Considering the Fallout
For the first time this week we started to get a fuller picture of how COVID-19 is affecting the brewing industry. Much as expected, it has had divergent effects. On the one hand, off-premise sales are way up, and those regional legacy breweries in so much trouble just a couple months ago have seen their fortunes reverse. (“Sierra Nevada’s portfolio-wide dollar sales are up 26.4% over the last four weeks, and up 13.6% year-to-date. New Belgium dollar sales are up 36.9% during the four-week period, and up 20.1% year-to-date.”)
Yet at the same time, those dependent on on-premise and draft sales have been devastated. Brewers Association economist Bart Watson reported on a survey he’d done with 455 members. Forty-six percent said their businesses could only last between one and three months, and 13% thought they would only last another month. Two and a half percent said they were already planning to close. Sales for the breweries in this sample dropped a weighted average of 68%; overall Watson said the category was down 29%.
As these data points begin to emerge, I begin to wonder what the post-COVID world looks like. It’s a dead certainty things will be different, but how? I’m going to offer a few thoughts based on my discussions with brewers and my own general observations, but first, a bit of historical perspective.
The market for beer changes periodically, often dramatically. In the 1970s and ‘80s, for example, Americans drank a huge amount of beer—the highest in history—and didn’t care about variety. They were brand- and category-loyal. Beer drinkers didn’t drink wine, and once they found a brand they liked, they stuck with it. Craft came along and attracted some drinkers, but even within that subset, things changed. From 1998 to 2008, there were roughly 1,500 breweries in the US and category growth was at a standstill. It was considered a safe bet that the volumes would never exceed 5% of the total for beer.
The next decade brought massive growth in the number of breweries and SKUs, and craft’s share of the pie grew. But overall sales of beer continued to decline and in the past few years, craft’s volume has barely increased—even while the number of breweries skyrocketed. If we look back to the time of the economic recovery, things were starting to hum again by 2012. More than 70% of the current breweries didn’t exist then. Half didn’t exist five years ago. Everything that marks the current state of the beer industry—explosion of taproom sales, cans, hazy IPAs and pastry/milkshake beers, consolidation, and weak legacy breweries—is a function of the last five years. The current state of the beer industry is a very recent one. Thinking that it will re-emerge unscathed in three or six months’ time is not reasonable.
So what will change? It may seem like a parlor game to guess, but for people who have to make strategic decisions, the considerations are deadly serious. I’ve been pondering it—and I bet you have, too. I am both trying to prepare myself for whatever that new era looks like, and also not hanging on too tightly to the idea that my speculations are reality. For much of this, only time will tell. Here’s some preliminary thinking.
Likely Outcomes
Let’s start with those things that seem likely—and which in some cases are already emerging.
Brewery closures. In a best-case scenario, states start loosening restrictions in May (and in that best-case, it doesn’t immediately spark worse outbreaks). June is more likely. That means breweries are going to have to hang on another 4-8 weeks before seeing any kind of relief. If Watson’s numbers are reflective of the larger population, that would mean a loss of something on the order of 20% of breweries.
New breweries slow. As a corollary, new brewery openings will be delayed and, given the potential long-term recessionary effects, probably scrapped. Roughly a thousand breweries a year have opened each of the last five. That was already becoming unsustainable, but now it’s untenable. I teach a class at PSU on opening your own craft beverage business, and I would be shocked if we offer it in the fall. It wouldn’t be surprising to see this number fall back to 100-200 brewery openings a year, and 6,000 breweries overall.
Legacy breweries get a bump. One of the most unexpected consequences of this crisis is how legacy breweries have gotten a bump thanks to grocery-store sales. Two months ago, everyone agreed that hyper-local breweries selling beer on draft and in cans from their taprooms was the safe business model; putting packaged beer into the three-tier system, with its brutal competition and poor margins, was the dangerous path. That has of course been turned on its head, but I think there will be another effect. A lot of these breweries are making exceptional beer and just haven’t been able to get on people’s radar. Now people are buying 12-packs of reliable flagship beer and getting a reminder of how good it is. This effect will last past the pandemic. It will tail off at some point, but slowly and I wouldn’t expect it to ever get as bad for those breweries as it was two months ago. This also happened in the 90s as people tired of buying wacky and crappy new beer.
Pub and restaurant failures. Another very bad outcome will be the loss of pubs and restaurants following this crisis. These are important outlets for breweries and their loss will further dampen opportunities for small and new breweries. And it will, of course, be tragic for the pubs and restaurants we lose.
Possible Outcomes
Other gears are turning, and they may or may not have unexpected effects. Here are a few I’m looking at.
Death of the $25 four-pack. Two-thirds of American breweries have never operated in a weak economy with high unemployment and little disposable wealth. Many breweries have enjoyed selling beer at a massive premium. Although breweries liked to argue that these beers were expensive to make, this was really a consequence of the market bearing those prices. It seems hard to imagine a world of 10% unemployment (what to speak of 15 or 20%) where that continues. Breweries can profitably make hazy IPAs for less than 40 cents an ounce, and going forward, I expect they’ll have to.
Further fragmentation of the three tiers. One of the ongoing trends has been massive consolidation among distribution. ABI continues to own a larger share of this tier, and it seems like a week doesn’t pass that Reyes has bought another local distributor. This has been terrible for small breweries, but the weird politics of the three tiers have made it hard to change. (Breweries that are locked into franchise laws are reluctant to change the rules and so even among independent breweries there’s no agreement.) There’s a lot of corruption in this tier, and I expected legal challenges to franchise laws that would begin breaking it up. Now I wonder if work-arounds like self-distribution and home-delivery may not be the way forward. Since a frontal assault on distribution is doomed politically, these changes may point a way forward. (Or not!)
Less-frequent pubgoing. This one is very much an open question. I polled folks on Twitter and they didn’t indicate they’d be going to pubs less often. However, given the less money people will have and the more comfortable they will be drinking at home, this is definitely a possible outcome. Even if pubgoing returns to former levels, how long will it take?
A lot of factors will affect these things. Will SBA loans arrive in time to tide businesses over? How long with the crisis last? Will it return? We can’t really guess what the effects will be until we know the answer to these questions—but they do seem to run along a continuum. The one thing I’m beginning to believe is that there will be changes, and while they may not be apocalyptic, they will usher in a new era in which all the rules and expectations have changed.