With 7,000+ breweries in the United States all signs would point to…yes! Yes, if it is planned with precision, forethought, and a strong team. No, if it is hastily thrown together because a homebrewer had a good idea.
Having built 2 Asheville breweries myself in the 90’s and aughts, I’ve seen the highs and lows of the business. I will give it to you straight.
A brewery is profitable if planned well, has a good team and solid financial foundation. A retail outlet that allows for by-the-glass sales is optimal. Hyper-competition in the market today makes micros (strictly packaging breweries) a longshot.
This is a complex issue and here I’ll provide a brief overview only. It will serve as a basis from which to begin. This model presents a small brewery of 500 – 750 square feet with an attached pub of 800 – 1600 square feet. A small operation.
How long does it take for a brewery to become profitable?
The goal for profitability is in about 3 years. If it could be achieved sooner, great. If achieved later, that is OK too.
The point in the early years is to build a growing, stable foundation. Early private investment and bridge loans are normal.
On-the-books losses are normal, although cash-flow should be stable.
Can you really make money with a microbrewery?
The optimal way to make money in brewing is through by-the-glass sales. No matter the size, whether nano or 30 bbls. attach a tasting room wherein the business can benefit from retail profit margins.
COGS – Cost of goods sold
Beer ingredients are inexpensive in the scheme of things, so a glass for $5 – 6 is quite the windfall. There are many factors at play here and many expenses.
In this section, I will break down Cost of Goods Sold – COGS.
Table 1: Cost of goods breakdown: These are educated approximations, used for modelling only. Regional prices vary.
|INGREDIENTS||7 BBLS./ YIELD||COST/REVENUE||TOTAL|
*2-row malt and specialty grains
|● 217 gallons|
● 14- 15.5 gallon kegs
|6 lbs. hops-||*premium imported and American Aroma varietals||$1.50 per ounce||$48|
|600 gallons of water|
*about 30% will end up in finished beer
|*filtered city water||$.0033 per quart|
*water was cheap in NC!
|Sugar/ adjuncts- 5%||$1.50/ lb.||$42|
|Minerals- ¼ pound||$3.00/ lb.||$0.75|
|Labor||*8 hour brew day, 8 hours of cellaring and packaging||$25.00/ hour||$400.00|
|Subtotal||$0.42 per pint||$698.67|
|Pints sold/ retail = 1,683.92||1,736 x (.03) wastage||$5.00 (rev.) x 1,680 pints||$8,400.00|
|Subtotal||$16.64 per keg||$698.67|
|1/6 bbls sold/ wholesale||42||$65 (rev.) x 42 kegs||$2,730.00|
I know what you are thinking: Where do I sign up? Well, it is a lot more complicated than that.
The gross margin on a pint is about 92%. The gross margin on a keg is about 74%. If the difference is only 18% then why is gross profit less than 30% of by-the-glass. The revenue on kegs is only a fraction of retail sales. To express more fully.
Table 2: 1st year: Forecasted Revenue and Cost of goods breakdown
price per unit
|Golden Ale – retail pints- 60 bbls.||14,400||5.00||72,000.00|
|Golden Ale – 1/6 bbls. – 40 bbls.||240||60.00||14,400.00|
|Brown Fruit Ale – retail pints – 80 bbls.||19,200||6.00||115,200.00|
|Brown Fruit Ale – 1/6 bbls. – 44 bbls.||264||70.00||18,480.00|
|TOTAL OF FORECASTED REVENUE||220,080.00|
|COST OF GOODS SOLD|
|Annual cost of|
|Golden Ale – retail pints- 60 bbls.||91.60%||6,048.00|
|Golden Ale – 1/6 bbls. – 40 bbls.||74.00%||3,744.00|
|Brown Fruit Ale – retail pints – 80 bbls.||85.60%||16,588.80|
|Brown Fruit Ale – 1/6 bbls. – 44 bbls.||74.00%||2,956.80|
|TOTAL COST OF GOODS SOLD||29,337.60|
In contrast to table 1, the pint cost of the brown here is higher to cover the cost of fruit. Also in table 1, the keg prices were averaged together to match the figures in table 2.
The potential for strong revenues exists here. They are dependent on retail sales.
Expenses and Liabilities
The brewery will have recurring monthly expenses: taxes, labor, utilities, insurance and much more. Below is an example. Again, I want to state clearly: These are educated approximations, used for modeling only. Regional prices vary.
For additional information see the articles, how to build a brewery and How Much Space Is Needed for a Brewery for more details.
Table 3: Detailed Expenses
|Year 1||Year 2||Year 3|
|Sales and marketing||4,800.00||9,792.00||15,275.52|
|Maintenance, repair, and overhaul||600.00||660.00||792.00|
|Legal/ Accounting fees||3,000.00||3,300.00||3,960.00|
|Interest expense on long-term debt||6,924.24||6,003.09||5,035.89|
|Total operating expenses||180,790.91||214,589.76||238,855.20|
|Total Non-Recurring Expenses||9,039.55||10,729.49||11,942.76|
These are costs that remain relatively stable overtime. General costs will rise about 2% per annum with inflation. 10-20% per annum increases also occur as illustrated in marketing, utilities, and maintenance. They do not grow however, in direct conjunction to production increases.
In other words, 100 barrels or 1000 barrels, these fixed- costs rise gradually.
Your marketing may be ramped up or down depending on the volume of sales. This requires cash money on a monthly basis.
Depreciation is not a real expense in that you do not pay every month. It represents the amount of value your equipment loses every month through age, wear, and tear. It does however count as a cash expense on the balance sheet.
Insurance is a fixed cost and will remain stable throughout, likely tied to inflation. Unexpected expenses are to be expected and, in most cases, unavoidable. They represent 3 – 5% of total operating expenses.
Interest expense will remain fixed through-out in most cases. This figure is based on a $150,000 loan at 5% over 7 years.
First year labor represents roughly 2 full-time employees in the early days, with a 3rd and 4th employee brought on in year 2 and 3. It is normal for owner operators to work for little to no pay for 1-2 years and hire hourly labor to help throughout. Servers for example work for minimum wages and get tipped.
Output increase and revenue
Table 4: 3-year Projection/ Profit and Loss
|PROFIT AND LOSS ASSUMPTION|
|Year 1||Year 2||Year 3|
|Annual cumulative price (revenue) increase||0.00%||50.00%||25.00%|
|Annual cumulative inflation (expense) increase||0.00%||2.00%||4.00%|
|Year 1||Year 2||Year 3|
|Golden Ale – retail pints- 60 bbls.||72,000.00||108,000.00||135,000.00|
|Golden Ale – 1/6 bbls. – 40 bbls.||14,400.00||21,600.00||27,000.00|
|Brown Fruit Ale – retail pints – 80 bbls.||115,200.00||172,800.00||216,000.00|
|Brown Fruit Ale – 1/6 bbls. – 44 bbls.||18,480.00||27,720.00||34,650.00|
|Year 1||Year 2||Year 3|
|Cost of Sales|
|Golden Ale – retail pints- 60 bbls.||6,048.00||9,253.44||14,435.37|
|Golden Ale – 1/6 bbls. – 40 bbls.||3,744.00||5,728.32||8,936.18|
|Brown Fruit Ale – retail pints – 80 bbls.||16,588.80||25,380.86||39,594.15|
|Brown Fruit Ale – 1/6 bbls. – 44 bbls.||2,956.80||4,523.90||7,057.29|
|Cost of goods sold||29,337.60||44,886.53||70,022.98|
|Other Tax (federal and state excise)||4,480.00||6,720.00||8,400.00|
Table 4 is notable in that it shows annual growth over 3 years: 50% growth in the first year as initial growth is often quite aggressive. The third year sees a 25% increase, as growth slows but profits are significant.
The brewery is still producing less than 1000 bbls. yet most revenue is dependent on retail sales.
Excise taxes (alcohol taxes) are significantly lower in some states, but NC has particularly high ones.
As proposed in the opening section, year 3 is the year of substantial profit. If you showed this kind of profit on your balance sheet, most any bank would back you for a capital expansion.
Notes on growth
This brewhouse could be quite small. Similar to the one seen in the article, how much space is needed to build a microbrewery. As little as 500 square feet could be enough for production, yet there would need to be some adjacent space for keg storage and the physical plant.
Pub construction could include a mix of professional contracting and DIY. To do it cheaply, contribute personally as much as you can to build it. Keep the debt to income ratio low.
I am assuming a mix of secondhand, new, and repurposed equipment. The original loan amount was for $150,000. There could be an additional 50K of private investment as well.
Retail Sales are Essential
The net revenue on by-the-glass sales is 300% of keg sales. They will drive and support the business. There are many strategies to build an attractive pub, draw crowds, and generate the target sales.
There are myriad ways to organize a professional brewing operation. At this stage in the market, retail sales are the smart bet.
There is outsized beer consumer enthusiasm to be sure. Within the open marketplace lies hyper-competition wherein the band of brothers mentality that brewers claim to have is quickly left behind and the next guy is coming after you!
Be wise, have the best beer, sell it by the glass. Ask for help when you need it.
KMB Consulting can assist you in all of your challenges, large or small. Brewers need support and input. It is an artisanal craft, refined by years in the brewhouse. It is also an uncommonly specialized business.
Interested in a start-up or expansion? From conception to construction and pilot brews, we have the experience.
Today’s brewers have puzzles that need a fresh perspective. I’ve walked in your shoes. I know the victories and struggles that come with the brewer’s life. Reach out to us. No problem is unfixable. Check KMB Consulting.