British breweries, distributors, and pubs are left with millions of hectoliters of stock as beer industry supply chains grind to a halt, and the situation is only expected to get worse.
With monthly beer duty payments due in the next few days and Prime Minister Boris Johnson announcing a total lockdown, brewers are running out of ways to generate cash and keep stock moving. Most are attempting to offset draft losses through online sales and heavy discounting; Northern Monk Brew Co, for instance, is selling its core Pale Ale, Faith, for £2 a can—a 35% discount, and lower than its wholesale price.
(Update 3/25/20: Northern Monk clarifies that the discount on its Pale Ale was for one weekend only, and also included a VAT calculation error that discounted the beer even further than intended.)
Such an approach leaves some business owners wondering how long that can last, and how much these sales will actually cover mounting expenses. Meanwhile, no cash is moving anywhere, as businesses hold on to what little cash reserves they have. Yvan Seth, owner of wholesaler Jolly Good Beer, says he has no choice but to halt payments.
“Customers stop paying me, I stop paying brewers,” he says. “Cash flow has near ceased. All the value in the business is tied up in a bunch of stock glued to the floor.”
Seth also sees a dangerous secondary problem: dropping prices could create issues further down the supply chain and set a dangerous precedent for when pubs and taprooms finally reopen.
As the situation around the COVID-19 pandemic changes daily, it’s becoming clear that what producers and retailers do now will echo for months or even years after the crisis passes.
With draft sales now non-existent and beer going out of date thanks to the closure of all pubs, businesses within the beer industry are in dire straits. Last week, the government took a huge load off by covering 80% of workers’ pay if a business closes or reduces hours, but overhead costs go well beyond wages.
The most immediate budget item is beer duty, paid by all breweries on the quantity and strength of their beer. Her Majesty’s Revenue and Customs (HMRC) has confirmed it will take its beer duty payment from all breweries by direct debit on Wednesday, March 25, and continue to do so monthly. According to the Society for Independent Brewers (SIBA), an average member pays around £5,000 every month but for larger breweries such as Adnams, the fee could be as high as £500,000.
With monthly beer duty payments due, SIBA chief executive James Calder says this payment will “absolutely” put some small breweries out of business, despite his members raising just £11 million through beer duty tax. The government’s official line is that those who will struggle to pay should call HMRC to negotiate a postponement of collection, but Calder says his members are struggling to simply talk to HMRC staff due to call volumes (An informal Twitter poll of his members showed 20% had managed to get through and defer their payment.)
Calder says that piling up debt further down the line is not a solution anyway, and that refusing to cancel beer duty for the year is "selling hundreds of small breweries down the river."
Those that do go out of business can rightfully blame the fact that all cash flow has frozen. While pubs have been closed with wages mostly covered by the government and some rents entirely canceled, there has been little support for breweries and distributors. Seth believes Jolly Good Beer’s fate is almost out of his hands.
“Overall it is going to make [the] 2008 [Recession] look like a blip,” he says. “I am still working to a best-case scenario of pulling through this. Without both a recovery within six months and viable government backing this will not happen.”
Around 70% of Seth’s stock is in keg and cask that cannot sell while pubs are closed, but he adds that some bottle shops are still buying, and that factor keeps small invoices moving. Off-premise retailers have seen a huge spike in sales over the last two weeks (the same is happening in the U.S.), with customers either breaking social distancing advice to stock up on beer or ordering delivery. Hop Burns & Black in South London had “Christmas time” levels of online sales even before the pubs were shut, and had its biggest-ever week in the last seven days, with sales up 178% on the first week of March (before the crisis hit the U.K.) and 28% up on its strongest week in December.
“We launched a same-day delivery service throughout London and it’s gone ballistic,” says co-owner Jen Ferguson. “We’ve run out of room to put all the boxes for orders going out for local delivery, but we're absolutely gutted that our busy week has come at the cost of our friends’ pubs.”
Ferguson adds that the mix of sales has shifted slightly too, with more customers buying beer by the case and preferring to support local breweries such as Gipsy Hill Brewing Company and Villages Brewery.
But with breweries looking to shift their beer as quickly as possible and bottle shops able to buy product lines in bulk, the wholesaler is increasingly being cut out of the supply chain. Martyn Railton, managing director of wholesaler Euroboozer, is sitting on £250,000 of stock, but sympathizes with both brewers and retailers.
“If they can monetize the stock they have at the moment, in the best way possible, then they should go and do that,” he says. “Even if they were phoning our trade customers and offering them the same price that they offer us, I would understand it.”
With such fundamental shifts in the supply system and the threat of stock going out of date, price has become a sensitive topic for everyone. Retailers are able to buy according to demand, but many breweries have full cold stores and have been forced to discount heavily. Fourpure Brewing Company is selling a case of its West Coast IPA for just £38, while you can get 12 cans of BrewDog Punk IPA for just £15, which, at just £1.25 per unit, is a drop of 30% on a single bottle. Such pricing is driving a wedge between producers and retailers.
“Offering trade prices to the consumer is a big error,” says Seth. “There's an oversupply of course, but now there's a race to the bottom and we have three tiers all with the same beer. We all need money in the door somehow, I just don't think it needs to be done in such a panic, knee-jerk-reaction sort of way.”
The strategy could lead to an all-out price war when the pubs reopen, with thousands of breweries all trying to sell short-dated stock. Some breweries have already started preparing for the worst to be over. Pressure Drop Brewing in North London hasn’t discounted any brands on its online shop and still sold out of its signature beer, Pale Fire, at £3.70 a can. It has, in part, achieved that by offering any customer who buys a full case the chance to nominate their favorite beer retailer or pub, which will then receive a £25 discount on their next wholesale order placed with the brewery. Abbeydale Brewery in Sheffield has extended the same offer with a £10 discount.
Pressure Drop hopes this tactic will help pubs with cash-flow issues, but is also a strategy designed to push Pressure Drop to the top of the list when it’s time to call local breweries to stock shelves.
“We know how interconnected our industry is and we all rely on each other to survive,” says Pressure Drop cofounder Graham O’Brien. “We had a directors’ meeting to decide once this is over, how are we all going to recover? We tried to find the balance of a discount that was meaningful but didn’t ruin us.”
O’Brien hopes that everyone else, at all points in the supply chain, finds a way to strike that balance, too.
Additional reporting for this story courtesy of Lily Waite.
Words by Jonny Garrett