May 3, 2013

Session #75: The Business of Brewing

The Session, a.k.a. Beer Blogging Friday, is an opportunity once a month for beer bloggers from around the world to get together and write from their own unique perspective on a single topic. Each month, a different beer blogger hosts the Session, chooses a topic and creates a round-up listing all of the participants, along with a short pithy critique of each entry. This month's Session, hosted at Allbrews, is about business of opening and running a commercial brewery: "What were the prescient decisions that saved the day or the errors of omission or commission that caused an otherwise promising enterprise to careen tragically off the rails?"

This one is up my alley, I'd say.

First, some reality: Most small breweries, like most small businesses, are not started by people with any serious or formal knowledge of business. They are started by people who are good at a craft, and think that should be enough to be successful. It has been my experience that, in beer, the brewers are often bearded introverts who would rather talk to yeast than people. There are also a group of (more recent) brewery founders that think beer is cool and like talking to people, and they do not intend to let their lack of beer knowledge get in the way of their business.

Both of these types of brewery owners come with - shall we say - some challenges. The obvious:

Of course, making good beer is not nearly enough to do well at business. Business involves managing cash flow, inventory, supply chains and public profile. One defunct PA brewery, Legacy, made some great beer. They're gone now, and their intellectual property is owned by Ruckus, a marketing company that just announced plans to open a commercial brewery in Allentown

Being good at business is also not good enough without good beer. Let's look at Bavarian Barbarian, another defunct PA brewery with some good marketing and aggressive instincts. Unfortunately, their beer never got consistent. One batch would be decent, then the next flawed. With so much good beer out there, the market won't tolerate that for long. 

None of this matters if you have a brewpub, in which case you have a monopoly, and the margins are so good that the beer can stink and people will drink it and you'll be fine. Just ask Dogfish Head, whose beer was by all accounts undrinkable for the first four years, when the restaurant kept them afloat (they've gotten better, I hear).

But if you've got a production brewery, balancing the need for business with the need for product is a tough thing; most people only have enough lifetimes to get good at one side of that.

In my upcoming meadery, we're trying to solve the problem with the most effective way I've seen in beer: Get one of each kind of owner.

Now, my business partner is clean shaven and personable, but he knows he's no businessman. He's a virtuoso meadmaker. I'd venture to say I know more about beer and mead than most of the marketing-happy guys who start a beer company because it seems cool, but business school didn't teach me about degassing and nutrient additions. So, while we can help each other and give opinions, we also have spheres of expertise where we defer to each other. I wrote the business plan and Mike determined what our equipment needs are; Mike told me which flavor ideas I had were not likely to work and I told him we need more products that don't take 4 months to produce. We believe it to be a good partnership, but of course we're not operational yet.

The other thing to note is that breweries can have drastically different goals. Some want to grow and produce tons of beer and make tons of ever-growing revenue. Some want to run a small, noted successful operation that basically prints money on good profits. Both are fine. What does not work when a brewery thinks it wants to be big, but isn't sure. Growth requires risk and investment; if you're a naturally cautious, risk-averse person (as many brewers are), then get comfortable with being small or get comfortable with being out of your comfort zone (a paradox!). If you're a growth-focused, world-domination type of person, my advice is to know upfront where the money is coming from, and what you're giving up for it (usually equity or collateral for a loan).

In the last few years, we've started to see that the beer business can lead to some big returns. Goose Island, Crispin Ciders, Terrapin and others have seen exits and investments at significant multipliers. Beer companies like Pedernales and Churchkey found ready and willing investors necessary to help them make a big marketing push out of the gate. This is in sharp contrast to the traditional craft brewery investment, which were really closer to buying art or a really small baseball team (i.e., one bought it as a luxury ownership item) than it was to investing in a startup (where one wants to get rich). With big money will come harsher scrutiny and competition, and those who actually want to make some cash in beer will require more business savvy.
Like this guy.
It's become fashionable to say that we're in a "craft beer bubble." I agree to the extent that no industry grows double digits forever, but not much beyond that. It's a big country and lots of people like beer; just as there is room for a lot of restaurants and coffee shops, there's plenty of room for small breweries. There is limited room at the top, as there always is, but not everyone wants to be Applebee's or Starbucks. I'll end by saying that one trait that all successful breweries I've seen share with other successful businesses is a willingness to acknowledge mistakes and learn on the fly. Every single business makes mistakes, some of them enormous (InBev planned to move Hoegaarden to Jupille; everyone said the water wouldn't work); when those mistakes become obvious, the businesses that recognize it and keep pride from running the operation are the ones that survive to brew another day (InBev scrapped the plan; Hoegaarden still tastes good; the company bought Budweiser).

1 comment:

  1. Very perceptive comments, Greg. Lots of people can brew beer and lots of people can run a business, but it takes a rare person or partnership to do both well. I think your idea for a meadery is a good one. Most of the attention in craft beer these days is on hop-forward ales, but the possibilities for mead and hard cider seems to be wide open.