The Ebb and Flow of the Liquor Industry Appears to be at Low Tide

A few years beyond the great boom in the liquor industry caused by the pandemic, the fortunes of this business are looking at hard times. A new generation of health-conscious young adults, a dire warning on alcohol consumption by the US Surgeon General and an overall moderation theme has put a cloud over the future of spirits. As retail chains and box stores overtake the on and off-premise markets, independent retailers and craft producers see their roles diminish, along with their sales.

The liquor industry is undergoing significant changes that are reshaping its competitive landscape. These shifts, driven by the introduction of wine and liquor into grocery stores and big-box retailers, have sparked widespread debate. Central to this discussion is the survival of independent liquor stores, the role of distributors, and the preservation of product diversity for consumers.

Consumers and Small Producers: Overlooked Stakeholders

Consumers and small producers are often the most vulnerable in the current industry dynamic. As independent liquor stores face increased competition from larger retailers, consumers lose access to the curated and diverse selections these stores provide. Big-box retailers tend to prioritize mass-market brands, leaving little shelf space for craft and local producers.

Small producers, meanwhile, face an uphill battle in navigating the industry’s three-tier system, which requires them to work with distributors to reach retailers. The limited number of distributors, combined with their power over market access, creates significant challenges for these smaller brands, often stifling their growth and reducing consumer choice.

The Attrition of Beer Breweries in the Past Decade

Over the past decade, the beer industry has experienced a significant shakeup, characterized by the rapid rise and subsequent attrition of breweries, particularly small and independent craft brewers. While the craft beer boom of the early 2010s brought unprecedented growth, the industry has since entered a period of consolidation and closures, highlighting the challenges of sustaining success in a saturated market.

The Craft Beer Boom and Saturation

The craft beer movement, fueled by consumer interest in unique flavors, local production, and artisanal quality, led to an explosion in the number of breweries across the United States. By the mid-2010s, the number of breweries had grown exponentially, surpassing 9,000 by 2021. This rapid growth created a highly competitive environment, with many breweries vying for limited shelf space, tap handles, and consumer attention.

However, the very factors that drove the boom also contributed to its eventual slowdown. Market saturation led to increased competition, and many smaller breweries struggled to differentiate themselves. Larger, established breweries leveraged their resources to dominate distribution channels, making it harder for new entrants to gain a foothold. Additionally, the sheer volume of choices overwhelmed consumers, diluting brand loyalty.

Economic Pressures and Changing Consumer Preferences

Economic pressures further exacerbated the challenges faced by breweries. Rising costs for ingredients, packaging materials, and transportation squeezed profit margins. Labor shortages and increased wages added to operational expenses, particularly for small breweries with limited economies of scale.

Simultaneously, consumer preferences began to shift. While craft beer remains popular, there has been growing interest in alternative alcoholic beverages such as hard seltzers, canned cocktails, and low-alcohol or alcohol-free options. This trend diverted consumer spending away from traditional beer, creating an additional hurdle for breweries already struggling to adapt.

The Role of Distribution and Consolidation

The beer industry’s three-tier system, which requires breweries to work with distributors to reach retailers, posed another significant challenge. With a limited number of distributors controlling market access, smaller breweries often faced unfavorable terms or were overshadowed by larger brands. Forced bundling and shelf-space monopolization by major players left little room for craft beers to compete effectively.

Consolidation also played a key role in shaping the landscape. Larger beer companies, including multinational corporations, acquired many successful craft breweries. While these acquisitions often provided financial stability, they also diluted the independent ethos that had initially attracted consumers to craft beer. For breweries that resisted acquisition, maintaining independence often meant operating at a disadvantage in terms of distribution, marketing, and pricing.

Closures and Attrition

As a result of these pressures, the number of brewery closures has steadily increased in recent years. While some closures are part of natural market adjustments, the attrition rate underscores the challenges faced by small and mid-sized breweries. Many brewers cited difficulty in scaling operations, navigating distribution, or adapting to changing market demands as reasons for shuttering their businesses.

Lessons for Survival and Growth

The attrition of beer breweries offers valuable lessons for the broader liquor industry. Diversification, innovation, and adaptability are critical for survival. Breweries that successfully pivoted to alternative products, such as hard seltzers or limited-edition experimental brews, have found ways to remain relevant. Direct-to-consumer sales, taproom experiences, and local community engagement have also proven effective in fostering loyalty and generating revenue outside traditional retail channels.

As the liquor industry continues to evolve, the beer industry’s trajectory serves as a cautionary tale of the need to anticipate market changes, embrace innovation, and prioritize sustainable growth strategies.

The Role of Liquor Distributors

Liquor distributors occupy a central position in the industry, serving as the link between producers and retailers. However, their practices often prioritize profitability over fairness, creating challenges for both ends of the supply chain.

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Challenges for Producers

Producers, especially small and craft distilleries, frequently face restrictive terms when working with distributors. These terms include exclusivity agreements, high fees, and unfavorable payment schedules. Smaller brands often struggle to gain visibility, as distributors prioritize larger, established brands that generate higher volumes. Additionally, producers may be required to offer financial incentives, such as promotional fees, to secure placement on retail shelves or bar menus. This creates an uneven playing field that hinders small producers’ ability to compete.

Impact on Retailers

Retailers also face significant pressure from distributors. A common practice is forced bundling, where distributors tie access to desirable, allocated products—such as rare whiskies or premium spirits—to less popular items. Retailers must purchase the bundled products to gain access to high-demand items. Distributors also negotiate for premium shelf space, often crowding out smaller craft brands and limiting the variety available to consumers. Retailers who refuse these terms may face reduced allocations of sought-after products, further disadvantaging them in a competitive market.

Leveraging Direct-to-Consumer and Delivery Services

As traditional retail dynamics shift, smaller players like independent liquor stores and craft producers have an opportunity to bypass some of these challenges by embracing direct-to-consumer (DTC) and delivery models.

Opportunities for Craft Producers

Craft producers can utilize DTC channels to connect directly with consumers, bypassing the constraints of the three-tier system. Many states have begun to allow or expand DTC shipping for alcohol, creating opportunities for small distilleries and wineries to reach customers nationwide. This approach allows producers to:

• Build stronger relationships with consumers through direct marketing and personalized experiences.
• Retain a larger share of profits by avoiding distributor fees.
• Offer exclusive or limited-edition products, enhancing their brand value and appeal.

Producers who invest in user-friendly online platforms and robust logistics can position themselves as leaders in this emerging sales channel.

Independent Liquor Stores and Delivery Services

For independent liquor stores, delivery services and online sales can create new revenue streams and help them compete with larger retailers. By offering convenient options like same-day delivery or curbside pickup, these stores can cater to the needs of modern consumers. Key strategies include:

• Developing e-commerce platforms that showcase their unique inventory and facilitate easy ordering.
• Partnering with local delivery services or using in-house drivers to ensure fast and reliable service.
• Creating subscription boxes or curated selections for regular delivery, appealing to customers seeking convenience and variety.

These services not only enhance convenience but also allow independent stores to differentiate themselves by offering a personalized shopping experience.

Promoting Fairness in Distribution

Addressing the power imbalance within the distribution system remains critical. Strengthening anti-competitive regulations can prevent exploitative practices like forced bundling and restrictive contracts. Supporting smaller, independent distributors can provide more opportunities for craft producers to enter the market and compete effectively. Transparency in distributor practices and policies will also promote greater fairness in the system.

The Path Forward for the Liquor Industry

The liquor industry’s transformation requires a balanced approach that considers the needs of all stakeholders. Independent liquor stores and craft producers can thrive by leveraging technology, embracing DTC models, and enhancing the customer experience. At the same time, distributors must adopt fair practices, and policymakers must ensure regulations promote equity and competition.

Consumers also play a vital role by supporting independent stores and seeking out products from small producers. By prioritizing quality and diversity over convenience, they can help sustain a vibrant and inclusive marketplace.

The industry is at a crossroads, and embracing innovation while addressing systemic challenges can create a thriving future for all participants.