Monday, March 4, 2019

The Economics of Opening a Brewery

The excitement over hazy/NE IPA is the best thing that has happened for local breweries in a long time. They are expensive to brew, difficult to package, a nightmare to distribute long distances, and get beer drinkers excited! When we put a juicy Double IPA on tap it flies. Our recent 7-barrel-yield of Snip Snap lasted less than three days, while an IPA might last three weeks, and a pale ale five. Having a beer that draws increases growler sales, and helps sell all of our other beers as people end up trying other similar beers when they come in.

Snip Snap DIPA

Here is a graph of the scores of 13 of our hoppy beers (pale ales, IPAs, and DIPAs) showing the Untappd score compared to the ABV. The formula for the trend line is y = 3.2008+.1392*x. That suggests if we brewed a 0% ABV hoppy beer it would score a 3.20 and to get a score of 5 would require 14.31% ABV. The R-squared value of the correlation is .71, so the most important factor in the consumer's opinion of our hoppy beers is strength (granted that typically comes with a higher dry hopping rate, sweetness etc.).

Impact of ABV vs. Untappd Score.

Driving business to your tasting room is job #1 for a small brewery because that is where the profit is highest. When you buy a beer at a bar or restaurant, most of the money goes to them rather than the brewery. While a ½ bbl keg of a pale ale might sell to a bar for $150-175 (a portion of which might go to a distributor), at even $5 pint the bar makes $620 in revenue. At our scale, it is almost impossible to make a profit only  selling beer at wholesale. It requires a tight reign on expenses with a premium price point, not to mention low overhead.

It is no coincidence that local brewery booms seem to follow when a state or city allows production breweries to serve/retail their own beer. In the case of Maryland this has created backlash from distributors, and a lesser extent bars and liquor stores who see more consumers cutting them out.

Sapwood Cellars Holiday Party

Ingredient Cost

We aren’t doing a great job controlling ingredient costs. We don’t reuse our yeast nearly as much as we "should" (3-4 batches per pitch), we pay as much as $35/lb for hops that are difficult to get on the spot market, we buy our malt pre-milled by the bag, we use expensive “real” ingredients for our variants (and usually don’t up-charge over the base beers) etc. That said, having a tasting room that is busy covers all of those sins.

Great Western Full Pint Malt

10 bbls – Pillowfort
$484 – 2-row
$137 – Malted Oats
$40 – Chit Malt
$50 – Milling Fee
$11 – Glucose
$.80 - Whirlfloc
$.06 - Zinc Sulfate Heptahydrate
$1 – Calcium Chloride
$1 – Gypsum
$.25 – Epsom Salt
$2.00 – 350 ml 75% Phosphoric Acid
$125 – Liquid yeast
$150 – Dry yeast
$77 – Columbus
$99 – Centennial
$396 – Citra
$264 – Azacca
~$100 – CO2/Gas/Electric/Chemicals
 ($1950/batch - $1.11/pour)

Let’s say we put more effort into yeast management and that gives us confidence to reuse the yeast for 20 batches. Bringing the proportional cost down from $125 to $25 per batch. The net savings to us would be $.05 per pour. What if we moved to a silo for 2-row, and cut our base malt cost down to a third and added a mill? $.14 per pour. That would make Pillowfort ~$.92/pour. Granted these recurring costs add up over the course of a year and both might yield improvements to the consistency and quality of our beer. But selling just one 1/2 bbl keg to a bar, even charging $250, loses us more money per batch then we’d save from making those moves. It also speaks to how important yield on these heavily dry-hopped beers is.

Most of our IPAs and DIPAs work out to $100-150 per ½ bbl keg. Self-distributing these beers for $200-250 there would be no way to make enough to cover rent, pay ourselves, and fund expansion. However, being a retailer of our own beers means we get $800-900 for that same keg sold by the glass and growler. It makes sense for us to charge a reasonable price ($7-8 for a 14 oz pour in a 17 oz glass) and have consumers return rather than charge a dollar or two more and end up having to self-distribute kegs (with the added effort).

When we do send kegs out, we try to get as much of a push out of it as we can (fests, tap-takeovers, beer dinners etc.). We don't pay for any traditional advertising, but we view the "losses" from self-distributing as a form of marketing. That also means not always sending beer to the same bars, as we want people to feel like they have to come to us to try our beers regularly.

Beer Festival

Most bars use a flat percentage markup to price their draft. If a beer costs twice as much for them to purchase, they’ll charge twice as much to the consumer. That means that they’ll make a much larger dollar-per-ounce profit on more expensive beers. The same isn’t true at most breweries, an IPA with Nelson Sauvin or Galaxy is easily twice as expensive as a session wheat beer (especially considering the lower yield with high dry-hop rates), but we don’t double the price. Still, charging $7 for IPA and $6 for the session wheat makes the IPA more profitable per pour. When you visit a brewery and buy beer, you’re allowing them to spend more money on the ingredients and make better beer. Not to mention that the brewery will care more about their beer and have better control over the product.

Overhead

After ingredient cost, our next biggest expense is rent. Scott and I debated where to open and toured spaces with a wide range of looks and costs. While a beautiful rustic plot with room for outdoor events and a small orchard was appealing… either running on a septic or paying hundreds of thousands of dollars for a municipal sewer connection was not. Conversely, opening in a vibrant downtown with plenty of foot traffic would have meant easier retail sales, but would have tripled our rent. Brewing is a space-intensive manufacturing business (especially with barrel aging), it is difficult for me to justify paying $30+ sq ft for the parts of the business that aren’t customer facing.

Lease Signing Day

If we are able to brew enough to outstrip tasting room demand, we’ll look into opening a small taproom someplace other than an industrial park. For the time being, our location is close enough to residential for the tasting room and inexpensive enough for 4,000 sq ft of production. Luckily the power of Google Maps, Untappd, and social media has been enough for us to draw people in.

In addition to the ability to sell beer by the glass, a tasting room opens up the way for merchandise sales, private events, packaged beer, and even food sales (working on that now). It has been essential for us to have a space and offerings that attract customers, even those who aren’t beer nerds. A fantastic staff, and enough of them working for short waits also improves the customer experience.

Salaries are the third big expense. Scott and I have done 100% of the brewing, tank cleaning, kegging, and keg washing up to this point. Financially speaking, our labor has been free, but we certainly could have kept our day jobs and paid less-per hour than our lost wages to hire brewers and cellar-people. That said, it didn’t seem right to trust something we’d worked so hard for to other people. As I learned from consulting, the people who are physically there have the biggest effect on the results. We’ll be looking to hire someone in the brewhouse soon, but we’re still trying to figure out what the role will be (cleaning and cellar duties, or someone who already has the skill-set to be a lead brewer eventually). We were willing to pay for front-of-house, as that is where we didn’t have experience (or the time to learn).

Other Income Streams

I posted about Brewery Clubs a few months ago. As a brewery that didn’t take on outside loans or investors, the extra money we brought in from club sales was essential. It gave us the breathing room to buy more expensive equipment, ingredients, not to mentions barrels for beers we won’t sell for months or years, and dump most of a batch that we didn’t love. Padding in the bank account helped with our sleep those first couple months too.

We’re now “paying” some of that money back. We made it through the club holiday events, for which we created 16 sixtels of variants that we didn’t sell a drop of. Not to mention paid employees to work (and at $15 an hour as tipping was light without tabs). Most of that cost was in our time, but we’ll continue to incur costs as we give bottles, decanter baskets (below), and events that club members paid for last year. Not only do we want to ensure that customers (and many friends) are happy they joined, we’d like to over-deliver so many consider re-upping for 2020!

Decanter Baskets

The rest of this year our biggest focus will be on packaging. Direct sales of canned and bottled beer should give us the chance to increase total revenue, but it will also lower our per-ounce revenue. While many people are willing to pay $8 for a 14 oz pour of DIPA... $5 for a 16 oz can of the same DIPA is about the top of the market. Cans have higher costs associated with them as well, both in terms of labor and materials (especially when you don't own a canning line). That really slims down the margins, and will dictate which beers are more likely to be canned (e.g., Pillowfort with Azacca rather than Snip Snap with Galaxy). The most important thing for us will be avoiding turning draft sales into can sales. Ideally cans are an add-on to tabs or an additional trip for a release rather than a replacement for draft consumption and growlers.

Shared Kingdom at Black Flag

What makes sense for a brewery will depend on the types of beer they brew and their goals as a company. If you want to be a large production brewery, it may make sense to start fighting for draft accounts early. We don’t have any resources dedicated to outside sales, in fact we turn down most offers to put our beer on tap. We’d rather have an excess of demand, and be in strong position rather than fight for a limited number of tap handles with an ever-increasing number of breweries.

Having the huge catalog of homebrew recipes between the two of us has been a big advantage too. On Saturday we tapped a scaled-up version of Atomic Apricot. The price difference on the apricot puree was particularly stark, $1.71 per pound at the commercial scale vs. $7.84 for the same product (Oregon Fruit/Vintners Harvest). I haven't been doing much homebrewing or test batch brewing so most of my social media posting has moved to the Sapwood Cellars Facebook and Twitter accounts (Scott does Instagram because I usually avoid posting from my phone).

23 comments:

brian_d said...

Excellent stuff as usual, Mike! We’re a taproom heavy model as well, and can certainly relate to how forgiving it is on ingredient costs. Thanks for taking the insight you’ve provided over the years, and translating it to the business and operations of a brewhouse. Cheers!

Brian

Hylen said...

Great read and a good look under the hood of how a small brewery ticks. Its cool to see whats important from the breweries POV.

Jared said...

I'd be curious to know a bit more about the canning system you chose to go with. Since you're a very small canning distribution, what system did you find that was scaleable and had a price-point that made sense with your space. Cheers!

The Mad Fermentationist (Mike) said...

We're contracting with a brewery to make the beer and can a portion of it. We're having trouble keeping up with draft demand in the tasting room as is with our four fermentors.

Glenn Wetherell said...

What are you getting from the addition of glucose?

The Mad Fermentationist (Mike) said...

Slightly higher ABV without adding more malt flavor. It's only ~3% of the extract.

Jack said...

Mike, do you guys use straight city water or do you cut your water with RO?

The Mad Fermentationist (Mike) said...

Carbon filtration, minerals, and acid. No other treatment at this point.

hawthorne00 said...

Excellent post (although your best fit line is surely concave downward). The impact of what's profitable for small breweries driving fashion is interesting. Is the popularity of hazy styles encouraged by brewers _because_ they don't travel?

The Mad Fermentationist (Mike) said...

I didn't feel that there were enough data points to justify a more closely fitted non-linear regression (you are correct that it has a slight curve to it). I debated removing that lowest scoring beer (Unhook Yourself) because it was substantially different than our other recipes - malty/herbal rather than juicy. It is pulling down that low-end considerably.

Once we have more data, I'll do a post that digs into the trends deeper. Hopefully looking at yeast strain, hop variety/amount, FG etc.

I think the lack of stability for hazy beers encourages consumers to buy local. It'd be easier to trade or buy a box of big dark beers or sours online and then enjoy them at your leisure over a few months. We've had plenty of people come in and thank us for saving them money compared to their previous monthly habits of trading for beers from New England, or driving to breweries in Virginia. Brewing them is a way to reduce the distance of the breweries you have to compete with.

Anonymous said...

Not sure of the significance, but don't forget the cost of water for that batch of Pillowfort (hops, yeast, malt and water).

jhewitt said...

Very interesting, thanks. The mention of the top price the market will bear for a can of DIPA raises one thing I think is unfortunate about the beer world.

When it comes to wine, there is a very high cap on the price a vinyard can potentially charge for a bottle of wine. A well established vinyard can often market a $50-$100 bottle of wine, giving it a high margin product to help with the bottom line.

Beer drinkers, though, are very reluctant to pay comparable retail prices on a per drink basis. I think you could argue that a four pack or a 750ml bottle of a special event beer -- an aged Imperial Stout, for example -- is just as worthwhile of a high price as a bottle of wine. But good luck marketing one for more than $20 or so. Only a lucky few brewers have managed.

Hilber said...

I loved reading your article, thank you!

Did you start out renting or buying your space?

Could you share a range of how much it costs you? <$5k/mo? $5-10k/mo?

Anonymous said...

Huh, Epsom salt, interesting. Do you take the view that the malt doesn't provide enough magnesium for the yeast, or do you add it for some other reason?

The Mad Fermentationist (Mike) said...

Something we play around with, there are some studies that suggest that magnesium helps at pulling fruity compounds out of coffee. No idea how the magnesium contributed by the malt (over 100 ppm when I've had beers tested) behaves differently that ions added from water treatment.

The Mad Fermentationist (Mike) said...

We're renting (nice long lease, seven years with a five year option). We're right between $5-10K including NNN. The monthly price is going to be dependent on the space and what other lease factors are in play (landlord improvements, free rent, annual increases, security deposit etc.)

Clark Updike said...

Thanks for the "open kimono" view into your operations--I never would have guessed about the whole DIPA/ABV thing. If it makes you feel any better, my cost per gallon as a home brewer is about $14/gal (2.5 gallon NEIPA) versus your $6/gal (if I calculated that right). And don't even get me started on my labor per gallon :-D

Andrew said...

I haven't had the chance to try your beers yet unfortunately - intend to make the drive down from PA in the spring.

The level of hopping in "NE IPA" seems to be highly variable depending on the brewery you go to. It seems that many breweries (places I no longer support) make a hazy beer that seem to be no more hoppy than a West Coast IPA from 10 years ago. I've also noticed that some breweries that provided very hoppy beer that had me very impressed on opening seem to now be making much less impressive beer. These breweries seem to just be interested in cashing in on the good will felt towards the NE IPA style and diminish it in the process.

The level of hopping in a lot of your recent homebrewing was impressively agressive. With hops being so expensive and there being an element of diminishing return as you use more it seems like dialing that in would be a pretty critical bit of calculus. How do you find the right balance? Is it a batch by batch reassessment of how the hops are applied?

The Mad Fermentationist (Mike) said...

Andrew, say hi when you do make it in!

We've been surprised how many brewers balk at our kettle hopping rates (including whirlpool). ~2 lbs/bbl doesn't seem crazy, but it seems like many local breweries are under 1 lb. Much trickier to justify high rates when you are sending beer to distribution.

We're still very much in the learning stages of this endeavor. Figuring out what varieties work best at each point, and to what effect. Tasting the beer along the way and continuing to use new ingredients are both key. Tomorrow we'll brew our first "West Coast" IPA... using a few tricks from the NEIPA bag of tricks of course!

Unknown said...

When you're adding glucose as 3%, is this in the form of maltodextrin?

Cheers!

The Mad Fermentationist (Mike) said...

Dextrose, not maltodexrin

donut the square said...

Hey Mike.
Great resource your posts about starting up your brewery. I've been following your blog for on about 7 years now. I'd love to see what your think of the physical aspect of brewing and cleaning, racking out every day. I only started gypsy brewing recently myself as of last year. I found the toll on the body pretty drastic. Most of us start getting carpal tunnel, tendonitus and/ or back issues dealing with full 50L kegs! I have to admit that was a shock to me thinking I was more then in shape for the job but dragging full kegs up two flights of stairs to deliver your beer to a pub is a back braker !! After a full year I am so glad I went gypsy first, it gave me a insight into the not so full aspects of commercial brewing i.e. making beer and recipe development is fun. Selling beer and chasing invoices and customers is a pain in the royal ass. I think everyone should go gypsy first before you give up your cushy day job to run out and pursue your passion as you forgo pay until the invoices get paid six months down the track. Anyhow good luck I envy your progress and the market your in as well as here in Sydney because of council issues and excise taxes doing craft brewing is not as profitable as it should be.
Cheers and Beers
Paul Nickodem
DooLittle Brewing Co. Sydney, Australia

The Mad Fermentationist (Mike) said...

Going from the desk job to brewing in the middle of summer was rough. I had to go cool-off in the air-conditioned tasting room mid-brew more than once. Even now I certainly have more bruises, scrapes, and soreness than anytime since childhood.

We do everything we can to limit strain and injury. For example, two of us move kegs together. Not an "efficient" use of time, but if someone screws up their back the whole operation gets twice as difficult. Similarly I usually start a brew day and Scott finishes so neither of us has to do everything from mash-in to clean-up.

Having some foot in the industry (working for another brewery, gypsy brewing, etc.) certainly makes sense to me too. There are so many aspects to brewing beer and selling it that it is almost impossible to jump in successfully on your own without experience outside homebrewing.

Cheers and best of luck!