In 38 states and the District of Columbia, governments have urged residents to stay home as restaurants and bars remain closed to the public. Without these on-premise accounts, as well as events like concerts or parties, demand for draft beer has shrunk considerably and is almost nonexistent in about two-thirds of the country.
Even still, there is plenty of beer currently in kegs, languishing in brewery coolers and distributor warehouses.
Breweries large and small face significant losses if that draft beer goes out of code—essentially, if it passes its “best by” date—before bars and restaurants reopen. Facing grave COVID-19 predictions from U.S. public health officials, President Trump last weekend extended federal social distancing guidelines through April, while at least one state, Virginia, has extended its stay-at-home order to June 10. This long timeline and lack of understanding of when things may actually return to normal means breweries have stopped packaging or shipping kegs, and those with packaging capabilities are redirecting inventory to cans and bottles.
But the financial losses on draft beer for the month of March are sure to be significant. According to figures from Lester Jones, chief economist for the National Beer Wholesalers Association, 17 million barrels of beer existed in the American marketplace in March 2019, with taproom and brewpub volume representing 1.5-2% of the total. Using those figures, he estimates the industry’s maximum loss exposure for March 2020 would be 250,000-300,000 BBLs, roughly the size of what Brooklyn Brewery produces in a year. April generally sees 17-18 million BBLs sold, so he anticipates losses for this month would be similar.
“The shift to packaging into bottles and cans wherever possible will help minimize losses,” he says. “It’s all a big moving target at this point.”
Breweries with any portion of their beer currently in kegs will doubtless see financial losses on those products. Nationally, draft beer accounts for 18-20% of annual beer sales; in many states, those sales have dried up entirely.
If the entirety of America’s on-premise sales disappeared for any 60-day stretch between March, April, and May, the loss would total 5 million barrels of beer. Kegs sitting unsold in storage are essentially in a graveyard; one brewery referred to its stacks of kegs as “Death Row for beer.” As social distancing guidelines remain in place and stretch well into the future, breweries are seeking ways to mitigate those losses. Any revenue right now is a win.
Draft beer that goes out of code before it can be sold is liquid money gone down the drain. Any losses that come from having to dump out-of-date beer hit at a time when the overall economy is slowing and shoppers’ anxiety is battering consumer spending. Breweries may be able to recoup some of their losses on draft beer in a few key ways:
Repackaging in cans or bottles
Selling kegs directly to consumers
Applying for a refund of excise taxes paid on beer poured down the drain
Brewers are quick to add, however, that none of these strategies will entirely make up for lost sales.
Breweries with canning and bottling capabilities (and especially those with grocery placements or ecommerce visibility) have an advantage over those without as demand for packaged beer rises. Through the first three full weeks of sales in March, grocery, convenience, and liquor store chains saw packaged beer sales increase 17% in volume compared to the same time last year, according to IRI, a market research company.
Lagunitas Brewing Company, for example, has completely stopped packaging beer in kegs, diverting production into cans and bottles. This is no insignificant amount of beer; Lagunitas sold 83,278 BBLs of packaged beer through convenience stores, grocery, and other retailers tracked by IRI in the 12-week period ending March 1. The brewery says it is still sitting on previously filled kegs, which it will sell to distributors if requested—and, crucially, if the beer is still fresh.
That’s a huge “if,” though. Distributors won’t want to buy kegs until there’s a clear opening date for on-premise accounts—a date that, even when speaking hopefully, health officials push back each week. Lagunitas, which is wholly owned by Heineken, produces the best-selling IPA in the country by dollar sales and second-best by volume, making the decision to halt draft production a significant one for the industry overall.
Molson Coors Beverage Company has taken this a step further and on March 26 announced it would reimburse its distributors for half the cost of its untapped kegs. While buy-backs have always existed for out-of-code or recalled beer, a buy-back of this scale is unprecedented.
According to a Molson Coors letter to distributors quoted by Beer Business Daily, the company offered “a 50/50 split with distributors for the cost of untapped Molson Coors and craft partner kegs—whether they’re in your distributor warehouse or at retail.” Molson Coors also stated it would evenly split any excise tax reimbursements on those kegs with its distributors.
This is an extraordinary step: Molson Coors is admitting to wholesalers that draft beer sales are dead for the foreseeable future, and it’s willing to give those wholesalers monetary support because of it. Molson Coors bets it can absorb this financial hit given the company’s size, but it still doesn’t come at a comfortable time. In January, Molson Coors restructured its business units to prioritize non-beer beverages as traditional brands including Miller Lite, Coors Light, Blue Moon, and Leinenkugel’s underperformed.
Small breweries have also bought draft inventory back from their distributors. In some cases, the breweries will dispose of that beer, and then hope to take a tax or insurance deduction. Breweries say they’re navigating exactly what those deductions would be and whether insurance policies will cover destroyed kegged beer under disaster relief clauses. The U.S. Alcohol and Tobacco Tax and Trade Bureau (TTB) threw breweries a life preserver on March 31 when it announced a 90-day extension for them to file excise and other tax documentation and payments.
But the financial risk is still imminent: Small breweries have for years relied on draft sales—whether in their own taprooms or at bars and restaurants—to grow their businesses. Now, they not only have to reverse course, but many will spend money to buy back their own beer without any open taproom to sell it through. Some breweries are buying kegs back from distributors with the intention of repackaging that beer in cans or bottles, hoping to recoup a portion of losses that way.
Andrew Nations, president of Great Raft Brewing in Shreveport, Louisiana, says he tried to get ahead of the issue three weeks ago when he realized how many Great Raft kegs were with distributors, particularly in southern Louisiana, an area hard hit by the COVID-19 pandemic. Nations estimates he’s bought back somewhere between $20,000-$40,000 worth of untapped, kegged beers from distributors, all of which has been kept refrigerated in trucks and warehouses throughout this time.
“The thought was: I can figure out something to do with this,” Nations says.
Great Raft has moved that previously kegged beer back to brite tanks, has run it through lab analytics to make sure there are no quality issues, and is repackaging it in cans. The process takes three-to-four days and is not efficient, Nations admits. There are very small volume losses moving beer from kegs to brite tanks, he adds, but it gives his staff something to do.
“We’re probably not making much money on that. … Economically I haven’t looked at freight cost, can cost, and margins, but I wanted to do this quickly before date codes came into play,” he says.
Nations adds that he’s also glad to regain control of the physical keg containers, which are brewery property. According to the Brewers Association, keg loss costs the U.S. brewing industry between 46 cents and $1.37 per barrel of annual keg production, totalling somewhere between $5 and $15 million a year.
Date codes are also top of mind for other small breweries. 2nd Shift Brewing in St. Louis ramped up production over the past couple months on its way to producing what is estimated to be about 5,000 BBLs of beer this year. It intended to launch in five new markets to hit that target, though those launches are now on hold. COVID-19 presents a significant setback, and now 2nd Shift and its distributors are sitting on excess kegs that shuttered bars and restaurants aren’t buying.
Co-owner Libby Crider says she anticipates the brewery will buy some kegs back from distributors, and estimates the brewery has lost two-thirds of its business—both in taproom sales and draft beer sales—over the past few weeks.
“I’m not going to sacrifice our determination to put out the freshest beer possible,” Crider says. “Any beer [that’s been in kegs] over 120 days we will dump personally in-house, which we’ve never had to do before. If distributors have stuff that’s 90 days old, we’ll buy that back because it would take a month for an account to get that keg and tap it.”
Bent Water Brewing in Lynn, Massachusetts has begun to take back kegs from its distributors in addition to the kegs it self-distributed to restaurants and bars in eastern Massachusetts. The state forced on-premise accounts to close March 17.
President and co-founder Aaron Reames is most concerned about on-premise accounts that may be closed for weeks, potentially leaving draft lines in an undesirable condition, which can negatively impact the quality of the beer that’s later run through them. Bent Water plans to buy back as many kegs as it can, clean them, conduct any necessary maintenance, and replace the kegs with fresh beer once restaurants and bars reopen.
But because a brewery typically pays a wholesaler for the cost of any kegs it takes back plus a restocking fee, replacing these kegs adds up quickly.
“We’re already doing financial calculations to figure out how much we’ll spend buying back all the kegs at a premium. It’s expensive, but it’s the right thing to do if you are serious about quality,” Reames says. “It’s going to be challenging for some [breweries], unfortunately.”
2nd Shift also sells kegs directly to customers from the brewery, something it’s done since it opened in 2010. But 2nd Shift is now discounting those kegs to wholesale pricing plus 10%. That means kegs of dunkel lager, blonde ale and session lager that would have previously cost customers $75 are now available for $45, and kegs of stouts and hoppier styles that would have previously cost $100 are now sold for $75, plus a refundable $75 keg deposit.
There’s no firm deadline to return the kegs, Crider says, as she doesn’t want to encourage people to consume a high volume of beer too quickly.
“In the past I’ve been very hesitant and defensive of the kegs and really conscious of getting those back because they are such a cost to the brewery,” Crider says. “Now I don’t have that luxury.”
Selling kegs directly to consumers for narrow profits—to say nothing of buying kegs back from distributors only to pour the beer down a drain—isn’t the long-term solution to keeping breweries afloat financially. But across conversations with GBH, industry professionals say the moves satisfy four priorities:
Recouping some losses on kegs
Satisfying distributors by offering them some reimbursement for kegs that are likely to go out of code before they can be sold
Removing out-of-code beer from the marketplace
Keeping brewery staff busy so the brewery can justify paying them
“You think of the millions of dollars of beer [distributors] have sitting in their warehouses,” Nations says. “Buying it back is maybe not economical, but it’s better than that beer going out of stock and distributors dumping it. I’d rather take action now than in 30 or 60 days.”
So many economic outcomes within the beer industry depend on how long social distancing and shelter-in-place guidelines remain in effect. Draft beer inventory is no exception. If on-premise accounts reopen and customers return to them within two months, there is still a chance some current kegged inventory could eventually be sold. But with each passing day, more beer intended for draft lines becomes destined not for customers but for the drain, taking profits with it.
Words by Kate Bernot