By most metrics, small and independent craft brewing companies posted solid volume growth in 2019. However, the disruption caused by the COVID-19 pandemic, which has forced many craft brewers into “survival mode,” is overshadowing 2019’s growth.
“Obviously, 2019 stats may feel somewhat out of touch in a world where things have shifted rapidly,” Brewers Association (BA) chief economist Bart Watson acknowledged during a press conference in advance of Wednesday’s “State of the Craft Brewing Industry” presentation as part of the now live-streamed Craft Brewers Conference.
“But, I think publishing this data set will allow us a good foundation to understand some of the changes that we’re experiencing in 2020,” he continued, “and understand really where craft brewing was in a solid foundation at the end of 2019, as we begin to evaluate some of the changes that have occurred to the industry and society more broadly this year.”
In 2019, BA-defined craft brewing companies held 13.6% of the beer industry’s market share by volume, and accounted for more than a quarter of the industry’s dollar sales.
“That’s for two reasons,” Watson said. “One, we just see price increases every year. So in real terms, that dollar growth would be a little bit less. But the second reason is we continue to see growth shifting to the long tail, which is more likely to be sold on-premise and at their own brewery, where margins are a little bit higher.”
Nevertheless, craft breweries have lost a considerable amount of sales in 2020 as on-premise and own-premise sales were cut off in mid-March 2020.
During a BA Power Hour webinar in early April, Nielsen CGA estimated that if social distancing measures continue through April, which is likely to be the case, BA-defined craft breweries stand to lose around 1.3 million barrels in sales. Should those measures continue into May, an additional 1.5 million barrels could be lost, Watson estimated.
“Generally, I think we can expect that 25% to 30% drop [in craft sales] to be fairly consistent until the beer business returns to some normalcy,” he said.
That’s left many craft breweries struggling to survive. According to the BA’s second impact survey, 46% of respondents said they may be forced to close their doors within the next three months if the shutdown continues.
In 2019, 294 craft breweries permanently closed. Looking ahead to 2020,Watson called COVID-19 “a shock to the system that’s going to increase those closings.”
Asked which breweries might be most at-risk of closing, Watson said the smallest breweries are the most at-risk due to relying on onsite sales and draft production.
“Certainly, if there were a draft distribution-only brewery, that’s probably the model that’s the most affected,” he said. “But, onsite sales, even if they’re seeing smaller declines, because you can make up some percentage of that in to-go, that’s a huge chunk of revenue for those breweries. So the smallest breweries are getting a vast, vast majority of their revenue from onsite sales. And even if the declines aren’t as steep as draft distribution, the revenue declines are in absolute terms typically much larger for the smallest breweries.”
Craft brewers typically over-index in on-premise sales, both at their own taprooms and through distribution. Since shutdowns began, craft brewers have reported a 95% decline in draft sales to wholesalers, which typically accounts for 27% of their volume. Onsite or “own-premise” sales declined 65%, and now account for 14% of craft brewers’ total production.
Survey results showed one small positive: Craft brewers’ packaged beer distribution increased 8% for both on- and off-premise accounts, which account for 60% of total craft production. Some states have allowed bars and restaurants to sell packaged beer and wine with takeout and delivery orders.
Responding to a question of how the current downturn compares to the recession that began in late 2007, Watson said beer and other alcoholic beverages are “recession-resistant, but not recession-proof.” Consumers are likely to continue buying beer, wine and spirits, even after they cut spending elsewhere. Since 2009, beer prices have increased, while wine and spirit prices have decreased.
“That has the potential to see beer volumes do a little bit better, if there is a recession, than wine and spirits, because wine and spirits have less room to trade down, so to speak,” Watson said.
Core craft consumers tend to be more affluent, which Watson said may help sustain craft volume.
“My guess is we will see beer lose a little bit of volume, but it will be smaller than the decline in overall consumer spending,” he said.
Watson also addressed the number of breweries in planning. The BA counted 8,275 in operation in the U.S. in 2019. Citing Alcohol and Tobacco Tax and Trade Bureau (TTB) numbers, he said there are now 11,800 active brewing permits in the U.S., of which he estimated there are around 2,000 breweries in the planning stages.
In the short-term, Watson said he expects the number of breweries in planning to decline.
“I think some percentage of people will be scared away, but we’ll also see some people who look for opportunities if we do see a significant number of breweries close,” he said.
Watson added the industry was already moving in a direction similar to the restaurant and bar industries, in which locations close and new ones open in their place.
“We were already seeing 25% to 30% of breweries that close get a new brewery going in,” he said. “And that rate may rise over the next few years as people look to get in at a lower price point than they couldn’t before.”
The way those breweries operate once they open may also change. A flaw in the taproom brewery model, which has been hailed as possibly the best way to build a brand and cash flow a brewery by selling beer directly to consumers with little to no distribution, was exposed by COVID-19. Watson said in a post-COVID-19 world, businesses will be forced to consider other revenue streams, such as beer to-go sales and direct-to-consumer sales with limited distribution, either self-distribution or through a wholesaler, where legal, “as a hedge against future shutdowns.”
A common thread in off-premise data reporting since the pandemic began is a resurgence of the nation’s largest craft brewers’ long-declining flagship offerings, which haven’t grown in months or even years. Though it may be easy to assume that troubling times inspire consumers to turn to trusted brands, Watson pointed out that these brands have much wider distribution than their smaller craft counterparts.
“How much of that is a return to familiar and comfortable versus widespread availability of those brands, their ability to buy them in 12-packs and some of the other factors we’ve talked about?” Watson asked. “I don’t know, but certainly this has provided some wind in sails of brands that have been struggling a little bit volume-wise, some of the more widely distributed brands from regional craft brewers and we’ll see if there are lasting effects or if this is just a temporary blip.”
Since March 9, off-premise dollar sales in retailers such as grocery stores, where shelves are typically stocked with products from major domestic and regional craft brewers, topped $3.4 billion, according to market research firm Nielsen.