Nanobrewery Models: Exploring three business plans

Photo courtesy of MoreBeer!

From their first batch of beer, I believe every brewer has at least a fleeting thought of selling their product to the public, and more specifically about sharing the joy of brewing with like-minded people who enjoy it just as much as they do. Alas, professional brewing is not immune to many of the issues that face other business owners: Cash flow, profitability, growth plans, and not least of all, being able to pay oneself a living wage. Aside from these barriers, one must also overcome the initial capital required to enter the industry on a professional level and scale. But brewers are nothing if not innovative, stubborn, and willing to put in extra work for the sake of a better product. Enter, the nanobrewer.

My goal in this column to provide a bit of insight into the legitimacy of the small-brewery model, focusing on the low-volume, high-margin “coffee shop-esque” concept that is dominating the current craft beer world. I think this is perhaps a more sustainable way to look at the future of craft beer in the United States. Indeed there is an easily drawn line between the neighborhood pubs of today, and the pre-Prohibition era brewing culture of the United States — where the public house was an integral part of small communities.

The first step to establishing a business, nanobrewery or otherwise, is to perform a profitability analysis. Now, I do not have a terrible preponderance of knowledge in the area of business finance (indeed mine has been a trial by fire at times), but fortunately I have friends who do have such experience. From talking with them, and reading articles in this very publication, I have learned that one of the most important tools in the early planning stages is the break-even analysis. This is a simple examination of cost vs. profit, taking into account fixed and variable costs, and balancing those against the factors that contribute to your profitability. More simply put, this examination allows you to realistically project what your gross revenue must be in a given period of time in order to meet your expected costs. (For a more in-depth examination of the financials of brewing, see Audra Gaiziunas’ excellent article “Crunching the COGS: When it’s not a hobby anymore” found in the January-February 2019 issue).

At The Incubator (a collaborative brewery I own and operate), the first step we work on when admitting a new member brewer is their business plan. Essentially, this is your proposed road-map for your company’s future, justifying why you should exist, what you exist for, and how you intend to operate. In many ways, the business plan is a living document which, like brewing, requires constant re-examination to ensure its quality and coordination with the overarching efforts of the brand. As your business develops, along with your understanding of where your brewery fits into your market, you should make edits to your plan, utilizing data you collect as you operate. This should include everything from monthly sales projections to demographic analysis. Indeed, a solid understanding of who your drinkers are is critical to carving out your brand’s space within your market. Utilizing marketing tools like social media advertising, email campaigns, and even your local periodicals, you can build a picture of your current average customer, compare this to where you want to be selling, and adjust or redouble your efforts accordingly. (For more information on defining your brand and market in craft beer, see Ashton Lewis’ “10 Keys to Nano Success” found in the May-June 2018 issue)

Alternating Proprietorship

So, let’s dive into our first business model. The alternating proprietorship license type was originally created as a way for operating breweries to capitalize on the time where their brewhouses sat unused between turns of their fermenters. The concept is a simple one — a brewery can rent out time on its operating space and equipment to another licensed brewery for the production of beer for sale by the lessee. One can see the appeal of such a situation for both parties involved. The operating brewery gains an additional revenue stream to offset their costs and provide another source of income during slow months or when all fermenting vessels are full, and the leasing entity benefits from the use of a large-scale production platform without a capital intensive initial investment, or the overhead of such a facility. In some cases, such as The Incubator Brewery I helped to establish, you might have multiple alternating agreements within one licensed location. In such situations, the most relatable concept is that of the Co-Op — a workspace wherein tenants share resources, collaborate, and pay an equitable portion of the associated costs of production. While these environments are wonderful for establishing new breweries, there are several limitations.

Alas, professional brewing is not immune to many of the issues that face other business owners . . .

The first limitation is that retail sales for the leasing entity must occur at a separately-licensed premises. In some cases, this is as simple as a taproom next door, operating as a distinct LLC and allowing the leasing brewery to capitalize on retail margins for their product. Or perhaps the leasing brewery is waiting on the build-out of their taproom space and must sell wholesale kegs to local accounts for a period. The second limitation is one of logistics. At any time, the owner of the space and brewing equipment may need to use 100% of their available production capacity, thus ousting, or temporarily hamstringing the leasing entity. Maybe the mash tun is left full of souring Berliner weisse on a day you had set aside for brewing. Or perhaps the host brewery’s glycol chiller breaks during active ferment on your gold-medal winning Pilsner. In any case, it is important to establish an alternating agreement long before production, such that the lessee and the lessor are protected. Indeed, such an agreement is required by the TTB during the initial filing of the license to operate under an Alternating Proprietorship license.

The Gypsy Brewer

Next up, a related, albeit less common model, is that of the wandering brewer. This path is an evolution of the alternating proprietorship, wherein the leasing party does not have their own premise for operations, or their own taproom, thus cutting overhead down close to negligible, allowing the maximum amount of flexibility in terms of production volume, schedule, and variety. Now, while this does permit one to start and stop operations much more readily than any other model, it comes with one glaring limitation from the outset: Not having a source for retail income on your product. As you’ll recall from Econ 101 (or a quick exploration on your cell phone calculator), it’s much more profitable to sell a product for $5 a glass than it is to turn around and sell 120 of those glasses (in a half barrel keg) for the average wholesale cost of around $165. We’ll discuss this a bit more in future articles, but for now, suffice it to say that trying to operate on a small scale only selling wholesale kegs is often a losing battle (ask me how I know). That being said, don’t discount this concept if all you want out of professional brewing is a way to legitimize your hobby, and at least have it pay for itself, while you analyze whether this business is really one you want to dive headlong into, or if you’re simply biding your time while your own facility is in planning. One of the great flexibilities of the craft beer world is, at least in part, due to the fanaticism of the fans of your product. Perhaps you can legitimize yourself as a producer of unique, value-added products, which customers are willing to pay a premium for through a bottle club? Maybe your Session Imperial Wet-Hopped Pastry Milkshake IPA is so good that accounts will fork out $300 per quarter barrel keg, marking it up proportionally to equally rabid patrons? Indeed, several now-successful commercial operations have begun as gypsy breweries — Grimm Artisanal Ales out of Brooklyn, New York, Triple Voodoo Brewing in San Francisco, California, not to mention the now world-famous Evil Twin and Mikkeller breweries, founded out of Denmark by the Bjergsø twins.

The Taproom

The final model I’d like to explore in this article is that of the now commonplace neighborhood brewpub. We all know what this model is, and you may even be reading this article while sitting at the counter of such an establishment, but what really makes this style of small-scale brewing work? To contextualize this example, I’ll define it as a brewery that sells the majority of its product over the counter in its own taproom (capitalizing on that high-margin per volume sale), and doing so on a relatively small system and production scale (typically a three to seven barrel system, producing 300 to 800 barrels of beer per year). I won’t break into the financials here (Audra Gaiziunas does a very thorough job of that in her article), but a small brewery can easily be profitable selling around 500 barrels per year, if even half of those sales are done in one’s own taproom. It is precisely this retail environment and associated sales which small businesses, especially craft beer, live or die by. Not only is your taproom a critical component in generating high-margin transactions, it is your brand’s public face to your market. Much like an independent neighborhood coffee shop, the small brewpub relies on locals and locale. The environment you create must be comfortable, memorable, and reflect what your brand is about. From my career in architecture, I can say with confidence that the physical environment you create to house your brand, whatever it may be, is synonymous with how the public will perceive your product. Are you a farmstead brewery making artisanal beers with unique ingredients grown on-site? Then your taproom had better push that message. Or, perhaps you’re a more edgy presence, featuring live metal-rock shows and unapologetically big beers. In this case, a warehouse with plenty of open space featuring an industrial ambiance would be more appropriate. Whatever your situation, on the nanobrewing scale, planning the space of your business is equally important as, and intrinsically linked to, your business plan.

While planning brewery operations may not seem quite as fun as getting your hands dirty on a brew day, it is an essential part of developing your brand from pastime to profession. In the interest of justifying this profession on the nano scale with some more credible information, I’ve enlisted the help of Sam Holloway. Sam is the founder and president of the brewery business planning community Crafting A Strategy, and an Associate Professor at the Pamplin School of Business at the University of Portland. I wanted to conclude with this brief Q&A I had with Sam recently over a beer at Loowit Brewing, a small, neighborhood operation in downtown Vancouver, Washington (incidentally the site of NanoCon 2019):

Q: If you were advising a new small-scale start-up brewery planning to open this year, what would your top three points of advice be?

A: (1) Keep your fixed costs (rent) as low as possible. Try to serve your beers in the smallest space possible to get the greatest yield per square foot. (2) Find an innovative way to serve food without operating a restaurant. Food carts, sublease your kitchen space to a real food operator, allow outside food to be brought into your taproom. Concentrate on the beer and high margins, let food be someone else’s challenge. But food is essential — profitability is getting one more pint ordered per four-top per visit. (3) Don’t be in a hurry to package and distribute your beers. The economics of wholesale favor large established breweries — so just build another taproom if you want to expand.

Q: Are small-scale breweries advisable at this point in the U.S. craft beer market? If so, what are their main advantages/ disadvantages over larger operations?

A: Small-scale is absolutely the way to go. You aren’t selling beer or competing against other breweries — you are competing for drinking occasions with wine and spirits and you are selling an experience that goes far beyond the technical quality of your beer. If you think and act like a large brewery, you are setting yourself up for failure. Why play by the large breweries’ playbook and try to sell in grocery stores when you can create an amazing retail experience of your own and control the conversations with consumers?

Q: As an educator and adviser in craft beer, what do you think the next 3 to 5 years are going to bring in terms of major changes in the U.S. beer landscape?

A: Fragmentation is the key trend. The top 100–150 breweries will continue to merge and acquire each other to drive down their average costs and play the volume/scale game. They have the most volume, but they aren’t the most prevalent in the sample. We are headed toward 10,000 craft breweries domestically and the vast majority (95%) will be small neighborhood pubs. Fragmentation gives more entrepreneurs and more neighborhoods the chance to benefit from having their own brewery — this is where a 3-bbl system in the right neighborhood can produce a happy life and profitable lifestyle business for you and your investors. If you want to get big and wealthy via beer, you are about 25 years too late.

Issue: November 2019