While government response to Covid-19 is exceptionally
fluid, the industry can learn from lessons of the past on what to expect going
forward. In the last two decades, September 11th and the Great Recession both
demonstrated vital dynamics that will likely be in play again – the resilience
of the industry overall to weather storms and the shift in consumption patterns
from On-Premise to Off-Premise establishments.
Through both these prior events, overall industry volumes
and consumption patterns held steady, and the loss of consumer expenditure
dollars was attributable to channel shift and the significant markups in the
On-Premise.
Given the recent announcements of mandated restaurant and
bar closures, On-Premise volumes and consumer spending will take a dramatic hit
for the foreseeable future as they have in the past. And, it becomes all the
more critical for Off-Premise establishments to remain open and stocked (of
which Pennsylvania’s decision to close its state wine and spirits stores is
ideally a one-off rather than an indicator of future trends).
On-Premise operators will see the most significant negative
impact of these closure mandates (for reference: in 2019 On-Premise contributed
19% of Beer volume and 45% of spending, 19% of Spirits volume and 49% of
spending, and 16% of Wine volume and 38% of spending). Conversely, Off-Premise
operators may see an increase in volume and spending as consumers shift their
consumption locations. Wholesalers, Importers, and Producers may see short-term
decreases, though they will likely recover over the medium term.
With the disruption to business and people’s livelihoods,
cash will be a priority (and, as always, “king”) moving forward which
may result in:
- On-Premise operators may delay or be unable to
pay bills to their suppliers, including wholesalers.
- These delayed collections may cause some cash
strains on wholesalers who will reduce inventories to conserve cash.
- This inventory reduction will then reduce the
cash flow of importers and producers.
- Based on history, given a cash flow shortfall,
companies may make decisions to cut back on staffing and purchasing, which may
be pragmatic in the short term but may make it more challenging to regain
business when this crisis passes.
That said, there are some ways to minimize the volume
impacts on the industry:
- An old saying in the Beverage Alcohol business
is “when times are good people drink when times are bad people drink more.”
- With people at home for an extended period,
there may be more opportunities to enjoy an occasional glass of Beer, Spirits,
or Wine.
- Wholesalers may want to consider expanding
credit limits for retailers on a case by case basis as their business
increases.
- The industry needs to make sure that individuals
can restock their pantry holdings of beverage alcohol products. As such, Industry
organizations should attempt to assure that stores selling beverage alcohol can
remain open if other closures are mandated.
- Companies that can sell direct to consumers
should consider opportunities for their customers to buy direct and have home
delivery – included possible exclusive sales.
- Producers need to keep operating to have
inventory available, so industry organizations need to consider this when
speaking with the government.
Ultimately, the hospitality industry is going to be
drastically impacted by the mandated closure of bars and restaurants in many
locales. The ability to sell for take-out or delivery will recover some
revenues. These actions will protect
some of the back of the house positions.
These activities will not make up for the full revenue impact of
mandated closures as On-Premise operators are reliant on the margins from their
beverage alcohol sales. Wait staff who are highly dependent upon tip income
will see the most significant impact.
The Beverage Alcohol Industry is highly reliant on the
hospitality business to build brands over the long term. A prolonged closure of restaurants and bars
could change the hospitality landscape in a way that will have long term
negative impacts. Some possible actions
that the industry might consider are:
- Where long term credit-worthiness is apparent,
wholesalers might extend credit terms.
Extending credit terms will likely require the approval of state liquor
authorities. If wholesalers extend
credit terms to the hospitality sector, suppliers might consider extending some
terms for wholesalers.
- The Beverage Alcohol Industry will see a
reduction in expenses with a decrease in dining out. Rather than banking these savings, the
industry might consider:
- Identify existing charities for donations that
can immediately assist hospitality employees impacted by this event.
- Consider adopting local establishments to assist
staff members directly. Tied house
issues will need to be considered, and possible waivers requested from state
liquor authorities.
While the dynamics of this event are continually evolving, the
key to remember is that like past crises, this too shall pass, and decisions
going forward are for survival in the short term as well as long term strengths.
