INSIGHTS: COVID’S IMPACT ON THE BEER INDUSTRY
Guest Columnist: Lester Jones, Chief Economist, National Beer Wholesalers Association
Across the country, COVID-19’s impact on the beverage alcohol industry is overwhelming since Mid-March (week 12) of 2020. From on-premise closures to supply chain challenges, the beer market is seeing significant disruptions. Several trends that the beer industry is explicitly experiencing drive home the wider socio-economic impacts COVID-19 has had on the economy in general.
On Premise – 18 Percent of All industry volumes
The U.S. marketplace has almost 400,000 licensed on-premise establishments, including bars, taverns, taprooms, restaurants, night clubs, hotels and concessioners. When on-premise licensees were forced to close their doors, brewers, distributors and retailers around the U.S. were left grappling with what do to with the untapped kegs of draught beer. Removing spoiled beer and replacing with fresh draft beer has been a logistical challenge for the industry. The finely tuned one-way logistics machine of the industry suddenly found itself having to reverse gears and pull large quantities of beer out of retail — an exercise it had only performed in the past for product recalls in limited scope and volume. Recycling some of the spoiled beer into ethanol and hand sanitizers has been a bright spot amidst on going hardships. The continued loss of on-premise drinking occasions at bars, taverns, restaurants and stadium venues continue to decimate traditional on-premise employment, tax collections and beer sales. As of July 2020, the total beer industry is down around 2.0 percent on volumes despite strong off-premise sales. Draft beer share of total volume has climbed back to about 2-3 percent of all beers sales, far below its 8-10 percent historical share.
Off-premise beer sales are up
With most of the 400,000 on-premise venues shut down, the 240,000 off-premise grocery, convenience and liquor store establishments remained open for beer consumers. These relatively few stores saw an impressive sales boom. A logical outcome as 100 million beer consumers suddenly found their options (outlets) for purchasing beer dwindle by almost two thirds. Through July of 2020, sales data show that off-premise beer sales are up an impressive 19 percent on dollar sales and 15 percent on volumes. While a significant growth trend, these gains are still not enough to make up for lost on premise volumes.
Higher demand for cans as the preferred pandemic package
The beer business, like any other business, relies on forecast for ordering supplies. COIVD-19 changed all that in March. Since the sale of alcohol in restaurants and bars has shifted to alcohol to-go, and there is a higher demand for packaged beer at the off-premise, the sale of package beer is now booming. Also, taprooms and breweries are trying to move their taproom on-premise drinking occasions into canned off-premise sales. All these factors contribute to significantly higher (unplanned) demand for aluminum cans in the marketplace. Before the March COVID-19 disruption, cans had already been making strong gains on glass bottles. In 2019, the can package share of total sales reached 60 percent of volume with glass bottles at 30 percent and draft at 10 percent. With draft beer out of the marketplace for most of the late spring and early summer months of 2020, can package share rose to 67 percent, and bottle package share rose to 33 percent of total volumes. See chart below.
The final impact of COVID-19 on the economy and beer market remains to be seen. At-home consumption will remain elevated through the rest of the year, but it is unlikely that the gains will be large enough to offset the loss of on-premise businesses. Since beer is typically sold at higher prices at on-premise establishments, removing this from the beer industry tends to lower the overall beer spending amount in the economy and its overall economic impact. Lost jobs, lost wages and lower consumer spending will impact state and local revenue collections in the months ahead. Finally, the continued economic slowdown will have even more pronounced impacts on consumer buying habits. The original CARES Act expired on July 1st, leaving many unemployed consumers in dire straits. Future relief packages are certainly not going to be as generous. As the economic turmoil continues into the third quarter of 2020, significant consumer disruptions are expected for the economy and beer consumers.
ON THE ECONOMY: MAMA SAID
John Dunham, Managing Partner, John Dunham & Associates
Mama said there’ll be days like this, there’ll be days like this, mama said. (Mama said, mama said)
Mama said there’ll be days like this, there’ll be days like this, my mama said. (Mama said, mama said). Thus begins the 1961 song, written by Luther Dixon and Willie Denson and performed by the Shirelles. The song, which was actually a B-side, reached number 4 on the Billboard Hot 100 and number two on the R&B chart.
One thing that my mama often said to me when I was growing up was If you don’t have something nice to say, then don’t say anything at all. While there is a kind of early 1960s ring to this advice, I’m going to take it for today’s discussion of the economy. Honestly, it’s been very hard to say much nice about the economy ever since the government-imposed shutdowns began, but as with everything in economics, there is always the other hand.
We’ve often discussed how recessions are good for the economy in the long term because they help bring about the creative destruction that Joseph Schumpeter popularized as his theory of the business cycle. Schumpeter actually derived the concept, which he described as the process of industrial mutation that continuously revolutionizes the economic structure from within, incessantly destroying the old one, incessantly creating a new one, from Karl Marx’s Grundrisse. In his explanation of the laws of motion of a capitalist economy Marx described “the violent destruction of capital not by relations external to it, but rather as a condition of its self-preservation. The laws of motion of the capitalist system are still one of the best ways to understand the business cycle and as Marx said, the momentaneous suspension of labour and annihilation of a great portion of capital.
This suggests that we should welcome the business cycle and the effects of economic downturns, and while the current downturn is dramatically different than one created by the market itself, it may have some of the same beneficial effects on the economy in the long run.
Today, we would call what Schumpeter and Marx were talking about productivity. Without increases in productivity, an economy cannot support more workers without decreasing wages, it cannot support better living conditions on net, but rather can only shift resources from one group to another. This is exactly how the pre-capitalist world functioned. Babylon did not become wealthy without extracting gold, and grain and slaves from conquered peoples, neither did The Romans, nor the Ottomans, or the Spanish, or the Empire of Mali… well for that matter anyone. Other than for some external shocks like the invention of fire, or of irrigation or of the wheel, the economy was basically stagnant, and cultures grew by extracting wealth from other cultures. It was not until the development of the capitalist economic system that the benefits of productivity began to increase the wealth of large numbers of people. Today nearly every American citizen lives better than even the wealthy did in the middle ages.
With this as background, it is likely that the government-imposed COVID-19 depression will lead to beneficial creative destruction in at least five ways:
1) The least productive businesses will not survive: Already many old-line companies have folded, and many of these were at best zombie enterprises prior to the shutdowns. Companies like Sears Holdings, Tuesday Morning, JC Penny and Lord and Taylor were already using capital that was probably better utilized elsewhere long before COVID-19. The loss of these firms, along with likely thousands of smaller retailers, will eventually free up resources that can be better utilized elsewhere in the economy.
2) Assets will reprice: Over the past couple of decades, actions by the Federal Reserve have artificially propped up asset prices. This has made the cost of many important investments, like homes, aircraft, equipment, even art, higher than would be the case under a free market. Artificially high asset prices have made it difficult for families to purchase goods like housing, automobiles and education, while companies have had to borrow more and more to keep productive capital active. As assets reprice the cost of home ownership and opening factories will diminish, and capital will flow to where it will create the most utility.
3) There will be significant consolidation in higher education: Today, much spending on higher education is non-productive. Rarely do the costs of higher education match the benefits, even in the long term. This is particularly true for certain degree programs and at certain institutions. The reduction in demand for college will free up resources that are now being wasted on low value degree programs at marginal institutions, while at the same time, increasing the number of people learning useful trades.
4) Investment in on-line technology will finally begin to show returns: Outside of entertainment, much of the capital that has been spent on information technology has performed poorly. For decades, the investment of capital on email, websites, virtual conferences, etc. has not shown up in the productivity figures. This is likely because these investments have led to dual IT/legacy systems. The COVID-19 shutdowns are changing this as companies abandon brick and mortar offices and become virtual, or as firms decamp from expensive urban environments to the suburbs. The change in the work environment going forward has the potential to be one of the largest productivity gains coming out of the whole Coronavirus disaster.
5) There will be gains in the economy of scale in the service sector: In spite of the massive spending on things like the Paycheck Protection Program, there will be a bloodbath in the service sector in the coming months as hundreds of thousands of restaurants, stylists, dry cleaners, entertainment venues, and other similar firms find it impossible to operate. The vast majority of these will be small, high cost, low productivity firms. The government-imposed shutdowns have benefitted larger, better capitalized businesses that may be more standardized, but definitely more productive. It is simply less costly for an Applebees to make a hamburger than it is for a local diner, and less expensive for Dominos to make a pizza than it is for a local pizzeria. While this may take some of the enjoyment out of dining out or having one’s hair coiffed, it frees up capital for new and more innovative enterprises.
As we reported last month, there is something dismal about these economic benefits that will eventually result from the government-imposed shutdowns, but in the long run, higher productivity will lead to more stuff for more people. This is something that socialism promises, and the shift on the part of many young people toward supporting more socialist policies may push the economy toward work decentralization and product standardization even faster. Having only mass-produced pizza and hamburgers may have its drawbacks, but as mama said it is at least something positive (at least in economic terms) that could result from this crisis.