Michigan’s craft beverage industry is facing a challenge with the economic fallout from the coronavirus pandemic that is unlike any other in its history.
Many companies have been completely closed for weeks as a result of state-mandated orders to end all in-person dining and drinking in their establishments in an effort to curb the spread of COVID-19. For the first time in many of their histories, the owners of breweries, distilleries, wineries and cideries have been forced to lay off staff members — their companies’ direct connections with consumers in their taprooms and bars.
The craft beverage companies that remain open are leveraging skeleton crews for to-go orders, curbside pickup or home delivery of beverages and food. Meanwhile, distilleries have repurposed their stills to produce ethanol in an effort to answer the call to boost critical supplies of hand sanitizer.
These scrappy and resilient companies are finding revenue wherever they can, but few could have prepared for such an abrupt sea change that’s been brought on by the pandemic.
In a survey compiled by Boulder, Colo.-based Brewers Association in early April, 14.1 percent of respondents indicated their business could sustain for four weeks or less if the current conditions persisted. An additional 45.8 percent of respondents said their businesses could only sustain for one to three months if the social distancing measures and restrictions on sit-down service remain in place.
Extrapolating the Brewers Association data to Michigan’s approximately 357 craft breweries, it’s possible that 50 companies could already be forced to close their doors because of the loss of business related to the pandemic. Now nearly six weeks into the bar and restaurant closure in the state, another 146 breweries might not be able to hang on if the restrictions persist until mid June.
“I think that number could potentially even be higher,” said Ryan Behringer, a CPA and senior manager at Plante Moran in Southfield, referring to the markets in Grand Rapids and metro Detroit.
“In some of the more heavily concentrated areas, it seems like you really could have a coin flip of 50-50,” Behringer said. “Over the past year or two, even those small local spots had been feeling the pressure of some of their regulars being taken away from them because they were going to the spot that was one mile from their house instead of two miles or three miles.”
Based on their prevalence in the industry, the small breweries are most at risk in the current conditions, said Bart Watson, Ph.D., the chief economist for the Brewers Association.
“The secondary answer is obviously brewery balance sheets matter,” Watson said in a virtual press conference this month. “Breweries with high debt loads right now are at an additional risk.”
Craft brewery sales plummeted by 25-30 percent as a result of the coronavirus mitigation efforts that shut down key draft beer accounts at bars and restaurants. Nationwide, draft sales account for 10 percent of beer sales by volume, although vary by state, according to the Brewers Association.
Watson said the current situation perhaps has exposed a flaw in the taproom-focused business model that so many breweries have adopted in recent years as a move to root themselves within their communities, particularly as crowded store shelves limited the viability of a retail model for small producers.
“I do think this is going to force businesses to think about other revenue streams and how robust their business is to shocks,” Watson said. “A lot of this is going to go back to: What do consumers want out of all this as we come out of this? How willing are they to return to on-premise activities that we’ve seen before? … I think this is going to have long-lasting effects for how the breweries that went through this think about their business and how they build it for the future.”
As they hope to rebuild and reopen in the future, many owners of craft beverage companies that also operate restaurants told MiBiz they found the government-sponsored small business relief programs particularly lacking.
While the Small Business Administration’s Economic Injury Disaster Loan was likely their best option, the program only offered loans up to $10,000. Most owners were lured in by the loan forgiveness provisions in the Paycheck Protection Program, which offered two-year, 1-percent loans of up to 2.5 times the company’s average monthly payroll. Companies can use the loan to cover payroll and most mortgage interest, rent, and utility costs over the eight-week period after the loan is made. Forgiveness hinges on companies maintaining their payroll during that period.
Jason Spaulding, CEO of Grand Rapids-based Brewery Vivant, called the PPP “a hard pill to swallow” since the brewery and restaurant was unsure if it would be able to hire back all of its employees to pre-shutdown levels to qualify for the loan forgiveness program.
Brewery Vivant, which also includes Broad Leaf Local Beer, a restaurant and brewery in Kentwood, typically employs 75 people and qualified for $500,000 under the PPP program, which the company did not end up taking. Spaulding conservatively estimated he would be able to qualify for forgiveness of about $80,000 of the loan, and did not want to put the company at risk by repaying the remainder of the loan plus interest within a two-year period.
“It feels like the boat we were on capsized, we’re floating in the water and have to take whatever life ring they throw at us. And the one they’re throwing us is a hard pill to swallow,” Spaulding said, noting he’s currently exploring options with the CARES Act’s Employee Retention Tax Credit, but is “going to try to not make any commitments until we absolutely have to.”
Brewery Vivant has faced many “terrible choices” in recent weeks, he said. The company has deferred what outstanding bills it could, while still buying food and employing people to run the takeout program, “which is the only thing keeping us afloat.” Even so, the company is operating at a small fraction of normal revenues, Spaulding said, adding that the distribution business is “approaching zero.”
“We had to stop midstream with bills already racked up and just had to change so fast,” Spaulding said. “There’s no way to plan or adjust. I don’t know what the solution is.”
For now, the company continues to “tread water” until life goes back to normal or a better relief option materializes.
“So far, so good,” Spaulding said. “We’ve got really nice support from our community around us.”
The current market turbulence also could drive more consolidation and M&A in the craft brewing industry, which already experienced a handful of deals in the last year. For example, Detroit-based Atwater Brewery, Michigan’s fourth-largest brewery that also operates a taproom in Grand Rapids, sold in January to Tenth and Blake Beer Co., the craft division of Chicago-based Molson Coors Beverage Co. (NYSE: TAP).
“Certainly, I think we’re going to see more breweries that look at exit options, but that doesn’t necessarily mean that they’re the breweries that someone who’s on the acquiring side wants to acquire. You need to have two to make a deal,” Watson said. “I think we’ll probably get a lot of people kicking the tires, and there certainly is the possibility that the strategic platforms look to use this opportunity to buy lower if they have the cash on hand and they’re in a good financial position.”
Companies focused on being able to reopen their doors once restrictions are eased also need to start contingency planning for the post-COVID-19 realities in which customers might not be willing to immediately return to crowded situations like taprooms and tasting rooms, according to industry watchers contacted by MiBiz.
“With the guidance that we’re starting to see from public health and other places, it wouldn’t be surprising if there are going to be social distancing requirements, and it wouldn’t be surprising if there are going to be square footage limitations,” said Dennis West, president of Marquette-based Northern Initiatives, a small business lender active across the state. “The other side is consumer confidence. How are people going to feel about servers in masks and gloves if that’s what it comes down to? It is a tough time, because there’s no crystal ball yet in terms of timing for reopening and under what conditions.”
In the meantime, companies need to ensure they have enough working capital to be ready for the restart, whenever it comes, West said. He noted that current market conditions are particularly difficult for entrepreneurs to wrestle with because of the lack of clarity.
“It’s a really difficult environment,” West said. “There are two things that humans don’t tolerate well, one is isolation and the other’s uncertainty, and unfortunately we have both.”
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