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Craft distilleries face ‘dire’ consequences as pandemic obliterates on-premise sales COURTESY PHOTO

Craft distilleries face ‘dire’ consequences as pandemic obliterates on-premise sales

BY Sunday, May 03, 2020 06:03pm

Michigan distilleries that switched to hand sanitizer production are keeping the lights on, but they face a tough road ahead with on-premise sales at bars and restaurants at a standstill for the foreseeable future. 

The statewide closure of bars and restaurants to in-person dining and drinking obliterated distilleries’ on-premise sales over the last seven weeks. Gov. Gretchen Whitmer on Thursday once again extended the bar and restaurant closure to May 28, citing the continuing need for social distancing to curb the spread of the highly infectious COVID-19. 

Jon O’Connor, president of the Michigan Craft Distillers Association, said members are suffering “significant loss” without on-premise sales. 

“We have seen an uptick in sales to-go at retail stores, grocery and the independent bottle stores that are still operating, and that’s made up for some of the loss. Some of our members have shifted to do the to-go model, but that’s still nowhere near what they’d make in a normal week of restaurant sales,” said O’Connor, the co-founder of Grand Rapids-based Long Road Distillers LLC

“The fortunate thing is we’ve had the hand sanitizer opportunity. I’d say more than 90 percent of our members are doing it, and it’s helping us be viable and be sustainable,” he said, noting “sanitizer is the reason the doors are open right now” at Long Road. 

Even so, some Michigan distillers say the market opportunity to manufacture and sell sanitizer is becoming more complicated with each passing week. 

Three Oaks-based Journeyman Distillery LLC started making hand sanitizer soon after the federal and state regulatory bodies allowed it, and the company was one of the first to market with a Michigan-made product. 

“And then, like business in general, as other businesses got online, we saw the demand drop considerably,” said Journeyman Distillery founder Bill Welter. “We looked at hand sanitizer as a tourniquet on a gaping wound, and the tourniquet appears to have loosened up as the sanitizer market is getting filled by major corporations.” 

Welter is grateful for the opportunity to keep some people employed in making sanitizer products during the shutdown, and for the ability to contribute to “a higher purpose” in helping out frontline health care workers. However, he acknowledges the sanitizer business is not a long-term strategy for Journeyman. 

“Hand sanitizer was a very small part of keeping the business going,” Welter said. “The reality is we need to get back to what we do, which is food, beverage, hospitality and events, and our primary business of making spirits.”

A recent national survey of craft distilleries illustrates the “dire” situation many companies face. In the survey released last week by the Distilled Spirits Council of the United States and the American Distilling Institute, 64 percent of respondents reported a drop in sales related to the COVID-19 pandemic. As well, 42 percent of respondents said they did not think their companies could last for more than three months under the current conditions. That widened to two-thirds of respondents if the conditions last for more than 6 months.

The results mirror the findings of a survey compiled by Boulder, Colo.-based Brewers Association in early April, which found nearly 60 percent of craft brewers could sustain operations for less than three months.

“There’s no way to sugarcoat this news — the economic climate for the craft distilling industry is dire,” Erik Owens, president of the American Distilling Institute, a trade group for more than 600 small and independently owned craft distillers, said in a statement. “Thankfully, many state governments have relaxed regulations to provide distilleries some flexibility with their business models. This certainly helps, but we have a long way to go to get the once vibrant craft distilling sector back to booming again.”

While Michigan permitted distilleries to repurpose their operations to make hand sanitizer, the state Liquor Control Commission has not followed other states’ lead in adopting rules that would allow for self-distribution or direct shipment of spirits. 

“We need additional tools in the toolbox to get by,” O’Connor said. 

WATCH CASH FLOW

Holland-based Coppercraft Distillery LLC has seen steady April sales, but is monitoring the situation for falloff in the rest of the second quarter, said CEO Brian Mucci. 

Like most Michigan distillers, Coppercraft Distillery, a portfolio company of the DeVos family’s Windquest Group Inc., has switched its “pretty lean” tasting room team to producing, bottling and labeling hand sanitizer.

In particular, Mucci is keeping an eye on consumer trends as nervous drinkers shift their buying habits to lower price points, which does not favor craft distilleries that produce in lower volume and whose products cost more than macro spirits brands. The company also is carefully watching its cash flow in the current operating environment. 

“The challenge that we all face is cash management, just knowing how to be sure we’re prepared well to not have the kind of sales volume or velocity that you might have had,” Mucci said. “The nature of the business is very capital intensive, so it’s a significant cash management task for craft distillers. When you start losing some of that cash flow, your ability to lay down bourbon goes away. If you’re not laying down bourbon today, you’re going to be in short supply in the three to four years that that bourbon ages. You’re just trying to find ways to conserve cash to make it through the moment and still remain in the market.”

According to the distilling industry survey, 43 percent of distillery employees nationally have been laid off or furloughed since the beginning of the pandemic. 

O’Connor acknowledged that most Michigan Craft Distillers Association members that have tasting rooms and restaurants have had to issue layoffs, including Long Road Distillers. For its part, Long Road closed its restaurants but has kept open for sanitizer and bottled spirits sales, including for cocktail kits that customers can take home to make their favorite drinks. 

The sales offer a way for the company to remain top of mind for customers, he said. 

“A lot of our members have multiple tasting rooms, and being in front of people is their best marketing tool. The question now is how do they shift to let people know they’re there,” O’Connor said. 

While distillers await the final word on when they’ll be able to reopen to serve customers in their tasting rooms, O’Connor also cautions that the new environment will be different. 

“None of us got into the business as craft distillers because we wanted to be hand sanitizer manufacturers. At some point, we’d all love to get back to doing what we got into business to do,” he said. “I feel like people want to come back, but even if the authority was given to open right now, I’m not sure I’d be the first one to turn on the open light.”

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