Part One - Making the Business Case
Before starting any project, you need make the business case to justify the investment. So sit down, pour yourself a cup of tea and ask yourself these two questions:
1. DOES THE WORLD NEED MORE OF WHAT YOU MAKE?
This is hard to answer. Your friends, family, people who visit your taproom and assorted novelty seeking identikit beer geeks will all shout ‘YES!’...but is that the truth?
In economics there is the concept of a Giffen good - a product which derives at least some of its value from its high price point. Will more people being able to get-hold of your beer actually decrease your revenue per unit? This is called a decreasing marginal rate of return and the second question will touch upon this idea again.
What we do for customers and clients is create a report that looks at the business and market from 3 angles:
Assemble case studies of other brands’ performance in the market from start to finish - pick 3 to 5 businesses and have a look at their performance
SWOT analysis - it’s so commonplace as to have become a joke, but it’s useful to measure the viability and vulnerability of your business
VMOST analysis using SMART KPIs - this is a lot of acronyms that help businesses set out a plan of how to achieve goals
VMOST means Vision, Mission, Objectives, Strategy, Tactics
SMART has a couple of interpretations but we use Specific, Measurable, Achievable, Relevant, Timely
KPIs are key performance indicators - you need to set KPIs to enable tracking your actual vs anticipated performance
2. CAN YOUR BUSINESS AFFORD THE INVESTMENT?
This is an easier question to answer: you can only afford to expand if you find that you can sell more of your beer at the same or greater margins than now, and if the increase in revenue justifies the project.
When determining whether the increase in revenue justifies a project, we look at the ‘payback period’ - the period of time that it takes for a project to pay for itself. I have embedded links to worked examples here and at the end of the page.
The following is a general guide to payback periods in the brewing industry. However, the payback is linked to risk appetite so will not apply to all projects:
>5 years - if this is not attainable then you should stop even considering the project as the likelihood of you recouping your investment diminishes significantly with time
<5 years - this is the ‘sensible to make the investment’ territory
1 year - find a way to do it now, immediately
Remember to include every factor and cost in the payback period, including production losses - your cold wort volume is not your sales volume. I have seen breweries operating at 10% losses from cold wort to beer in pack, but that’s incredibly low. Anything less than 15% losses is optimistic. I have seen as high as 50% losses in the case of highly hopped beer and poorly run production
You should now have a rough payback at your anticipated numbers, so you need to do a quick stress test.
The quickest and easiest stress test is to look at breweries who have grown to your target size and work backwards from retail prices. Find where these breweries are selling their beer and at what price points. Find the lowest price that this beer is sold for (I use mysupermarket.com or similar) and work backwards using your margins (remembering to include for the increase in beer duty) to determine how much you would make if you sold your beer at this price. In the worked examples (here) I have considered 2 breweries and a supermarket margin of 25%:
Brewery 1 - making around 500,000hl and selling 8 x 330ml cans of 5.6% beer at £9.00 gross
£0.35 contribution to brewery per can
Brewery 2 - making around 8,000hl and selling 3 x 330ml cans of 5.5% beer at £5.25 gross
£0.86 contribution to brewery per can
Remember that this contribution figure is what you receive from the supermarket once it is with them. You have to supply everything to get the beer to that point - all production equipment and premises, staff, packaging, transport...all costs. You want this to be as accurate as possible so make sure to include everything down to the smallest detail. For example, if your van needs new tyres every 30,000 miles, how much do those tyres cost and what proportion of that 30,000 miles is the return supermarket journeys? Work this out per unit and include it in your calculations.
Once you have assembled your costs and looked at the margins in a supermarket, consider your payback calculations again.
Does your project still stack up?