,. it is difficult to
estimate the salvage value of a plant ‘closed because Of the added cost of
effluent controls.. For purposes of analysis,. the estimated salvagevalue
has been determined based on 30 percent of the book value of the plant’s
• assets. This percentage is partially based on survey results from a
survey of the fruit and vegetable canning industries.
111-3
-------
Table 111-1. Soft drink model plants, financial profiles
Annual Production
(24/8. oz. cases)
Average Number Employees
Less
1,965
430
1,535
40,550
12,965
27 ,585
355,152
163 ,973
191 ,179
1,500,000
187,000
1,256,717
596,724
659,993
.
.
Small
Existing
.
.
New
Sourc.e
Medium Large Extra Large
Large
Extra
Large
Costs
105,000
720,000
3,000,000
11,000,000
3,000,000
11,000,000
4
26
98
374
79
289
Revenue
.
Sales ($1.70/Case).
178,500
1,224,000
.
5,100,000
18,700,000
.
5,100,000
18,700,000
Other
.
4,035
30,970
100,980
291,720
100,980
291,720
TOtal Re.venue
182,535
1,254,970
5,200,980
18,991,720
5,200,980
18,991,720
Materials
27,900
204,655
854,760
4,023,370
780,147
2,848,758
Packaging
Plant Labor
7,675
10,515
121,545
59,365
902,190
248,370
3 319,250
791,010
884,167
182,034
3,228,.592
664,710
Contract Purchases
58,760
345,535
993,480
2,806,870
780,147
2,848,758
j .
Indirect Plant
Other . S
6,960
61,975
47,735
388,375
203,490
1,582,530
863,940
5,862,450
208,039
1,560,294
759,669
5,697,516
Total Costs
173,785
1,167,210
4,784,820 .
17,66 ,890
4,394,828
16,048,003
Cash Earnings
8,750
87,760
416,160
1,324,830
806,152
2,943,717
Depreciation
5,000
34,970
176,540
801,430
400,000
Interes.t (1% Sales)
1,785
12,240
51,000
187,000
51,000
Pre-Tax Income
Income Tax
After-Tax Income
188,620 336,400
84,040 154,972
104,580 181,428
Cash Flow
6,535 62,555 281,120 982,858
591,179 2,159,993
-------
Table 111-2. The Soft Drink Industry, estimated investment capital for model plants
Existing New Source
Small Medium Large Extra-Large Large, .. Extra-Large
Book Salv. Book Salv. Book Salvage Book Salvage Book Salvage Book Salvage
$l,00O
Total Assets 71.4 21.4: 437.1 131.1 1,961.5 588.5 8,904.8 2,671.4 4,000.0 1,200.0 15,000.0 4,500.0
Current Assets 29.2 29.2 225.9 225.9 1,04.0.2 1,040.2 4,558.0 4,558.0 1,040.2 1,040.2 4,558.0 4,558.0
Current 18.2 18.2 141.2 141.2 650.1 650.1 2,848.8 2,848.8 650.1. 650.1 2,848.8 2,848.8
Liabilities . .
Net working il.0 11.0 .84.7 84.7 390.1 390.1 i,7O9.2 1,709.2 390.1 390.1 1,709.2 . 1,709.2
Capital S .
Total Invested 82 4 32 4 521 8 215 8 2,351 6 978 6 10,614 0 4,380 6 4,390 1 1,590 1 16,709 2 6,209 2
Capital
-------
3. Operating Capital
Current assets, current liabilities and net working capital are also
shown on Table 111-2. Current assets were estimated ;as a percentage of
sales which varied according to the size of the operation. For the models
in this analysis, current assets for the small plant were estimated to be
16 percent of sales; for the medium plant, 18 percent; for the large
plants 20 percent; and for the extra large plants 24 oercent. Current
liabilities were estimated utilizing a current’ratio (current assets
divided by current liabilities) of 1.6 which would be financially sound
and comparable to firms in the foods industry where there is a relatively
high rate of inventory turnover.
D. Model Plant Capacity and Utilization
As soft drink plants vary from one to another, there appears to be no
industry rule which can be utilized for the determination of the models’
capacities. The models developed were assumed to operate eight hours
per day, five days per week. Thus, the opportunity for increasing pro-
duction is very evident . During the normal day’s operation, the model
plants were not assumed to be operating at full capacity but, rather,
at a range of 70 to 85 percent. These less than full capacity percents
were resultant of considerations for clean-up,.down-time due to equipment
failure and efficiencies resultant from changing from oneflavor to
anOther.
The soft drink industry is not characterized by highly seasonal differences
in demand and as such, plants can be utilized on a relatively constant
basis. According to the National Soft Drink Association, some seasonal
variation did occur; however, these variations were not assumed to have
significant impacts on the operation of the mod& plants. For the year
1974, the NSDA has estimated the following sales distribution for the
United States:
Quarter Percent of total 1974 Sales
1st 21.5
2nd 27.0
3rd 28.4
4th 23.1
100.0
E. Cost Structure of Model Plants
The cost structures for the model soft drink plants are shown in Table 111-1.
Major items are discussed below.
111-6
-------
1. Raw Materials Costs
Rawmaterials used in the production of soft drinks include water, purchased
formula, and packaging. Of the materials, the formula syrup purchased from
the formula owners represents the most significant expense. The bottler
has little control over the price paid for the formula and in recent
years, the formula price has increased rather substantially. This increase
has been resultant of the increased sugar price which constitutes a major
input to the syrup (the soft drink industry consumes approximately 20
percent of the domestic sugar production). Those bottler.s who use flavoring
concentrate instead.of purchased syrup have been able to control their
material costs by using substitute sweetening agents .purchasedon the open
market at competitive prices.
Packaging also reoresents a rather significant expense to the soft drink
bottler. The amount of this expense is directly related to the packaging
mix which the plant Droduces. Some expenses are involved with the replace-
ment of returnable bottles; however, the majority of the total packaging
expense is attributable to the expense for non-retur, 1 able bottles. and cans.
Furthermore, some olants, instead of purchasing a canning line, contract
with another firm to can soft drinks. In terms of the model existing plants,
the costs were developed as a proportion of the olants sales and these pro-
portions varied according to the model size. Costs related to purchased
syrups and related materials ranged from 15.63 percent of soft drink sales
for the small plant to 21.51 percent for.the extra-large plant. Packaging
expenses ranged from 4.30 percent for the small to 17.75 percent for the
extra-large plant. Contract purchase expenses ranged from 15.01 percent of
soft drink sales for the extra-large plantto 32.92 percent for the srnalrl.
plant. The reason for the small plant paying a greater portion of its sales
for contract purchases is resultant of the assumption tha.t due to its small
size, the small plant will contract for more services instead of purchasing
the equipment.
The costs associated with the new source model plants were developed from
the existing model plants’ data •with considerations for possible efficien-
.cies obtainable in a completely new structure.
2. Operating Costs
Derivationof both direct and indirect plant operating costs was based
primarily upon the 1973 Financial Survey of the Soft Drink Industry con-
ducted by the NSDI\ with other sources; such as the Censu , used to supL
rlement the Survey data. Direct plant labor costs were determined to in-
clude only those labor costs incurred by employees operating the plant.
The costs of the driver-salesmen were included in other costs. Indirect
plant costs were determined to include those costs resultant from the
operation of the plant such as utilities.
3. Other Costs
This cost classification includes those costs incurred due to the operation
of the plant but, yet, not directly considered an operating expense. These
costs include expenses for the warehousing, selling and administrative
functions with the cost of selling representing the major portion of the
three.
111-7
-------
4. Depreciation and Interest
Depreciation was derived from IRS data and determined to be, expressed as
a percent of book value of assets, 7 percent for the small model plant,
8 percent for the medium plant and 9 percent for the large and extra-large
plants; and 10 percent for the new source plants. The percentaged varied,
as it was assumed that the smaller plants would ‘be more fully depreciated
than the larger plants.
Interest was estimated ‘atone percent of the sales dollar.
5. Total Costs
Total raw material costs for the existing models ranged from 15.3 percent
of the sales dollar for the small plant to 21.3 percent for. the extra-large
plant. These costs include the total costs for the syrup as well as the
somewhat lesser expensive water used in the soft drinks. Packaging costs
ranged from 4.2 percent for the small plant to 17.5 percent for the extra-
large plant and contracted purchases for finished products ranged from
14.8 percent for the extra-large to 32.2 percent for the small plant..
Thus, the total materials costs ranged from 51.1 percent of the sales
dollar for the small plant to 53.5 percent for the extra-large plant.
Production labor costs for the existing models ranged from 4.2 percent of
the sales dollar for the extra-large plant to 5.8 percent for the small
plant.
Tims, for the existing model plants,, total costs for the small plant were
estimated to be 95.2 percent of the sales dollar. For the medium, large,
and extra-large plants, total costs were estimated to be 93.0, 92.0, 93.0
percent of the sales dollar, respectively.
For the new source model plants, total costs were estimated to be 84.5
percent for the large model and the extra large model.
F. Annual Profits
A,fter.tax income, return on sales, both pre-tax and after-tax, and return
on investments, both pre-tax and after-tax for the various sizes’ of
model plants are shown in Table 111—3.
It should be noted that the model plant profiles were based on average 1973
conditions as no later published sources of information were available.
It appears that the 1973 period would be a good representative year as the
industry experienced a decline in’ margins in 1974 resultant from a leap
in sugar prices and a general inability to keep selling prices in line
with cost increases and the, development of consumer resistance to sub-
stantially higher prices. The projections for 1975 are brighter with lower
sugar prices,, but a continuation of consumer resistance could continue to
depress margins.
111-8
-------
Table 111-3. The soft drink industry, net income, returns on sales
and, investments for model plants
sj:ze’ of ‘After-Tax ‘ Return on Sales Return on Investment
Model Plant , Income Pre-Tax After-Tax Pre-Tax After-Tax
(Dollars) ‘ (Percent)
Existing ‘ .
Small 1,535 1.1 .0.9 ‘2.4 1.8
Medium 27,585 , 3.3 2.3 7.8
Large 104,580 3.7 2.1 , 8.0 4.4
Extra-Large 181,428 1.8 1.0 3.2 ‘ 1.7
New Source . ,
‘Large . 191,179 6.8 3.7 8.1 4.4
Extra-Large , 659,993 6.6 , 3.5 . 7.5 .3.9
111-9
-------
G. Annual Cash Flows
Estimated annual cash flow for the different sizes of plants usedin this
study are shown in Table 111—4. Cash flow as calculated is the sum of after-
tax income plus depreciation. It is shown, in absolute dollars and as
a percent of sales and as a percent of investment.
As a percent of sales, cash flows for the existing models ranged from a
low of 3.7 percent to a high of 5.5 percent. The higher cash flows as a
percent of sales for the larger (assumed to be newer) model plants are a
function of the higher investment costs resulting’ in considerably higher
actual annual depreciation charges.
Cash flows when considered as.a percent of investment are much more tightly
grouped. The narrower range indicates the lower investment base for the
smaller older’ plants. Another. factor narrowing the differences’ is the
difference in income tax as a percent of pre-tax earnings. The small firm
with’ less than $25,000 income would be taxed’.at an assumed rate of 22 per-
cent whereas the earnings in excess of $25,000 would be taxed at an
assumed rate of 48 percent. ‘
• The smaller model plants remains in an unfavorable competitive cash flow
position in relation to the larger plants.
III-.10
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Table 111-4. The soft drink industry,
Annual
Cash
Flow
(Dollars)
6,535
62,555
281,120
982,858
Medium
Large
Extra-Large
11.4
ii. .4
• Size of
Model Plant
Existing
Small
annual cash flows for model plants
Cash Flow Cash Flow
As a Percent • As a Percent
of Sales of Investment
----(Percent)------
37 7.9
5.1 12.0
55 12.0
5.2 9.3
New Source
Large
Extra-Large
591,179
2,159,993
13.5
12.9
11 1—il
-------
IV. PRICING PATTERNS
A.. Price Determination
The price of soft drinks is based primarily on the cost. of inputs and the
demand for soft drinks by.. the consuming public. In the past, consumer
demand has been the more influential factor affecting, prices; however,
recent significant increases in.materials costs have caused the cost
of inputs to gain in influence of prices.
1. Demand for Soft Drinks
Demand is reflective of the.quantity of soft drinks the consumers are
willing to buy at the current level of prices. Historically, soft drink
demand has been steadily increasing, with .the average annual incre.as’e
since 1960 being 6.4 percent. In 1960, the average number of 8.ounce
equivalents consumed per, capita was 192;’ by 1973 this has, increased to
430 8-ounce units. The per capita consumption of soft drinks fo’r’the
years 1960 through 1973 are dep cted below.
Per Capita Consumption of Soft Drinks
Year
1960
1961
‘1962
1963.
1964
1965
966
1967
1968
‘1969
1970
197.1
1972
1973
Total ‘Per
Capita Sales
Percent Change
from Previous. Year
3.0
7.6
6.6
7.0
6.6
10.8
3.8
11.4
3.6
5.5
6.9
4.6
‘ ‘Sourc’e:
National Soft D,rink Association
For 1973, approximately. 80 percent of the total sales were in.. packaged
form with the ‘remaining 20 percent being i’n bulk form. This compares to
packaged’.sales in 1960 representing 91 percent of sales with bulk’
representing only 9 percent. This ‘trend can be assumed to be reflective
of consumers acceptance of soft drinks for consumption in restaurants,
192
198
213
227
243
.259
287
298
332
• 344
363
388
406
430
‘v-i
-------
theaters and other functions where bulk sales are available. Thus, it
may be assumed that consumption of soft drinks has progressed from a
“treat” drink to an everyday beverage.’
When aggregated, soft drink purchasers consumed approximately 35.4 billion
8—ounce equivalent in 1960. For 1973, this quantity had increased by 155
percent to 90.2 billion.
For 1974,’ the quantity consumed may have only increased modestly due to customer
resistance to higher prices. The higher prices were primarily attributed
to higher sugar costs. ‘Consumers, , already faced with soaring food bills
and a generaPy inflationary environment, began to cut back on purchases
of name-brand soft drinks. This consumer resistance took the form of
increased purchases of private-label brands,and other competing beverages
such’ as beer, powdered drinks and fruit juices. According to Standard and
Poor’s, Industry ‘Surveys , the outlook for 1975 is one of uncertainty and,
thus, wecan conclude the demand for soft drinks will depend on a variety
of factors, the most important being price.
There is relatively’ no foreign demand for bottled soft drinks as it is
too expensive to export soft drinks. Instead most foreign requirements
are fulfilled by bottling plants located in the foreign country itself.
These plants may be foreign or domestically owned and most often repre-
sent U.S. brands.
2. Supply of Soft Drink
The ‘basic nature of ‘soft drinks (mixing purchased syrups with treated water)
eliminates most restrictions on the supply. Soft drink supply constraints
do exist in the forn of bottling plant and warehouse capacities as well
as the availability of purchased material inputs (i.e. syrupand sugar).
However, overall, it is assumed that if demand increases, supply can meet
it.
3. Market Structure
Basically,the bottler’operates in a highly competitive marketin which he
is relatively free to set his prices. However, bottlers in general con-
sider a variety of factors in determination of their final product price,
including such considerations as the historical demand for a particular
f1avor, the competitors’ sales position and prices, the cost of the
purchased inputs and labor and the direction, of the present advertising
campaign. While being relatively free to set their finished productprices,
‘it should be noted that soft drinks are highly competitive and that the
consumers are very price conscious; setting the price one or two
cents too high could be disastrous to the individual bottler.
IV-2
-------
B. Price Trends
Soft drink’, prices vary throughout the United States by region as well as
by metropolitan area. In the 1973 U.S. Department of Labor survey, the
price of a 72-ounce six pack of cola-flavored beverage in returnable con-
tainers cost 66 cents in Dallas and 93 cents ‘in Honolulu. Average annual
1973 prices paid in 23 different cities’as well as the national averaqe
prices paid for cola and fruit flavored beverages are shown in TablëI\(-1.
in terms of the national average, the consumer price index for
has increased from 61.0 in 1953 (1967 = 100) to163.0 in 1974 .
the consumer price index for cola has increased by 37 percent.
annual average, cola prices have increased by approximately
since 1970.
in terms of the national average, the consumer price index for
has increased from 61.0 in 1953 ‘(1967 = 100) to, 163.0 in 1974.
the consumer price fndex forcola has increased by 37 percent.
average, o1a prices have increased by 37 percent since 1970.
The price received by the bottler (the wholesale price) has also shown
trends of significant increases. The wholesale price index (1967 = 100)
has increased from 57.1 in 1953 to 148.6 in 1974. Aside from general
inflat,ibnaryinfluences, the most significant contributor to the increased
wholesale softdrink price has been the increased price of sugar which
affects the bottler either directly (purchased sugar) or indirectly’ (in
the form of presweetened purchased syrup). The wholesale indexes for
cola drinks,’sugar and cola syrup are compared in Table IV-2 for the years,
•1970 through 1974 as we’ll as on a. monthly basis for 1974.
When viewed
cola drinks
Since 1970,
Thus, on an
9.0 percent
When viewed
cola drinks
Since 1970,
Thus,’on an
IV-3
-------
Table IV—l.
Soft drink retail prices by city, average 1973,
in cents per 72 ounce carton
.
City
..
•
1973 Average Price
Cola Fruit Drink
.
. .
(Cents)
.
Atlanta
69.4 69.1
Baltimore
103.9 69.6 2/
Boston
97.4 1/ 80.4 2/
Buffalo
72.9 82.6
Chicago
.99.3 100.7.2/
Cincinnati
77.1 83.7
Cleveland
79.5 799
Dallas,
66.6 70.2
Detroit
101.8 1/ 107.0
Honolulu
93.4 . 87.2
Houston
.
65.8 63.1
•
Kansas City
.87.0 . 63.0 2/
Los Angeles
84.4 82.15
Milwaukee
Minn./St. Paul
.87.4 69.6 2/
87.8 81.8
w York
Philadelphia
•
117.8 1/. 63.7 2/
.99.81/ . 59.3 2/
Pittsburgh
75.5 79.1
St. Louis
79.0 60.9 2/
San Diego .
,
72.9 73.8
San Francisco
87.8 77..8
Seattle .
111.0 109.8 1/.
Washington D.C.
112.9. . 102.21/
U.S. Average 3/
86.1 75
1/ Non returnables
2/ Cans
3/ U.S. average is the average price for a 72—ounce. carton weighted by
the population of each city from sample of 5S cities.
Source.: U.S. Department of Labor, Bureau of Labor Statistics.
IV-4
-------
Year
Source: U.S. Department of Labor, Bureau of Labor Statistics, Wholesale
Price Index.
Tabl e IV-2. Wholesale Price Inde --The soft drink industry,
selected products (1967. 100)
1970
1971
1972
1973
1974
January
February
March
April
May
J u né
Jü 1 y
August
September
October
November
December
Granulated
Cola . Sugar Flavoring
Drink Cane Syrup
Average ,_
121.5 ‘ 113.3 . N.A.
123.7 118.3 109.5
126.3 124.2 115.3
124.4 . 134.6 116.1
• 148.6 323.5 .170.9
• 123.6 • 144.8 • 119 3.
123.6 163.2 120.7
125.5 201.8 • 123.6
130.9. . 201.8 133.4
133.2 2 O.9 144.0
144.8 288.,1 . 155.0’
156.1 • 322.7 167.3
157.6 • 341.6 . 187.1
160.3 399.6 . 188.0
173.1 . 413.0 • 211.3
175.9 555 7 .226.6 .
178.8 599.4 275.0
IV-5
-------
V. EFFLUENT CONTROL COSTS
The effluent control system requirements and costs depicted in this
‘chapter were provided by the Effluent Guidelines Division of the
Environmental Protection Agency as provided by the technical contractor,
Environmental Science Engineering. The recommended and optional, treatment
alternatives for; the model soft drink plants were the same as presented
in the Development 1 Document.I/ However, the associated investment and annual
costs have been revised by the technical contractor to reflect the model
plants’ production characteristics previously described in Chapter III.
A. Pollution Control Requirements
Three effluent control levels for point.source categories (direct dis-
chargers)’were originally considered:
BPT - Best Pr?cticable Control Technology Currently
Available, to be ‘achieved by. July, 1977.
BAT - Best Available Control Technology Economically
Achievable, to be achieved by July .1, 1983.
NSPS — New Source’ Performance Standards are recommended
to be equal to the BAT control level and to apply
to any source for which construction starts after
thepublication of the proposed regulations.
Raw waste loads for the existing model soft, drink plants as well as the
new source plants are depicted in Table V-i. From this table it can be
seen that variations i,n flow in gallons per day do exist, hOwever, the
concentration expressed in milligrams per liter (mg/l): of wastewater,
of biological oxygen demand (BOO) and suspended solids (SS) are constant
regardless of’ plant size. The concentration of fats, oils and grease
(FOG) are not present. The recommended effluent limitation guidelines
for the model soft drink plants as proposed in the Development Document
are shown ‘in Table V—2.
“ Development Document’’for Effluent Limitation’ Guidelines and New Source
Performance Standards, Miscellaneous Foods and Beverages , Point. Source
‘Category, Draft Report prepared by Environmental Science and Engineering
Inc ., for the U.S. Environmental Protection Agency.
V-i
-------
Table V-i. Raw waste loads for model soft drink plants
Model
Production
. Flow . BOD
SS
FOG
.
Cases! day
Gallons
per day. .
mg/i mg/i
.
mg/i
.
•
Exi.sti ng
‘
Small
400
2,900
1,380
263
N.A.
Medium
2,880
18,000
660 .
108
N.A.
Large
12,000
76,000
660
108
N.A.
X-large
44,000
-280,000.
660 .
108
N.A.
New. Source
.
Large
12,000
76,000 . .
660
108
N.A.
X-large
44,000
280,000
660
108
N.A
V-2
-------
Table V-Z. Recorrniended EffluentLimitation Guidelines for
the SOft Drink Industry
.
BPT
.
BAT:.
.
NSPS
—- kg/cu.
m•finished product ——
BOD
•
Max
30 dayave.
0.231
0.115
0.115
Max
Day
0. 54
0.276
.0.276
SS
Max
30 day ave.
:
0.132
0.066
0.066
Max
Day
0.369
0.185
0.185
Source: Development Document , Environmental Protection
Agency. . .. .
V-3
-------
B. Discharge Status of the Industry
The common method of effluent discharge in the Soft Drink Industry is to
utilize municipal treatment systems. In fact, of the 2,317 soft drink
plants operating at the end of 1975 all but 20 utilized municipal systems.
Of these 20 plants discharging effluents to navigable waters, according to
the EPA, six presently meet the proposed.BPT standards and five meet the
proposed BAT standards. Of the remaining 9, two have some form of treat-
ment but their treatment systems do not achieve proposed BPT standards.
The remaining 7 direct dischargers have been identified by the EPA as hay-
ingno treatment and thus discharge their untreated effluent directly to
navigable waters.
C. Pollution Control Costs
The cost estimates, in 1972 dollars, and the components of the recommended
andoptional. (if consi ered desirable) treatment alternatives’for the
model plants are shown in Table V-5 through Table V-8. From the infor-
mati on provided, total investment and annual costs were inflated so as to
be consistent with the costs associated with the models. Investment -
and annual costs were inflated from 1972 to 1974 dollars •by the use of
the Engineering News Record Construction Cost Index (1.205 times he
provided EPA costs). The resulting treatment costs in 1974 dollars
for both. the recommended and optional treatment alternatives are summarized
in Table V-3.
Investment costs include costs for construction, land, engineering anda
contingency fee. Annual operating costs include expenditures for labor,
power, chemicals,mainteflaflce and supplies. Total yearly costs include
annual operating costs, depreciation and interest. Depreciation was
based on a 20 year depreciable life for the pollution controls. Interest
was based on a 10 percent rate which Was then computed as 10 percent of
one half the total pollution control investment, costs.
Total investment costs for pollution controls expressed as a percent of
book value of the model plants’ fixed assets and the total annual costs
expressed asa percent of annual sales are depicted in Table V-4.
V-4
-------
Table V-3. Effluent control costs for model soft drink plants (1974 dollars)
BPT Incremental BAT ‘. NSPS
Annual Total
Annual Total Annual Total
Model
Treatment
Alternative
Investment Operating Yearly Investment
Costs Costs Costs Costs
Operating Yearly Investment Operating Yearly
Casts Costs Costs Costs Costs
..
$1,000
Small
Recommended
18 2 4 ‘ ‘0
0 0 — . - —
Medium
Recommended.
46 11 15 19
2 ‘4 — — —
Large
Recommended
11,2 , 11 , 22 31
4 7 270 46 74
X-Large
Recon mended
Optional ,
349 49 84 29
294 69 98 29
6 ‘8 .480 89 137
, 5 . . 479 , 120 168
-------
Table .V—4. Investnien costs and yearly costs expressed as a percent of niodel plants’ tnve tment and sales.
.
Treatment
Model
Alternative
Small
Medium
Large
Extra Large
_____ ________ BPT __________________________________
Total T vestment Total Yea,r y Costs Total Investment Jotal Yearly LOStS
as % of .. as.% of . as % of . I as %of
Book Value Annual Sales book Value. Annual Sales
T T
26.0 .2.2 26.0 2.2
BAT
- - Total Investment
as%of
Book_Value
NSPS
Total
Costs
Yearly
as%of
Annual_Sales
Recommended
Recon iended
Recommended
Recommended
Optional
10.5
1.2
15.0
1.5
:
5.7.
0.4
7.3
0.6
..
•
6.8
?.2
:
3.3
0.4
4.2
0.5
3.2
2.7
o.s.
3.6
0.6
.3.?
1.4
1.5
0.7
0.9
-------
Table V-5’. Itemized cost summary for soft drinks--BPT
. .. Srnal1
Alternatives A27-II
Medium
A27-iII
Large
A27-V
Investment Costs:
(1) List Price
(2) :J.nstall’atjon and
Contingencies
(3) Land
(4) Freight
TOTAL
Yearly Operating Costs:
(1). Labor
(2) Power
(3) Maintenance, Chemicals,
and Supplies
Total
(1)
(2)
TOTAL
Yearly Costs:
Yearly Operating Costs
Yearly :Investment Cost
Recover (Interest)
(3) Depreciation
TOTAL
Treatment Chain Design
Efficiency (‘% BOO Reduction)
Treatment’ Modules
11,843.00*
1,200.00*
1,800.00*
1,800.00*
15,403.00*
1, 500 . 00
.‘O.OO
230.00
1,730.00
1,730.00
710.00
710.00’
3,150.00
.100.0%
Septic
Tank
System.
13,483.00
1,291.00
5,000.00
2,500. 00
38,274.00
3,122.00
2,500.00
3,300.00
8,922;0O
8,922.00
1,531.00
1,664.00
12,117.00
89.9%
Package. Bio-
logical
Trea tnien t
Plant @
20,000 GPD.
37,393.00
48, 1 2 .00
5,000.00
2,500.00
93,025.00
3,122.00
2,500.00
3,300.00
8,922.00
8,922.00
3,721.00
4 , 401. 0,0
17,044.00
89.9%
Package Bio-
logical
Treatment
Plant @
75 ,00O GPO
* Categories for small plant in consecutive order are: . (1) Construction,
(2) Land, (3) Engineering, and (4) Contingency.
‘ 1-7
-------
Investment Costs:
1. Construction.
2. Land.
3 Engineering
4. Contingency
5* PVC Liner
Total
195,880.00
4,160.00
19,590.00
19,590.00
4,650.00
243,870.00
Yearling Operating Costs:.
1.. Labor
2. Power
3. Chemicals
4. Maintenanceand supplies
5* PVC Liner
Total
18,740.00
11,580.00
4,520.00
6,000.00
40 ,840.00
12,490.00
34,210.00
4,520.00
5,540.00
320 . 00
57,080.00
Treatment Chain Design
Efficiency (% BUD Reduction)
57,080.00
9,759. 00
11,990.00
78,820.00
Treatment modules:
Al..Control House
B.. .Pumping Station
C.. .Equalization Basin
F. ..Acid Neutralization
H...Nitrgen addition
K..:Activated sludge
Q. . .Sludge thickened
V.. .Holding tank
U.. .Spray irrigation
B.. .Pumping station
C.. .Equali.zation basin
F.. .Acid neutralization
H... Nitrogen addition
L.. .Aerated Lagoon
Table V-6.
Itemized Cost Summary for Soft Drinks, BPT
K-Large
- BPT
X-Large
BPT Optimal
P 1ternative
A27-VII
A27-IX
225,690.00
9,160.00
22,570.00
2? , 570. 00
289,990.00
Total
Yearly Costs:
1.
2.
3.
Yearly operating
Yearly investnie it
recovery
Depreciation
Total
cost
cost
40,840.00
.
11,600.00
13,540.00
65,980.00
89.4% 89.9%
V- 8
-------
Table V-7. Itemized cost summary for soft drinks--BAT
Investment Costs:
(1) List.Pr.ice
(2) Installation and
C nti ngencies
. 3) Land
(4) Freight
TOTAL
Yearly Operating Costs:
(1) Labor
(2)
• (3)
TOTAL
11,843.00
1,200.00
1,800.00.
1,800.00
15,403.00
1,500.00
:0.00
Total
(1)
(2)
Yearly Costs:
Yearly Operating Costs
Yearly Investment Cost
Recovery (Interest)
(3) Depreciation
TOTAL
Treatment Chain Design
Efficiency (% BOD Reduction)
Treatment, Module
1,730.00
710.00.
710.00
3,150.00’
100.0%
Sept i.c
Tank
System
10,542.00
2,171.00’
2,464.00
15,177.00
94.7%
Package Bio-
logical
Treatment
Plant @
28,000 GPD
& FiltratiOn
12,054.00
4,741.00
5,616.00
22,471.00
94.1%
Package, Bio-
logical
Treatirent
Plant @
75,000 GPO
& Filtration
Small
• Medium
Large
Alternatives • • A27-II
A27-IV
, A27-V
29,483.00 62,893.00
17,291.00
5,000.00
.2,500.00
48,132.00
5,000.00
2, 50C. 0.0
Power
Maintenance, Chemicals,
and Supplies
54,274.00 118,525.00
230.00
1,730.00
3,122.00
2,500.00
4,920.00
10,542.00
3,122.00
2,500.00
6,432.00
12,054.00
V-9
-------
Table V-8.
Itemized Cost Summary for Soft Drinks
.
Alternatives
X-large BAT
A27-VIII
X-large BAT opt.
A27—X
Investment costs:
.
1. Construction.
245,620.00
215,810.00
2. Land
19,160.00 .
4,160.00
3. Engineering .
24,560.00
21,580.00
4. Contingency
5 * PVC Liner
Total
24,560.00
--
21 ,580..00
.4,650.0,0
313,900.00
267,780.00
Yearly Operating Cost:
.
1. Labor
18,740.00
12,490.00
2. Power
15,830.00
,
38,460.00
3. Chemicals . .
4,520.00
4,520.00
4. Maintenance and’supplies
6,310.00
5,850.00
5* PVC Liner .
Total
--
.
320.00
61 ,640.00
45,400.00
.
Total Yearly Costs:
.
1. Yearly operating costs
45,400.00 .
61,640.00
2. Yearly investment cost
.
recovery
12,560.00
10,710.00
3. Depreciation
Total .
14,740.00
13,180.00
85,530.00
.
72,700.00
Treatment Chain Design
Efficiency (% BOD Reduction)
.
94.7%
. 94.7%
Treatment Modules:
B1. . .Control House
B.... Pumping Station
C... .•Equalization basin
F... .Acid neutralization
H... .Nitrogen addition
K... .Activated siudge
G... .Sludge thickener
Y. .. .Holding tank
L....Spray irrigation
B.... Pumping station
N... .Dual media pressure
.Pumping Station
.Equalization basin
.Acid neutralization
.Nitrogen addition
.Aerated lagoon
.Pumping.. station
.Dual media pressure
Filtrain
B..
C..
F..
H..
L..
B...
N.
V-10
-------
VI. ECONOMIC IMPACT ANALYSIS
The impacts considered in this analysis are as follows:
A. Price effects
B. Financial effects
C. Production effects
D. Other effects
‘The resulting impacts from the imposition of effluent controls on the
Soft Drink Industry for existing sofi drink plants are expected to’ be
nominal as only’ 20 known planes discharge their wastewaters to navigable
waters. Furthermore, the overall impacts are expected to be’limitéd be-
cause of the 20 known direct di schargers, 11 plants presently meet the
proposed BPT standards and 5 of these 11 plants meet proposed BAT standards.,
Of the, plants not meeting either BPT or BAT ‘standards, 2 have some form
of treatment already in place and’only the remaining 7 plants have no form
of treatment systems. Thus, of the 2,317 plants operating atthe end of
1975, 99.1 percent utilize municipal treatment systems, 0.5 percent ‘meet
either BPT or BAT, 0.1 percent have some form of treatment and 0.3 percent
have no treatment whatsoever.
Whilethe overall ind’ustry impacts will be small’, concern, is still warranted
for the cew existing plants which will be i’mpacted. Concern is also
warranted fo,r analysis of those plants which are yet to be constructed
and will discharge their effluent to navigable waters •(hereafter referred
to as New Soi rce). Therefore, this impact analysis will address the poten-
tial impact resulting from the’ imposition of effluent controls oh.bOth
thos,’e existing direct discharging plants and the new source plants. These
impacts are analyzed for the model plants described in Chapter III, with
the impacts being based on the production and financial characteristic,s
of the models and the effluent control costs as Dreserited in, ‘Chapter V.
It should be noted that in Chapter V, two sets of control costs were
described for, each model; the recommended treatment system and an optional
system. For purposes of,this impact analysis, only the recommended treat-
ment system will’ be utilized. This treatment alternative consists of’an
activated sludge system and according to cost estimates furnished by. the
EPA, is considerably less exp’ nsive than the optional aerated lagoon.system.
A. Price Effects
1. Required Price Increase .
An implicit indicator of the expected price effects Of effluent controls
used in this report is the amount of sales price increase ‘necessary ‘to
VI-1
-------
maintain a soft drink’s profitabiiity,after effluent control expenditures,
at the same level as the plant without the control expense. The method of
computation was described in Part I, Chapter II (Methodology), Section F,
under subsection 2 of this report. The ability of soft drink plants to
pass on such price increases is evaluated in this section of the report.
The amounts of sale pri.ce increases necessary to offset estimated effluent
control costs for the model soft drink plants range from 0.6 percent to
2.7 percent and are depicted in able VI-1. For the existing model soft
drink plants, both the required price increases for BPT and BAT are shown;
For the new source plants, the required price increases to offset NSPS
standards are
2. Expected Price Increase
While Table VI—1 illustrates what the model soft drink plants would require
to offset expenditures for controls, it is doubtful those plants which
require controlswould be able to pass on the additional expense to customers
in the form of higher prices. This is due to (1) the discharge status of
the Soft Drink Industry and (2) the market characteristics of the industry.
As discussed earlier, of the 2,317 soft drink plants- operating in 1975,
only 20 (0.9 percent) plants are known to discharge their effluent to
navigable waters with the remainder of the industry, 2,297 plants, utiliz-
ing municipal treatment systems. Althoughmunicipal charges have and are
expected to continue to increase, the impacted existing and new source •soft
drink plants will only be able to pass-on price increases equivalent to the
level of increase in municipal charges experienced by the remainder of the
industry.
However, should municipal charges become higher than private treatment
costs, then -mpacted arid new source soft drink plants would have a com-
petitive advantage and have the opportunity to pass on the increased
costs of effluent controls assuming the industry as a whole increases
prices to offset the increased municipal charqes. Although not quantifi-
able at this time, some industry sources feel that this situation could
very easily happen in the near future.
• The market characteristics of the Soft Drink Industry may provide some
opportunities for impacted and new source plants to pass on effluen con-
trol costs but these will be limited to only:those plants wh ch by location
or production efficiency can maintain or establish a competitive advantage
over other plants. In other sords, an impacted or new source plant which
• can produce and/or deliver its products for lower costs through its
competitors,may be able to utilize its greater margin to absorb control
costs and still remain competitive.
VI-2
-------
Table VI-l. The Soft, Drink Industry, required price increases necessary
to offset éffluentcontrol èosts.
.
Cases
Produced
‘ Required Price ‘Increase
Percent Propose.d Control Costs
Model
Annually
80%
.
‘100%
•
120%
Existing
Small 105,000
‘BPT . 2.1 27’ 3.2
.BAT 2.1’ 2.7 ‘3.2
Medium 720,000
BPT ‘ ‘1.3 1.6’ l .9
BAT. . . . 1.5. ‘ 1.8’ 2 2
Large . . 3,000,000
BPT 0.5 ‘ 0.6 ‘0.8
‘BAT’ , 0. 6 0.7 0.9
Extra-Large. 11,000,000 .‘. . .
BPT’ ‘.‘ ‘ . . ‘ 0.5 . .0.6 O.8
BAT 0.5 0.7 0.8
New Source ‘
Là:rge , 3,000,000 1.4 1.;8 2A
Extra-Large ‘ 11,000,000’ 0.7 ‘ 0.9 1.1
VI-3
-------
However, for those impacted plants which cannot achieve a competition
advantage, it is probable that such plants will not be able to pass on
the required price increases because of the generally high competitive,
low profit margin and excess capacity of the industry, and too, for the
new source plants, the high costs of new construction. As discussed in
earlier chapters of this report., the Soft Drink Industry has experienced
relat 4 vely low profit margins, is highly competitive and has excess
capacity as evidenced by plant closures relative to an increasing output
(increasing population and per capita consumption). As shown below in
Section 3, Financial Effects, high costs of ew plant construction are
not offset sufficiently by lower operating costs through improved technology
which results in new point sources and the existing extra large plant have
similar to lower income ratios than the other. existing plants and negative
net present values of cash flow when discounted at the estimated industry
after-tax cost of capital (7.5 percent).
Therefore price increases by impacted plants to offset the costs of effluent
controls and the high costs of new construction are not expected to occur.
In the following analysis, no price change was assumed to occur as a result
of the entire industry increasing prices to offset effluent controls and
accordingly the economic viability of the plants are based on financial
characteristics of the models without added revenue stemming from aggregated
effluent control effects on industry prices.
B. Financial Effects
Based on model plant profiles described previously and costs of øollution
control provided by EPA, the following financial indicators were computed
under baseline (without pollution controls) and with pollution controls:
1. After tax income
2. After tax return on sales
3. After tax return on invested capital
4. Cash flow and cash flow as a percent of invested capital
Net present value
The, above were computed according to the discounted cash flow (DCF) and
return on’ investment (ROl) procedures outlined in the methodology.
Furthermore a senitivity analysis was performed using pollution control cost
estimates at levels of 80 percent and 120 percent of the costs provided by EPA.
VI -4
-------
The results of the model plant analysis of the proposed effluent guide-
lines are summarized in Table VI-2 for the existing model plants and
Table VI-3 for the new source plants. These results are discussed below.
1. After-tax Income
As shown in Table VI-2, the imposition of BPT standards on the soft drink
models severely reduces the after-tax income to negative levels for existing
small andmediun model plants. The small model, plant’s income is decreased
by $4,000 due to BPT controls from the baseline marginal income of $2,000
to -$2,000. The •after-tax income for the medium plant decreases by $8,000
from a before controls level of $28,000 to an after-tax contro’s i.i cdme
of $20,000. The after-tax incomes.for the large and extra-large models
are reduced, however, not to the point of becoming negative. The large
model’s income is reduced by 11 percent from $105,000 before controls
to $93,000 after controls. The extra-large model’s income declines by
24 percentfroni $181,000 before controls to $138,00 after controls.
BAT standards further depress profits. for each of the mode plants except
for the small model’s profits which stay the same. Thus, fcr existing
plants the imposition of effluent controls seriously affects the profits
of the small and medium soft drink plants and depresses, but not. to the
same magnitude, the profits of the large and extra-large plants.
The imposition of NSPS on new source plants affects after-tax income in
that the large model new source’s income is reduced by 20 percent and
the extra-large new source model by 9 percent.
2. Return on Sales
The after-tax return on sales for the existing and new source model soft
drink plants were also shown in Tables VT-i and 2. Basically the returns
reflect the same general pattern as after-tax income. As explained pre-
viously, the Soft Drink Industry has experienced relatively low.profits
in recent years. This is exemplified in that the baseline model’s after-
tax returns on sales are relatively low. The imposition of BPT standards
with th.e following BAT standards furthe ’ deteriorate the already. marginal
returns
For the small model plant returns on sales decline from 0.8 percent for
the baseline case to -1.1 percent for after the BPT standards and 1.1
percent for after the BAT standards are imposed. The medium model indi-
cates a positive return after controls are imposed declining from 2.2
to 1.6 to 1.3 percent for the baseline, BPT and BAT cases respectively.
The large and extra-large models’ returns remain positive after controls.
but do decline; the large declining from 2.0 to 1.8 to 1.7 percent and
the extra-large declining frbm 1.0 to 0.7 percent for the baseline,
after BPT and after BAT cases respectively. . .
VI-5
-------
Table VI-2. ‘. Key values of impact analysis for soft drink industry- existing sources
..
Key
‘ ‘
Value
.
‘
.
Size Baseline
.
.
Percent:Proposed_Control
BPT
Costs
‘BAL’.
.
80%
100%
12.0%
80%
100%
:120%
-0.6
1.7
.1.6
1.4
1.6
1.3
1.1
1.8
1.8
1.7
1.8
1.7
1.7
0.8
0.7
0.7
0.8
0.7
•
0.7
—1.3
—2.1
—2.9
—l 3
—2 ,l
‘
‘
—2.9
3.9
3.6
3.1
‘
3.6
3.0
2.4
4.0
3.9
3.8
3.8
3.7
‘
3.6
After Tax Income ($000)
.
‘S
105
2
, -l
-2
-3
-l
-2
-3
M
‘L
720
3,000
28
105’
21
95’
20
93
.
17
.91
.
20
93
‘
17
90
13.
87
124
X-L
11,000
181
146
138
129
143
After Tax Return on Sales
(%)
5
M
L
X-L
105
720
3,000
11,000
.0.8
2.2
2.0
1.0.
After Tax Return on
,
Invested Capital (%)
.
‘
S
M
L
X-L
105
720
3,000
11,000
‘
Estimated Cash Flow ($000)
S
105
.
.
M
720
.
L
X—L
3,000
11,000
Cash Flow as % of Invested
.
Capital ‘
S ‘
105
.
M.
L
X-L
720
3,000
11,000
‘
Net Present Values (‘$000)
S
105
.
.
NI
720
.
L
3,000
.
1.9
5.3
4.4
1.. 7
7.0
63
281
983
7.9
5.5
4.8
4.0
5.5
4.8
4.0
12.0
11.1
10.9
10.5
11.0
10.5
10.0’
12.0
11.8
11.7
‘
11.7
11.7
9.0
11.6
9.0
11.5
8.9
4
3
5
4
.3
.
‘58
57
55
57
55
52
276
962
275
957
274
951
. 275
959
273
954
272
948
—6
71
—30
6
-36
-10
. ‘
-42
-26
-3 ‘
—36
-22
-42
—41
145
, 37
10
—17
21
—.11
.
—42
—1,762
-2,149
—2,167
-2,246
-2,269
—2,342
—2,370
-------
Table \‘I-3. Key values of impact analysis for soft.drink industry: NSPS
Percent Proposed:Control . Costs
Key.Value Size Baseline p80%. 100%
After Tax income. ($000) L 3,000 191 161 153 145
XL 11,000 660 603 589 57 5
After Tax Return on Sales (%) L 3,000 3.7 3.1 ?.9 2.8
XL 11,00U 3.5 3.2 3.1. 3.0
After Tax Return on Invested
Capital (%) L 3,000 4.4 .3.6 3.4 ‘ 3.2
XL 11,000 3.9 ‘ 3.6 3.5 •3 4
Estimated Ca h.Flow ($000) L •‘ 3,000 591 •‘ 572 567 562
XL 11,00 2,160 2,122 2,113 2,103
Cash Flow as % of Invested
Capital ‘. L 3,000’. ‘13.5 13.0 12.9 . 12.8
XL 11,000 12.9 12.7 12.6 12.5
Net Present Väi éS ($000) L 3,000 . —318 —677 —767 —857
‘XL 11,000 -1,995 -2,669. —2,837 -3,006
VI -7
-------
The NSPS do affect the after-tax returns on sales of the model new source
plants but not to the sane degree as the effects to the existing models’
returns. For the large new sOurce model, return on sales are depressed
by 22 percent from 3.7 percent to 2.9 percent after the imposition of NSPS
controls. The extra-large new source model’s returns are reduced by 11
percent from 3.5 percent to 3.1 percent.
3. Return on Invested Capital
As shown in Tables VI-2 and 3 for the model soft drink plants, pre-control
after-tax return on invested capital range from 1.7 to 5.3 percent for
the existing models and from 3.9 to 4.4 percent fc the new source mode s.
For the existing models, specific returns were 1.9 percent for the small
model, 5.3 percent for the medium model, 4.4 percent for the large model
and 1.7 percent for the extra-large model.. These pre-control returns in-
dicate economies of scale in production which are limited by geographic
size of the area served by the plants.
After the imposition of BPT controls on the existing models, return on
investment falls to -2.1 percent •for the small plant, 3.6 percent
for.the. medium plant, 3.9 percent for the large plants and 1.3 percent
for the extra-large plc nt. BAT controls further decrease these plants’
returns to levels where it would be doubtful if they would continue to
operate.
For the new source model plants,.the imposition of NSPS reduces the returns
on invested capital but. not to what could beconsidered less than marginal
levels. The new source large plant’s returns decline from 4.4 perc.ent to
3.4 percent and theextra-large mode1’s returns from 3.9percent to 3.5
percent.
4. Cash Flow
Estimated cash flows (after-tax income plus depreciation on invested capital
for themodel plants) are shown in Tables VI-2 and VI-3 for the existing
and new source model plants respectively. In the baseline case cash flows
range from 7.9 percent to 12.0 percent for the existing models and 12.9 to
13.5 percent for the new source models. Individually, the cash flows as
percentages of invested capital are 7.9 percent. for the existing small
model, 12 percent for medium and large models and 9.3 percent .for the
existing extra-large model. For the new sourcernodels returns are 12.9
for extra-large model and 13.5 percent for the large model.
When .the existing models were impacted by BPT standards, the small model’s
cash flow as a percentage of invested capital decreased to 4.8 percent,
the medium model decreased to 10.9percent and the large and extra-large
declined slightly to 11.7 and 9.0 percent respectively. The imposition
of BAT controls further depressed the cash flows but not by the same
magnitude as the BPT controls.
V I-8
-------
The resulting irnpacts on the new source models attributable to NSPS caused
a moderate decline in the new source models’ cash flows with the large
new source declining from 13.5 percent to 12.9 percent and the extra—
large new source declining from 12.9 percent to 12.6 percent.
5. Net Present Values
The computed net present values (NPV) for the model soft drink plants
indicate in the baseline case, the small, medium and large existing
plants achieve positive NPV’s and the existing extra-large and the large
and extra-large new source plants generate negative NPV’s. As discussed
in Part F, Chapter II (Methodology), negative et present values would.
cause mOst firms to cease operations orto scrap plans for building a
new plant. Since for the existing extra-large and both new source models,
their NPV’s are negative in the baseline case, it could be concluded
that very few extra-large plants would be in operation and that. few,. if
any, new source plants would be built. However, it should be noted that
negative NPV’s indicate that the associated.plant would earn less than
the estimated 7.5 percent industry cost of ‘capital.. Thus., such plants
may reEiiain in operation o; new plants built provided the firm has been
well established in the industry, has expectations to capture a major
market share at profitable prices’ and has an excellent financial per-
formance record (e.g., lower cost of debt capital).
Th.e imposition of BPT controls on the existing model plants results in
the small and medium models’ NPV’s becoming negati’ie, the large ñiodel’.s
NPV decreasing by 93 percent and the extra-large model’s NPV becoming
significantly more negative ‘(from -$1,762,000 - .12,167,000). The
requirements to meet BAT standards result in further declines in the
NPV’s, with the large model’s still remaining positive.
The results of an analysis of the impacted net present values would, •sug-
ges.t that it would be’probable that the impacted small, medium and extra-
large model plants would not continue operations after BPT requirements
as they would not be able to incur the associated costs of the controls..
If the plants could marginally absorb the BPT control, costs, they may
choose to do so and’ continue operations, however, the expected ‘costs of
BAT would probably close them prior to 1 the installation of the BAT system.
However, it should be noted that the models are considered representa-.
tive averages of the industry and while the imoact analysis may ind icaté
possible plant closures, actual industry plants of similar sizes may
have unique operational and/or financial situations which may result
in imt act characteristics differing from the models.
As stated above,’ given the characteristics of the new source plants
described, it would be ‘doubtful •that such new sourc,e plants would be
constructed. If, however, such plants were built, their net present
values would be reduced due to the requirements for effluent controls.
V 1-9
-------
C. Production Effects
Due to the extremely small portion of existing plants in the Soft Drink
Industry which would be affected by the imposition of effluent controls,
it. is doubtful that the current levels of total industry production
achieved by the existing plants would reflect any reductions due to the
effluent control requirements. As has been pointed out previously 7
direct discharging soft drink plants presently have no controls and 2
plants which do not meet BPT standards have only some controls in place.
Discussions with individuals at these plants by members of the EPA has
resulted in the determination that if the proposed standarc s. are pro-
mulgated, no plant closures will result. Managements of each of the 9
plants all feel that they can meet the standards and remain viable as
they have operational and/or financial characteristics differing from
those developed for the models in the impact analysis. Thus, the im-
position of effluent controls on the Soft Drink Industry is expected
to result in no plant closures.
As would be expected, the imposition. of.NSPS standards will have little,
if any, effect on current production levels. However, the NSPS standards
could affect future industry growth as firms could be deterred from entry
due to the differential impacts of waste treatment requirements.
However, as described in the above financial description, future growth
from new source plants is expected to be restrained by the seemingly
high costs of construction not being offset by the. lower, production
costs. In addition, new sources may be further restrained by their
limited ability to pass through the additional costs of controls, assuming
the rest of the industry does not pass on municipal charge increases.
This does not completely rule out the possibilities for new soft.drink
plants as it is foreseeable that some operations, those which could be
classified as optimal producers, could construct and successfully operate
a new plant. This has and presently is occuring with a few new plants
just recently being constructed, however growth for the ir.lustry as a
whole is expected to result from additions to or alterations of existing
plants which discharge effluent wastes to other than navigable waters..
0. Other Effects .
Other types of economic impacts such as employment, community and balance
of payment are normally assessed when th.ere are significant plant closures
attributable to effluent controls. As previously discussed, it is apparent
that the Soft Drink Industry will suffer few effects from the proposed
guidelines. Furthermore, the effects’ of possible closure of the few plants
which ‘would be impacted due to control requirements’, would be extremely
limited when viewed with the number of plants leaving the industry each
year for purely economic reasons. Thus, in this report, these related
effects were not pursued. .
VI-lo
-------
PART VII
SOFT DRINK SYRUPS AND CONCENTRATES
Flavoring Extracts and Syrups
-------
Part VII: SIC 2087 - THE SOFT DRINK SYRUPS AND CONCENTRATES INDUSTRY
Non-Synthetic Flavoring Extracts and Syrup Industry
1. INDUSTRY STRUCTURE
The Soft Drink Syrups and Concentrates Manufactures represent the
major portion of SIC 2087, the Flavoring Extracts and Syrup Industry.
As this analysis is concerned with the four digit SIC code most
references will be made to the Flavoring Extract and Syrup Industry.
However, it should be noted that the impact analysis is primarily
reflective of Soft Drink and Concentrates Manufacturers.
The Census of Manufactures defines the Flavoring Extract and Syrup Industry as
an.industry comprised of establishments primartly engaged in manufacturing
flavoring extracts, syrups and fruit juices, not elsewhere classified, ior
soda fountain use or for the manufacture of soft drinks and colors for bakers’
and confectioners’ use. Flavorings derived from parts of aromatic plants are
termed natural flavorings whereas those prepared from synthetic chemicals,
such as esters, aldehydes, ketones and other are considered artificial, imita-
tion or synthetic flavors. According to the Environmental Protection Agency.,
this analysis will be limited to those plants which primarily produce non-
synthetic flavors. Those operations producing synthetic ;lavors are cate-
gorized as inorganic operations and are included in a separate report concern-
ing the Inorganic Chemical Industries. This analysis :ill alsôbe
further limited to impact analys2s for soft drink beverage base
plants as effluent quidelines for the other tyoes of SIC 2087
establishments will be developed in another EPA document. However,
as soft drink beverage base establishments are a major portion of
SIC 2087 the majority of the general industry discussion will con-
cern itself to the entire SIC 2087 industry.
At the present time, there are no known members of the Non-Synthetic
Flavorinq Extracts and Syrups Industry which discharge effluent to navl-
gable waters; all are connected to municipal sewage treatment systems.
As such the industry will incur very few, if any immediate impacts
due to the imposition of effluent controls. The potential does exist
however that plants which are yet to be constructed could be impacted
if they choose to utilize their own treatment system and thus have to
meet the proposed new source performance standards (NSPS). In view of
this, this analysis wil.l primarily concentrate on the economic descrip-
tion of the industry characteristics with some discussions pertaining to
potential new source impacts.
A. Characteristics of the Industry
The Flavoring Extracts and Syrups Industry is highly competitive as well
as being rather complex in its structure. As mentioned previously the
overall industry is comprised of those which are considered synthetic
manufacturers and those which are considered non-synthetic. Furthermore,
I—i
-------
the aggregated industry also contains beverage base manufacturers who
produce concentrates and syrups almost exclusively for the major soft
drink companies which utilize them in their soft drink products. As a
result of the above, information regarding any particular segment of the
Flavoring Extracts and SyrupsIndustry is limited to only aggregated
forms from the traditional information sources such as the Census of
Manufactures and periodic industrial reports. These sources do have, their
limitations but efforts toobtain specific industry segment data were
not successful. While specific information ‘concerning the Non-Synthetic
Flavoring Extracts and Syrups Industry (including beverage base plants)
is not readily available, information is available concerning the aggre-
gated industry. Accordingly, these aggregated data will be utilized
to describe the characteristics of the industry with explanations, when
possible, to denote possible differences associated only with the Non-
Synthetic Industry.
1. ‘Number and Size of Firms and Plants
The Census of Manufactures states that in 1972 there were 350 firms in
the Flavoring Extracts and Syrups Industry operating some 400 establishments.
Thus in 1972, 12.5 percent of all establishments were owned or controlled
by firms which operated more than one facility. This percentage has
increased in recent years from s.4 percent in 1963, to 7.0 percent in
196.7 to the present 12.5 percent in 1972.
According to Census data, the number of industry plants have decreased
during recent years from 534 establishments in 1958, to 431 in 1967, to
400 in 1972. As can be seen in Table 1-1, the majority of these existing
establishments have been in the smaller size categories.
Also shown in Table I-i are the employment classes’ respective value of
shipment and corresponding percentage of total shipment. From this table
it is evident that the majority of the industry’s shipments are produced
in the arger plants with just over 6 percent of all establishments
providing nearly 56 percent of the industry’s total shipments.
•Specific breakouts. depicting the number of non-synthetic establishments and
beverage base plants are not available from the Census data. However,
according to the Development Document /, there are 60 non-synthetic
plants and 22 beverage base niants. As no other sources of information
‘were ‘available, it will be assumed that the Development Document estimates
are correct.
2. Value of Shipments
Value of shipments and other receipts of the Flavoring Extracts and Syrups,
N.E.C., Industry in 1972 totaled $1,472.0 million. This included shipments
of flavoring extracts and syrups, n.e.c., (primary products) valued at
$1,245.2 million, shipments of other products (secondary products) valued
at $188.7 million, and miscellaneous receipts (mainly resales) of $38.1
million.
Development Document for Effluent Limitation Guidelines and New Source
Performance Standards, Miscellaneous Foods and Beverages , U.S. Environ-
mental Protection Agency, March 1975. .
1-2
-------
Table I—i. The flavoring, extract and syrup industry, by employment size group, number of e’stabl’ishnents, and value of shipments 1963-1972.
1963
•
1
967
!stablishments
1972
:
Establishments
Value of
Shipments
Establishments
Value of
Shipments
Shipments
Number of
Employees
Number
Percent
ofTotal
Million
Dollars
Percent
of Total
Number
Percent
of Total
Number
‘. Percent
of Total
Million
Dollars
Percent
of Total
Million
Dc. lars
Percent
of Total
1-4
250
48.1
18.8
2.6
198
45.9
14.2
1.4
160
40.0
.29.6
2.0
5-9
97
18.6
23.8
3.3
68
15.8
21.2
2.1
60
15.0
37.1
2 5
10—19
76
14.6
70.0
9.6
55
12.8
14.2
42.7
4.2
5
16.2
. 89.9
6.1
20—49
54
10.4 ‘
113 4
15.5
61
161.8
16.0
70
17.5
311.2
21.2.
50-99
24
4.6
219.6
30.1
23
5.3
168.3
16.7
20
5.0
197.4
13.4
100 -249
250-499
16
1
3.1
. 0.2 .
127.6
156.5
‘
17.5
21.4
22
3
5.1
0.7
334.1
266.9
3 .1
26.5
20
3
5.0
‘0 .0.8
438.4
368.3
29.8
25.0
500-999
2 ‘
0.4 1
1
0.2 1
2
0.5)
.
1,000+
—
—
-
Total
.520
100.0
‘.729.7
.100.0’
431
100.0
1,0C9.1
100.0 ‘
400
100.0
1,471.9
100.0
—
C-,
- 11 Contains extensive duplication because the products of some establishments are used as materials by other establishments classified in the
same’ industry,. ‘ ‘
Source: Census of Manufactures.’
-------
Estimates of the 1975 valueof shipments for the industry are expected
to total $1,803 million, 8 percent above the estimated shipments for
1974 and 22.5 percent above the 1972 value of shipments (Table 1—2).
Historically, the value of shipments increased by an annual average rate
of 8.3 percent bet ween the years 1958 and 1975. During this period, the
actual rate has fluctuated between minus 2.2 to 18.2 but for most.years
the range has been relatively near the 17 year average of 8.3 percent.
Shipments of flavoring extracts and syrups, n.e.c., (primary products)
in 1972 represented 87 percent (specialization ratio) of the industry’s
total product shipments (primary and secondary). The industry speciali-
zation in 1967 was 94 percent. Secondary products shipped by this industry
in 1972 consisted mainly of bottled and canned soft drinks ($20 to $50
million); cane sugar refining ($20 to $50 million); and food preparations,
n.e.c., ($43.6 million).
Shipments of flavoring extractsand syrups, n.e.c. , (primary products)
from establishments classified in industry 2087 in 1972 represented 86
percent (coverage ratio) of these products valued at $1,452.9 million
shipped by all industries. In 1967, the coverage ratio was 85 percent.
Other industries shipping flavoring extracts and syrups, n.e.c., consisted
mainly of industry 2086, Bottled and CannedSoft Drinks, ($20 to $50
million); industry 2043, Cereal Breakfast Foods, ($20 to $50 million);
and industry 2099, Food Preparations, N.E.C., ($47.0 million).
3. Level of Integration
The Flavoring Extracts and Syrups Industry can be characterized as
containing varying levels of integration with forward integration being
the most common. As previously stated, the Flavoring Extracts and Syrup
Industry is partially comprised of beverage base plants which produce con-
centrate, and syrups for soft drink manufacturers. These plants are usually
owned by national soft drink brands and furnish their products to
franchised soft drink bottlers. In this sense, the Flavoring Extract and
Syrup Industry can be thought of as forwardly integrated.
4. Number of. Products .
Flavoring extracts and syrups are produced in a wide variety of forms
and concentrations —- extracts, concentrates, powders, emulsions, tablets
and essences -- with the strength depending on the intended use of the
product. Common flavoring, extracts ‘include vanilla, lemon, clove,
cinnamon,’ orange, nutmeg, peppermint, and wintergreen. The industry also
produces beverage bases utilized by soft drink bottlers in their production
of soft drinks. .
5. Level of Diversification . .
The Census of Manufactures shows the Flavoring Extracts and Syrups Industry
with a relatively hi.gh specialization ratio of 87 percent. This indicates
87 percent of the sales of establishment classified in SIC 2087 are in the
1-4 . .
-------
Table .1-2. The flavoring extract, andsyrup industry, value
of shipments, 1958-1972
Year
,
: ValUe of Shipments
Percent Change
.
($ Millior 1 )
(%)
1958
477.1
.
1959
535.2
12.2
1960
*5483
2.4
.1961
1962
*559•3.
*661.3
2.0
18.2
1963
729.7
10.3
1964
33.1
14.2
1965
836.5
0.4
1966
974.4
16.5
.1967
1968
1,009.1
1,145.5
.3.6
13.5
1969
1,173.7
2.5
.1970
.1,361.3
16.0.
.19.71
,
1,331.9
-2.2
1972
1,471.9
10.5
.1973
1,600.0
8.7
1974
‘1,669.0
4.3
1975
1,803.0
8.0
* limited reliability (high standard errors)
Source: U.S. Department of Commerce, Census of Manuf cturés , and
Bureau of Domestic Commerce, 1975Industrial .0utiobk .
1—5
-------
• primary SIC code. The remaining 13 percent of the industry’s shipments
primarily consist of soft drinks and food preparations. It can be
assumed, in general, that the industry is not widely diversified.
6.. Location of Plants
Flavoring Extract and Syrup plants tend to locate either near a major
metropolitan’area or else near a source of raw materials, which in many
cases is a port. As is depicted in Table 1-3, 35 percent of all plants
are located in the northeast region of the United States. Most of ‘these
‘plants are’. located in either New York, New Jersey or Pennsyl’iania. The
next most concentrated area in terms of plants is the north central region.
Illinois contains.the most plants in this region. The remainder of the
plants .are distributed in the south or the west regions.
In terms of production, the north central and the south regions, while
they have fewer plants than the northeast region, are about equal in
having the major portions of the industry’s shipments; each with just
over 33 percent of allshipments.
B. Em _ ployment Characteristics
Total employment ri the Flavoring Extracts and Syrups Industry has
increased by nearly 10 percent from 9,300 employees in 1958 to 10,200
in 197.2 (Talbe 1-4). During the 1958 to 1972 period the total’ numbcr of
persons employed in the industry varied considerably from year to year
with a total range from 9,100 employees in 1963 to 10,800 in 1970. During
the same time period production workers hare accounted for 55 to 60 percent
of all employees. This relatively low proportion of production workers
maybe partially explained by the fact that the corporate headquarters
for the, major soft drink bottlers may fall into this classification and thus
their numerous management level individuals would be included in the
all employees category.
Overall, the output per prod ction worker has increased’ significantly with
the’val of shipments and value added per production worker tripled
between. 1958 and 1972. Portions of,this increase may be attributable to
inflation, .howe.ver the major portion may be attributable to technological
advances as well as the more efficient utilization of manpower.
The basic production worker can be described as semi-skilled, with much
of the labor being involved with monitoring equipment and cleaning it
during the changing of products. The average annual hours worked by
production workers has remained relatively constant with the’average
being 2,067 hours’in 1972. Mourly wages nearly doubled since 1958,
increasing from $2.14 per hour in ‘1958 to $3.98 in 1972.
1-6
-------
Table 1—3. The Flavoring Extracts and Syrup Industry, regional:.distri_
bution of plants and shipments, 1972.
.
Region
Value of
. Shipments
Percent
of Total
N
of
Umber
Plants
•
Per ent
of Total
($ Million)
(Percent)
(Percent)
.
Northeast
348.7
23.7
140
35.0
New York.
168.3
1 .4
47
11.8
New Jersey
119.1
8.1
40
10.0
Pennsylvania
19.5
1.3
25
6.3
Other States
41.8
2.9
28
6.9.
North Central
.489.5
3 7.3
33.3
22.2
107
45
26.8.
1L3
Illinois
Missouri
68.3
4.6
14
Other States
93.9
6.5
48
12.0
South
487.6
3.i
87
21.7
West
146.2
9. 9
66
16.5
California
118.4
8.0
49
12.3
Other States
.
27.8
1.9
17
.
4.2
United States
1,472.0
100.0
400
100.0
SOurce: U.S. Department of Commerce, Bureau of .Census, tensus of Manufac.tures .
1—7
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Table 1—4. The flavoring extract and sy rIjp industry, employment statistics 1958—1972
.
•
.
All Employees
.
.
Production Workers
V i1u of
sbipnients
per production
worker
Man huurs
per
production
worker
Wage per
production
worker
man —hour
Value, added
per producti
wor ker
man—hour
on
•
F uñ ber Man—Hours Wages
Year
Number Payroll
(coo) ($ Mfl.)
(000) (Mn.) (S Mfl.)
($000).
.
-($)
($T)
•
1958
9.3 47.5
-
5.3 10.3 22.0
90.0
1.943
2.14
24.21
1959
9.5 52.2
5.5 11.6 23.4
97.3
2,109
2.02
24.54
1960*
1961*
9.5 51.2
9.5 53.5
5.3 10.8 22.9
5.4 11:1 23.5
103.5
103.6
2,038
2,056
2.12
2.12
28.42
30.18
1962*
1963
1964
9.6 56.4
9.1 56.6
9.4 63 5.
5.4 11.4 24.6
5.0 10.2 25.1
5 .2 11.5 27.8
122.5
145.9
160,2
2,111
2,040
2,212
2.16
2.45
2.42
32.82
39.24
38.97
1955
9.4 62.8
5.0 10.1 25.7
167.3
2,020
2.54
48.27
1956
10.5 70.8
5.9 ii. ? 31.3
165.2
1,983
2.68
47.48
1967
9.7 73.0
5.5. 11.0 33.0
183.5
2,000
3.03
53.09
1968
9.3 71.5
5.4 10.8 33.3
212.1
2,000
3.08
51.76
1959
10.1 77.3
5.8 12.0 37.9
202.4.
2,069
3.16
56.14
1970
10.8 91.1
6.3 12.8 43.3
216.1
2,332
3.3..
51.88
1971
9.8 91.4
5.3 11.1 39.7
251.3
2,094
3.58
68.57
1972
10.2 100.9
5.0 12.4 49.4
245.3
2,067
3.98
70.31
* data for these years has imited reliability
Source: Census of Manufactures.
-------
As would be expected the majority of the employees are concentrate4
in larger establishments ‘(Table (1-5). In 1972, just over’ 50 percent
of the employees were employed by plants with more than 100 employees.
C. Other Considerations
No known plants in the. industry discharge waste water other than to
a municipal sewage system. For this reason, aggregate effects of water
pollution.controls are expected to. be small.
However, aggregate impactscould be significant if other economic impacts
to be expected in the next two .to.e ght years,such as would b’e imposed
by other Federal, State and local regulations are brought to ‘bear upOn
the industry. The increasing cost of energy of ali.types and the possible
limitations on natural gas consumption are also of concern.
These other economic impacts include but a,re not necessarily limited to
the following:
OSHA;
Air pollution controls;
Solid Waste controls;
Energy;
State nd local, waste water regulations; ‘and,
Municipal. system user charges.
1-9
-------
TaHe I-S. The flavoring extract and syrup industry employment - 1972
Employment Size
• 1-4
5-9
10-19
20-49
50-99
100-249
20-499
• 2,300
500- 999
Total 10,200
Source: U.S. Department of Commerce,
Census Of Manufactures .
Percent of.Total
2’. 9
3.9
8.8
21.6
12.7
27. 5.
22.6
All• Employees
300
400
900.
2,200
1,300
2,800
100.. 0
Rureau of the Census,
-10
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II. FINANCIAL PROFILE OF THE INDUSTRY
Within the limits of information available, this chapter will present
the financial characteristics of the Flavoring Extracts and Syrups
Industry. There is little, if any, information concerning the non-syn-
thetic plants and as such, the aggregated industry will be used.
A. Sales
For 1975, the industry’s value of shipments were estimated to amount to
$1,803 million (Table 1—2). This compares to $1,361 million in 1970 and
$548 million in :1960. During an average yearbetween 1958 and 1975, the
yearly value of shipments would have increased by 8.3 percent over the
previous year’s shipment. As the Flavoring Industry is closely related
tO the’ Soft Drink Industry, it should be noted that sales of soft drinks
have increased by over 200 percent since 1954.
The Census value of shipments was based on data obtained from 400 different
establishments. Thus the average establishments had shipments worth
$3.7 million in 1972. This compares to $2.3 million in 1967 (Table lI-I).
While the average plant had sales of $3.7 million in 1972, the actual
sales of plants varied considerably. ActUal plants ranged fronismall
operations employing less’than 5 employees with annual shipment of
$185,000 to large operations with more than 250 employees and shipment of
$73.6 million.
B. Distribution of Sales Dollars
Very little change has occurred in the industry in terms of the distri-
butionof its sales dollars. In 1967 just over 50 percent of the total
industry sales went for miscellaneous operating costs, taxes and profits.
In 1972 this had increased to 51.5 percent. Raw materials and labor
portions of the sales dollar decreased between 1967 and 1972. These are
summarized below:
Distribution of Sales Dollar (Percent)
1967 1972
Total Sales 100.0 100.0
Raw Materials 42.6 41.6
Payroll 7.2 6.9
Other operating costs,
taxes andprofits 50.2 51.5
fl—i
-------
Table’II-l. Flavoring Extracts a id Syrup Industry, val’ieof shipments, value added and employees census years
1963, 1967, and 1972.
Item
.
Units
•
1963
1967
1972
Industry Per
Total Establishment
Industry
Total
Per
Establishment
Industry
Total
Per
Establishment
Establishments
‘No.
520
-
431
-
400
-
Value of Shipments
$ Mil.
729.7
1.40
1,009.1
‘ 2.34
1,471.9
3.68
Value Added
$ Mil’.
‘400.2
0.77
584.0
1.35
871.9
2.18
Total Employees
No.
9,100
18
9,700
22
10,200’
26
,
Source: U.S. Department of Commerce, Census of Manufactures .
-------
C Earnings .
The only data available concerning the earnings of the Flavoring Extracts
and Syrups Industry which were not aggregated with the Soft Drink Industry
were found in Statement Studies,by Robert Morris Associates!!..
According to this source profits before taxes for the industry were
approximately 4.2 percent of sales in 1974. This compares to a similar
figure for 1972 of 5.1 percent. In 1974 the industry’s ratio f profit.
before taxes to worth ranged from 9.4 percent to 39.5 percent with an
average of 19.5 percent. The ratio of profit before taxes to total
assets ranged from 2.7 percent to 21.8 percent with an average of 6..3
percent
D. Ability, to Finance New Investment
The ability of a firm to finance new investments for pollution abatement
is a function of seve.’al critical financial and economic factors. In
general terms, new capital must come from one or more of the following
sources: (1) funds borrowed from outside sources; (2) eq.ufty capital
generated through the sale of common or pr ferred stock; (3) internally
generated funds -- retained earnings and the stream of funds attributed
to depreciation of fixed assets.
For each of the three major sources of new investment, the most. critical
set. of factors is the financial condition of the individual firm. For debt
financing, the firm’s credit rating, earnings record over a period of
years, stability of earnings, existing debt-equity ratio and the lenders’.
confidence in management will be major considerations. New equity fund s
through the sale of securities will depend upon the firm’s future earn’ings
as anticipated by investors, which in turn will reflect past earnings
records. The firms’ record, compared to others in its own industry and
t.o firms in other similar industries, will be a major determinant of the
easewith which new equit3/ capital can be acquired. In the comparisons,
the investor will probably look at the trend of earnings for the past
five years.
Internally generated funds depend upon the margin of profitability and the
cash flow from operations. Also, in publicly held corporations, stockholders
must be willing to forego dividends in order to make earnings available
for reinvestment.
1 ”Robert Morris Associates, Statement Studies , 1975 Edition.
11—3
-------
The condition ofthe firm’s industry and general economic conditions are
• also.major considerations in attracting new capital. The industry will be
compared to other similar industries (i.e. , other beverage industries)
in terms of net profits on sales and on net worth, supply-demand relation-
ships, trends in production and consumption, the state of technology,
impact of government regulation, foreign trade and other significant
variables. Declining or depressed industries are not good prospects for
attracting new capital. At the same time, the overall condition of the
domestic and international economy can influence capital markets. Afirni
• is more likely to attract new capital during a boom period than during
a recession. On the other hand, the cost of new capital will usually be
higher during an expansionary period. Furthermore, th.e money markets play
a determining role in new financing.
Basedon the previous discussion in this chapter and Chapter I, it appears
that it will not be difficult for the majority of firms to acquire
sufficient new capital to finance investment. In most, instances, these
plants are owned by large conglomerates with adequate abilities to finance
new investments.
E. Cost of Capital - After Tax
Return on invested capital is a fundamental notion in U.S. business. It
provides both. a measure of actual performance of a firm,as well as expected
perfo ’mance. I.n this latter case, it is also called the cost of capital.
The cost of capital is defined as the weighted averaqe.of the cost of each
type of”capital employed by the firm, in general terms equities and interest
bearing liabilities. There is no ‘metbdology that yields the precise cost
of capital, but it can be approximated within reasonable bounds.
The cost of capital was determined for purposes of this analysis by esti-
mating performance measures of the industry. The weights of the two res-
‘pective types of capital for the Flavoring Extract and Syrup Industry were
estimated at 32 percent debt and 68 percent equity. The cost of debt’ was’
assumed to be 10.0 percent. The cost of equity was determined from the
‘ratio of earnings to net worth and estimated to be 9.5 percent.
To determine the weighted average cost of capital, it is necessary to adjust
the before tax costs to after-tax costs. (debt capital only in this case).
This is accomplished by multiplying the costs by one minus the tax rate
(assumed to be 48 percent). These computations’ are shown below and result
in the estimated after-tax cost of capital being 8.1 percent.
Weighted Average After Tax Cost of Capital
Before Tax • •. After Weighted
Item Weight Tax Cost , Rate Tax Cost Cost
Debt .32 10.0 .48 ‘ 5.2 ‘ • 1.7
Equity .68 — — 9.5 6.4
8.1
11-4
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III. MODEL PLANTS
The model plant described in this chapter represents the operational and
financial’characteristics of a plant which is likely to be built after
the promulgation of the guidelines and hence is called a NSPS (New Source
Performance Standard) model plant. The model was not constructed to
describe existing plantswhich are direct dischargers.
The opei ating and financial data contained in this chapter pertain to a
plant which is representative of actual plants in the industry and do’ s
not reflect information pertaining to specific plants or firms. The
data were obtained from industry contacts and published sources.
A. Industry Processes
The Non—Synthetic Flavoring Extracts and Syru,p,s Industry is comprised of
a variety of plants which utilize several-basic processes to produce
numerous products. Some of the more common processes and’ their resultant
products are described below:
Flavoring ‘extracts from essential oils -. Thisprocess produces standard,
terpeneless, and concentrated flavoring extracts from essential oils.
Essential oils are liquids which Occur naturally in many types of plants
or which may beproduced by extraction, steam or dry distillation, or,
in some cases, destructive distillation.
The preparation of a’standard flavoring extract involves a blendingprocess
in which specified formulas of the essential oil, alcohol and water are
mixed in tanks. in some cases it is desirable to produce a more. water
soluble flavor, which is accomplished by removing the more insoluble com-
ponents (terpenes) by either vacuum distillation or solvent extractio:i.
Finally, concentrated extracts are produced in the same manner as standard
extracts except the formula is modified to make , the final extract more
concentrated.
Flavoring extracts from direct solvent extraction of aromatic plant tissues —
The most common extract produced by this process in vanilla which is.
extracted from vanilla beans. The beans are initially chopped ‘and then
steeped in an alochol-water solution. The vanilla extract isthen drawn
off through a’ filter andadjusted to the desired concentration of water,
alcohol’and sugar, storedand finally bottled.
1 1 .1—1
-------
Natural Flavoring Concentrates and Powders - These are derived from plant
liquid or essential oils. Fruit liquor is usually used in the case of
fruit.concentrates and powders while essential oils are used for spice
concentrates and powders.
In c rder to produce fruit concentrates or powders, fruits are washed and
chopped and the fruit liquor containing water, oil, and fruit particles
is’expressed from the chopped fruit. To prepare the fruit’ concentrate
the liquor is evaporated under vacuum. If powdered flavor is to be
produced, the liquor together with vitamins, sugar, and acid is completely
‘dehydrated. The production of spice concentrates involves the evaporation
of essential spice oils. The oils are removed for the production of
powder.
Finished Specific Flavors and Cordials - The manufacturing of .finished
flavors and cordials is a blending process in which natural and/or synthetic
flavoring extracts are blended in numerous proportions and combinations
with other ingredients’such as alcohol, sugar, coloring agents, and water.
Beverage Bases - By far the majority of beverage bases, both concentrates
.and syrups, are manufactured by major soft drink companies in plant’s which
produce concentrates and/or syrups exclusively.
The fiavo”ing extracts, acids, treated water, colors, and sugar (except
in concentrate production) are proportioned from storage taiks into large,
stainless steel mixing tanks and blended. The product is then ‘strained
through a wire mesh screen and packaged or shipped in bulk by tank cars
or trucks.,
B. 1SPS Model Plant
Based on information provided in the Development Document , the new source
model plant (that is, the plant which has yet to be constructed and ‘will
be required to meet new source performance .standards’if it will be a direct
discharger) was determined to be a fac ’lity which primarily produces
beverage bases and which manufactures approximately 80,000 gallons per
day.’ The size of this new source model plant may seem to be rather
large but ‘this was determined to be appropriate as it is doubtful if:
(1) any new small flavoring extracts or syrups plants would be built; and
(2) if a new plant were to be built, it is probable that only a large plant
would consider the alternative of treating its own effluent (the small
plant would probably locate in a city and discharge to a municipal sewer
system).
The basic description infOrmation concerning the. production and investment
characteristics of the model plant are depicted in Table 111-1. The
111—2
-------
Table 1 11-1. The Soft Drink Syrübs. and CQn e ,ntra,t.es 1nd , ’
try, NSPS model, desóriptive information.
Total Assets
Fixed Assets
Cui’ren ’t. Assets
Current Liabilities
Net Working Capital
Total Invested Capital
Production
Daily Plant Capacity (Gallons)
Days per year
Plant Utilization (Percent),
Annual Production (Gallons)
Average Employees
Investment ($1,000 )
80,000
230
85%
15,640,000
204
Book
$29,403
18,999
10,404
4,444
5,960
24,959
Salvage’
T5 T
18,999
10,404’
4,444
• 5,960
11,841
111-3
-------
financial profile of the model is shown in Table 111—2. These model
plant profiles were developed utilizing the limited data available from
the Census of Manufactures , and Robert Morris Associates, Statement
Studies .
1.11-4
-------
Table’III-2. ,NSPS model plants for the Soft Drink SyrUps and Concen-
trates Industry, financial profile.
Daily Plant Capacity. (Gallons)
Plant Utilization
Days per year
Annual Production (Gallons)
Sales ($2.82/gallon)
Less
Production Costs
Other
Total Costs
Cash Earnings
Less:
Depreciation
Interest
Pre-Tax Income
Income Tax
After-Tax Income
Cash Flow
Returns
After-Tax Return on Sales
After-Tax Return on Total Invested Capital
Cash Flow
As a Percent of Sales
As a Percent of Total Invested Capital
111-5
($1,000)
• 44 , 104 .8
31,799.6
7,669.6
39,469.2
4,635.6
2,352.2
• 441.0
1,842.4
877.8
964.6
3,316.8
(Percent)
100.0
72.1
89.5
10.5
5.3
1.. 0
4.2
2.0
2.2:
7
2.2
3. 9
7.
.13.
80,000
85%
230
15,640,000
-------
IV. PRICING PATTERNS
The industry impact of increased processing costs associated with imposi-
tion of requirements for effluent pollution controls on the Soft Drink
Syrups and Concentrates Industry will be directly influenced by t.he ability
of processors to pass pollution control costs forward to the consumer, in.
the the form of higher prices for.finished products, or backward to suppliers,
in terms of lower prices for raw materials a.ndpurchased services. To
the ext int that such cost transference opportunities are limited,
he costs of effluent controls will have o be absorbed by processors;.
profits will be..reduced and the impact on the industry will be more
severe. The reversal of this situation would tend to reduce the severity
of the impact on the industry.
This chapter will examine those industry and product characteristics
which affect the ability of the Flavoring Extract and Syrup Industry to
ni ike the required pricing adjustments.
A. Price Determination
The determination of prices f r the industry t s product involves the
complex. interaction of demand, the available supply and the corporate
strategy set by the industry leaders (particularly for the beverage base
plants). .
1. Demand
The demand for flavoring extracts and syrups can be associated with two
di:ffering markets. First, there is the production of extracts and syrups
for sale to individual consumers for eventual sale in the retail store,
and second there is the soft drink bottlers who require syrups and bever-
age bases to be used in the production of soft drinks. The demand for
extracts arid syrups di ffers for these two markets as one deal s with con-
sumers’ trends and consumption preferences and product recognition (the
sale to individuals of extracts and flavorings) and the other deals with
the same consumer attitudes but also with the policies as set forth by
large national soft drink companies.
Unfortunately, little information is available concerning the demand charac-
teristics associated with the sale of extracts and syrups to individuals.
There is however, some information concerning the demand trends forsoft
drinks which can be directly related to beverage bases and concentrated
syrups. This information is described below. .
IV- 1
-------
Soft Drink Demand - The demand for soft drinks is reflective of the
quantity of soft drinks the consumers are, willing to buy at the current
level of prices. Historically, soft drink demand has. been steadily increasing,.
with the average annual increase since 1960 being 6 . 4 percent. In 1960,
the average number of 8 ounce equ valents’consumed per capita was 192;
by 1973 this has increased to 430 8 -ounce units. The per capita consump-
tion of soft drinks for the years1960 through 1973 are depicted below.
Per Capi La. Consu pti on of Soft D.ri i! s
Total Per Perccnt Chanqo
Yeu , p; t ’i:l. from Pronoun
1960 192
1961 198 3.0
1962 . 213 7:6
1963 227 6.6
1964 243 7.0
1965 259 6.6
1966 87 10.8
1967 298 3.8
196E 332 11.4
1969 344 3.6
1970 363 5.5
1971 388 6.9
1972 406 4.6
1973 430. 5.9
When aggrcqated, soft drink purchasers consumed approximately 35.4 .bil lion
8—ounce equivalent in 1960. For 1973, tins quantity had increased by 15 .
percent to 90.2 billion,
For 1974, the quantity consumed may have only’ increased mode .tly due to
customer resistance to higher prices. The higher prices were primarily
attributed to higher su,gar costs, consumers, already faced with soaring
food bills and a generally inflationary environment, began to cut back.
on purchases of name-brand soft’drinks. This consumer resistance took
the form of increased purchases of private-label’ brands and other com-
peting beverages such as beer,’ powdered drinks and fruit juices. According
to Standard and Poor s Industry Surveys , the outlook for 1975 is one of
uncertainty and, thus, we can conclude the demand for soft drinks will
depend on a variety of ‘factors, the mos.t important beina price.
IV-2
-------
2. Supply
The . supply of flavoring extracts and syrups is primarily set by th.e
expected quantities demanded by either consumers or .soft drink bottlers.
In 1972, approximately 50 percent of the materials consumed was sugar,
with the remainder being fruit juices, essential oils and various, types
of plants and beans as well as other supplies and containers. As such
it is difficult to identify those inputs which could act as a. constraint
on the potential supply of flavorihg extracts, syrups and beverage bases
since at any given time any one commodity could experience a shortage.
. . Market Structure
The products of the Non-Synthetic Flavoring Extract and Syrup Industry
are numerous and differentiated with many of the plants producing
several produOts for sale in a wide range of market structures. In some
instances a plant may market its product(s) directly to retail stores
or it may produce flavoring extracts for use by another manufacturer
(i.e., soft drink bottlers, bakers and confectioners). Thus the market
structure may be one of nearly pure competition for soim products and
oligopolistic for other products. Accordingly, the ability of industry
members to influence their products’ prices vary.
While there is a wide range of market environments in the Flavoring Extracts
and Syrups Industry, the greatest portion of the industries 1 shipments
are made in a market which could be characterized as oligopolistic. This
is based on Census data which depicts, that in 1972, the largest 4 com-
panies accounted for 62 percent of the industry’s shipments and the
largest 8 companies accounted for 70 percent.
A strict economic definition of an ologopoly is as follows:
“A market situation where sellers are so few that the supply
offered by any one of them materially affects the market
price, and, in which, because sellers are so few, each one
is able to measure, with afair degree of accuracy, the
effect of his price and production decisions upon similar
decisions by his competitors.”
In an ‘oligopolistic industry, the pricing decision is subject to a greatS
uncertainty because of interdependent reaction, i.e., if a price increase
does not succeed the firm may experience a substantial loss in sales,
profit, and prestige. Therefore, the oligopolistic firm is likely to
possess morediscretion, and therefore to view the pricing decision in a
longer term perspective and is less likely to attempt to equilibrate
supply and demand in the short run. When denand rises, more of the burden
of market adjustment will fall on rationing and backlogs of orders,
P /-3
-------
particularly since purchasers have fewer alternative sources of supply.
When demand falls, more of the adjustment will be on lower production
instead of cutting of price.I/
According to interview studies, a common principle of long—term pricing
appears to be to set price to earn a target rate if return on capital at
a standard volume of output. / Price is altered if the cost of producing
the standard output changes, either because of changes in prices of the
main inputs or becaus.e of technological progress. According to this
practice, fora level of output at or above breake en point, average
direct cost per unit is estimated and a given percentage of direct
cost is added to cover both fixed cost per unit and the desired target
rate of return. The price based on this. formula may be called the
normal price. The actual price that a firm seeks to charge in a given
location is the normal price adjusted for freight charges, discounts
as allowances and the market strategy (i.e., advertising campaigns and
“specials”, for that area.
The firms that ordinarily set the price as price leaders usually have
cost advantages based on location and scale and are usually large in
terms of their local market share. Other firms that have less of a cost
advantage and produce lower volumes of output will charge an actual price
close to that of the actual prices charged •by the price leaders. The
normal prices determinEd by the price leaders in a given location are
often the price at which they presumably maximize their profits (or
minimize their losses)J/
B. Price Trends
There is very limited data concerning the price trends of the various pro-
ducts of the Non-Synthetic Flavoring Extract Industry. The only relevant
data found were the wholesale price index for flavoring syrup and this was
available only since 1971. As can be seen in Table IV-1, the price of
flavoring syrup remained relatively stable between 1971 and 1973 increasing
by only 6 percent. In 1974, however, the flavoring syrup price incr9ased
significantly and by December of 1974 had increased by 137 pcrcent over
the, average price in 1973. As can be seen in the table much of this
increase may be attributable to rather significant increases in sugar
prices which increased 345 percent during the same period. Finally, it
should be noted that as the flavoring syrup price increased, •the whole-
sale price of cola soft drinks also increased; thus the influence of the
Flavoring Extract and Syrup Industry can be seen in the Soft Drink Indus-
try. .
.J’Eckstein, Otto and From, Gary, “The Price Equation,” The American
Economic Review , December, 1968.
VKaplan, A.D.H., Dirlam, J.B., and Lazzilotti, R.R., Pricing is Big
Business - A Case Approach, 1958.
‘Environmental Protection Agency, Economic Analysis of Proposed Effluent
Guidelines Cement Industry , August, 1973.
IV-4
-------
1970
197.1
1972
1 73
‘1974
January
iehru ry
1’iarch
April
hay
• June
July
• August
September
• October
WOvellibe r
December
N;A.
109.5
115.3
.115.1
170.9
119.3’
120.7
1.23.6
133.4
144.0
155.0
167.3
• 187.1
188.0
211.3
226.6
275.0
113.3
118.3
124.2
13 4.6
• 323. 5
144.8
1 3.2
‘201.8
203. .8
250.9
.288. 1
3•2?.7
341.6
399.6
413.0
55,5.7
599.4
121.5
‘123 .7
.126.3
124.4
‘148.6
123.6
123.6
125.5
130.9
‘133.2
144.8
155.1
157.6
160.3
173.1
175.9
178.8
Source: U.S. Department of
Price Index.
Labor’, Bureau of Labor Statistics, Wholesale
Table IV-1. ‘Wholesale Price Index —- selected
products (1967, 100)
. ‘
.
‘
‘
Year
‘
.
Flavoring
Syrup ,
Granulated
Sugar
Cane
.
‘Cola
Drink
.
Average
IV-5
-------
V. EFFLUENT CONTROL COSTS
The effluent control system requirements and costs depicted inthis
chapter were provided by the Effluent Guideline Division of the En-
.vironmental Protection Agency as provided by the technical contractor,
Environmental Science Engineering. The recommended treatment alternative
for the NSPSniodel soft drink syrup and concentrate was the. same. as
•presented in the Development Document 1/. However, the associated invest-
ment and annual operating costs were developed by the technical contractor
in accordance with the model plant’s production.characteristics previously
described in Chapter III.
A. Pollution Control Requirements
Three effluent control levels for point source categories (direct dis.-
chargers) were originally considered:
DPI - Best Practical Cont.rol Technology Currently Available,
to. be achieved by July, 1977
BAT — Best Available Pollution Control Technology Economically
Available, to be achiev d by July, 1983
NSPS Now Source. Performance Standards are r commended to •be
equal to the BAT control level and to apply to any source
for which construction starts after the publication of
the proposed regulations. .
As was stated in Chapter I of this report, the Non_SyntheticFlaVOriflg
Extract Industry..presentl.y has no known, establishments which do not
utilize municipal sewage systems for effluent discharge. Accordingly,
only an NSPS model plant was developed and subsequently cost data pro-
vided pertained only to the NSPS model.
The flow for the NSPS model plant was determined to. be 80,000 gallons
pe.r day with a waste load of 2,400 mg/i biological oxygen demand. (BOO)
and 50 mg/i suspended solids (SS). .
The recommended effluent limitation guidelines for NSPS plants are
as follows (expressed in kg/cu. ni. finished product):
1/ Development Document for Effluent Limitation Guidelines and New Source
Performance Standards, Miscellaneous Foods •and Beverages, Point Source
Category, Draft Report.prepared by Environmental Science and Engineering,
Inc., for the U.S. Environmental ProtectiOn Agency.
V-i
-------
NSPS RECOMMENDED GUIDELI.I 4ES
Max. 30-day
Average Max. Day
BOO 0.050 0.112
SS 0.015 0.042
B.: Discharge Status of the Industry
At the, present, all known plants in the Non-Synthetic Flavoring Extract
tnd Syrup Industry discharge their effluents to municipal treatment
facilities.
C.. Pollution Control Costs
The cost estimate in i97.2.dollãrs and the components of the recommended
treatment alternative. .(activated.sludge) for the NSPS model plant are
shown in Table V-i. Shown in Table V-2 are .the costs for an optional
treatment aiternati\i ’(aerated lagoon) which could be inlplen!entecl if it
was determi ned desi rabi e. ‘ From the information provided, cotai I nve tnient
and annual costs were modified so as to be consistent with the model plant
characteristics descri bed in Chapter 1I1. These modi ficati.ons, however,
did not change the technical cost basis of the costs provided by the EPA.
Modifications made to the treatment altcrnatives costs for the NSPS
plant. consisl:ed primarily of inflating, investment and annual costs from
1972 to 1974 dollars by u e of the Engineering News Record Construction
Cost Index (1.205 ‘times the EPA provided costs). The resulting treatment.
costs in 1974 dollars for both the recommended and optional treatment
alternatives are summarized below:
Annual Total
Investment Operating Ye’ar y
Costs , Costs . Costs
Recommended System $ 908,823 $ 99,087 $189,969
Optional System $‘ 390,649 114,692 153,756
V-2
-------
TABLE ‘V-i
ITEMIZED COST SUMMARY FOR BEVERAGE BASE PLANT (NEW SOURCE)
.ALTERNATIVE A 28-VII(NSPS)
ITEMIZED COST SW t ARy FOR STE ATFR T EATNENT CHAIN
DESIG J EFFICIENCY. 97 9:’ PERCE T BUD REDUCTION
TREATMENT MODULES:
B1 .,CONTROL HOUSE
Be . PUMP’ING sT.A’flON:.
C,. ,EOUALIZATICN BASIN
.P(,. 9 ACTIVATED SLUDGE,
,G...SL’LDC.E THICKE iE’R
R,’, ..A.EROBIC DIGESTOR
S . 0 VACUUM FILTRATION
Y.; HOLDING TA <
NG . ,DUAL t’iEDIA PRESSURE
‘ILTRA N
INVESTMENT CCSTS:
1,
3e
TOTAL
33! 1cO,O0
353 E0 1 00
33L’20 00
33 Li 20 • C C)
75Li2. o. 00
37 . 00
33L 7O .00
000
I 2 E O C C
C2230 • CO
B 2 23 iD C, 0
3017C.00
2005•D • 00
‘1 3 2 .0 C
Source: Effluent Guidelines Division, Environmental Protection Agency
CONSTRUCTION
LAND
ENGINEERING
‘CON TI N G E N C V
YEARLY OPERATING COSTS:
1 LA8OR
2, POWER
3, ‘CHEMICALS
1AINTENANCE&SUPPLIES
TOTAL
TOTAL. YEARLY COST:si
1, YEARLY OPERATING COST
‘2, YEARLY IN.VE TME’NT
COST RECOVERY
3. DEPRECIATION
TOTAL
V- 3
-------
TABLE V-2
ITEMIZED COST SUMMARY FOR BEVERAGE BASE PLANT (NEW SOURCE)
ALTERNATIVE A 28-VI (NSPS-OPTION).
I1EMIZED COST SU ARY FOR WASTE ATEP TREATMENT CHAIN
DESIGN EFFICIENCY,. 0 97.9 PERCENT I OD REDUCTION
TREATMENT MODULES:
8 10 ,PIJMPING STATION
C. , ,EQUALIZA1iCN ftASIN
L,.CAERATED LAGOC J
P ,..0UAL MEDIA PRESSURE FILTRAIN,
YEARLY OPERATING COSTS:
1. LABOR
2, PO ER
3. CHEMICALS
.I Q ?4AINTECE PPLIES
5, PVC LINER
TOTAL
2 r c C
A
2 S.. Li 0 0
( 300
32&1 1 C 1 0 0 0 0
I 21i00 O0
75 Q 0 0.
000
( -Crn. . t
270 C
)5 J 0 . 00
TOTAL YEARLY
COSTS:
I, YEARLY OPERATI” G COST
2. YEARLY INVESTMENT
CCST RECOVERY
.3, DEPRECIATION
TOTAL
c 5 80. .O0
I ( 0 C) 0• d 0 0.
I2 I 150 • 00
Source: Effluent Guidelines Division, Environmental Protection Agency
INVESTMENT CCSTSF
1. CONSTRUCTION
2. LAND
3 ENGINEERING
Q, CONTINGENCY
.5, PVC LINER
TOTAL
V-4
-------
Investment costs depicted above include costs for construction, land,
engineering and a contingency fee. Annual operating costs include labor,
power, chemicals, maintenance and supplies. Total yearly costs include
annual operating costs, depreciation and interest (based on 10 percent
of. one half the total investment costs). For purposes of the impact
analysis, the depreciable life of the pollution control equipment was.
determi ned to be 20 years.
‘Total investment costs for pollution control systems expressed as a
percent of the’ NSPS model plant total investment and total yearly costs
expressed as a percent of annt -il sales are depicted below:
Total investment for Total yearly costs
pollution controls as for pollution con-
a, percent of model trols as a percent
investment of annual sales
Recommended NSPS
Treatment Alternative 3.1 ‘ 0.4
Optional NSPS
Treatment Alternative 1. 3 0.4
‘1-5
-------
VI. ECONOMIC IMPACT ANALYSIS
The impacts considered in this analysis are as follows:
A. Price ef.fects
B. Financial effects
C. Productipn effects
D. Other effects
The resulting impacts from the imposition of effluent controls on Non-
Synthetic Flavoring Extracts and Syrup Industry for existing plants are
expected to be negligible as all known plants discharge theireffluent
to municipal sewage treatment systems. Thus, the impacts described
herein will pertain only to those plants which are yet to be constructed
who will discharge their effluent directly to navigable waters (hereafter
referred to as New Source). These impacts are analyzed for the NSPS
model plant described in Chapter III. Impacts are based on the prOduction’
and financial characteristics of the NSPS model plant and pollution con-
trol costs ‘as presented in Chapter V.
It should be noted that in Chapter V two sets of control costs were
described, the recommended treatment system and an optional treatment system.
For purposes of this impact analysis, only the recommended treatment system
will be utilized. This treatment alternative consists of an activated
sludge system ard according :to industry sources, fl1OS new source. plants
which could be built, would be located such that the activated sludge.
system would have many advantaqes over, the opional aerated lagoon system.
A. Price Effects
1. Required Price Increase
An implicit indicator of the expected price effects of pollution controls
used in this report is the amount of sales price increase necessary to
maintain a NSPS p.lant’s profitability, after pollution control expenditures,
at a level the same as a similar plant without the pollution control expense.
The method of computation wa.s discussed in Part I, Chapter II (Methodology),
Section F, under subsection 2 of this report. The ability of a new plant
to pass on such price increases is evaluated in this section of the report.
Theamount of sales price increase necessary to offset NSPS’pollution con-
trol costs for the model NSPS plant is depicted below. Also shown are
sensitivity ranges of required price increases when pollution control
costs vary’ plus or minus 20 percent from the estimated cost.
Daily Plant Capacity Required Price Increase (%)
NSPS Model ( Gallons) - 20% Estimate +20%
Plant 80,000 0.4 0.5 0.5
VI-l .
-------
2. Expected Price Increases
Although the above illustrated price increases indicate what the NSPS model
plant would require to offset expenditures for pollution controls, it is
doubtful new plants would be able to pass on the additional expense to
customers in the form of higher prices. This is due to (1) the discharge
status of the Flavoring Extract Industry and (2) financial effects of build-
ing new point source plants relative to the market characterist cs of the
industry.
As stated above, it is unlikely new source beverage base plants will
be able to pass on required price increases due to pollution controls
due to, in part, the discharge status of the industry. As pointed
out earlier, all known soft drink syrup and concentrate plants dis-
charge processing waters to municipal facilities. Although municipal
charges have and are expected to continue to increase, the chargqs
have usually been andare expected to be lower thanprivate treatment
costs. In general , new sources will only be able to pass on required
price increases due to NSPS levels of control toth’e extent increased
municipal charges are passed on by a majority of financially viable
plants in the industry. However, should municipal charges become
higher than private costs of treatment, new sources would have a
conipetitive advantage and would have the opportunity to pass on the
inc eásed costs.of effluent controls assuming industry prices increased
to offset the increasing municipal charges. Although not quantifiable
at this time, some indusLry sources feel that, especially in large
urban areas, this situation is likely to happen in the near future.
The market characteristics of the industry may provide some capabili-
ties for new plants to pass on pollution control costs but these will
be limited to only those plants built in an rea where the location
or production efficiency of the plant generates a competitive advan-
tage. In other words, an impacted plant which can produce and/or
deliver its product at lower costs than its competitor, maybe. able
to utilize its greater margin to absorb the control costs and still
remain competitive.
However, fc’r those new source plants which do not achieve a competitive
advantage, it is probable that such plants will not be able to pass on
required price increases. As discussed in earlier chapters of this report,
the Flavoring Extracts Industry has not experienced high rates of return
and as shown below in Section B, Financial Effects, the high cost of new
plant construction are not offset by lower operating costs through improved
technology. This results in new point sources having the same to lower
income ratios than existing plants and negative net present values of cash
flow when discounted at the estimated industry after-tax cost of capital
(8.1 percent).
VI-2
-------
Therefore, based on the low profit margin and market structure of the Non-
Synthetic Flavoring Extracts and Syrup Industry, price increases by new
point sources to offset pollution controls, and high costs of construction
are not expected to occur. In the, following analysis, no price change was.
assumed to occur due to the entire industry increasing prices to offset
effluent controls and, accordingly, the economic viability of the new source
plants was based. on financial characteristics of the model without added
‘revenue stemming from aggregate pollution control effects on industry
pri ces.
B.. Financial Effects
Based on NSPS model plant profiles. described previously and costs of pollu-
tion controls provided by EPA, the,following financial indicators were
computed under baseline (without pollution controls) and with pollution
controls:
• After tax income
• After tax return on sales
• After. tax return ‘on invested capital
• Cash flow and cash flow as a percent of invested capital
• Net present value
The above were computed according to. the discounted cash flow (DCF) and
return on investment (ROl) procedures outlined in the methodology.
Furthermore a sensitivity analysis was performed using pollution control
cost estimates at levels of.80 percent and 120 percent of the costs pro-
vided by EPA. .
The results of the model plant analysis of ‘the soft drink syrups and
concentrate NSPS guidelines are summarized in Table VI-]. After the
imposition of effluent’controls, ‘after-tax income, after-tax return
on sales and after-tax retUrn on invested capital are expected to de-.
dine 9 to 10 percent. Variance of the estimated control costs by
plus or minus 29 percent results ‘in only nominal, changes in the above,
mentioned percentage reductions. Thus, it ‘appears that NSPS effluent
control investments and annual costs do affect the NSPS plants’ re-
turns, but only by relatively small amounts.
In terms of the effect of NSPS controis on cash flow return ‘on invested
capital, the’ percentage return declined from 13.3 percent for the base—
line case to 13.0 percent (a drop of 2.3 percent) for the after controls
case. When costs were varied plus or minus 20 percent, the after control
return varied only slightly.
VI-3
-------
Table VI-l. Key values of impact analysis for soft drink, syrups and
concentrates: NSPS
.
Key.•Vaiue
‘
.
Percent Proposed Control Costs
Baseline 80%
100%
120%
After tax
income ($000)
965
892
875
857
After tax
return on sales (%)
2.2
2.0
2.0
1.9
After tax
return on mv. cap.
(%)
3.9
3.5
3.5
3.4
Est. cash
flow ($000)
3,317
3,268
3,256
3,243
‘
Cash flow
as % of i nv. cap.
13.3
13.1
13.0
13.0
Net present values ($000)
-10,781
-11,606.
-11,813
-12,019
VI .-4
-------
Net present values for the NSPS model plant are negative both before and
after the imposition of controls (Table VI-1). As discussed in Part I,
Chapter II (Methodology), large negative net present values would cause
most firms to discard plans for building a new plant. Since the estimated’
net present value is negative before controls are imposed, it is concluded
that very few plants, classified as a new source, would be built. However,
it should be noted that the negative net present value indicates that the
associated plant would earn less than the estimated 8.1 percent industry
cost of capital. Thus, a NSPS plant may be built in the future provided
the firm has been well established in the industry, has or has expectations
tc capture a major market share at profitable price levels and has an
excellent, financial performance record (e.g. a lower cost of capital)..’
Should a NSPS plant be built, it can impact its Net Present Value to decline
due to the requirement for pollution controls.
C. Production Effects
Although new source performance’ standards will not affect current levels of
production, future growth in th2 industry could be seriously affected by
the imposed controls. Point source category firms are potentially deterred
from entry because of differential impacts of effluent treatment require-
ments. ‘. S
However, as indicated in the above financial description, future growth from
new sources is expected to be restrained by the high costs of construction
not being offset by lower costs of production achieved through improved
technology. Also a restraint is the inability of a new source to pass
through costs for controls to the consumer. This does not completely rule
out the possibilities for new sources. It is foreseeable that some operations,
those which could be classified as optional producers, could construct and
successfully operate a new plant. However growth for the industry, as a
whole, is expecte.d from additions to or alternatives of existing plants that
are discharging effluent wastes to municipalities.
• D. Other Effects
Other types of economic impact such a employment, community and balance
of payments deficit effects are normally assessed when there are plant
closures due to pollution controls. However, these other effects are not
meaningful nor quantifiable in a report assessing new sources. Although
employment is an important consideration to a potential new firm and
increases in employment and local business are important to surrounding
communities of a potential new plant, these effects are more related to
the decision to construct a new plant. Thus, in this report’, these
related effects were not pursued.
VI-5
-------
P RT• VIII
LIMITS OF THE ANALYSIS
-------
PART VIII
LIMITS OF THE ANALYSIS
A. General Accuracy
The, data and other information used in’this study were drawn from publizshed
governmental reports, industry trade associations and from.extensive ‘con-
tacts with individual beverage firms. Information on status of effluent
discharge, recommended effluent treatment systems and costs were’ furnished
by EPA. Every effort was made to verify the data and other information
used. The data and analyses will be’ reviewed by EPA and by specially-
constituted committees of the major reJ.ated trade associations and com-
ments of both’groups will be considered in finalizing the analysis.
Detailed data on size distribution by types of plants are not avajlable.
Using industry size distributions from the Census of Manufactures, to-
gether with information obtained from numerous trade associations, industry
and university contacts, segmentation of size and type of plants were made’
for each industry.
The Beverage Industries were found to be mostly discharging to municipal’
treatment facilities. •Since the scope of the work i’n this report is to
assess the economic inipacts of effluent.limitation guidelines and new
source performance standards on point source categories (direct dischargers),
the majority of this report’s effort was concentrated on the economic im-
pacts of new source performance standards (NSPS). However, fOr industries’
in which direct dischargers were -known to exist, analyses were also made
of’ the ecohomic impacts of BPT and BAT requirements on existing operations.
Financial information concerned with investments, operating costs and
returns was not available for individual plants or firms. ‘As a,, result,
the financial aspects of the impact analysis were, of necessity, based
on synthesized costs and returns for “representative” types of model plants.
These costs and returns were developed from a variety of sources including
published research from universities and government agencies, information
obtained through trade associations frcni operating firms in the beverage
industries, and published financial performance data.
Published information from the Internal Revenue Service, references such
as Standard and Poors, Dun and Bradstreet and other sources of data on
financial ratios and financial performance Were also used and were checked
by industry sources. ‘ ‘
Throughout the’ study, an effort was made to evaluate the’data, and other
information used and to update these materials wherever possible. ‘ Checks
were made with informed’ sources in both industry, government and univ’ersi’ties
to help insure that data and information used were as reliable and as repre-
sentative as possible. For example, construction costs, working capital
V I 11-1
-------
requirements, proportions of capital financed through debt and equity
and profitability ratios were checked with the appropriate persons in
industry firms who are experienced and knowledgeable in these matters.
Efforts were made to use the latest data available.
Specifications of the contract require the Contractor to use effluent
çon trol costs provided by EPA. The Effluent Guidelines’Division, EPA’,
together with its’ technical contractor, provided recOmmended alternative.
effluent control systems, investment costs and annual operating. costs
adapted to the types and sizes of “repr2sentative’ model plants used
in this analysis. The recommended alternatives primarily consisted of
aerated lagoons or activated sludge systems. Disposition of final dis-
charge by plant typ€ and the industry was taken from the Development
Document Draft and checked to the extent possible by the Contractor.
Given the accuracy of the pollution control costs, it is believed that
the analysis represents a usefully accurate evaluation of the, economic
impact.of the proposed effluent limitation guidelines and newsource
performance standards, point source categories on the six Bevera’ge
Industries.
B. Range of Error .
‘Different data series and different sections of the analysis will have
different. possible ranges of error.
Errors in Data - Estima ted’ data error ranges as an average for the
industry are ‘as follows:
Error Range
(1) Information regarding the organization and
structure of the industry, number,. location
and size of plants,’ and other information
descriptive of industry segments + 10
(2) Price information for products and raw materials ± 15
(3) Cost information forplant investments an ‘ .
operating costs ± 15
(4) Financial information concerning the beverage
industries ‘ + 10
(5) Recommended alterrjative. effluent treatment costs
for new sources 1/ ‘ . + 20
Error, ranges for effluent treatment costs are the Contractor’s estimate.
EPA. did not provide error ranges.
VIII-2
-------
C. Critical Assumptions
In an economic impact analysis of most any industry, it is inevitable
that simplifying assumptions must be made to bring the problem intá a
framework of analysis consistent with the constraints of time, budget
and data availability. The major critical assumptions used in this
analysis are as follows:
.1. Types and sizes of the model.plants are.representativeof
plants actually existing in the industry and of plants
expected to be built in the future.
2. It is assumed the financial dat. are representative of costs..
and returns of existing plants. or new plants to be constructed
after promulgation of proposed guidelines. As stated earlier,
the model plant financial data are on a constant 1974 dollar
basis and can be adjusted at future times to reflect the future
economic activity.
3. Levels of profitability reflected in model plant profiles (based
primarily on the average, of the period frol 1970 to 1.975 so as
to include years ofhigh and low profits) will be the same for
new sources in the future.
4. It was assumed that the economic impacts of effluent controls
on those products. not.included in the detailed analysk ’of:
‘ representativ.e’ 1 plants could.be evaluated in general terms
through associating them with those ‘representative model
plantsfor which detailed analyses were made. This, association
was based primarily on the fact tha t models were. de.ve loped for
a single product plant which represented a majority of industry
production. In thbst cases, there were actual plants producing
products in similar combinations to the model plants which was
the primary objective where possible.
5. Effluent control costs and control status estimates were supplied
by the Effluent Guidelines Division, EPA. It is assumed that
these data.are realistic interms of:
(a) Applicability of effluent treatment system re cbmmended.
(b) Investment and annual operating costs for systems
(c) Percentage of total number of plants which are direct dis—
chargers fo.r each industry segment and for the industry in
general reported in the ‘Development Document Draft.
VIII-3
-------
D. Remaining Questions
1. A major question, not addressed by this study, is concerned with the
economic impact of effluent guidelines on those beverage plants dis-
charging throug.h municipal Waste treatment systems, in total or in
part. Nearly all plants in these industries are discharging to
municipal systems. Municipal sewage charges and other costs related
to such sewage services are reported •to be rising rapidly. The econ-
omic impacts of these increasing sewage charges on beverage plants
have not been determined. Such determination is needed to complete
the evaluation f proposed effluent c ntrols on the beverage related
industries.
2. The use of the model plant approach necessarily raise1 questions
as to the representativ ness” of the model plants used and in
particular., the process of generalizing ‘by association” from the
specific model plants analyzed to plants processing other beverages
or combinations of beverages. However, the Wine, Malt, Beverage,
Soft Drink and Distilled Spirits Industries are felt tobe adequately
represented. In the Malt and Flavoring Extracts industries, the lack
of information from the industries, together with limitations on time
and budget for this study, made a more detailed analyses of industry
segments impracticable.
3. Another fundamental question which remains unanswered stems from the
fact that this analysis was concerned only with the impacts of proposed
effluent guidelines. it is recognized that there are other regulatory
EPA programs in air and noise control, pesticide regulatory programs,
OSHA, FDA, energy controls, consumer protection and various State
controls, either existing or emerging whic , will influence the oper-
ations and profitability of plants studied. The analysis does not
consider the full impact of this aggregate of regulations, particularly
as they may affect the future of the beverage.related industries.
Although it is impossible to quantify the aggregate impacts of all
these regulatory programs, it is evident that the combination of
programs imposes additional burdens on management in keeping up with
regulations, filing reports, replying to surveys and other similar
administrative requirements, constitutes a significant degression
from the major function of these irnis -- producing beverages for
human consumption.
VI 11-4
------- |