COVID flips the script on craft brewing fortunes

By most metrics, the worst position in the craft brewing industry last year was in being a regional or national distributor.

The pandemic completely changed that.

The surprise sale of New Belgium Brewing Co. to a subsidiary of Japanese brewing conglomerate Kirin Co. Ltd. last fall was just one of several craft-brew acquisitions made by macrobrewers across the world in 2018 and 2019, even though New Belgium was the fourth-largest craft brewing brand in the U.S.

At the same time, Boulder Beer Co. sold off its distribution arm to focus on its taproom, saying at the time that the deep competition for shelf space on liquor and grocery store shelves was draining the company’s resources. It later spun off its recipes to a Denver mass-brewer for distribution and closed its taproom on Wilderness Place.

The thinking was that craft brewing in general had matured and no longer had the free growth that catapulted the industry’s increase in new barrel production through the middle part of the last decade. Major craft brands were competing against big brewers for a slice of a beer market that wasn’t growing as quickly as it did years before, and the costs of distribution cut into their bottom lines.

However, small community-focused brewers were doing relatively better by focusing on serving beer in their taprooms. The margins were significantly higher by selling beer in a pint glass or out the door in a growler, eschewing the costs of canning and actually moving the beer to retailers or restaurants.

But in mid-March, Colorado’s taprooms were cleared out to reduce the spread of the nascent COVID-19 and reversed the industry’s trendlines.

In an interview with BizWest, Brewers Association chief economist Bart Watson said most of the growth in craft brewing in recent years have come from small breweries driving sales through their taps.

Now, the brewers who were already on liquor store shelves prior to the spring of 2020 are in a far better position. In 2019, association data showed that for craft brands that were producing 100,000 cases or more, just less than a quarter had sales growth. In 2020, more than half reported growth.

Watson said it’s not a given that distributed breweries saw revenue jumps from the pandemic, but they were far more likely to see growth than they were in the pre-pandemic era.

“In general, this has benefited breweries whose business model and strategy was under a lot of pressure a couple of years ago and hurt the breweries that were growing the fastest previously,” he said.

That’s not to say that community taprooms weren’t scrambling to build to-go systems. Approximately 80% of Brewers Association members had some type of to-go sales before the pandemic, and a survey in 2020 showed about 10% added to-go, delivery or ways to sell beer other than at the bar.

Zach Sattler, a distribution representative for Rails End Brewing Co. in Broomfield, said the brewer primarily focused on selling kegs to restaurants in its distribution plan before the pandemic and in the warmer months as people visited those restaurants with outside seating.

In October, the brewery started to focus more heavily on canning runs and getting that beer onto liquor store shelves.

“People aren’t going to slow down drinking, right?” he said. “It’s just a matter of where they go for that.”

That demand for fizzy beverages both alcoholic and non-alcoholic didn’t go away; it shifted to cans and placed unprecedented stress on aluminium can producers, to the point where even beverage giant Coca-Cola Co. (NYSE: KO) started holding off on canning lesser-selling drinks.

Rails End owner Dale Reeder said smaller brewers like him aren’t getting the prioritization they need from canmakers, especially when they’re trying to compete against macro brewers and large drink makers that can offer more volume in their orders.

“The shrink-sleeves and can suppliers are taking care of their bigs, not the smallest [customers],” he said. “There’s been a lot of speculation, not necessarily from us, that they tried to push the smalls out.”

At the same time it was waiting to take delayed delivery of cans, Rails End had to figure out how to distribute the canned product to retailers and estimate how quickly it’d be until those retailers ran out.

However, the pandemic hasn’t completely extinguished in-person drinking. Reeder said while the taproom is following all health protocols, the support of the local community has stayed alive during stay-at-home.

“We have people come in every single day saying we’re not going to let this place fail, and that’s a big part of it,” he said.

Reeder said the brewery always planned to expand its distribution network, potentially as wide as across the country. The pandemic has forced the brewery to start that distribution strategy earlier than expected, but that remains the long-term goal.

At the same time, Rails End wants to hold onto the community feeling that led to its growth over the past few years.

“I think it’s going to be the same as before we shut down, the same community we have coming in here, same friends who we’ve met, the relationships that we built, they’re all going to be the same,” Rails End brewer Nate Ternes said. “Until then, we’re going to do what we can to stay alive.”

But until then, taprooms are still mostly empty or face deep capacity restrictions, even with some counties implementing COVID certification programs to allow businesses to have more people inside their walls or changing rules from state health officials.

Watson echoed the downbeat predictions that the hospitality industry at large had as the weather got colder: As COVID caseloads soar in Colorado and across the U.S., the Front Range counties were forced to enact deep capacity restrictions that kept customers out.

And while COVID vaccines are being rolled out now, the high-priority groups of nursing home residents and medical workers don’t align with the demographic groups that were filling up taprooms before the pandemic.

“For the vast majority of craft customers… they’re not going to get a vaccine until it’s widely available,” Watson said. “It’s just another contributing factor to why this is going to be a really tough winter, and breweries are going to have to rely more than ever on some of these new sales methods. They’re adjustments, but they’re adjustments away from what they do best.”