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Covid-19 and The Beverage Alcohol Industry

by Jon Moramarco
March 18, 2020

 

 

 

While government response to Covid-19 is exceptionally fluid, the industry can learn from lessons of the past on what to expect going forward. In the last two decades, September 11th and the Great Recession both demonstrated vital dynamics that will likely be in play again - the resilience of the industry overall to weather storms and the shift in consumption patterns from On-Premise to Off-Premise establishments.

Through both these prior events, overall industry volumes and consumption patterns held steady, and the loss of consumer expenditure dollars was attributable to channel shift and the significant markups in the On-Premise.

Given the recent announcements of mandated restaurant and bar closures, On-Premise volumes and consumer spending will take a dramatic hit for the foreseeable future as they have in the past. And, it becomes all the more critical for Off-Premise establishments to remain open and stocked (of which Pennsylvania's decision to close its state wine and spirits stores is ideally a one-off rather than an indicator of future trends).

On-Premise operators will see the most significant negative impact of these closure mandates (for reference: in 2019 On-Premise contributed 19% of Beer volume and 45% of spending, 19% of Spirits volume and 49% of spending, and 16% of Wine volume and 38% of spending). Conversely, Off-Premise operators may see an increase in volume and spending as consumers shift their consumption locations. Wholesalers, Importers, and Producers may see short-term decreases, though they will likely recover over the medium term.   

With the disruption to business and people's livelihoods, cash will be a priority (and, as always, "king") moving forward which may result in:

  • On-Premise operators may delay or be unable to pay bills to their suppliers, including wholesalers.
  • These delayed collections may cause some cash strains on wholesalers who will reduce inventories to conserve cash.
  • This inventory reduction will then reduce the cash flow of importers and producers.
  • Based on history, given a cash flow shortfall, companies may make decisions to cut back on staffing and purchasing, which may be pragmatic in the short term but may make it more challenging to regain business when this crisis passes.

That said, there are some ways to minimize the volume impacts on the industry:

  • An old saying in the Beverage Alcohol business is "when times are good people drink when times are bad people drink more."
  • With people at home for an extended period, there may be more opportunities to enjoy an occasional glass of Beer, Spirits, or Wine.
  • Wholesalers may want to consider expanding credit limits for retailers on a case by case basis as their business increases.
  • The industry needs to make sure that individuals can restock their pantry holdings of beverage alcohol products. As such, Industry organizations should attempt to assure that stores selling beverage alcohol can remain open if other closures are mandated.
  • Companies that can sell direct to consumers should consider opportunities for their customers to buy direct and have home delivery - included possible exclusive sales.
  • Producers need to keep operating to have inventory available, so industry organizations need to consider this when speaking with the government.

Ultimately, the hospitality industry is going to be drastically impacted by the mandated closure of bars and restaurants in many locales. The ability to sell for take-out or delivery will recover some revenues.  These actions will protect some of the back of the house positions.  These activities will not make up for the full revenue impact of mandated closures as On-Premise operators are reliant on the margins from their beverage alcohol sales. Wait staff who are highly dependent upon tip income will see the most significant impact.

The Beverage Alcohol Industry is highly reliant on the hospitality business to build brands over the long term.  A prolonged closure of restaurants and bars could change the hospitality landscape in a way that will have long term negative impacts.  Some possible actions that the industry might consider are:

  • Where long term credit-worthiness is apparent, wholesalers might extend credit terms.  Extending credit terms will likely require the approval of state liquor authorities.  If wholesalers extend credit terms to the hospitality sector, suppliers might consider extending some terms for wholesalers.
  • The Beverage Alcohol Industry will see a reduction in expenses with a decrease in dining out.  Rather than banking these savings, the industry might consider:
  • Identify existing charities for donations that can immediately assist hospitality employees impacted by this event.
  • Consider adopting local establishments to assist staff members directly.  Tied house issues will need to be considered, and possible waivers requested from state liquor authorities.

While the dynamics of this event are continually evolving, the key to remember is that like past crises, this too shall pass, and decisions going forward are for survival in the short term as well as long term strengths.


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