Texas Gov. Greg Abbott’s June 26 order closing bars and other establishments that receive more than 51% of their gross receipts from the sale of alcoholic beverages now comes with unforeseen consequences for craft breweries.
Craft breweries that operate restaurants, such as Houston-headquartered Saint Arnold Brewing Company, are being forced to cease on-site service due to the state including beer sales to wholesalers within its calculation of the 51% threshold.
“The mental gymnastics that they had to go through to justify including our sales to distributors as part of the alcohol calculation is so absurd that I don’t see how a reasonable person can defend it,” Saint Arnold founder Brock Wagner told Brewbound.
“It doesn’t take much of a distribution business to push you over the 51%,” he added. “For us, distribution is our main business. When you look at it, we’re 90-plus% alcohol sales, according to this crazy definition that they came up with — like we’re the world’s biggest bar. For most of us, we probably hover right around the 50% mark anyway with alcohol.”
Abbott issued the order in late June as cases of COVID-19 in the state continued to rise. On Tuesday, Texas recorded a record 10,745 new COVID-19 cases, along with 87 deaths, according to William Joy, a reporter for WFAA. The number of cases over the past seven days in the state has topped 65,000, with a 7-day positivity rate of 16.89%.
Record high 10,569 hospitalizations statewide.
1,834 in DFW (two-day drop).
7-day positivity rate at record 16.89%
— William Joy (@WilliamJoy) July 14, 2020
Saint Arnold’s beer garden and restaurant didn’t open until two weeks after the state allowed the initial reopening, Wagner said. However, the establishment never offered indoor service, and instituted social distancing protocols, mask requirements and cleaning and sanitation programs for its outdoor service.
Although on-site service has closed, Saint Arnold will continue to offer curbside food and beer to-go sales.
The restaurant and beer garden is located in a separate building 300 feet away from its brewery and packaging operations. The restaurant operation has its own management team and work force, and it is accounted for separately from the brewing operations, Wagner said.
Saint Arnold, with reported production of 67,591 barrels in 2019, is the second largest craft brewery in Texas, as defined by the Brewers Association. Wagner estimated that more than 20% of Saint Arnold’s revenue was lost by the shutdown of the beer garden, and overall revenue is down for the year.
“We’re not down as far as I thought we were going to be down,” he said. “But our total revenues will probably be down 25% this year, I would guess.“
In the fallout of the restaurant closure, Saint Arnold could be forced to lay off 75 of the establishment’s 100 workers unless the state amends its definition of what is considered a bar, Wagner said.
“I’m really hoping to get resolution and get everybody back to work,” he said. “If we don’t get resolution this week, that would certainly be a negative and we would have to start looking at it a lot harder.”
Wagner said he’s had extensive conversations with the Texas Alcoholic Beverage Commission (TABC), which told him the governor’s office has set the direction for the shutdown. Wagner said his correspondence with the governor’s office has been largely unreturned beyond a single text saying the governor’s office would not be addressing the situation that due to pending litigation, likely referring to a lawsuit brought by several Texas bar owners challenging the constitutionality of the latest shutdown.
Wagner hasn’t ruled out his own lawsuit against the state.
“I have to look at all avenues,” he said. “And when the government is reaching conclusions that a reasonable person would not reach and continuing to maintain those positions, I mean you have to look at the legal route, unfortunately.”
The distinction between being considered a restaurant and a bar is the difference between maintaining Saint Arnold’s team and being forced to cut staff.
“We’ve created the safest place you could possibly have, but also with this reduced seating, we’re not making any money,” he said. “We’re not even doing this for the money. We’re just trying to keep our people employed.”
In an effort to keep those workers employed, Saint Arnold applied for and received between $1-$2 million via the federal Paycheck Protection Program, with provisions for forgiveness written into the loan.
“Whereas we were looking to be in line to probably get all of it forgiven, with this change, it probably changes our position and we’ll get about 50% of it [forgiven],” he said. “We’ll probably have to pay back the other 50%.”
The bar designation could also come with longer term consequences. Wagner said he fears closures of establishments deemed bars could last through the end of 2020.
“That is a scary prospect to me,” he said.
Even if the state alters the designation of what constitutes a bar, Wagner said he could envision a scenario in which restaurants are also forced to shutter as cases of COVID-19 continue to increase in the state. Even if restaurants are required to shut down, Wagner said he would expect them to reopen within weeks, not months.
Saint Arnold isn’t alone in seeking changes to the designation. The Texas Restaurant Association (TRA) is encouraging consumers to contact their elected officials to encourage them to clarify the definition of a restaurant. The TRA estimates that at least 1,500 restaurants have closed under the governor’s order, which has put 35,000 people out of work.
“Many of these businesses look and feel like a restaurant in every practical sense and are regulated as restaurants at the local level,” the organization wrote. “Further, many of them have invested significant resources to retrain staff, change their floor plan to require social distancing, and purchase PPE for their employees and guests. These are not the businesses that had large crowds at the bar, and yet, they were closed with a few hours’ notice.
“Many restaurants cross the 51% threshold simply because they sell higher-end wine or cocktails, not because they operate like a bar,” the organization added.
The TRA is asking the state to define restaurants as those that operate a permanent kitchen on its premises with an exhaust hood and fire suppression system; operates a kitchen during all hours of business and offers multiple entrees for on-premise consumption; and only serves patrons seated in accordance with social distancing protocols established for restaurants.
“These criteria are clear, objective, and easy to enforce,” the group said. “Also, they better reflect the practical realities of a restaurant versus a bar.”