As the coronavirus pandemic wreaks havoc on American businesses, it’s exposing a brutal reality about who is protected in this economic system and who’s not. While big corporations are tightening their belts with the aim of emerging even stronger than before, small businesses across the country are facing bankruptcy.
The alcohol industry is no different.
As many as 7.5 million American small businesses are likely to have closed before the crisis is over, according to a report by The Main Street America Group. In alcohol, that means small, local craft breweries and distilleries.
With the exception of a few brands that were well-positioned for the conditions of a global pandemic, most are taking a big hit and seeing reliable industry trends upended as consumers adjust to the crisis. While big conglomerates will likely be able to weather the storm and make the strategic shifts necessary to stay profitable until things go back to a relative normal, many smaller breweries, distilleries and wineries are unlikely to survive.
“It is the small, fledgling startup brands that have been at the heart and soul of the business; [those] are the ones that are showing the most vulnerability,” said wine and spirits consultant Arthur Shapiro, adding, “It’s a pity. Those are the products that someone has taken a risk on. You build a distillery to start working and all of a sudden, the bottom falls out.”
The shift to big brands
As shutdowns have led to a near complete shift to off-premise drinking, it all comes down to availability and distribution, Shapiro said. Homebound pandemic drinkers aren’t thinking about sampling the latest release or tasting new collaborations—they’re limiting shopping trips, consolidating where possible and ordering booze online.
Because big players have access to more grocery shelves and ecommerce platforms, consumers are buying more of those big, classic brands, benefiting conglomerates like Molson Coors, AB InBev, The Boston Beer Company, Diageo and Pernod Ricard over smaller breweries and distilleries.
A month ago, Anheuser-Busch chief marketing officer Marcel Marcondes told Adweek that people were “going back to the brands that they know, to the brands that they trust, to the brands that they know they can rely on, to the brands that they know that will deliver.” At Molson Coors, communications director Adam Collins noted that Miller Lite, Coors Light, Blue Moon and Keystone Light “are all doing particularly well.”
Lesya Lysyj, CMO, The Boston Beer Company, made a similar observation. “People are kind of going to their comfort brands,” she said. And as a result, “we’ve seen a resurgence of people coming back into Sam Adams and Angry Orchard.”
Even though consumers are shifting back to brands they know, revenues are still down at AB InBev and Molson Coors, which saw Q1 revenue drops of 5.8% and 8.7%, respectively.
The loss of tasting rooms
Over the past decade, the number of breweries in the U.S. has quintupled, according to the Brewers Association, with the vast majority of that growth in microbreweries and brewpubs. Craft spirits are also gaining momentum, with nearly a 20% increase in producers between 2014 and 2018.
These smaller, younger businesses rely heavily on direct sales in their tap and tasting rooms. The on-site experience allows breweries and distilleries to make money through beverage, merchandise and food sales with a low overhead cost.
“Kegging and serving directly represents the cheapest, easiest way [to serve beer],” said Matt Simpson, owner of beer industry consultancy The Beer Sommelier. “It also represents a great, efficient way for many breweries to increase their profit margins by simply adding this kind of space.”
Even before the pandemic, the proliferation of breweries was making it hard for new or small producers to reach consumers outside of tasting rooms. “Tap handle space or off-premise cooler space, shelf space, has been an absolute minimum,” Simpson said. For smaller breweries and distilleries, that competition only reinforced the importance of tasting rooms.
At Texas-based independent brewery Austin Beerworks, the tap room represented about 30% of total revenue. “But it was more like 35% to 40% of profit because the margins are so much better,” said the brewery’s co-founder, Will Golden.
Since closing its tap room in mid-March, the brand has had to furlough roughly half of its employees. “We’re seeing probably a 40% to 45% reduction overall in total sales volume,” Golden said.
And Austin Beerworks is doing better than most small breweries. According to a Brewers Association survey in April, the median drop in sales for respondents was roughly 75%. Without a serious lifeline, a majority said they’d have to close within three months.
What Beerworks doesn’t sell at the tap room generally gets split between cans and kegs. Right now, around 800 kegs are sitting idle (some of which were part of its efforts to ramp up for South by Southwest) and will go bad within weeks.
In fact, millions of gallons of beer across the country are spoiling in bars, restaurants, concert venues and stadiums, and an estimated $921.4 million in uncollectible or difficult-to-collect wine and spirits are in the same position.
Molson Coors dropped an estimated $44 million on a keg buyback program that offers bars and restaurants 50% of the cost back on kegs that are slated to spoil before economies reopen, and many other giant conglomerates followed suit. An initiative on that scale is completely out of reach for most small breweries, many of which are still unsure whether they can absorb the losses without going under.
Wine, spirits and the ever-trendy hard seltzers
Beyond beer, hard seltzers have continued to surge in popularity. The Boston Beer Company attributes much of its growth prior to the pandemic to the success of its hard seltzer brand, Truly. Since March, seltzer’s popularity has only accelerated. “We would have thought that everything would have been relatively stable,” Lysyj said, “but seltzer getting even stronger has been a bit of a surprise.”
Before the pandemic, Shapiro said, there was a “growing and accelerating fascination and involvement with cocktails” among younger consumers. “This new generation of drinkers drinks to enjoy taste, to sample—not just to get hammered as previous generations did,” he said.
Now, without access to a bartender, consumers are gravitating toward ready-to-drink cocktails. Industry analysis firm SipSource’s Dale Stratton said premixed cocktails saw a 12% year-over-year spike in popularity in March. As cocktail culture accelerates, “you’re going to continue to see that that premixed cocktail area really grow substantially and derive a lot of growth,” Stratton said.
Other trends within the spirits industry have stayed relatively consistent with pre-Covid growth. For example, tequila and U.S. whiskey are continuing to enjoy the spotlight, Stratton said.
For Jameson Irish Whiskey, coronavirus lockdown orders came just before its most important annual event: St. Patrick’s Day. “We were planning multiple activations to engage consumers across across all touch points,” said Kate Pomeroy, marketing vp for Jameson’s parent company, Pernod Ricard. “Part of that was also an effort to get consumers into their local neighborhood bars where Jameson was built and has always performed very strongly.”
Like so many other big alcohol brands, Jameson pivoted to a virtual event for the holiday and launched initiatives to support its partners with much thinner margins, bars and restaurants.
Unlike spirits and beer, wine has been on a pretty consistent decline over the past few years. E & J Gallo Winery, which produces Barefoot Wine, planned to reintroduce itself to younger consumers with brand activations at since canceled concerts and music festivals this year.
Instead, the brand is working to connect with consumers virtually and making “significant investments” in ecommerce, said CMO Stephanie Gallo. (Barefoot also recently jumped on the hard seltzer bandwagon, releasing a summer campaign promoting its wine-based seltzers and spritzers last week.)
Consumers opt for bigger package sizes and online ordering
While online alcohol sales surged a staggering 339% in the first week of May year over year, according to Nielsen, that growth is largely limited to the brands that already have widespread distribution and availability.
The Boston Beer Company, for example, has grown most of its online sales through Instacart and Walmart’s click-and-collect service, Lysyj said. If brands didn’t already occupy space on grocery store shelves, it’s unlikely they’re seeing much benefit from the explosion of online alcohol sales.
“The losers are the craft beer and craft spirits people,” Shapiro said. “Those are products that are very difficult to get online or through ecommerce.”
Drizly, an alcohol delivery app, is one of the few winners of the pandemic economy. The platform partners with more than 2,600 retailers across the U.S. and has seen more than 400% growth above its projections through May as people increasingly reach for their smartphones to order alcohol.
The platform’s seen bigger average order sizes and more frequent purchases from users since the start of the pandemic, according to Drizly CEO Cory Rellas.
Similarly, Molson Coors has seen consumers buying in bigger case sizes as people attempt to minimize the number of trips they’re making to the store, Collins said, opting for 24- or 30-packs of beer instead of a six- or 12-packs.