As COVID-19 has accelerated existing trends in beer, breweries are now well within the window at which many reported to the Brewers Association (BA) they’d run out of cash. In early April, just shy of 46% of responding breweries said they could sustain their businesses for only one to three months under social-distancing protocols enacted in response to COVID-19. It’s early June, and they’re on the clock.
Each day that taprooms, bars, and restaurants remain closed—or open at reduced capacity—is another day breweries lose out on projected revenue. Congress has yet to pass a latest round of economic relief, and only just made crucial tweaks to the existing Payroll Protection Program (PPP)—too late for many businesses. A group of researchers that studies the corporate bankruptcy system in early May warned Congress of what could be “a flood of large corporate bankruptcies arising out of this pandemic.”
The situation is worse for small businesses. COVID-19 wasn’t a meteor that shattered a utopic American craft beer industry. Rather, the pandemic exposed fault lines that already existed, and that will linger whenever it abates. Taproom closures are a worrying sign that conventional wisdom—“focus on own-premise taprooms”—may no longer apply.
This is a jarring scenario for an industry that has come to rely heavily on the taproom model—about 40% of Brewers Association-defined “craft” growth has come from own-premise sales in each of the last three years. The pandemic has put a premium on distribution, and if a business hasn’t figured that out, data reported to the BA indicates the coming weeks could be a tipping point. The BA’s latest member survey found responding breweries have seen an average revenue drop of more than 43% since the pandemic began.
Cleophus Quealy Beer Company shuttered its taproom March 16, following its county’s shelter-at-home order. Just a day later, the San Leandro, California brewery announced it would permanently close the business on April 30, five years after it opened: “We just can’t weather the storm ahead,” the brewery posted.
While it was tempting to read this as one of the first brewery casualties of the pandemic, the reality is Cleophus Quealy was on thin ice before COVID-19.
“I can’t say at all that the business would have been thriving without the coronavirus,” says Dan Watson, the brewery’s owner. “We never reached a point of being consistently profitable.”
Last year, the brewery sold 350 barrels of beer. That’s roughly the size of the average U.S. brewery, and thanks to favorable margins on taproom sales, companies of that scale have generally been able to become revenue-positive fast despite smaller production sizes.
Watson says factors that existed years before COVID-19 took their toll. He cites increased competition from a growing number of Bay Area breweries, as well as rising labor costs. (Cleophus Quealy offered full-time employees healthcare benefits and a 401(k) match. Watson says employees earned $25-$35 an hour; for bartenders, about $10 of that came from tips.) The brewery’s landlord also nearly doubled rent last year.
The type of beers Cleophus Quealy brewed—barrel-aged Sours, 75% of which were sold through the taproom—were slow to make, and slow to sell. A bar would typically buy a sixtel from the brewery once a month. It couldn’t match the volume of breweries selling quicker-brewed and quicker-selling styles like Hazy IPAs, and couldn’t package enough beer to sell in supermarkets. Cleophus Quealy did brew an occasional IPA, but Watson admits it was too slow to pivot away from the original focus on Sours.
“We needed to adapt our strategy in order to survive and honestly we never got our hearts into it,” he says. “The market got a lot more competitive, and the styles of beer we make didn’t do us a lot of favors.”
He says producing a “boutique product” in such an expensive area became unsustainable; many breweries with similarly niche focuses eventually rely on IPAs to keep the lights on. The business has since liquidated, selling its equipment to pay staff and cover their healthcare for two months. Because Watson kept his day job in technology while running the brewery, he’s losing a sense of identity and money he’d invested, but not a primary livelihood.
“I would have loved to have been in a more successful place and a better place to weather the storm,” Watson says. “But we weren’t, and a lot of businesses aren’t.”
His observation mirrors what the BA’s survey found: many breweries are already operating with shallow cash reserves. If making ends meet is difficult under normal circumstances, how can small breweries survive when taprooms are closed and bars aren’t open to buy kegs?
Breweries with diversified revenue streams, lower operating costs, and solid retail presence are most likely to keep their heads above water. Those who are already floundering, won’t.
Several breweries have announced during the pandemic that at least one of their taprooms or brewpubs will remain closed indefinitely. Again, these decisions are easy to attribute to COVID-19, but that doesn’t tell the full story.
Take Lickinghole Creek Craft Brewery in Goochland, Virginia. CEO Lisa Pumphrey announced May 21 that the brewery’s Richmond taproom would not reopen after its initial closure following the pandemic outbreak. The company would instead focus on its Goochland production facility—a facility the brewery recently spent $14 million renovating. That renovation added 50,000 square feet of production space and a new taproom.
Eyeing a protracted economic recovery, ongoing public health crisis, and having just finished an expensive production expansion, Lickinghole Creek circled its wagons around the original facility it owns, rather than the new one it rents.
One can see a similar refocusing at 3 Floyds Brewing Co. The Munster, Indiana brewery announced in late May that it would keep its brewpub closed indefinitely, to many Midwest beer geeks’ chagrin. Co-founder Nick Floyd cited the health concerns presented by the pandemic, but it’s worth noting that the brewpub—which he’d planned to expand significantly—also competed for company resources with projects that were part of a massive overhaul of the brewery’s campus: a second canning facility and a distillery, at a reported cost of $7.5 million. In early March, the business also started the search for sales reps for New York City and New Jersey.
Floyd told The Chicago Tribune of the brewpub expansion: “There’s not enough infrastructure to support it. If we would have done that, we would be done right now for sure.”
3 Floyds had been on a production tear, selling 15% more beer in 2019 than the year prior to reach 97,750 BBLs. That’s more than double where the business was five years ago when it made about 45,000 BBLs, and it made 3 Floyds the 31st biggest BA-defined craft brewery in the country. During times of economic pressure, the sales potential in distribution must be balanced against a 70-person occupancy taproom with 50-60 employees. It’s logical that the brewery would concentrate on growing distribution rather than on its 15-year-old brewpub.
While these closures—either of taprooms or entire breweries—were accelerated by COVID-19, that’s by no means the only cause. The pandemic simply forced breweries’ hands and required them to triage parts of their businesses.
The danger in attributing closures entirely to COVID-19 lies in overlooking other weaknesses. If taproom- and draft-dependent breweries are no longer safe from economic vulnerability, the industry needs to reexamine its prevailing wisdom. The pandemic will someday recede; other pressures won’t.
Words by Kate Bernot