A lot has changed in the past month; most of the world has been in various degrees of lockdown, forcing many businesses to close temporarily. Some may never reopen, and for those that do, the challenge will be to see if they can survive in the ‘new normal’ of a post-COVID-19 world.
So, what will the new normal look like and how will it impact on the drinks business? Let’s start with a positive: people are still buying alcohol – let’s face it, if ever we needed a drink or two it is now! But the big change has been in the point of delivery; lack of pub sales is being taken up by ecommerce/online delivery services and purchases through off-licences and supermarkets. That in itself has further implications for the type of alcohol consumed and, because of the global restrictions, also the supply chain. So how are these changes impacting the drinks industry and can we identify who will be the winners and losers in a time of such monumental change?
The future of pubs
First of all, it’s likely that some form of social-distancing measures will last at least another 18 months, the minimum time needed to find a vaccine. Things are likely to be inconsistent between countries and even regions or towns within countries, with rolling lockdowns either applied or reduced at different times. In short – chaos – and extremely difficult for any business to plan, adapt and survive. But survive they must.
During this period, pubs and bars are likely to open last of all. The whole raison d’être behind bars is to socialise, so it is no surprise that they’ll be last in line to reopen. They arguably carry the greatest potential danger for casual re-infection. If it takes longer than 18 months to find a vaccine or a cure, then could we be witnessing the end of the bar business as we know it? It’s possible. If in doubt, you only need to remember that the whole outbreak began from just ONE asymptomatic person in Wuhan. It only takes one sick human to trigger a global pandemic.
Even when they do reopen it will be on a severely restricted basis and only those pubs with significant space (to accommodate one-metre distancing) will have any hope of surviving. Expect to see table service only, capacity numbers halved, few events, no football or sports events being shown, permanent queues for the bathrooms and no more loitering at the bar. Face masks and hand sanitisers will be everywhere. Sounds enticing? No, me neither….
So by the time the restrictions are fully lifted, the damage may already be done and many pubs will have gone under or be fundamentally repositioned as restaurants or even B&Bs. That may be the only way they will survive. Sales will not bounce back to normal any time soon, and the scars from the pandemic could be long-lasting, with people naturally less inclined to spend time together closely lumped in with strangers. It used to be a fart that could quickly clear a crowd, now it will be a sneeze…
In many ways, gradual opening is worse for bars than staying closed until they are able to open for business as usual. As I have highlighted above, it will have a huge impact on the atmosphere and the range of events these venues are able to host. Once the novelty of going back into your local has worn off, the offer, so heavily restricted, will basically be unappetising. This would also mean many venues would lose most of their income while still having to pay a high proportion of fixed costs, such as rent, utilities, staff costs etc… It’s a disaster.
Many hospitality venues have already lost money on wasted stock, especially since beer kegs have a short lifespan. The Campaign for Real Ale (CAMRA) estimated that around 50 million pints will go to waste if UK pubs stay closed until late summer. Hotels may have had to refund some reservations and several parties have been cancelled. Many of these businesses make a huge chunk of their income from catering for weddings and other parties but fewer of these will go ahead, and those that do will be severely restricted in terms of numbers and layout. Once the atmosphere at events and in pubs is so severely restricted it will lose much of its attraction to most punters.
The importance of ecommerce
The closure of bars and restaurants doesn’t mean people have stopped drinking. Many online retailers have seen a huge surge in drinks orders in the past few weeks. Master of Malt had a nearly 200% increase in sales in one week. Ecommerce is the way for any business to keep some level of income coming and we have seen many businesses opening online stores, from breweries to wineries. Many wine retailers are struggling to keep up with the orders and have had to stop taking new customers.
People are buying in bulk, reflecting what is probably an initial surge in demand at the start of the lockdown process and one that, whilst it won’t last at quite the current levels, is still a good sign of a shift in buying patterns. The main retailers (such as supermarket chains) carry limited lines and therefore it will be important for the brands or operators to be able to supply large quantities. This may be harmful for smaller, craft ventures as they aren’t able to offer the volumes the retailers require. An additional challenge for many of the craft distillers and brewers is that they may have a limited online sales presence in the first place. It isn’t easy to just suddenly reinvent yourself as an ecommerce business, but that may be the very thing they need to do (and fast) in order to survive.
The initial knee-jerk when the lockdown began was for people to buy whatever they could, as quickly as they could and, for some people, as much as they could. As ‘lockdown’ becomes the new norm and people realise that they aren’t going to starve or die of thirst, the shopping habits will become more sophisticated again, and instead of bulk-buying mainstream brands, people will target their favourite craft brands and individual bottles. But will they be able to find them?
The current climate may require suppliers to increase their B2B relationships if they want to survive. Bacardi, for example, has done just that. Now that bars aren’t buying stock, they have turned their focus to online stores and grocery stores. Bacardi may have got lucky – they have been slowly developing these ecommerce projects for the past two years, so it was reasonably easy for them to shift their focus. That will not be the same for many other suppliers who have built much of their business model around supplying pubs and restaurants.
We are likely to see a fair number of small distilleries and micro-breweries fade away due to their lowering sales and expensive upkeep. However, if they do manage to stay afloat short-term, the craft spirit brands can still try to sell their stocks later on.
The future of the supply chain
As countries continue to restrict travel and government regulations change, disruption to supply chains will be inevitable. There are likely to be new trade restrictions, changes in border controls or even tariffs, even once the current quarantine measures begin to loosen. There will be cancellations and huge delays with supply deliveries in all sectors. These social-distancing measures will have an impact on the staff available in terminals, shipping ports, warehouses, Customs and any other facilities along the way.
There are many indications that we should start focusing on local resources as much as possible. Globalisation has its benefits, but during situations such as the current pandemic, we really need to be able to rely on the local supply chain to keep more businesses afloat. Obviously, not everything can be handled locally, but companies should start looking into suppliers which are closer to their own market. Even though the cheapest supply may be the one furthest away, consumers scared by the impact of the pandemic may amplify a trend that was already in evidence before all this occurred – buying local.
In that scenario, distilleries, vineyards and breweries will need to re-evaluate each aspect of their processes – where they get the glass bottles, bottle tops, distilling parts, botanicals and other possible ingredients or items they need – and find out how these can be sourced closer to home or replaced with something local.
The businesses that are prepared for supply chain disruption are the ones who will likely recover faster. Anyone relying on supply chains that stretch to China and beyond should assess their current exposure and start looking into alternatives, ideally from geographically more convenient locations. Of course there is a cost to changing your supply chain, and companies will assess the increased cost of production alongside impact on sales or, even better, start measuring their performance using the triple bottom line: people, planet and profit. It may be that their customers demand it.
How is the drinks industry coping?
It is hard for some companies to assess the impact of this pandemic on their businesses as the future is still very unclear and no one really knows where we go from here. The closure of bars, pubs, restaurants and hotels doesn’t only damage the venue itself but also its suppliers and staff. Even by February, when the impact of the virus was barely felt, Diageo was estimating their profits this year could go down by £200 million. Companies like Diageo and Pernod Ricard can take the hit, but smaller companies who don’t have the same level of resources and cash reserves of these large corporations are likely to face a tough decision about their future.
Some venues have started to run take-away and delivery orders for both food and/or cocktails. Bacardi teamed with Deliveroo to help bars in the UK and Ireland with their cocktail deliveries. This helped some 120 bars across the UK to start their deliveries this month (from 16th April). They also launched a campaign #raiseyourspirits in support of bars and restaurants affected by COVID-19, pledging US$3 million to help the bar and restaurant community. Cocktail orders are rather tricky, especially in larger cities, and may not provide enough income to maintain the business. In fact, there may be more risks than benefits as they will need to be able to maintain the quality of their service. It is possible that some businesses are mainly using it for its marketing benefits (keeping their name in customers’ minds), but even that will be of limited value if this grinds on.
In Germany the government has waived the beer tax (approx. €650 million) to help brewers to survive the pandemic and to support their workers. Breweries can apply to suspend their tax payments until 31st December. In the UK, the Wine and Spirit Trade Association (WSTA) has asked for a duty suspension to help businesses to hold on to some of their money. BrewDog co-founders have decided to forgo all their salary for 2020, and many of BrewDog’s senior team members have volunteered to take pay cuts to be able to protect as many jobs as possible. Similar gestures have been made in a few other breweries across the UK, but will it be enough? Sadly, I doubt it.
Many venues already struggling before the pandemic will quickly go into liquidation, the lack of cash flow and the build-up of debt (even a closed pub still has regular costs such as rent, insurance, maintenance…) meaning they cannot reopen or survive reduced trading conditions.
It’s not just the on-trade, but also production, such as bottling plants, that has been hit in many countries. Distilleries may have been closed or they have temporarily swapped making spirits for producing hand sanitisers.
These are unique times.
And even once the pandemic is over, we are most likely to be left with a long painful recession. There are bound to be winners and losers, especially when you consider that sectors such as gin production are already over-saturated with new and varied producers.
In such a scenario as this, it may not be the quality of the product, or indeed the price or value it provides that determines whether a business survives or fails – it will be its distribution network and its ability to change and adapt quickly.
It is clear many hospitality venues are taking a huge hit on their sales, and some are having to close their doors permanently. Even if these venues may not have to pay their rents just now, it doesn’t mean their landlords won’t come chasing the money post lockdown. This seems more likely for pubs that are tied houses.
But there is some good news. People have not stopped drinking. It’s not that this stocking-up necessarily means that people are drinking (a lot) more or all at once, it is simply just replacing all those drinks we would normally consume outside our homes. Many are now enjoying their weekend catch-up and drinks through video calls, a habit that is likely stay well into the future. People are also taking advantage of various discounts, as many brands are competing to stay relevant during this unusual time.
These are unprecedented times and the future is very uncertain. But things will settle down and we will adjust to the ‘new normal’. We always do.
Would you go to a crowded pub as normal? Have you taken the advantage of any online drink offers?