Self-Auditing Your Brewery
Embracing the challenge of current financially relevant trends
This past year was a tough one for breweries, including nanobreweries. From a financial perspective, 2023 was a year of realization that certain economic models were no longer working, a year of reckoning as cash flow from our various governmental agencies that had been intended to serve as temporary sources of relief ran out, and a year of being forced to take decisive action as taproom traffic in many areas of the country wasn’t returning to previous 2019 levels.
For the first time in over two decades, craft beer sales are down or flat. Closings are on the rise while openings are slowing. And as an industry, we’ve now entered what economists call a mature market. Yet, we’re not adapting quickly enough with both eyes open, as many brewery owners still don’t have a firm grasp over their financial statements or are missing key pieces of information needed for decision making by running things from too analog of a perspective.
As a CFO, I witnessed many nanobreweries operating in 2021 and 2022 without a budget of any sort. EIDL (Economic Injury Disaster Loan) money was being spent on capital improvements, taproom expansions, and even second location openings, while guidelines tied to return on investment and return on asset expectations related to those expansions were sorely lacking. PPP (Paycheck Protection Program) funds were being spent on wages, payroll taxes, and benefits, but were lacking corresponding sales figures the brewery would have to hit to support this level of payroll once those temporary funds ran out.
At the same time, brewing raw materials saw price increases at least twice by suppliers in 2022 and packaging costs increased for many in 2023, but the majority of nanobrewers I interviewed neither tweaked their recipes nor adjusted pricing to the consumer quickly enough. Rather, they absorbed these increases instead. Brewers were essentially running faster to stay in the same place.
It felt industry-wide, as if too many of the standard operating procedures related to finance, cash flow, and administration, had taken a back seat once the pandemic hit in 2020. But when things started opening back up they never returned, even years later.
Panning out a bit to add some additional context, in September 2023 the Brewers Association’s Chief Economist, Bart Watson, posted an insightful summary of aggregated data, including multiple charts and graphs covering the shift of consumer purchasing trends over the past two years. When we look at the general sales trend within approximately 600 grocery stores, for example, total sales for the same store set were slightly higher in 2023 compared to 2022 (up 2.6% January-May), with both 2022 and 2023 significantly stronger than the first portion of 2021. However, year over year (YoY) Consumer Price Index (CPI) averaged 5% in January-May, so in real terms, we’re looking at a slight decline in sales.
When digging further into the composition of sales by type (beer, food, apparel, other beverages, etc.) at those same stores, there is clear and persistent decline in beer sales (both draught and retail) from January ‘21–May ‘23. So, what’s making up those sales if beer is declining as a percentage? There isn’t one answer, but food and other alcoholic beverages are big contributors. Food is the number one growth item — averaging 18.4% of sales in March–May 2023 versus 15.8% in March–May 2021.
Another part of the story is other beverage alcohol. While those sales still are small compared to beer, they are consistently growing. In summary, inflationary pressures over the past two years, combined with the rising prices of food, have caused people in grocery stores to spend less on beer. Understanding that, consumer behavior tells us that the opportunity for growth may not exist in spaces outside our taprooms at this time and we should perhaps rather focus on what we can offer within our taproom space. This is a positive insight for us nanobrewers, as our revenue predominantly comes from within our taprooms in the first place.
In summary, inflationary pressures over the past two years, combined with the rising prices of food, have caused people in grocery stores to spend less on beer.
When we turn our attention to average prices per pint nationwide (this sample set comes from Arryved point-of-sale data of approximately 2,000 breweries), they started at $6.05 in January 2021 and increased to $6.74 by May of 2023. When we crunch the numbers year-over-year, the pricing growth is slightly below the numbers we’ve been seeing from the CPI for beer away from the taproom. The CPI index was 1.5% higher in August than it was in May, so current prices are likely a bit higher on average. Higher prices are generally going to mean larger absolute increases, but what we see is that higher-priced states generally took less price in percentage terms.
Looking at May 2021 to May 2023, the states that took on the most price in percentage terms were Texas, Florida, and Georgia, states that averaged $6.00 a pint in 2021 and $6.74 in 2023. The three lowest in percentage terms were all Eastern states, Pennsylvania, Virginia, and New York, starting at $6.42, but ending May 2023 at $6.83. While we’d need a much more rigorous analysis to say more definitively, this may suggest that our taprooms are seeing upper bounds on how much they can push price. We as nanobrewers may be hitting the ceiling on our ability to ask our consumers to pay more per pint.
To provide an overview of the current trends affecting nanobreweries financially, we can look at various aspects such as market growth, consumer preferences, technological advancements, and financial challenges. Here’s a summary:
1. Consumer preferences and focusing on where we can grow: In 2023, there was a continuing trend towards purchasing hyper-locally produced craft beer and flavored malt beverages. Nanobreweries benefit from this trend due to their size, taproom focus, and ability to be nimble as consumers seek unique, locally produced beers with diverse flavors. Breweries should continue to innovate and explore new categories and flavor options. Rather than being all things to all people, focus less on what’s growing industry-wide and more on what you as the specific nanobrewer can grow. Perhaps that’s a focus on appealing to a more diverse crowd through one’s offerings or on inclusivity via the types of events that one hosts in the taproom.
The current craft beer demographic can only take the craft beer industry so far without yielding diminishing returns at some point in time. The customer experience within the taproom is a place we can truly shine as a differentiation point, so allocating a set budget for marketing and events alongside measurable metrics to gauge the success of those dollars spent should be an area we explore. Women, people of color, younger generations, and anyone who might not currently identify as a beer drinker could be a future beer drinker with a new approach to sales, marketing, hiring, and community-building.
2. Sustainability and eco-friendliness: There continues to be an increasing emphasis on sustainability being placed across our industry. Nanobreweries are adopting eco-friendly practices in production, packaging, and distribution, appealing to environmentally conscious consumers, as well as improving their efficiency within their standard operating procedures.
3. Technological advancements: The use of technology in nanobreweries is becoming more prevalent, with innovations in brewing equipment, fermentation technology, and digital marketing tools. This includes the use of automation to improve efficiency and consistency in beer production using inventory management software.
4. Direct-to-consumer sales and online presence: With the rise of e-commerce and changes in alcohol distribution laws, many nanobreweries are shifting towards direct-to-consumer sales models beyond the taproom. This includes online sales, subscription services, and local delivery options, enhancing their reach and customer base.
5. Local collaboration and community engagement: The strong trend of local collaboration, where nanobreweries partner with local businesses, participate in community events, and engage in local causes, continues to thrive and grow. This not only helps in marketing but also strengthens community ties and supports the local economy.
6. Financial challenges and funding options: Nanobreweries continue to face financial challenges, including rising ingredient costs, competition from larger breweries, and shrinking access to capital from more traditional funding sources such as regional banks. However, there’s a trend towards the development of more creative funding options in the areas of crowdfunding, within local investment groups, and small business loans tailored to small-scale breweries. Approach your local CDFI (Community Development Financial Institution) to explore some of these options. Leases have been increasingly difficult to negotiate and are often cited as a reason for brewery closure in our current environment.
7. Regulatory changes and challenges: In many regions, there’s ongoing evolution in the regulatory landscape affecting alcohol production and sales. Staying compliant with these changing regulations remains a challenge for nanobreweries for a multitude of reasons, one of them being our inability to afford keeping an alcoholic beverage attorney on retainer to watch over us at all times.
8. Niche and experimental brewing: Nanobreweries are increasingly experimenting with niche and unconventional beer styles, catering to a segment of consumers seeking novel and diverse beer experiences. As the consumer has been seeking out double/triple imperial or session beers full of flavor, we’ve been forced to stay creative without breaking our batch cost goals.
9. Impact of global events: Ongoing global events, like economic fluctuations, supply chain disruptions, and changes in consumer spending habits, continue to impact nanobreweries requiring adaptability and resilience.
10. Community-based marketing: Marketing strategies are becoming more community-focused, leveraging social media, local events, and word-of-mouth to build a loyal customer base. Encourage reviews from loyal customers.
These trends indicate a dynamic and evolving industry where adaptability, community engagement, and a focus on unique product offerings will be our keys to success as nanobrewers in 2024.
One actionable way we can appropriately position ourselves for these trends is by elevating our financial literacy and by truly understanding our cost structure as it applies to our financial goals for 2024. In the January-February 2019 issue, I penned the article “Crunching the COGS: When it’s not a hobby anymore” where I covered cost components per product, the four types of costs every brewery encounters, as well as the calculation of the breakeven formula. I strongly suggest revisiting that article first before delving ahead.
Next, I recommend the following step-by-step exercise to understand what your current cost structure and breakeven looks like:
- Review your annualized income statement line by line, labeling each cost as “fixed” or “variable” AND “direct” or “indirect.”
- Add up the totals of each of those four buckets: Fixed, variable, direct, and indirect. Your check is that you should get a total that is exactly 2x your total expenses.
- Divide your indirect bucket by the number of BBLs you sold last year and/or the number of BBLs you project you will sell in the current year. That is your overhead rate per BBL.
- Divide your variable bucket by the number of BBLs sold over the past year. That is your VC (variable cost) component for your breakeven formula.
- Keep your fixed bucket as a $ total. That is your FC (fixed cost) component.
- Divide your total beer sales $ by the number of BBLs sold over the past year. That is the S component for your breakeven formula.
- Set your financial goal in $ for the year, then solve for x. In this case, x is expressed in BBLs.
- S(x) – VC(x) – FC = your set financial goal
Once you rearrange your income statement in this sort of way, you’ll gain a greater understanding of your fixed overhead, or the costs that you must cover regardless of how much beer you produce. Be sure to include the overhead rate per BBL in your analysis going forward when creating pricing scenarios. Likewise, your attention will then shift to the VC category, a realm where you have greater control to influence cash outflow.
For 2024, be sure to create a monthly profit and loss and cash flow projection. For those who would like to learn more, I encourage you to check out the online Boot Camp where I give in-depth tips to manage craft brewery financials: www.byo.com/bootcamps/
Financial literacy is not just about mastering numbers; it’s about gaining the wisdom to make informed decisions. It’s this literacy that will keep propelling us nanobrewers forward.
