The Coming Economic Challenges Facing Craft Brewers

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The novel coronavirus (COVID-19) is going to have numerous reverberations around society and our economy. You can find general resources that may be helpful to your business in our Coronavirus Resource Center, but the point of this piece is to delve into some of the potential short-term and long-term economic impacts.

Before I get started, I want to stress the word “potential.” What’s going on right now is unprecedented in recent history, and so it’s hard to model what the effects will be. There’s also a great deal of uncertainty; both in terms of how the pandemic will unfold, and how individuals, individual businesses, and local, state, and federal policymakers will respond. All of these decisions will shift what is written below. I normally write posts and leave them. This post will be updated over the coming weeks and perhaps months as we get more information.

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Short-Term: On-Premise and Own-Premise Sales will Dip, Regardless of Forced Closings or Not

Let’s start with the short-term impacts. Sales of beer in taprooms and other on-premise establishments are certain to fall. Some of this will be supply-side with breweries shutting their doors for health and safety concerns, and some of this will be demand-side as beer lovers simply venture out less. As we saw yesterday, several states are taking the unprecedented step of closing bars and either closing or limiting the capacity in restaurants.

How Big Will the Impact Be?

It’s hard to measure these types of big and fractured events in real-time, but we’re getting a picture from some data providers. OpenTable, a leading restaurant reservation website, is posting daily year over year (YoY) reservation data on their site.

The numbers aren’t pretty. As of March 14, reservations in the cities they are showing range from -22% down (Honolulu) to -64% down (New York and Boston). That’s every city significantly down, whereas many were up only a few weeks ago. Seated dining isn’t going to a brewery for a pint, so things may be better for some brewers, but even if you’re not in a state currently with mandatory closings, I’d prepare for those types of drops in your businesses. I’d also prepare for the eventuality that you may be forced to close for a period of weeks. When those states that have seen mandatory closings come out of those closings, it may be to numbers that look like these.

For taprooms and brewpubs, there is some hope that those drops might be partially offset by to-go sales or even delivery. If your taproom or brewpub is still open, you’re probably thinking about a plan to make your to-go sales program more robust. As we gather more data about what those sales look like, I’ll plan to update this post.

Short-Term: Off-Premise Sales

For packaging breweries, the short-term effects may be more mixed.

Some consumers may actually buy more beer as they prepare to self-isolate. That said, beer is a luxury, and so others may buy less as they stock up on other goods. We’re hearing reports from members who distribute in the Pacific Northwest of distributor orders being cut by 20% in the Seattle region. Nationally, we only have scan data through March 8, 2020, and if the OpenTable data is accurate, the next week (through March 15) will give a different picture when it is available.

That said, sales the week of March 8 are currently much more positive than the year as a whole. For all beer, sales were up 3.2% versus a year ago in the first nine weeks of the year. They were up 6.4% the week before March 8 (trend +3.2%). Same thing for Brewers Association (BA) craft. The first nine weeks showed a slight dip YoY, with volume sales off -0.3%. But the week of March 8 sales were up 3.7% versus the year before (trend +4.0%). One week is a small sample that I typically don’t like to show, but these are unusual times.

UPDATE: March 15, was indeed a big week, with BA-defined craft sales for the week of 3/15 up 24.6% by volume and 24.3% in dollar sales in IRI Group scan data. The week didn’t quite reach July 4th levels, but it definitely looks like a normal summer week as opposed to one in mid-March. 12 packs picked up share, going from 24-25 share of dollar sales the weeks of 3/1 and 3/8 to above 29 share the week of March 15. Six packs lost a similar share amount.

Longer-Term: Recession Looming

These short-term shocks are going to be important for any small business, but the longer-term impacts to the economy will also matter. I’d again stress the speculative nature of what is below. We aren’t in a recession and the fiscal and/or monetary response from policy makers will be critical in what economic growth looks like over the next months and years.

That said, there is a growing consensus amongst economists that we’re heading for a recession – many thought so even before this unprecedented shock. Here is the latest from a panel of expert economists.

Both of these questions matter: 1) Are we headed into a recession, and 2) Will the novel coronavirus disrupt supply or demand more. The first shows consensus on an economic slowdown coming. The second suggests that it’s probably going to be demand-driven (related to consumer spending) moreso than supply-driven (related to problems with supply chain as workers get sick and businesses shutdown). For both, however, there is a lot of uncertainty.

Given that level of uncertainty, I’m not going to weigh in on what a recession might look like, but more generally going to talk about how beer performed as a category during recent recessions. The good news is, although beer on average has performed slightly worse during recessions than during periods of economic growth, the differences aren’t huge. My oft-repeated phrase on the subject is “beer isn’t recession proof, but it’s recession resistant.”

Before going further, I’ll again stress that what we’re facing might be pretty different than past recessions. I’m not sure how much time you spend on #econtwitter, but there are real disagreements among economists about how to respond to any potential downturn, mostly because we have no idea what it will look like, how long it will last, and what other policy responses will be in place. Comparing a recession brought on by a novel virus pandemic to one brought on by bankers taking huge risky bets on the housing market isn’t taught in Econ 101.

Alright, with that huge caveat, the graph below shows quarterly YoY shipment data from the Beer Institute. The shaded gray areas are the two most recent recessions.

The periods of growth and recession don’t show huge differences. The 10 quarters that were covered by recessions average 0.08% growth, and the 88 covered by growth average 0.27% – so growth quarters were better, but that difference isn’t statistically significant. You can see that beer did decline as the great recession wore on, but that’s also the period where Anheuser-Busch was bought by InBev, MolsonCoors and Miller merged, and the price war that had been raging ended – so that’s a partial explanation for the decline.

What about sub-parts of the beer business? I often get asked if on-premise impact is softer than off-premise during recessions. I unfortunately don’t have quarterly draught beer sales numbers with significant time series, but from 2002-2019, draught sales have averaged 0.73% growth. The great recession covered the fourth quarter of 2007 through the second quarter of 2009. Draught growth those three years was 2.22%, 0.99%, and -1.45%. If we use a weighted average of those three, the growth ends up at 0.47%. So a similar drop as we see above (loss of 0.2-0.3 points of growth), but not a sharp drop off.

Again, I’d say that we typically see a bit of slowdown during recessions, but not sharp drops – note that draught sales were down -2.35% in 2019, so any drop comes on an already weak number. Will this be a typical recession? Who knows. The last recession hit those at the bottom of socio-economic spectrum hardest, a group that is also less likely to drink. If there is a recession coming, all signs point to it being broad-based, but we’ll have to wait and see. I’ll continue to update this post as we get more data in and get a better sense of what the economy will look like through 2020.

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