HOMEMADE LEMONADE, NOW AT COSTCO
HELLO AGAIN BEERFELLOWS,
When I was a kid, I, like most red blooded American children, ran a short-lived Limeade stand. I had no idea what things cost, and thus what to charge, so I probably asked for something like $1.50 per cup (and this was in the dollar menu days, so that was neither horrific nor a steal). I had fun, enough money flowed in so that I could buy a VideoNow, and since there were essentially no fixed costs, it was easy enough to pack it all up a day later.
Now, imagine that young entrepreneur scheduling a meeting with a Costco rep, offering a sample of SoCal’s finest sparkling Limeade, and negotiating the details of a contract for 300 gallons per store, per month, professionally packaged in an OSHA-approved environment. Even were young Adrian to secure such a contract, and even be able to keep up with the volume by filling nine bottles at a time around the clock, problem number two pops up: at some point, very soon, the cost to produce these bottles is going to come into play, and there’s basically no chance that our intrepid small business owner can possibly keep costs low enough to compete with MinuteMaid, which, by the way, supplies the key ingredient at a massive markup.
While this may seem like an absurd, possibly time-wasting scenario to consider, it’s not all that far from the reality that new brewery owners face when contemplating distro. We’ll talk first about why that’s the case, and then get into why MacLeod doesn’t distribute right now, and under what conditions we might.
TREADING WATER IN A FLOODED MARKET
When the beer industry was younger (so, the 90s), I posit without proof that, while I doubt distribution was easy, it may have been easier to expand and make a profit due to the abject lack of competition, and the fact that craft beer was a unique product.
I’d defend this two ways: firstly, with the Phil Knight story, in which a young guy realizes there’s a massive hole in the American shoe market and proceeds to fill it; and with Economics, which states that in a competitive marketplace, in the long run, the money you’d make from, say, brewing craft beer, will probably be a touch less than you’d make in a less fun job. Before that point, the piles of untapped beer money lure in Gold Prospectors from out East; once enough of them come, only big, well-funded, and most importantly efficient companies can mine profitably.
So, now that we live in this world, how do we make a living wage in it, as beer producers? And to you beer drinkers, this may not be the most fun post, but if you’re thinking of starting a brewery or would like to know about the forces driving our most central decisions, well, here you go.
The answer is essentially twofold: know thyself, and know the market.
KNOW THYSELF
Under the “thyself” category, there are a few key things worth knowing and thinking about:
How much does it cost you to make beer?
An average is good, but you’ll need a beer-by-beer cost model in order to have a shot at surviving distribution. (How much is our IPA vs our Pale Ale? Uh...maybe, like, $30 more per keg?). Granted, pricing is an art - we’ll talk more about it shortly
This is actually somewhat tough, and this book helped me finally take a fine-grit sandpaper to my previous, largely solid, spreadsheet and incorporate insane stuff like depreciation
What’s your realistic production capacity?
We go through 70 BBL/month or so in the taproom (two kegs to a BBL), and whether we distribute or open a second location, say, we can only make so much more beer before we cut out all wiggle room
And when you have no wiggle room, your variety at the “home base” (your taproom, or taprooms) will fall, which is really not so good
This is known as Opportunity Cost, and the cost in this case can be steep, especially if your home base is your only profitable department
Can you afford to make way less money on a portion of your beer?
(Granted, your brewery labor per keg may go down along with a few other nice things, but the fact remains)
So, there’s an insane little feature of the distro/taproom dichotomy that certainly wasn’t obvious to me before looking into it: your profit from selling a keg in the tasting room might be, say, ten times what it is via distro. Which is exactly what it sounds like: you might make ten times as much actual money from the same keg of beer by just not distributing it
That leads to a quite dangerous and sinister dynamic, as, say, if you’re about to run out of a very popular beer in the taproom, you might decide to stop distributing it, thus kneecapping your distribution team, but ultimately making hand-over-fist more money
Heck, why even distribute a beer like a Hazy that’s guaranteed to sell out? If this thought crosses your mind, it’s likely that you haven’t maximized your taproom revenue
(Also, a note: most (?) breweries aren’t insanely profitable, so big profit should read as higher survival chance)
Which is to say: how maxed out is your taproom?
Because if there’s any room for growth there, and if you make way more money there, then it may be wise to invest your full energy in building that out as opposed to distribution. I think of distribution as a very late game play, the kind of play that takes a well-developed, multi-taproom brand with endless local demand, and parlays that into a bit of extra profit. A bit.
KNOW THE MARKET
As for knowing the market:
What does stuff cost?
As alluded to above, pricing is complicated. You should, if your job is to do pricing of any sort, go out to, say, 3-5 different reputable beer-selling establishments (bottle shops and grocery stores, say), and just write down as many prices as possible. What’s the average IPA 4-pack price in the Valley? Hazy IPA? Fruited Kettle Sour? You may not know, but your customers, in a will-of-the-people sense, do
Between these prices and your costs to produce, plus a few markups, you should have a good idea of whether or not you can survive in the market given your costs, and what to charge generally
What’s over-valued?
We learned the hard way that people are paying market price or less for Brown Ales and Nitro Stouts, because they’re not sexy. Hazy IPAs, all manner of Kettle Sour, Pastry Stouts - these can be expensive to make, but they often fetch a price that’s more than their cost to produce would imply, meaning: if you want the easy money (read: survival in a flooded market), selling these is a viable route
Heck, you can even brew one set of beer for your taproom, and a second set for cans and distribution...wait a minute
Have you sold to everyone near you?
There are uncharted waters that I have never, personally, looked into, like the correlation between can sales and the average income in a neighborhood, or perhaps some census-driven “maximum” volume of beer sold to a region. The idea being that it’s easiest to sell in a very small radius around your brewery, so you want to be damned sure you’ve sold to every single bar possible within a 5-10 mile radius before branching out
SO, WHY EVEN DISTRIBUTE? WHAT MIGHT THAT LOOK LIKE?
MacLeod’s got a “problem,” which is actually a largely great feature - our brewing equipment is relatively small. The good? We can brew a large variety without worrying too much about how fast it might sell. The bad? Our brewing costs are, thus, a bit high, and therefore it’s just...not in the cards to brew a large portion, or really sell any of our beer via distribution, outside of, perhaps, a very small radius, and even then, not for profit.
This is largely a result of opportunity cost - why make beer for distribution and make pennies on the dollar, when you can...not do that? And, it turns out, that when we brew enough to feed the distro machine, we get outages at worst and planning headaches at best.
So should anyone distro?
Obviously, but a few qualifications: if you’re thinking of buying a brewery, go as small as possible (hell, 5 BBl fermentors, @ me!), and don’t even think about planning around distribution. You are a bar - own it.
Further, even if you have the capacity, if your taproom isn’t full to the brim on weekends, don’t spend your emotional and mental energy building distro - build the hearth, build the easy money machine.
But, if we, say, had two or three full taprooms, which in and of themselves would necessitate buying a larger production facility, well, then it may be...acceptable, say, to build one a touch larger than you need, with the goal of distributing. By then, the easy money is made, and your production costs are as low a they’re going to be. If you have a gamut of popular brewpubs around the city, and you are damned sure that people are coming at least in part because of the beer (I can think of an LA brewery that I’d go to once a week if I lived close, and I am ambivalent about their beer - looking at you, Busch Gardens), then yeah, I can see distro being sensible. It’s icing, thin, thin icing, on a cake that should be Shaq tall.
CONCLUSION
So, should our intrepid lad sell his hand made Limeade through Costco? I might suggest he start by building a cost spreadsheet, downloading QuickBooks, charging enough per cup to break even, and after maybe a few years of modest profit, buying an old brewery, converting it into a Temple to the Lime, and going for broke.
Cheers,
Adrian “Daiquiri Ice” Febre