Gear envy. We all experience it. One step into another gorgeously spec’d brewery and we’re filled with tech lust (as we begin mentally compiling our next shopping list).
But time and distance bring clarity, and in today’s dynamic brewing climate, every investment deserves careful vetting, so as not to create excessive exposure for the brewery. How, though, does a brewery owner/operator calculate which investments will move the needle for the business and which can be put off until growth and revenue pictures become clearer?
We asked Mary Brettman, former CFO of Surly Brewing and founder of Beverage Business Builders, to guide us through the financial priorities (and pitfalls) that brewers at different scales should consider when making these important investment decisions.
Breweries Under 500 Barrels
For breweries on the smaller end of the spectrum, the most important investment they can make is both capital and operational: First is a larger brewhouse; second is hiring a brewer to operate it.
“If you’re a nanobrewery brewing half-barrel to one-barrel batches, the best thing you can do is up your brewery to a three- to five-barrel system,” Brettman says. “That generally means that you have to not only sell in the taproom, but also have some sort of limited distribution. In order to have those multiple beers on tap, you have to have somebody to drink the liquid. Usually at this scale, it’s the owner doing all the work, and the next investment step is hiring a brewer so the owner can go off and sell. That’s not capital equipment, per se, but the investment in a large enough brewhouse to brew the amount of liquid you need goes hand-in-hand with hiring someone to focus on the brewing.
“If that additional volume isn’t just soaked up in the taproom, you have to start thinking about outside sales, and it is typically better to hire a brewer, rather than a salesperson, while the owner goes out and sells.”
The person selling the beer has the crucial job of telling the brewery’s story and building relationships. No one is going to be better at telling that story, or building lasting relationships, than the founder of the brewery. As a result, Brettman says, it’s best to prioritize larger volume production and hire someone with experience to achieve that production goal.
In addition, at this scale, small-scale bottling, using inexpensive fillers, and crowler machines are the most cost-effective way to create portability and share-ability for your beer. Building a brand at this scale is about creating opportunities for consumer discovery, so getting beer on tap at respected restaurants and beer bars should be a high priority, as well as increasing the ability of your beer to find new audiences.
Breweries Between 500 and 2,000 Barrels
At this level of growth, prioritizing packaging is Job One, and in today’s beer market, cans are king. They’re shareable and tradeable, and increase the range of your beer and brand.
“The sooner you get your beer in cans, the sooner the beer can travel,” Brettman says. “It doesn’t travel nearly as well in growlers or crowlers. The best thing you can think about is buying a canning line, so that you can package your beer and sell to-go from the brewery and through various bottle shops.
“The price of canning lines has dropped substantially over the past few years,” she says. “It used to cost at least $200,000 for a decent canning line. We’re seeing canning lines being more flexible, handling more size cans, and being much cheaper. Some of the nanobreweries I work with are considering purchasing a canning line for between $50,000 and $100,000. When you do that, depending on the state, you can sell beer out the door or also get off-premise shelf space, which is where the majority of beer is being purchased at this point in time.”
Breweries can dip their toes in this world via mobile canning, but it’s a bridge solution and not an endpoint. Treat it as a paid internship in canning, Brettman says, and take every opportunity to learn from the mobile operators. Over the long run, building your brewery’s institutional knowledge and experience in canning is incredibly valuable, and—like brewing itself—it shouldn’t be seen as a function to be outsourced.
“Mobile canning is so expensive, and the quality is not nearly as consistent as what you can do with your own machine,” Brettman says.
One of the reasons for canning is to help build a larger market for your beer, but there’s another way to accelerate this process for a small brewery.
“The best way to build an audience, of course, is to win a medal,” Brettman says. “That’s how you move into the varsity. You’re always going to have beer geeks, and beer geeks are always going to want to look for quality. If you’ve passed the test of being a varsity-level brewery, then you’re going to start to do collabs, you’re going to get into festivals, and people are going to hear from you. It’s an upward spiral.”
Finally, with the amount of excess capacity in the brewing world today, it’s surprisingly easy for a small, hot brewery to scale up without making immediate and large capital investments. Alternating-proprietorship agreements, contract brewing, brand licensing, and similar arrangements allow smaller breweries to test demand in the wider market before commitment to expensive upgrades.
“Breweries are deliberately starting small, and some create more demand than they can fulfill,” says Brettman. “How do you grab that market share while you can? It’s ushering in a flexibility in contract brewing that we’ve never seen before.”
Breweries Between 2,000 and 5,000 Barrels
For breweries growing in this segment, recent industry trends can help accelerate growth without requiring new financing. Banks, says Brettman, “are getting scared. Really scared.”
That lower tolerance for risk is pushing the equipment-manufacturing sector of the brewing industry to get more creative in order to sell its wares. Today, it’s increasingly common to find manufacturers offering no-interest payment terms for as long as a year. That lets breweries install and generate revenue with new equipment before paying for it.
“Most people at this point in time are going to look at equipment financing rather than a bank loan,” Brettman says. “A lot of times, breweries are not showing profitability because of high rates of depreciation, and the equipment manufacturers need to make a sale. So, a lot of times what I’m seeing is ‘same as cash’ over 12 months. That would be a way to make these purchases before another round of investment.”
Manufacturer financing will continue as a trend this year. “I think it’s the only way they will keep their sales up, and it’s really not that much risk,” Brettman says. “I have one brewer who is losing a lot of money, and still the equipment manufacturer is happy to do 12 months same-as-cash financing.”
At this point, breweries also must carefully consider larger purchases. There continues to be an active resale market in smaller brewhouse and tank sizes. But as those sizes increase, there are fewer buyers, and sellers have to accept lower percentages of the original sale price.
“There are a whole lot of people who are starting small and trying to push their way forward,” says Brettman, “but I’ve seen prices for 60-barrel tanks drop in half.”
Another key investment at this stage is in cooperage. Leasing kegs may look attractive, with a pay-per-fill model that a brewery can build into its draft prices. However, as a brewery grows and sells more beer, the economics clearly shift toward ownership over leasing.
“If you can afford it, you should always buy your own kegs,” Brettman says. “The price for used kegs on the market has gone down quite a bit, and at $8–12 per fill, it doesn’t take that many fills before keg leases make absolutely no sense. To the extent that brewers are savvy and can find used kegs out there—especially if you’re only pouring in your taproom and using kegs instead of serving vessels—anyone who can purchase their own cooperage is going to be far better off than in a lease. That’s at any size.
“When you start distributing beer outside of your local market, then I think there’s a case to be made for keg leases. But it’s amazing how as barrelage goes up, how fast the keg-lease bill goes up. It’s shocking to see the difference.”
The other investment that breweries should begin to make at this scale is a lab program. At this scale, a brewery won’t be able to afford a full-time lab manager, but investing in basic lab equipment and training a cellarperson on the necessary processes are a major step toward consistency. While it’s challenging to quantify a direct return on investment in a lab and processes, missteps at this stage can be fatal to a brewery’s growth.
“You quantify it by not having recalls,” Brettman says. More importantly, you lay the groundwork for a specialization of roles and a greater quality focus if (or when) the brewery grows.
Breweries Between 5,000 and 10,000 Barrels
At this scale, parameters such as yield begin to make a significant impact on financial performance. Small losses per batch add up with the size and number of batches brewed. At this scale, Brettman sees more frequent purchases of “baby” centrifuges, which serve the dual purpose of increasing batch yield while reducing tank residency times for popular styles such as hazy IPA. Shaving a few days off per batch and netting out more liquid increase throughput without adding more tanks, more batches, or significant additional labor.
“I don’t see a lot of people buying tanks right now,” she says. “They’re being smart about what they’re doing.”
This scale brings a big turning point for breweries, as role specialization becomes a must.
“At this point, you have careers that start to diverge,” Brettman says. “You have a head brewer, director of brewing operations, and you have quality—the creative side versus the practical side that figures out how things are stable. In the brew staff, those jobs start to bifurcate themselves. By the time you get to 10,000 barrels, you’re going to want someone in that director of brewing operations role, focused on how you make stable, quality beer. You’re going to have a head brewer who hopefully won a medal or two, so that people are interested in what you’re doing. Then you have probably close to a full-time lab person.”
Breweries Between 10,000 and 20,000 Barrels
“When you get between 10,000 and 20,000 barrels, then the planning horizon super matters,” Brettman says. “You want a system that has perpetually corrected inventory, but you have a planning horizon and start to make decisions in advance for raw materials, beers, and so on and so forth. The manufacturing mistakes start to multiply once you get to this barrelage level, so that’s when you need a more advanced system or higher skill level, so that the planning horizon is clear and makes sense with minimal errors. What I see a lot at that level is cans don’t come on time, so the bright tank has to stay full. It’s that kind of thing where you start to lose money.”
Biggest Mistakes Breweries Make
The world of brewing is fickle, and the predominant narratives around brewery startups have shifted significantly over the past few years. Ask successful brewers for advice on starting up in the early 2010s, and they would tell you to plan for growth and buy a bigger brewhouse than you think you need. The result has been quite a bit of excess capacity in brewhouses, as brewers didn’t know how the increasingly competitive market would curb these rapid-growth stories.
“Anybody who opened a brewery between 2012 and 2016 oversized it,” Brettman says. “Everybody thought they were going to get to 25,000 or 40,000 barrels. It’s very hard to sell that level of beer, certainly through distribution these days.”
Today, though, new breweries are erring in the opposite direction.
“The biggest mistake I’ve seen in the past two years is a reaction against that—opening too small. You really have to be honest about how much liquid a nanobrewery is going to produce and whether you can live off of that. Most people have fixed expenses—mortgages, etcetera.”
If your business can’t make enough product to generate the revenue necessary to support the lifestyle you want to lead, then it won’t last. But that doesn’t mean that the industry should return to oversizing. Everything in the brewing world is getting smaller. Customers like small-batch products, and even large production breweries are brewing smaller and one-off beers.
“There’s so much fear out there of over-expansion,” Brettman says. “The conventional logic used to be that you had to start with a 15-barrel system. Now it’s 7.5. I was talking to the head of Rolec, a brewhouse manufacturer, a year or two ago. They started with 250-barrel brewhouses, and now their average is 75 barrels. Everything is shrinking, and you’re seeing that more and more.”
As larger production breweries deal with shrinking volumes of individual brands, they’ve generally coped by simply creating more brands. That strategy is reaching its logical end as distributors are saying “no” to more and more products.
“The solution used to be ‘make more beer, make more brands,’ but distributors are refusing to carry beer now,” Brettman says. “Even if you create great branding and spend six months developing a great concept, there are distributors refusing to take it in—even if you pre-sell it—because everyone is trying to do 20 to 30 brands per year. Everyone took that differentiation note and went back and tried to differentiate, and the distributors are saying ‘no mas.’”
Caution is everyone’s key word in today’s brewing business.
“The rules are changing so fast,” Brettman says. “I used to tell people 18, 24 months ago, ‘Get into seltzer, that is where things are going.’ Now it’s too late. Everyone has taken the concept of differentiation, and they’re plundering it in multiple ways. Work on a vision first, and the capital will follow.
“Making the beer is the easiest part. Selling it is the hard part. If you’re sure you have a market, then you’re going to build the equipment to make it happen.”
Illustration by Jamie Bogner