Wine Club Newsletter - July 2020
The COVID-19 is Upending the Alcoholic Beverage Industry
So far, the impact of the COVID-19 pandemic on U.S. alcoholic beverage sales has been different from the experiences in past recessions. Alcoholic beverage sales have spiked significantly, but the impact has been uneven. Some producers have seen their sales soar, while others have seen them decimated.
According to Republic National Distributing Company (RNDC), a major, $20 billion revenue, wine and spirits distribution company, sales of spirits jumped by around 50% for the week ending March 21. Nationally, the overall increase for the week, according to Nielsen data, was a 55% spike in sales.
Significantly, according to RNDC, the rate of increase in sales of spirits declined in the last week of March, even though it continued to increase at a 20%+ rate. Not surprisingly, 1.75 liter sized bottles were showing the largest increase, while 375 ml bottles showed the smallest increase. Sales of economy and premium spirits were outselling sales of luxury, super-premium and ultra-premium by roughly two to one. The latter was consistent with historical trends, even if overall demand was elevated.
Ironically, Corona beer, whose name similarity to the Coronavirus many pundits assumed would crater its sales, saw its sales rise instead. According to Constellation Brands (STZ), sales of its flagship Corona beer soared 50%, well above the overall increase in beer sales
Not surprisingly, sales were dominated by off-premise retailers, especially mail order accounts. The anecdotal evidence is compelling. Drizly, an alcohol E-commerce platform operating in over 100 markets across the United States and Canada, saw a 300% rise in sales. Nicknamed the “Amazon of liquor,” Drizly allows consumers to obtain delivery of a variety of alcoholic beverages directly from local retailers. According to Nielsen, online spirits sales were up 243% during that week.
Liquor retailers have been classified as essential accounts in most states. Their sales results are mixed, however, depending on their customer profile. Remedy Liquor and Wine Cellar in Glendale is one of Southern California’s biggest wine and liquor retailers and has a sizable, national mail order operation. Its experiences are indicative of the plight of many liquor retailers.
According to Michael Issakhanian, the owner, overall sales are down considerably even though online sales are booming. Per Issakhanian, about 40% of the store’s revenue was driven by events—weddings, parties, receptions, etc. “That business is gone,” he says, since under the stay at home orders large gatherings of people have been banned. Likewise, purchases of high-end liquor as gifts “have also disappeared,” he notes, since people aren’t socializing like they used to. Internet sales have exploded, on the other hand, resulting in the hiring of four more staff to keep up with demand.
On-premise accounts, on the other hand, saw an even more dramatic decline in sales. It’s estimated that 85% to 95% of bars and, excluding fast food restaurants, over 80% of sit-down restaurants have been closed. According to Ozgo:
Since March 1, the restaurant industry has lost more than three million jobs and $25 billion in sales. Despite the aid offered by the Cares Act, Laurent Grandet, an analyst at investment banker Guggenheim, estimates that 20% of bars and restaurants won’t reopen. Overall, Moody has revised its 2020 forecast for restaurant industry sales from a 2% to 4% growth to a 10% decline.
Convenience stores are a significant outlet for beverage sales, especially wine and beer. Many of these stores are linked to gasoline outlets. Stay at home orders, now in 33 states covering over 90% of the U.S. population, have sharply limited driving. Additionally, consumer purchases have shifted to destination stores with large selections and bulk purchase options, like warehouse clubs or large grocery stores, and away from convenience stores.
Even though convenience stores were deemed essential outlets, they are still seeing significant declines in revenues. Last week, Casey’s (CASY) for example, the fourth largest convenience store chain with 2,146 outlets, reported significant declines in its store traffic and withdrew its 2020 guidance. Other convenience store chains are doing the same
Quick service restaurants (QSRs) are doing better since they are usually already set up for or drive through or in-store pickup. Historically, roughly 65% of QSR sales are drive through. QSRs, however, sells virtually no alcoholic beverages, so their resiliency has little impact on the beverage industry. Allowing a QSR to sell alcoholic beverages, even if it was just wine or beer, would be a boom for the beverage industry. It’s unlikely that state regulators would adopt that change, but it wouldn’t hurt to ask.
The changes in the distribution pattern have far-ranging implications for the beverage industry regardless of the overall increases in volumes. Craft beer producers, for example, rely on on-premise sales for around 70% on their revenues. They are seeing significant reductions in revenues, despite the spike in bottled beer purchases. Many craft beer producers do not even offer bottled beer.
Boutique wine producers are facing similar problems. An informal survey of Willamette Valley wine producers, for example, showed that on average the typical winery derived 25% to 35% of its volume from direct to consumer sales and the balance via distributor sales to on-premise and off-premise accounts. Revenue wise, however, the revenue split was 50-50, since direct to consumer sales are more profitable than sales to distributors.