Coronavirus's impact on business: The liquor industry faces an uncertain future

This article is part of a Fortune Special Report: Business in the Coronavirus Economy—a look at the impact of the pandemic on more than 50 industries.

It took a day for Chris Montana, owner of the Du Nord distillery in Minneapolis, to draft an email to his staff to tell them they no longer had jobs.

“That’s an incredibly painful thing to do,” Montana says of the layoffs. “And it is a more painful thing to have it happen to you.” Du Nord’s head distiller has been in the business of making liquor for seven years. But if things don’t change soon, he fears his company will fade into the past.

The alcoholic beverage industry is among the harder-hit sectors of the economy as the COVID-19 outbreak resulted in restaurants, bars, taprooms, and tasting rooms closing up across the United States. Sales and profits have evaporated overnight, crushing the nation’s top distilleries and breweries.

The largest players have warned Wall Street of the financial wreckage. Liquor giant Diageo last month disclosed it would lose millions in sales in China. Rival Pernod Ricard recently warned of a sharp drop in profit. Corona maker Constellation Brands tried to reassure investors that shipments of Corona and other Mexican beers to the U.S. won’t be disrupted by a partial closure of the border, while Anheuser-Busch InBev ditched the brewer’s 2020 outlook.

Westward Whiskey’s tasting room in Portland, Ore.

But the nation’s scrappier craft players are far more vulnerable and are confronting the industry’s greatest challenge since Prohibition. Over 60% of craft distilleries and brewers have said they will lay off workers or anticipate doing so as a result of the COVID-19 events. Two out of every three craft distillers predict that they will be forced to close their doors within three months without support from the government, according to a survey from the American Craft Spirits Association.

As a result, tens of thousands of jobs are at risk for small businesses that helped revitalize neighborhoods in cities like Philadelphia, Cleveland, and St. Louis. There are more than 2,000 independent craft distillers in operation today and over 7,400 craft brewers. Combined, they employ over 175,000 Americans, according to industry estimates.

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“Some craft distillers could be at real risk because they are dependent on the day-to-day revenue,” says Chris R. Swonger, CEO of industry advocate Distilled Spirits Council. American whiskey distillers had already been struggling for months under the weight of steep European tariffs. A one-year tax reprieve for smaller distillers is set to expire at the end of 2020.

While the industry has won well-earned praise for using their alcohol to make hand sanitizer, most distillers sold them at cost or donated. Distillers are also behind the eight ball as it pertains to online sales, which generates scant revenue for most. A three-tier system mostly forces producers to sell their alcohol to distributors, who then sell it to liquor stores, where consumers can purchase it. Nike can close its stores and direct folks to the athletic brand’s website. Diageo and AB InBev must direct shoppers to other channels to buy their booze.

Catoctin Creek produces rye whiskey, gin, and brandy in Virginia.

Like many, Westward Whiskey has been forced to pivot. The Oregon distillery offers curbside pickup and has stepped up efforts to ship directly within the state. Westward has boosted relationships with online sellers Flaviar and Reserve Bar. “The way we build our brands and the way we tap whatever demand there is have changed dramatically,” says Tom Mooney, founder and CEO of Westward.

Jugoslav Petkovic, Flaviar CEO and cofounder, says the company has fielded new business inquiries from craft producers looking for an alternative route to market in the wake of lost sales from distilleries, local bars, and restaurants. In the past 30 days, sales for vodka have jumped 84% on Flaviar, while demand has soared 64% for mezcal and cognac as more Americans drink at home and explore new cocktail creations.

Scott Harris, cofounder of Catoctin Creek Distillery, admits he hasn’t had time to give e-commerce much thought. Day-to-day production at the Virginia operation has scaled back, though whiskey is still being put in barrels for aging. All 20 of the small operation’s employees still have jobs, though some sales-focused employees were reassigned to production, including the hand sanitizer that Catoctin is now making for local hospitals and police stations.

At Blinking Owl Distillery in Orange County, Calif., co-owner and CFO Robin Christenson says that earlier in March, she thought business conditions were so bleak she would need to file for unemployment. “We had furloughed everyone from the tasting room to figure out if we could survive,” she says.

The closure of the company’s tasting room was particularly bruising for Blinking Owl, which generates 90% of sales from that channel. Across the industry, direct sales at the distillery account for as much as 44% of sales, on average, for small producers.

Blinking Owl is repurposing its vodka production line to produce “Dirty Bird Hand Sanitizer.”

The $2 trillion rescue deal includes more than $350 billion in aid in the form of small-business loans. The Distilled Spirits Council backs the bill, lauding a tax waiver for hand sanitizer that’s produced by distillers and the broader economic support. Some brewers have said they think aid must come faster.

“We need money today,” says Chris Ericson, founder of Lake Placid Brewery and Big Slide Brewery in upstate New York. He adds that relief in the form of loans would be difficult to stomach, preferring loans or grants that would be forgiven if staff were rehired when the economy recovers.

Ericson is in a tough spot. He operates two breweries in a small tourist town that has seen the local economy dry up as events like a college hockey tournament and an international synchronized skating championship were canceled. On the day New York ordered bars and restaurants to shut their doors, he had to lay off 88 employees.

“It has been surreal, to say the least. No business ever plans for zero sales,” says Ericson. He has set up a makeshift to-go operation with a limited menu and selling to-go beer. But brewers like his reinvest most of their money in their brewery or by hiring locally. “Not many of us have slush fund accounts,” he adds.

New York State, which has become the epicenter of the coronavirus crisis in the United States, is home to 464 breweries. Only California has more.

Paul Leone, executive director of the New York State Brewers Association, says the vast majority of breweries have already let go as much staff as they could. Some are operating curbside or home delivery businesses in a bid to remain afloat, but that’s a temporary fix. He prognosticates that if the nation’s economy normalizes within four weeks, most New York breweries would survive. “If eight weeks, that number comes down considerably,” Leone warns, “and some of them will never open their doors again.”