Making beer is easy. Keeping track of all of the related expenditures that go into making the beer, however, can be challenging, especially for new and small brewers.
Raw ingredients, labor, packaging materials, costs associated with running the brewhouse, marketing the beer, and so on—it all adds up to impact the bottom line and to help determine the margins by which a brewer needs to operate to stay profitable. Understanding how those costs impact profitability and efficiency in a way that’s expressed in context and is relatable is key to maximizing efficiency and realizing healthy growth.
Madeleine Pullman cofounded Wasatch Brewing in Park City, Utah, in the eighties, and later worked as a consultant for start-up breweries. Today, she’s an instructor at Portland State University’s distance-learning Business of Craft Brewing Program, as well as the author of the recently published book Craft Beverage Business Management, which she co-wrote with veteran brewer John Harris.
Pullman organized the curriculum of the Business of Craft Brewing Program at Portland State, in large part, to help owners of new breweries and breweries-in-planning craft a more realistic and conservative business plan and to help them more fully realize what they were getting into with the business. And a large part of that is the ability to better estimate and calculate how business expenses impact profit and growth.
“Undercapitalization is a huge problem,” Pullman says of the misstep she often sees new owners making. “People are enamored by the romanticism of it and all the press about people who’ve started in their garage and built up a big brand, and all the famous stories that we know about today, when the reality is that most of the people coming in in recent years are not starting like that.
“They know how to make a product, and they may have become quite capable of making that product. Or then we get people who have no idea how to make a product at all, and they’re just going to hire brewers. They still have to understand how the product is made, what all the costs are coming in to the product, and what the potential labor implications are.”
Through extensive planning and research and spreadsheets with detailed costs and a model of potential revenues, “people start to see how expensive it is to start a brewery, and then they start to see the financial impact,” Pullman says.
COGS Analysis
A critical tool that students learn during the Business of Craft Brewing Program at Portland State, and to which Pullman dedicates an entire chapter in her book, is how to put together a cost of goods sold (COGS) analysis. It’s a fundamental benchmark that helps brewers understand and quantify the relationship between various inputs and outputs across their product line.
“For the financial statement, the COGS is one entry where all the product types and package types produced during the recording period are pulled together,” Pullman writes. “Business plans looking into the future must project the mix of different brands, packages, and kegs for three years at least to get at the potential costs and revenues of the firm.”
A COGS analysis accounts for the cost of:
- All materials
- Direct labor
- Overhead costs (including rent or mortgage, utilities, telephone bills, insurance, repairs, property taxes, accounting fees, interest, legal fees, supplies, and utilities)that go into producing one unit of product—typically for one barrel of beer.
It does not account for:
- Distribution
- Marketing
- Sales costs
but those can easily be factored in as part of the entire overhead needed to cover costs.
One way to calculate COGS is to track inventory, add in any materials purchased, and then subtract that figure from gross profits at the end of a period. However, Pullman details a more direct calculation that’s useful for calculating COGS across different brands and for forecasting.
First, brewers should factor in their direct costs—the total cost of the recipe that includes all raw materials used in making the beer.
This figure should also include the cost of:
- any cleaning aids and additional materials
- water adjustments
- filters
- yeast nutrients
- barrels, if barrels are used (the cost of barrels can be divided by the number of times they are used)
- any federal and state excise taxes.
You can also separately factor all of your packaging costs per unit to determine the cost per barrel of beer produced, as well as the cost per packaged barrel. Then brewers should add up all direct labor costs—the time and rate spent on the actual production of the beer, including:
- milling the grain
- brewing
- fermentation
- packaging
Brewers will also need to decide what portion of indirect labor costs to assign to that batch. These indirect costs include:
- accounting
- management and supervision
- marketing
- other administrative tasks
In the book, Pullman provides a calculation that expresses the COGS analysis as a factor of labor cost per batch. To factor this,
- Multiply the total brew time by wages per hours
- Then add transfer time multiplied by wages per hour
- And finally, add packaging time multiplied by wages per hour at that step
- Then divide the total costs by the total batch yield (expressed as total barrels or cases, depending on which unit you’re trying to figure)
to come up with your cost of goods sold for each unit. This is expressed as:
labor cost per bbl = (brewing and cleaning time x average hourly rate) + (transfer, filter, and cleaning time x average hourly rate) + (packaging time x average hourly rate)/total batch yield
Here’s an example from the book. Assume the resulting batch size is ten barrels and the average hourly wage for the employees is $18 per hour. If it takes six hours to brew and clean; four hours to transfer, filter, and clean; and two employees at six hours each to package or keg (twelve hours packaging total), then the total labor per barrel is:
labor cost / bbl = (6 x $18) + (4 x $18) + (12 x $18)/10 = $39.60/bbl
Making Decisions with Costs In Mind
COGS per barrel is a useful statistic to consider when pricing new beers, but pricing should not simply be a function of the cost of the product. Other factors play just as important a role—competitors’ pricing, perceived quality of your product, brand position, volume goals, etc.
However, understanding the true cost of the beers you brew will help you not lose money, make smarter decisions around product lineup and pricing, and push to find process efficiencies that improve profitability—while continuing to produce high quality beer, of course!