Pandemic leaves Delaware craft brewing industry with hazy future

Once the state eased up restrictions, Revelation Brewing Company adapted to the new normal – and saw people eagerly come back for beer to experience some semblance of normal. | PHOTO COURTESY OF PATRICK STAGGS

Delaware’s craft brewery business boomed in the last decade, but the COVID-19 pandemic leaves the future hazy in terms of who will survive and how customers will buy the craft beer.

It’s hard to get an accurate picture of the economic fallout at this point, since breweries are seeing different revenues based on location and business models. In its mid-year survey, the national Brewers Association estimated that craft beer volumes declined around 10% in the first six months of 2020 versus the same period in 2019. But even that number may be off, with the trade association noting that it faced challenges obtaining sources like scan and tax data and seeing more variation in brewers’ performances.

Delaware breweries contributed $430 million to the state’s economy last year, and it’s an enterprise that ranges from heavy-hitters like Dogfish Head Craft Brewery, which customers can buy in almost every store in America, to small businesses like Volunteer Brewing Company that only sell drafts from its 500-square-foot taproom in Middletown.

Craft breweries across the country make about 40% of their sales from draft beer — and that revenue source dried up when bars, restaurants and taprooms closed in the early days of the pandemic.

“Everyone’s guessing what the future looks like,” said Patrick Staggs, president and brewmaster of Revelation Craft Brewing in Rehoboth Beach. “We’re doing well enough right now with to-go sales, but that’s enough to make it right now. I’m not sure it will be enough for some breweries as we head toward the winter months.”

Blue Earl Brewing Company is still going strong, but taproom sales took a hit when the state started its reopening plan. Sales were down by 50% in May and it’s had to cut back on live music events, which was an integral part of its business model. | DBT PHOTO BY KATIE TABELING

Some will close

Delaware’s craft breweries faced nearly two decades of uninterrupted growth, starting when the state law was changed to allow commercial breweries to open in the mid-1990s. Around that time, at least two breweries started operations: Iron Hill Brewery and Dogfish Head. Today, there are roughly 27 breweries in the state.

But some of them will not make it to what comes after COVID-19, and with more breweries comes more division of the market share. Claus Hagelman, sales director for Milford-based Mispillion River Brewing and a 25-year industry veteran, said he’s seen plenty of top-notch breweries close in part because they lacked capital needed to fuel brand or production expansion.

“What’s going to happen is what would have happened without COVID: some are not going to make it,” he said. “Some breweries are started because it was someone’s dream and they took their savings or their inheritance to make it happen. What they don’t realize is it’s going to require more capital to keep growing and get more equipment to grow the equity of the brand.”

Even though Delaware has not seen too many breweries close over the years, market saturation drove about 300 breweries across the nation to close for good in 2019. Banks are also more leery to write loans to breweries than they were five years ago because of the increased chance of closure, Hagelman said.

Historically, breweries make most of their revenue in the summer months and use that to carry into the wintertime. But with Delaware still capping restaurant and drinking establishments at 60% capacity amid the pandemic and some in the resort area even more limited in terms of seating, Delaware Brewers Guild Executive Director Kim Willson said it’s hard to gauge how some members are holding up.

“Some in Wilmington are doing well, but there’s others by the beach that are hurting because they’re lifted by tourism, which has taken a hit. It varies based on location, like there’s some in Dover that depend on NASCAR, which isn’t here,” she said. “I won’t lie, they’re hurting right now.”

At Revelation Brewing Company, sales are down 30% and their 25-seat taproom was slashed down to five seats. But Staggs said outdoor seating and serving out of two locations – Revelation bought the former 16 Mile Brewing Company in Georgetown last year – helped them hang on.

“It’s like anything else in the hospitality industry right now: we look like we’re doing fine, but behind the scenes we’re drained,” he said. “ We’re not going to see shutdowns until winter or early 2021.”

Ronnie Price, Blue Earl Brewing Company owner, stands on-top pallets of cans headed out to liquor stores in Delaware and Maryland. The Smryna brewery added a fifth can to its lineup and Price said he’s expanding distribution capacity to meet rising demand. | DBT PHOTO BY KATIE TABELING

On tap and in stock

Even when the pandemic ends, Staggs said he’s doubtful people will be eager to crowd Delaware’s bars like they once did before out of caution. That could mean big trouble for small breweries who rely on draft sales instead of distribution.

“I don’t think we’ll have those record-setting weekends in July and even if the restrictions lift, we may not be at 100% capacity for a while,” he said.

That could also lead to kegs drying up at restaurants offering local beers on tap, further cutting into profit. The Delaware Restaurant Association recently reported that 81% of its members said they predict operating at a financial loss for the next six months, which could lead to more cutting back on expenses. Mispillion River Brewing’s kegs that previously needed to be replenished within a few weeks, or even days, are now sitting for months, Hagelman said.

“There’s some caution out there right now in buying kegs, because there’s beer that can sit anywhere for 60 days to six months, depending on what kind it is,” he said.

The market demand could also be shaped on work-from-home habits and the job markets. Blue Earl Brewing Company owner Ronnie Price said typical craft beer consumers are the educated middle-class, and that demographic is facing more layoffs. That’s pushing them to buy six-packs and not pints in the taproom.

In year-over-year comparisons, Blue Earl Brewing Company’s sales were down 75% in April and 50% in May. Price said it’s still not taking off in bars and restaurants because of the public’s reluctance to come out.

But distribution sales – selling six packs in liquor stores in Delaware and Maryland – has increased by 50% during the pandemic. Enough for Blue Earl to add a fifth beer to its distribution lineup: the Diamond State Lager.

“It’s really blasted off in the last 60 days. What breweries could look like in the future depend on their whole sales breakdown,” Price said. “Right now I’m looking at doubling my capacity to distribute more beer and I have tanks leaving the ports in China right now. [If COVID did not happen], it’s unlikely I’d do it this soon.”

Distribution and to-go

Looking at the alcohol industry as a whole, COVID-19 has even flipped market expectations of what sells in liquor stores. Paul Ruggiero, president and chief operating officer of N.K.S. Distributors, said that typically during economic downturns, beer is an affordable luxury. But that’s not the case these days: spirits are leading the pack with wine close behind.

“People in white-collar jobs are still working from home, and what we’re seeing is they’re taking that budget they had for restaurants and using it to trade up their spirits and wine,” Ruggerio said. “But if you were a blue-collar worker, you may be facing layoffs and turning to your comfort brands, like Budweiser and White Claw seltzer.”

Customers are also narrowing down their options of what they are buying, and they are more willing to trade down when times are tough. A beer draft for $6 may look more appealing than spending $14.99 on a six pack in the store. But with off-premise sales booming, Ruggerio said that cans are in short supply.

“Pantry stocking means we’re running out of those cans. Anheuser-Busch was able to source them, but not everyone has been so lucky,” he said.

Many local brewers came together through the Delaware Brewers Guild to share canning resources or tips where to buy when the supply chain broke down, Willson said. For small breweries without mass-scale production, selling beers out of 32-ounce crowler cans to-go became the only source of revenue for April.”

To-go beer sales for microbreweries are still steady and will be here to stay, Staggs predicts. But that will not be enough to make up for total losses in draft sales. Staggs estimates that selling Revelation beer through a distributor cuts 50% to 60% of their profit versus selling directly to a customer.

“I always saw distribution like advertising. I want people upstate to see that beer and be intrigued by it, buy it, and start thinking about coming here and having that experience,” he said. “To-go is here to stay, and it will come to a head because small breweries face even more challenges in getting the cans than large breweries.”

The Delaware legislature passed a bill that allowed restaurants and taprooms to sell alcoholic beverages to-go until March 2021, but Delaware still prohibits direct shipment of alcohol from manufacturer to consumer under a three-tier system.

Revelation adapts to outdoor use amid the pandemic, and many customers were happy to feel “normal again.” | PHOTO COURTESY PATRICK STAGGS

Stay relevant

With small breweries up against great challenges to distribute beer into a wider market, the future could call for hyperlocalization of the draft itself. That would not be an easy feat as the market continues to be saturated with breweries.

Hagelman said in the mid-1990s there were about 1,500 breweries across the country, and craft beer was a fringe interest. Today, he said there are around 9,000 breweries in the United States, and craft beer can be stocked in every American’s fridge.

“What’s local can be defined by what’s the local brand in the store or what you can get from your craft brewery eight blocks away. It’s made the market way more competitive and craft is now being driven by what’s new and innovative,” he said.

To stand out could call for a bolder and fuller flavors in craft beer, Hagelman said. To some degree, that has already happened with hoppy India pale ales standing out in the last five years.

“We’re in a palate revolution right now, and people will want that bolder taste. But there will always be 50% to 75% of the market that wants an easy beer to drink,” Hagelman said.

While small breweries like Blue Earl cannot compete against brands like Miller, Coors and Budweiser, Price said that the strength lies in the culture surrounding bars and craft beer.

“It’s a culture in the country now. It’s where you go and develop an extended family and go to events. You can set up Miller tours in St. Louis, but that’s about it. You can’t form an identity with that,” he said.

Beer consumers want that experience of trying something new and drinking with friends, and that sentiment has stayed true even in the early days of the pandemic. When Revelation opened partial seating weeks ago, customers came out because they were “so desperate to have something that felt like normal,” Staggs said.

“There’s still room to grow, but you have to stay local, maintain a quality product and have the experience to follow through on the business,” he said. “If you don’t have those, you’re not going to stay relevant. The big guys will continue to get bigger, but people want a unique experience. We can make that happen.”

By Katie Tabeling

ktabeling@delawarebusinesstimes.com