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Half a Bag of Common Sense

 

People who have known me as a homebrewer for a long time often ask me what I think of professional brewing.

“Honestly,” I say to them, “brewing is pretty much brewing. The challenge is on the business side of things.” I find myself spending more time focused on spreadsheets than brew logs these days. Professional or homebrewing, you make wort, ferment it and then package it. The only reason professional brewing is different from high-end homebrewing is the added challenge of making consistent beer that you must sell in a profitable way, every day.

Notice I said profitable. This is the tricky part to the business and why I spend sooooo much time working with spreadsheets these days. Anyone can sell a small amount of beer and there are always people willing to buy beer based on price. However, the harsh reality for the smaller craft brewer is that you can’t compete on price with the larger craft brewers. The larger brewers have an economy of scale. Generally, the larger your production, the lower the cost per ounce. When the beer costs less per ounce, you can still make your needed margin at a lower price point to the distributor or retailer.

I’ve heard of some start ups that think they will compete on price, but that is not sustainable. They respond that their plan is to start with a lower price initially, to get their beer in the door, and then to raise prices later to a profitable level once the accounts can’t live without their beer. That is just crazy talk. I think most readers with half a bag of common sense will know right away what is wrong with that logic. There are so many great craft beers out there that the retailers and consumers can easily live without one more.

Often this low pricing strategy is borne out of another type of ignorance: cost of goods sold. While the brewery might have some idea how much their malt and hops cost per batch, they are woefully ignorant of all the other costs of production. Without tracking and knowing all of the costs, it is easy to make the mistake of under pricing your beer.

The opposite of that is when the brewery declares they will charge what their beer costs to make, plus a nice profit margin. I don’t think this is nearly as bad as the previous example, but it does have its flaws. Keep in mind that when a brewery starts up, the cost of production is usually higher than an established brewery. There are plenty of other breweries out there charging less for just as good a product, so there is little incentive for the retailer or distributor to take on your product if it is excessively higher than the competition. You do need to play the price game a little, at least to the extent that you don’t price yourself out of the market. You can be on the high end as a start up, but you still will need to run as tight a ship as possible if you hope to make a profit. It might be better to hope for breaking even, at least until you can get production and sales up. The goal is to grow production, and as production grows, your cost per ounce drops. As your cost per ounce drops, your profit rises without having to raise prices. At least that is my theory, but I’m still as green as anybody in this business.

So that is why it takes a great deal of tracking and calculating. It isn’t easy, and it is really boring compared to brewing, but if you hope to turn a profit, you need to focus on the business side of making beer.

One Comment

  1. Mike Heniff says:

    Well said! Sounds like you got your MBA from the Brewing School of Hard Knocks. Here’s to continued good luck! From many of the breweries that I have seen go under, it is more often because of bad business practices and not because of truely bad beer. Cheers!

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