COVID Backward and Forward: Restaurant, Hotel and Alcohol Sales

In News by Flaherty & O'Hara

Devastating. It is a word that is probably overused and overly dramatic. But as it applies to the impact of the COVID-19 pandemic on alcohol sales generally, and on restaurants and hotels in particular, it is an accurate and, yes, often used description.

According to IWSR, the global beverage alcohol sales analysts, overall sales of alcohol were up slightly in 2019, after being down slightly in 2018 and prior years. By all accounts, this trend continued into the very early part of 2020, but came to a screeching halt in March 2020.

In March 2020, as the pandemic began to take hold in the United States, and as closure orders commenced, restaurant and hotel business began to wither.

The opinion of the National Restaurant Association (NRA) is that the pandemic has been “devastating” to the restaurant industry. In fact, in 2020, through January 2021, the restaurant industry lost an estimated $240 billion in sales and 2.5 million jobs, losing almost half a million jobs just between October 2020 and January 2021. The hardest hit segment of the restaurant industry has been full-service sit-down restaurants that do not engage, in normal times, in either sales of food or beverages to-go or via delivery. This segment of the restaurant industry alone lost about 1.3 million jobs in 2020, according to the NRA, and it is not likely that employment in restaurants will return to pre-COVID-19 levels until 2024. At the peak of layoffs in the restaurant industry, 8 million restaurant employees were laid off or furloughed.

The NRA’s State of the Restaurant Industry (2021) Report (SRI), estimates that approximately 110,000 restaurants closed in 2020. Some of these closures were meant to be temporary, of course, while some were intended to be permanent from the start, but the longer the pandemic continues, the more likely that temporary closures will become permanent.

The hotel industry is faring even worse than the restaurant industry. Hotel industry insiders have called 2020 the “most devastating year on record for the hotel industry.” (See, American Hotel & Lodging Association (AHLA), State of the Hotel Industry (2021) Report (SHI). Unlike restaurants, hotels do not have a product that they can sell off-premises use only—they rent rooms for overnight accommodation. By definition, virtually all hotel customers are travelers—and travel fell to almost negligible numbers in 2020. Hotels across the country experienced historically low room occupancy rates in 2020, as well as historically low revenues, massive job losses, and closures. Hotels simply do not have the alternative business models that many restaurants do.

Roughly $82 billion in sales were lost by the hotel industry in 2020, and a net of about 500,000 jobs were lost, reaching a high of 700,000 jobs lost during the year, but adding back about 200,000 before year end. (SHI) The AHLA projects that in 2021 roughly half of all hotel rooms will not be occupied, and that business travel—the heart of the industry—will remain down 85%. While the industry is hopeful that domestic leisure travel will increase in 2021, based on consumer surveys on travel, the industry is not expected to recover pre-pandemic sales until 2024. The AHLA is hopeful that travel will increase somewhat in the second half of 2021 as a result of a pent-up demand for conferences and other events, and it is counting on consumer confidence (and travel) increasing as COVID-19 vaccines are more widely distributed.

So how have alcohol sales fared during the pandemic? An analysis of retail alcohol sales during the pandemic reveals a split personality in the retail segment of the industry, with one side— the off-premises segment—experiencing never-seen-before growth, and the other side of the industry—the on-premises segment—being devastated.

With forced closures of restaurants, bars and hotels for an extended period in mid-2020, and the subsequent reopening subject to severe occupancy and other limitations, consumers simply have not had the ability or opportunity to purchase and consume alcohol or meals while seated inside restaurants, bars or hotels in anywhere near the same manner they did pre-COVID-19. This resulted, in part, in the losses in business referred to as “devastating” by restaurant and hotel insiders.

With that said, consumers have not been willing to give up libations all together. On the contrary, they have sought out alternatives to on-premises consumption. IWSR determined that online alcohol sales increased by about 80% in 2020, accounting for $5.6 billion in sales. Where in 2019 online alcohol sales comprised about 1% of total retail alcohol sales in the United States, in 2020 online sales jumped up to about 7% of all retail alcohol sales.

What is the actual source for alcohol sold online? The answer is there are two primary sources for alcohol sold via online orders: first, alcohol ordered online comes from local retail package and grocery stores (referred to collectively as off-premises licensees), with some restaurants and bars contributing modestly, and second, alcohol ordered online comes direct to consumers from manufacturers of alcohol, such as wineries and distilleries.

How does alcohol ordered on online alcohol arrive at a consumer’s door? The easy answer is by common carrier or local delivery driver employed by a retail off-premises licensee, an on-premises licensee that has been given off-premises sales privileges, or a third-party delivery company. Delivery companies may be required to obtain transporter for hire permits or similar transport-oriented permits and to affix signage to their vehicles.

(As an aside, the U.S. Postal Service is legally prohibited from delivering alcohol. Legislation has been proposed to allow the Postal Service to deliver alcohol, which would increase Postal Service revenue. Such legislation has been proposed before. Certain segments of the alcohol industry oppose the current legislation, and have opposed similar legislation in the past, but given the budget shortfalls and other drama associated with the Postal Service in 2020, perhaps it has a better chance of passing this year.)

Local delivery of alcohol—in which the delivery does not cross state lines—is soaring in popularity. By far, the vast majority of alcohol delivered locally is actually sold by retail off-premises licensees, like package and grocery stores, but restaurants and bars have, during the pandemic, been permitted to sell alcohol for off-premises consumption as well, something they are not normally allowed to do, generally. Enabled by technology, an increasing number of off-premises licensees are offering customers their own apps, or are utilizing the apps of third-parties, and providing customers with the ability to order alcohol, and perhaps food, online and to receive their orders via delivery to their front doors, often within an hour.

Subject to state and local laws, package stores, like goPuff, offer their own apps and deliver alcohol from their own alcohol inventories direct to customers, while many other package and grocery stores contract with third parties to allow consumers to place internet-based orders for alcohol to be delivered to their homes. Drizly, Instacart, DoorDash, UberEats and Postmates are some of the well-known companies that process orders and deliver alcohol that consumers order from retailers. These companies do not sell alcohol, and they are not retail alcohol licensees, but rather they contract with retail off-premises licensees to provide internet platforms and software that enable the consumer ordering experience, and that assist with or conduct payment processing, coordinate fulfillment and delivery, and confirm the age of purchasers. Restaurants, hotels and grocery stores often sell alcohol orders with food, either prepared meals or groceries, often with the assistance of these same third-party delivery companies, which has added to their remarkable sales growth during this pandemic.

According to an online Forbes article by Chris Furnari, in 2020 Drizly tripled its retail partner network (read: package stores that buy their software). An NPR report in the latter part of 2020 stated that Drizly’s sales through September 2020 were up 350% compared to the same period of 2019. (See NPR, “Hangover From Alcohol Boom May Last Long After Pandemic Ends,” Brian Mann, 9/11/20.) (Drizly does not deliver its own alcohol, but instead creates “online marketplaces” for alcohol being sold by retail off-premises licensees. The phrase, “on-demand alcohol,” could be worrisome to alcohol regulators and public health officials, who may believe that the purchase of alcohol should be curtailed when possible, and not made available on-demand.)

It cannot be denied that online alcohol sales have grown incredibly since the start of the pandemic. While delivery apps—whether owned by licensees or provided by third parties— make ordering and home delivery more widely available than ever, the source for the alcohol is typically from local retail off-premises licensees or bars and restaurants that have been given off-premises sales privileges. In light of the crushing impact of the pandemic, state and local governments have strived to provide some measure of economic relief to on-premises licensees. Most states have suspended the normal rules that prohibit on-premises licensees from selling alcohol to-go, but only temporarily and often through emergency rulemaking, not legislation. Most on-premises licensees may, for the time-being, sell a variety of alcohol types and packages for off-premises consumption, including wine and beer by the bottle and pre-made mixed drinks.

The question is, will the temporary suspension of state laws that prohibit on-premises licensees from selling alcohol for off-premises consumption be made permanent after the pandemic passes?

During the pandemic consumers have gained an increased proclivity for ordering alcohol online, and this new behavior is likely here to stay. (see Forbes, “On-Line, Alcohol Sales Surge Amid Coronavirus Pandemic,” 12/1/21, Chris Furnari, citing IWSR.)  When bars and restaurants finally reopen after the pandemic passes, will consumers fully return to their old habits and purchase their alcohol primarily at on-premises accounts? Will they stick with their new habit of buying online? Or will there be a blending of old and new habits? The answers to these questions may forever impact the look and feel of the post-pandemic restaurant and bar industry.

Despite the growth in sales occurring via interstate shipping and local delivery, overall alcohol consumption is, in fact, down globally since the pandemic began. The losses in on-premises sales have not been wholly replaced by the increases in off-premises sales, and IWSR does not anticipate alcohol sales to rebound until 2024.

Many industry observers doubt that the genie of alcohol delivery can be put back in the bottle of prohibition. By buying Drizly, Uber is making at least a billion dollar bet that increased alcohol delivery is here to stay and that it is likely to increase even further—after all, even with its meteoric growth, sales via local delivery still only accounts for 7% of total alcohol sales. When (and if) the pandemic is under control, regulators could move to repeal the temporary relief that now permits on-premises licensees to sell alcohol for off-premises consumption. Additionally, greater regulation of and limitations on unlicensed third-party delivery companies could be in the post-pandemic mix as well.

How fair and how well-received would repeal of the temporary measures be? Bar and restaurant owners are especially sympathetic members of the community at the moment. People feel badly for how impactful the pandemic has been on them. They are local employers and many are local residents. It might be hugely unpopular for an elected official to advocate the repeal of the temporary relief measures rather than advocating that they be made permanent. Is it likely that, magically upon wide distribution of vaccines, consumers will again feel comfortable crowding into restaurants and bars? The experts agree that restaurants, hotels and the alcohol industry are not likely to recover until 2024. It would hardly make sense to allow the temporary measures to remain in effect through 2024, only to rescind them then, after licensees and consumers have been operating pursuant to them for over three years. There is a strong case to be made that the temporary changes should be made permanent. In large part as a result of the pandemic, it is a brave new world when it comes to alcohol delivery, and it is likely here to stay.

Robert “R.J.” O’Hara is president of Flaherty & O’Hara, a Pennsylvania-based boutique law firm with 11 attorneys and 15 support staff practicing exclusively in the alcohol beverage space. He is an associate member of several national professional and alcohol regulatory organizations and he frequently speaks at national and regional conferences on alcohol-related topics, as well as on the legalization of marijuana for medical and recreational uses. 

Reprinted with permission from the February 17, 2021 issue of The Legal Intelligencer. © 2021 ALM Media Properties, LLC. Further duplication without permission is prohibited.  All rights reserved.