Adapt or die: Evolution will help breweries survive


It is not the strongest who survives but the one that is best able to adapt itself to the environment in which it finds itself, according to evolutionists, and this has never been more true in the face of the unprecedented crisis of COVID-19.

Here, two very different experts weigh in on the effects of the COVID-19 pandemic on the brewing and hospitality industry, discussing what we might expect and what businesses should be thinking about to help their survival and viability in the medium term.

“What’s going on and why this is so challenging for everyone is that we’re talking about very fast-moving change and restrictions on peoples’ activity,” explained Dr. André Sammartino, Associate Professor in the Department of Management & Marketing at the University of Melbourne.

“There is not one player in this market that has a sense of what next week might look like, or next month, or how long it is going to last.”

To help, the government has implemented a range of measures from wage subsidies via JobKeeper to business support grants and this week, a rent relief package. But that doesn’t mean that businesses can rest on their laurels or rely fully on government assistance to keep them afloat at this difficult time.

It is an especially painful situation for businesses who were previously solid and profit-making, who now, through no fault of their own, may be on the breadline.

“If four weeks ago you’d asked me what the most viable business model, I and anyone in this space would have said having your own taproom. Selling direct to your customers in the taproom is by far the most financially sensible thing to do. Now it’s those that are having to re-imagine what they do the most,” Dr Sammartino said.

“The high uncertainty means that people have to move really fast, prioritise who they work with and who they have the most honest and frank conversations with.”

Hear Professor Sam Holloway discuss pre-COVID-19 strategies for brewers on an episode of Beer is a Conversation just two months ago

Craig Dangar is principal consultant at Brisbane-based CD Restructure and Tax Advisory, which provides advice on tax and restructuring business assets. He recently wrote a blog on how to put your business in ‘hibernation’ with useful tips on communicating with banks, landlords and other stakeholders.

Dangar said even if things seemed bleak for a business, they should not give up hope yet.

“One thing I’d say to businesses is don’t bring in the liquidators. There’s a lot of information around at the moment.

“Communication is everything. If you’ve got an accountant they should know what they’re doing, but nothing will change in the next fortnight. Once you go to insolvency there is no coming back from it.

“The rules have changed, the ability to recover money has dramatically changed overnight. We have time.”

Hardest hit

Dangar explained that while small businesses would certainly be hurt and there may be some casualties, in the hospitality space it may be surprising to hear that big box pubs are also at high risk of closure.

“Some of these big pokie providers, I don’t know how they will survive, especially with the amount of debt they have and with the drop in property values, there’s no way they’re in a strong financial position to weather this,” Dangar said.

“If you look at some of the older pubs, they’re spending heaps on maintenance already.

“The value of the pub has diminished and the turnover drop is so dramatic that commercially many of these are not in a position to reopen.”

He said inevitably regional towns would be hit hard as well.

“Some are already teetering. If you look at a regional town in NSW, at this rate only half might re-open. They just don’t have the financial capacity to hold on.”

However in the brewing industry it might be a little bit different, according to Dr Sammartino.

“From the outside looking in, the craft or indie brewing sector is an intriguing sector, it’s been a growth sector for a decade and a half.

“We’ve had very few business failures really, much lower than what you might expect, particularly in a market that intersects with such a mature one.

“Part of the reason we don’t see them is because a lot of failures happen before they start, there are people that don’t get off the drawing board.”

As such, while new breweries pop up all the time, there is a well-established customer base and supply chain, and much less movement in the industry in terms of closures.

“This also means that there is a lot of goodwill in the sector, and in the supply chain in particular,” he said.

Indeed many suppliers, including Bintani, HPA, Cryer Malt and others are still operating at capacity and looking to support the industry, whilst major retailers including the Endeavour Drinks Group and Coles are rallying behind breweries too.

Closing businesses

Closures during and immediately after this period will be inevitable, according to the experts. The IBA has predicted it could cause as many as 50 per cent of the independent breweries in Australia to close.

One of the biggest bills a brewery or any business faces, next to wages and ingredients, is rent. Despite commercial rent relief being brought in this week, the code allows a lot of room to manoeuvre to enable landlords and tenants to come up with “tailored” agreements.

Dangar said that every commercial landlord would be different, and some will be more lenient than others. However even these measures and agreements might not prevent businesses closing.

“Some people will think, I may as well close my doors now and start from scratch,” Dangar explained.

“There will be a lot of businesses in the next month where people will just walk, they’ll turn to their landlord and just say no, we’re leaving, and the cost of recovery will be just too high for the landlord to chase.”

However this doesn’t mean businesses will be gone for good.

“It’s not hard to refit a venue. Some people are talking about having a year off. So you won’t recover that immediately,” he explained.

But while in the short to medium term this will have an impact on the industry and the economy, there may be some small silver linings.

“The problem is that there has been a long period of time when the situation has been in the landlord’s favour, for the past 10 to 15 years,” Dangar said.

Rent, he said, was totally disproportionate to many businesses’ revenues.

“Originally it was around 28 per cent of revenue, and now it can be over 40 per cent. Rent has been going up, but what we’re finding is that even 15 per cent is too high.”

So with landlords desperate to attract businesses back, the end of the COVID-19 crisis may be an opportunity to turn the commercial rent space into a tenants’ market.

Changing habits

Another outcome to expect, the experts said, was changing consumer habits in the hospitality space.

Breweries are currently undertaking an industry-wide refocus on packaged beer, online sales and deliveries.

“Most breweries are being smart and pivoting to packaged. They are scrambling to get everything packaged and building the channels to sell the packaged product directly to consumers in most instances,” explained Dr Sammartino.

“My Facebook feed is filling up with breweries offering a mixed slab of various things. That’s great, that’s what you need to do to sustain your cash flow for the next month.

“But there are some goodwill questions even at the consumer end. We can all help local and keep it alive, but there are only so many slabs of beer that any of us can buy.”

With the alcohol limitations being brought in (at state government level in Western Australia and through industry body Retail Drinks voluntary purchasing limits) this is only going to be exacerbated.

“I would hope people aren’t building their business model on that being sustainable,” Dr Sammartino said.

“The question is, in two months time will there still be as much demand? Smart folks out there are thinking about it and working it out.”

Indeed, a snapshot of buying habits from recent CommBank data suggests that while spending on alcohol from bottle shops and other retailers has risen 28 per cent, this is not enough to offset the 71 per cent decline in alcohol sales from venues.

Many breweries are diversifying to temper this, by launching virtual events and online beer festivals to keep interest alive, such as the Tasmanian brewers’ Isolation Beer Festival which was on last weekend, or the Beer Lounge from Aether Brewing.

But inevitably, consumers drink differently at home than they do at the taproom, and this may change even further when we come out the other side.

“The way we go out will change,” Dangar predicted. “This will change how people interact with the world – you’re not going to have 500 people in a venue any time soon. Bars and venues will be more intimate.”

It also may have an impact on how customers consume beer. Beer Cartel’s 2019 Australian Craft Beer Survey found that what now seems a relatively low percentage of people bought beer online for example.

“These are other interesting questions for brewers to be thinking about – what they can learn about revealed behaviour. To what extent people may discover that maintaining an online presence beyond the end of all this is worthwhile, if their licensing allows it,” Dr Sammartino said.

The bars and pubs will be hit hard, so it is a real question as to what they look like after the fact.

“Hopefully we’re all going to want to go back out into the world again and they can all survive, but outside the craft bubble is actually of bigger concern than inside.

“There might also be some interesting changes in terms of people packaging preferences.”

How breweries adapt now to the changing consumer landscape will determine their future survival.

“This will be the difference between some keeping doors open and some closing,” Dangar said.

If you’re struggling with any aspect of business during this time, check out the Brews News COVID-19 Resources page for tips on who to get in touch with and info on everything from online sales and deliveries to government support and subsidies.

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