Six months into the pandemic and two narratives continue to lead conversations surrounding alcohol sales in the U.S. The first, by all accounts, is that off-premise alcohol sales are up. Most reports suggest that larger brands are mainly benefitting from this trend while craft producers have not seen the same boost.
There’s a significant number of testimonies from market analysts supporting these narratives. But the more we scrutinize the numbers, the more it becomes apparent this is a nuanced conversation — one that’s impossible to sum up with a one-size-fits-all answer. Nowhere is this more true than in craft beer.
While craft beer has seen upticks at retail, those gains have not offset the losses from bar and restaurant closures across the industry. However, to say that the entire craft beer industry is reeling from on-premise closures is also an oversimplification. There are profits being made in beer right now, and not all of those are being banked by macro producers.
To find out exactly how Covid-19 has impacted the craft beer industry, VinePair spoke with industry analysts, producers around the country, and professionals working in sectors that support craft beer. They highlighted the factors that have hit brewers hardest during the pandemic and the business models that have been most impacted, as well as predicting what the pandemic could mean for the future of craft beer.
The Impact of On-Premise Sales Losses
While off-premise sales data seems to paint a positive picture for craft beer versus beer as a whole, industry analysts say these figures don’t tell the whole story. For the 26-week period that ended Sept. 5, beer sales rose 11.2 percent in value, while craft beer sales increased 16.3 percent, according to Nielsen data. But these increases have not canceled out the widespread losses from sales at bars and restaurants.
Prior to the pandemic, many craft brewers placed more emphasis on on-premise sales, because that channel offers greater profit margins. Bart Watson, chief economist at the Brewers Association, estimates that on-premise sales accounted for 45 percent of craft beer volume sales before Covid-19.
With lengthy on-premise closures and continued capacity restrictions, the loss (or significant reduction) of this vital revenue stream has had a notable impact. “The craft beer category is estimated to be down around 12 to 15 percent in the first half of 2020 versus the same period in 2019,” says Adam Rogers, North American research director for IWSR.
The Challenges of Pivoting to Off-Premise Sales
In order to combat on-premise losses, many brewers have turned to packaging their beer in cans and bottles, and selling to wholesalers or direct to consumers via curbside pickups. While this has presented a vital lifeline during the pandemic, packaging and indeed selling that beer has not come without its challenges.
“Even if you can bottle or can beer, you have to sell it to somebody,” the Brewers Association’s Watson says. Gaining retail placements had become increasingly hard even before the pandemic, he says, and proved to be tougher still within the more competitive Covid landscape. For those brewers who could get their beers on grocery store shelves, that still didn’t guarantee sales — especially during the early stages of the pandemic.
During the “pantry loading” months of March, April, and June, consumer purchasing habits shifted to favor macro brands and their larger packaging formats (12-packs and cases), according to analysts such as the IWSR. Brewers contacted for this piece confirmed this theory and further explained why larger packaging is not a feasible option for smaller producers.
“The problem for us as craft brewers is we’re not as poised as the larger brewers to meet that kind of demand,” says Sam Cruz, co-founder of Against The Grain Brewery in Louisville, Ky. “Another caveat of that is the price factor: Shoppers are looking for value in those larger formats; if we meet that value point, we’re going to lose margins.”
The success of pivoting to canning has also been largely dependent on a brewery’s location, according to Roger Kissling, VP of sales and customer management at Iron Heart Canning Co. Iron Heart operates in 25 states and Kissling confirms demand for his company’s services has increased during the pandemic. But not across the board. Breweries in large urban areas have found success from mobile canning because they’ve been able to take advantage of to-go sales and curbside pickup, Kissling explains. But this has not been the case in more sparsely populated rural markets.
Further complicating matters has been a high-profile aluminum can shortage. This issue existed before the pandemic, but Covid has only exacerbated the growing demand for aluminum cans, explains Jon Beam, marketing manager at can manufacturer Crown Beverage Packaging. With increased at-home consumption of beer and other canned beverages, the pandemic has driven demand for aluminum cans to an “all-time high,” he says, creating “an unexpected surge” the industry is still working to address. Crown Beverage is among a number of packaging manufacturers now working on plant expansions and line additions to meet the continued demand for aluminum cans.
Self-Distribution Proves to Be a Lifeline
By all accounts, having solid relationships with distributors has been a key factor to surviving the pandemic for craft producers. Another approach that has proven particularly successful during this period has been the flexibility and control offered by self-distribution, as illustrated by the Massachusetts-based Night Shift Brewing and New York’s Other Half Brewing.
Michael Oxton, co-founder of Night Shift Brewing, predicts revenues for his business will be up this year, though overall profits will likely be down compared to 2019. Night Shift has an annual output of around 40,000 barrels, most of which is sold through wholesale channels. Night Shift also operates a separate distribution business, so it has not faced the challenge of creating new distributor relationships nor struggled to gain retail shelf space. “We will likely be down profit-wise just because our taprooms are so profitable and we are seeing a huge downturn in revenues there,” Oxton says.
Other Half Brewing is another example of a brewery that almost entirely self-distributes, though in a different model from Night Shift. Prior to the pandemic, up to 40 percent of Other Half’s production went into kegs, while the remaining 60 percent was packaged in cans and mainly sold at its breweries. “We have stopped packaging beer in draft format altogether,” co-founder Matt Monahan says. “Beforehand it was mostly cans to-go. Now, we are all cans to-go minus a couple of key retail partners.”
Confidence In the Craft Beer Market
Craft beer was already becoming an increasingly competitive space prior to the pandemic, with record numbers of producers and competition from hard seltzers and canned cocktails. Judging the exact impact of Covid-19 on the subcategory is therefore tricky. But certain data sets appear to support the notion that confidence in craft beer remains high, even now.
As of June 30, data from the Brewers Association showed there were 8,217 active craft breweries in the U.S., up from 7,480 during a comparable time frame last year. Watson puts this down to the timeframe involved in opening a brewery — it’s a process that can take years, he says.
A better indication of the current confidence in craft beer may be the number of brewery permit applications submitted to the TTB. Somewhat surprisingly, that total has also grown this year, to the tune of 219 new applications between Q2 and Q3. Given that all of these permit applications were submitted during the pandemic, as Watson pointed out in a recent tweet, this could suggest many still believe they can operate new businesses profitably in craft beer. But it should also be noted this was the slowest growth for new permits in 11 quarters, according to Watson.
The Future of the Craft Beer Industry
Sources contacted for this article said they did not think the pandemic would not weaken the long-term demand for craft beer in the U.S. The overall opinion was instead that the pandemic would change the landscape of who’s meeting that demand.
“A portion of the breweries that had to close recently may have had to close in three to five years due to the increased competition, so the pandemic just condensed their timeline,” says IWSR’s Rogers.
Still, market analysts like the IWSR predict the craft beer industry will return to a “healthy” landscape within two years, and volume losses will also be regained in the coming years. But crucial to the continued health of the industry will be a diversification of revenue streams for brewers. While we shouldn’t doubt that the taproom and draft-focused business model will prevail in the future, when it comes to growing a business, increasing production size, and gaining a multi-state footprint, packaged beer and well-established wholesaler relationships will likely be key.
Within retail channels, consumers can not only expect a reduction in brands on shelves, but also a streamlining of styles. “I think this is really going to cull the selection because stores were already overwhelmed with the amount of variety on offer,” says Night Shift’s Oxton.
One pandemic trend all hope will continue is the manner in which consumers have increasingly supported local businesses. “As long as the quality is there, consumers will also be there,“ IWSR’s Rogers says.
Published: October 6, 2020