Exploring the Nanobrewing Business Model

As I write this piece, I sit in a local brewery in Springfield, Missouri, called Tie & Timber, listening to music, drinking beer, and looking forward to chatting with friends after I hit the save button. Tie & Timber has a 10-BBL brewhouse and is also focused entirely on selling beers in-house. Although they brew great beers and their brewhouse and fermenting tanks are open to and visible from the seating area, owners Jennifer Leonard and Curtis Marshall will tell you that they are first and foremost in the hospitality business.

I think this is true of most successful taproom breweries, even if the owners of many of these great businesses don’t always know what really makes their places tick. And when we look back at the history of brewing, most breweries did not sell beer outside of the brewery and the best of these great places attracted locals as a place to socialize, warm their bones, cool their heels, and enjoy a few beers over several hours. Indeed, many gasthauses, taverns, and pubs were probably more comfortable places for patrons to relax after work than their homes.

If I were in your position and questioned about my business decisions, I would politely and positively offer your perspective as the owner of a nanobrewery using business points that your friends and enthusiastic supporters should appreciate. Here are my top three answers to this great question:

1. When craft breweries of any size sell beer in the open market, they knowingly choose to compete with all beers in the retail outlets selling their beer. Cans of beer from breweries producing hundreds to millions of barrels annually are all sitting in the same store, often in the same cooler, and sometimes rubbing shoulders with one another. And they are all screaming, “Pick me! Pick me!”

The challenge that these beers all have is that their voices cannot be heard because, spoiler alert, beer cans don’t make noise on the shelf. This is where marketing and branding is a key differentiator. Beer brands that are known and recognized often have an advantage to those brands that are unknown. I say this is often an advantage because not all brands resonate to all consumers. And to a very small minority of consumers, complete unknowns are an attraction. But in today’s rich market with lots of choice, most consumers gravitate to what they know or have heard about.

The bottom line is that your taproom brewery does not have to compete with all beers in your market after one of your customers walks in through the door. Not too different from why great restaurants rarely choose to compete in grocery stores and markets.

2. The average consumer doesn’t spend much time thinking about packaging and is rarely aware that the single most expensive part of a can/bottle of beer is the entirety of the package. This includes the container, the lid or cap, the label, shrink sleeve, or paint job, and it also includes a carrier for 4- and 6-packs plus a box or tray. And package costs are a volume game where smaller brewers are at a disadvantage out of the gate.

Packaging is also an efficiency game (labor spent per barrel); this is where small breweries get stomped by larger breweries with higher speed packaging lines. A nanobrewery filling packages at 4 x 16-ounce cans per minute (much faster than breweries doing this all by hand) are filling almost 1 BBL of beer per hour. In contrast, 30 x 16-ounce cans per minutes equates to 7.5 BBLs per hour, and 240 cans per minutes equates to 60 BBLs per hour. The largest craft brewers are filling 200+ BBLs per hour. This means that the labor cost of packaging for a nanobrewery is between 7.5 to 200 times greater than breweries with more automated packaging lines using the same number of operators (not at all uncommon).

3. When small breweries take the leap into the retail market, there is still more money to spend before beer is sold. Examples include the cost of sales staff, beer delivery, account service, schwag, tap handles, quality control, and spending money to defend market position from the ever-present school of sharks searching for opportunities. Entering the market outside of your four walls means starting an entirely new business venture. Distribution has been the demise of many small breweries and is something that taproom breweries do when they are desperate for business or when they underestimate the magnitude of the endeavor.

In my opinion, the smartest business decision for nanobreweries like yours is to max out beer sales in your own house. And when the day comes that you have done that, expanding the size of your facility, or even opening a tied house (where permitted), is a better move than playing in the distribution world. Even adding a segment to your business in the form of a morning café business using your existing building is an option that is simpler than entering the world of distribution. To echo my friends Jennifer and Curtis, taproom breweries are in the hospitality business. Not only is the highest margin returned from in-house beer sales, brewery exclusive sales guarantee control of the taproom environment, beer presentation, messaging, and beer quality. 

Response by Ashton Lewis.