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Thursday, April 23, 2020

Pandemic 2020: The Great Disrupter

It goes without saying that the pandemic we are currently passing through has been a catastrophic disruptor in myriad ways. By the time we exit the other side, whenever that is, this will be the greatest deflationary event since the Great Depression.

There will be no return to anything approximating normal in the near term. Supply chains are broken and too many are or will be unemployed. The government response has been wholly insufficient. A recent column in the New York times predicted a very slow return to what the city was prior to the pandemic. Regardless of how and when stay home orders are lifted around the country, recovery will surely be long everywhere.

Mucking up the works is the fact that a vaccine for the coronavirus is probably a year or more away. This bug isn't going away quietly and infection rates are likely to spool upward once restrictions are lifted. That means there will be some risk involved in going to public places and a pretty good chance a lot of people will limit that risk when things begin to open. Once there's a vaccine, attitudes will moderate. But that's not happening soon.

Even when it's risk-free to go out again, will people go? Keep in mind that many small businesses, including breweries, pubs and taprooms, won't reopen when this shitstorm subsides. Or they'll have limited payrolls. The pandemic is delivering a monstrous hit to the economy and a lot of people aren't going to have jobs or disposable cash in the immediate aftermath of this thing.

Another factor that hasn't been widely discussed is that people are experiencing new things. They're doing things at home that they've never done. I saw my neighbor cutting her son's hair. I see people gardening and cooking and doing things around the house that they haven't been doing forever. It's fair to wonder how much of that carries over when things reopen.

In beer, it's been interesting to watch the creative responses to the closure of bars, restaurants, pubs and taprooms. Draft died a quick death in the wake of stay at home directives. Places that were never interested in packaging beer for retail sale have been forced to do just that. Boneyard, Barley Brown's and Rosenstadt, for example. It was package or perish. Beer-to-go and by delivery are part of that,

These sales models aren't really sustainable for smaller breweries. Selling draft beer direct to consumers is a good business. Kegs in distribution are okay. But packaging and distributing add cost and offer lower margins. Same goes for delivery of packaged product. Aspects of these "revised" models may carry on in some form when we emerge from the pandemic. But these are really emergency measures put into play to keep places afloat.

Creative strategies won't be enough. There will be brewery failures, lots of them. More than 46 percent of breweries surveyed by the Brewers Association reported they could survive only one to three months. Nearly 13 percent said they would last a month or less. There were more than 8,000 breweries in the United States prior to the pandemic. We may lose a third of them.

Keep in mind that more than half of the craft breweries we have today opened in the last five years. Also keep in mind that those breweries contributed 94 percent of craft growth in 2019, while breweries that opened in 2014 or earlier contributed just 6 percent. Shocking. That point was made by Bart Watson in his State of the Industry presentation at the Craft Brewers Conference.

There's an important point to be made here, which is that newer breweries succeeded primarily by selling directly to consumers in draft, specialty bottles and premium 4-packs. A huge percentage of newer brewers adopted that model, which the pandemic has now laid low. Watson, in his presentation, wondered if perhaps too many have bet on the direct strategy. We shall see.

While there will be fewer brewers on the other side of the pandemic, there will also be fewer places buying beer. As Watson pointed out in his talk, a huge number of bars and restaurants aren't going to reopen. That number will be significantly larger than the number of breweries that close. So even though there will be fewer breweries, they will be competing for far fewer tap handles in the establishments that do survive. How this plays out is uncertain.

In some sense, it appears the pandemic has reopened the door for established breweries that rely on large scale production and distribution to grocery and retail chains. Beer sales in off premise channels are up, which may provide a boost for larger craft breweries that have been losing market share to upstarts who own the direct to consumer market, but can't effectively compete in grocery.

The only thing we know for sure is that craft beer, like a lot of other industries, will almost certainly look substantially different on the other side of the coronavirus mess. Exactly what it will look like remains uncertain and unpredictable.

Photo credit: Barley Brown's

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