Everyone from Wall Street to Main Street is talking about recession. It’s impossible to go a day without seeing a new survey or prediction in your newsfeed. And politicians on both sides are pointing fingers and fearing the worst. But your business wouldn’t be impacted, because you keep tight control of costs and alcohol is generally considered recession-proof, right?
Don’t be so sure.
Craft beverage clients tell us they’re nervous a new wave of “crisis buying” is around the corner, marked by:
- Significant gains in off-premise retail
- Declines in on-premise dining and drinking
- Surge buying of bulk and value products, large formats and big/national brands
Looks a lot like the first quarter following acknowledgement of the COVID-19 virus, doesn’t it? Except one major difference: inflation recently reaching a 40-year high. Rising costs affect what consumers can buy and reduces the margin for products sold. The economy shrank in the first quarter of 2022, and recent studies report nearly 80% of small business owners surveyed fear we’re headed towards a recession.
Just to level set, we understand a recession in terms defined by Julius Shiskin, head of the Bureau of Labor Statistics, back in the 1970s:
Recession: a period of two consecutive quarters of negative growth in Gross Domestic Product (total value of goods and services we produce in a year).
He goes further to define: depth of impact as a decline of at least 1.5% and a rise in unemployment by 2 points to a level above 6%; duration of impact as a nonfarm employment drop for at least 9 months; and diffusion of impact as most of the economy (more than 75% of all industries) feeling a pinch in employment for 6 months or longer.
While we currently don’t check all the boxes (April’s Unemployment Rate was 3.6%, for example), the Consumer Confidence Index for that same period declined. Analysts keep pushing back the date of “full economic recovery” to pre-pandemic levels, with some estimates as far out at Q4 2023. Gas prices continue to rise, offering little relief to commuter employees transitioning from remote to in-person work. And Target recently lost 25% of its value after reporting earnings that fell far short of analysts’ forecasts. It’s enough to make any craft producer take drastic measures to defend itself.
Now is the time for your team to increase value, not prices. There’s a buzz right now in all corners of craft, talking about the inevitable need to increase price to combat inflation and the threat of recession. In the beer industry alone, prices have increased by over a dollar a pound for overseas malt and global hop availability is limited. While every business is different and owners/managers must make the tough decisions, we would encourage you to explore value-added products and services to help retain and attract new sales before taking a price increase.
It may be counter-intuitive to sell your craft beverage on special when you’re trying to grow your sales, or in this case defend against a possible recession. But the best advertisement for your business is a full tasting room and drinkers buzzing about you. Time to get creative with themed promotions and tactics like dollars-off, buy-one-get-one and bundling. There’s a sweet spot here – the point is not to lose money, but to recoup per-unit discounts with sales volume. Promotions lead value-conscious consumers to change their buying behavior. And if they already love your tasting room, a regular schedule of promotions helps them say Yes! to choosing you over others in what they may now consider an indulgent event. Consider the following:
- Special release and new product pricing
- Online and pre-order discounts
- Joining a community passport program (like PubPass here in Denver)
- Advertising on a local craft beverage trail
- Offering free food with purchase
- Grab-and-go deals
- Merchandise bundle
- Buy $20, get $5 free gift card promotion
- Local venue ticket stub discount (pre- or post-event)
- Buy one, get one deals
Something to be conscious of: states have the ability to regulate promotional (and advertising) activity around alcohol. Generally speaking, a tasting room can’t give product away for free, so check with your legal counsel before setting anything up.
Most craft beverage producers are very familiar with hosting events, particularly the cost-benefit analysis of pulling it off. The planning, coordinating, execution and cost: is it worth it? Getting your craft beverage in front of current and prospective drinkers is always valuable, and this summer will be no exception. Customers will be looking to maximize the dollar and time investment they make in any activities outside home and work, and a tasting room that offers weekly entertainment options in addition to great-tasting beverages will win over competitors every time. Consider adding more events at a smaller scale to your calendar:
How often do you re/evaluate the economics of keeping your tasting room open? You may have done the math years ago before you first opened your doors. Sunday-Tuesday can be slow. Monday is typically an industry night for bartenders. Perhaps you started by opening at noon for the lunch crowd, or decided on 4pm Thursday-Saturday to capture peak sales. Whatever the rationale for your current operating hours, it may be time to look objectively at sales versus expenses and tweak your timing.
What’s your breakeven number for the tasting room? You may have calculated the average weekly sales your team needs to meet in order to offset your expenses, with anything above that being profit. And if you regularly enjoy busy Thursday and Friday nights, perhaps you’re positive overall for the week, making up for slower days. But what if you were to get more granular and look at the average daily sales expectation? How often do your Sunday-Tuesday sales measure up? Unless it’s a holiday or special event, most tasting rooms don’t meet their average daily sales goals for those days. In fact, many consider those days a loss. If you need $700 in sales any day you’re open to offset expenses, and the 3-month sales trend for Mondays averages $250, does it make financial sense to be open? Your daily expenses may be higher or lower, but we’re generally considering your operating costs plus fixed costs across all operating days:
Operating Costs: supplies, packaging, taxes, labor, marketing, office supplies, utilities, etc.
Fixed Costs: insurance, maintenance, property tax, depreciation, interest payments, etc.
Operating Days: those days you’re open for business
Tasting room managers and owners must also look at operating hours subjectively when making a decision whether to remain open. Would you have to let people go if you were to close your doors for part of the week? Possibly. And no one wants to do that. During COVID-19 businesses across all service industries struggled to retain their staff. But how long will you keep employees who make $20 in tips on a slow night? Would reducing the number of operating days actually help retain team members who are getting shifts on busier nights? There’s no single answer for this one. But it’s worth reviewing your sales performance quarterly to ensure expectations of both management and team are being met.