As on-premise consumption has ceased almost nationwide in an effort to stop the spread of the coronavirus disease COVID-19, the preservation of capital is now paramount for both packaging and taproom breweries, attorney Mike Drumm advised craft brewers during a Brewers Association (BA) Power Hour session titled “Beer in a Time of Disruption” on Monday.
“You need to stay as liquid as possible in the short term to ensure that you survive,” Drumm said.
For brewery owners whose income has slowed precipitously, Drumm said the first step is to review all contracts to account for all monetary obligations to landlords, banks, suppliers and investors, and start conversations to see if any payments can be put on hold. Expenses that are not required while taprooms are closed should be stopped, such as payments for music licensing and paid social media advertising.
Next, owners should determine their “bare minimal operating costs for the next few months,” Drumm said.
Brewery owners should start discussing the situation with their landlords and asking for help, he recommended. Options include a rent waiver, so that the tenant is not responsible for rent during this period; rent abatement, which suspends rent payments in whole or in part; or a rent deferral, which puts rent payments off for a period of time.
“Keep in mind, we’re going to start negotiations generally. We’d love for the landlord to make the first offer,” Drumm said. “And keep in mind that we may be negotiating again. Unfortunately, we don’t know how long the situation will last and what will change.”
If landlords refuse to offer relief, brewery owners should review their leases for force majeure or casualty clauses, which may bolster a legal argument.
To preserve as much capital as possible during shutdowns, Drumm said workforce reductions may be necessary.
“You are trying to preserve your brewery so that when the clouds part and the sun comes out, there is a place for your workers to come back to,” he said, noting that the decision may be difficult. “If you go out of business, that’s not helping your employees.”
Business owners have options when it comes to cutting staff: layoffs, which have no end date; furloughs, which are finite; and reducing hours. All three entitle staff to unemployment benefits in most states. Just a few of the breweries that have furloughed or laid off staff include McMenamins, Russian River, Night Shift, the Lost Abbey, Green Flash (as reported in Craft Business Daily) and Deschutes (as reported in Beer Marketer’s Insights).
“Employees should file for unemployment benefits as soon as possible to maximize the amount of compensation that they can receive,” he said. “So, if you are on the fence whether or not you are going to lay someone off, think about making that decision as soon as you can so that your employees can take advantage of some of the benefits that are being offered.”
The Keeping Workers Paid and Employed Act, pending legislation in Congress, would provide cash assistance to businesses to maintain their payroll in the form of loans that are forgiven as long as payroll is maintained, Drumm said. Loans would be retroactive to March 1.
“This would be great if this passes but you have to balance this with your immediate needs,” he said.
In the meantime, the U.S. Small Business Administration (SBA) is offering Economic Injury Disaster Loans, low-interest loans to business owners “suffering substantial economic injury” as a result of COVID-19. The loans, which come with a 3.75% interest rate for businesses, “may be used to pay fixed debts, payroll, accounts payable and other bills that can’t be paid because of the disaster’s impact,” according to the SBA.
Drumm cautioned that owners seeking loans should prepare all the necessary documents first.
“You can’t just show up to your bank and they’re going to give you money,” he said. “My recommendation would be to start preparing now just like any loan — banks are going to want tax returns, interim financials, income statement balance sheet, bank statements.”
Brewers should also consider every potential avenue for income, which includes speaking to wholesalers about their needs and plans.
“Draft sales are low or nonexistent,” Drumm said. “What is your distributor planning on doing? Do they want an increase in packaged goods? Do they want an overall decrease?”
For taproom-only breweries, Drumm suggested exploring packaging beer, selling kegs, offering home delivery or repurposing taproom space as a remote-work location.
“If you are going to get creative — at a minimum — check your insurance,” he said. “Make sure you are covered for these creative ideas.”
Drumm cautioned that business interruption insurance likely will not cover lost income due to forced closures during the pandemic.
“What business interruption insurance generally covers is the physical building. It’s a structural policy, so that if your building were burnt down, you would be able to get paid based on the lost revenue,” Drumm said. “Because it’s tied to physical property, and most of your buildings are fine, It’s just that the government is requiring a shutdown of taproom and draft sales, this policy most likely will not apply.”
Losses from coronavirus closures would likely be covered by communicable disease coverage policies, which were developed after the SARS epidemic. Drumm said he assumed most breweries don’t have this coverage, but he recommended owners file claims under their business interruption insurance.
“And while right now, business interruption policies are denying coverage, if there were to be a change in interpretation as a result of a lawsuit, you don’t want your claim barred because you didn’t make the claim,” he said. “So I would recommend that you make the claim anyway, get your denial and then add it to your contracts pile.”