The closure of bars and restaurants had a significant effect on the alcoholic beverage industry, but it’s not all bad news, as people have shifted to drinking at home. To get a handle on the industry amid the pandemic, GLG spoke with Fernando Palacios, former Chief Integrated Supply Chain Officer at Molson Coors Beverage Company. Below are a few select excerpts from our broader discussion.

COVID-19 has shut down many of alcohol’s main retailers, restaurants, and bars, but looking at Boston Beer’s last quarter and management commentary, there seemed to be some growth, mostly fueled by the Truly brand. Which channels will sell the most now?

Grocery and convenience stores. If the business was broken down into convenience, grocery, and on-premise, it could be a third, a third, a third. But for the most part, on-premise (restaurants, bars, pubs, etc.) is typically where a lot of the volume is after convenience. Convenience stores, which have stayed open, have always sold a lot of product, as have grocery stores. The amount of product that has gone through grocery stores has been exponential, but it’s been big packs.

In some cases, brewers made up for some of the restaurant volume. For the craft people, it’s a little different story. A lot of their product is on-premise centered. When they can’t sell a keg or bottles of craft beer, that’s a big deal because that comprises a lot their business.

In the past three months, some of the major alcohol players have seen strong gains, especially Boston Beer. What recent developments have you seen within the industry?

In the past three months the name of the game has been seltzers, seltzers, and more seltzers. That trend continues. ABI, Corona, and Molson Coors have all introduced hard seltzers. The next thing is a switch, driven by the virus, to bigger packs of 24 to 30, especially 12-ounce cans. The beer business has seen some volume growth in grocery, with a lot of Busch Light, Miller Light, Michelob, and Blue Moon moving out the door.

After that it’s how people are dealing with suppliers. Right now, there’s an environment where models for demand forecasting don’t apply. The lack of on-premise business created a big disruption in the bottle and keg business for brewers and craft brewers. Those things are not being consumed, and it’s creating a big disruption in supply with the shift to cans.

How are producers continuing to adapt to COVID-19?

The demand now is very different from what the models projected. Most of the brewers do not keep more than a few days of inventory and packaging. Pretty much everything is just-in-time. The suppliers are close to the breweries. So, any hiccup on a bad forecast means they probably didn’t have it in the supplier’s storage, and it’s not that easy to switch from one package to the next when there’s no inventory.

How brewers are dealing with manufacturing has been a little hectic. There’s a lot of overtime in can production, with idle bottle and keg lines. There’s a lot of creativity on how to deal with the workforce, some with furloughs or shifting schedules. But we’ve got to tip our hats to producers for making sure that employees are safe. Amazingly, there have been no issues with quality at any company, which is a testament to how they’ve been making sure that the protocols are well followed and adhered to.

Has the raw materials disruption caused any significant problems?

Definitely. Cans have been an issue because of the demand, specifically 12-ounce. It’s put suppliers in a pickle. Suddenly, brewers don’t need 24 ounces or 8 ounces, which they have inventory for, but they need 12-ounce cans, and suppliers can’t make enough. With seltzers and any new product in slim cans, the industry was tight to start with, regardless of the supplier. Every new introduction and more volume tasks the system. So, people have invested in changing or adding new lines to make sure that that capacity continues to grow.

How could a company start employing third-party breweries to help manage inventory shortages and stronger demand?

It takes 10 to 14 days just to brew beer, without the packaging. Third-party brewing relationships are not easy. They’ll have to trial, adjust, and make sure the yeast performs. If companies have a good relationship with a co-packer, it could probably be three weeks to four weeks before beer comes back in a package. So short term, it probably won’t be any less than three to four weeks, even if companies have a relationship. Now, is it doable? Yes. Does it take more time than co-packing some foods? Yes. There are brewers that pay money to reserve capacity at a co-packer based on what they think they may or may not use. In a situation like we are in today, that proves beneficial.

What do you expect from the alcohol industry looking down the road into the second half of 2020 and beyond?

People will rethink this notion of “How much inventory should I carry?” Some people might have room, some people might not. I do expect there will be some additional cost, especially in the next two to three years. People will be leery of not having enough inventory or enough access to inventory.

We’ve been working for a long time on lowest cost; service and lost revenue will play a bigger role in the future. Manufacturers will rethink: “Do I really have a relationship with my supplier so that when I need them, I’ll be the one getting the product versus somebody else?” Supplier-brewer relationships will be reevaluated. Some might change, some might not. Of course, innovation and quality will continue to be vital as well. We’ll see people try to play risk a little differently, at least for the next three years.

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About Fernando Palacios

Fernando Palacios has more than 30 years of industry experience, having recently retired as Chief Integrated Supply Chain Officer for Miller Coors Beverage Company. Prior to joining Miller Coors, Palacios spent 11 years at Land O’Lakes as the Executive Vice President of Supply Chain and the EVP and Chief Operation Officer of the Feed Division. He also served as Director of Food & Beverage Consulting for KPMG, Vice President of Operations for Häagen-Dazs, Director of Brand Operations and Contract Manufacturing for Pillsbury, and Plant Manager, Operations Manager, Business Unit Manager, and Production Supervisor for Kraft General Foods.

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This article is adapted from the July 31, 2020, GLG teleconference “The Alcoholic Beverage Industry: Updated Outlook and Supply Chain Positioning.” If you would like access to this teleconference or would like to speak with Fernando Palacios, or any of our more than 700,000 experts, contact us.