Numbers

Batch 100!

Yet another new beer! On Wednesday we'll be tapping Batch 100 Imperial Oatmeal Porter with Vanilla Beans (9.8% ABV). This was one of our easier naming sessions, as you can imagine. The beer was brewed on our 5 barrel pilot system with a helping hand from our 30 barrel big boy brewing system. Earlier in the year, Jonathan quickly figured out that brewing high-ABV beers on the 5 barrel system was tough due to the size of the mash/lauter tun. The amount of grain needed to produce enough sugar for the yeast (in the case of Batch 100, 950+ pounds) required at least two separate mashes, which was adding an additional 3-4 hours to the overall brew day.

The solution has turned out to be using the 30 barrel mash/lauter tun for the first step of the brewing process. The grain is milled as normal and then transferred to the 30 barrel mash/lauter tun through an auger pipe. Once the mashing and lautering process is complete, the wort is then transferred to the 5 barrel kettle for boiling. The Batch 100 recipe calls for 4 specialty malts and flaked oats in addition to the base malt that we use in the majority of our beers. Chocolate malt is one of the speciality malts - it provides most of the color and a lot of the classic Porter flavor you will taste in the beer.

When fermentation was almost complete, Jonathan prepared 41 Madagascar Vanilla Beans and dropped them into the fermentation vessel. Why 41 beans? Because we can only purchase them in quantities of 16 or 25! After 3 days of conditioning, the rich vanilla flavors we were hoping for were evident and the beans were removed. From there, the beer was cold conditioned, carbonated, and packaged into kegs. Now it's ready for the taproom! 

The first mash in at The Virginia Beer Company (which was Single Hop Sessions - Mosaic) took place on January 24, 2016. Those of you who have been with us since the beginning will probably remember that opening day beer! Batch 100 was brewed on December 21, 2016. One hundred batches in 333 days - not too shabby for our first calendar year. All told, we brewed 57 unique beers in 2016. Five of those beers are still biding their time in various barrels, waiting for a 2017 release. That is a new beer for the taproom about every seven days or so following the opening day lineup we had available on March 26, 2016! Besides our four year-round beers, there were only five beers that were brewed twice (Citra Pale Ale, Deadbolt Double IPA, Saison Tournante - Rye & Amarillo, Green's View IPA, and Rob Your Head Imperial Red). Others may return in the future...we're excited to share those old friends as well as many, many new beers in 2017!

Roll Out The Barrels!

On a daily basis we're reminded of how challenging it is to open a complex manufacturing operation like a brewery. There are a million pieces to the puzzle; we've completed the border and are slowly making headway as we try to fill in the rest. Given that we've ordered the bulk of our brewing equipment, submitted a site plan, and are close to completing our building plans, we've now moved on to other pieces of equipment that are equally as important but require less lead time.

A beautiful sight, especially when full of VBC's finest #BurgBeer.
A beautiful sight, especially when full of VBC's finest #BurgBeer.

One of those items is our keg float. The beer we produce will only be as good as the container from which it is served! While kegs may seem relatively minor in terms of the entire brewing process, they are a major expense for a brewery and can become a bottleneck for production if there aren't enough available. Cleaning kegs is a repetitive, thankless job the best job in the world, is anyone interested?

Understanding the lifecycle of a keg is important before considering how to procure them. Kegs arrive at a brewery and are then cleaned and sanitized according to the brewery's procedures. The keg is filled with finished beer and then transported a wholesaler's warehouse. From there the wholesaler delivers the keg to a retailer upon order. The wholesaler returns to the retailer to pickup the empty keg once it has been served. The empty keg then returns to the wholesaler's warehouse and is eventually returned to the brewery. 

This process can be quick (2 weeks or so) but is generally between 4-6 weeks. Retailers will sometimes hold onto a keg for a long period of time before serving the beer. Basically, breweries have no idea when their kegs will be returned! Another issue to consider is keg loss. This can happen due to simple misplacement of kegs, wholesalers returning kegs to the wrong brewery, or somebody stealing kegs and scrapping them for cash. The Brewers Association calculates that keg loss costs every brewery between $0.46 and $1.37 per-barrel of annual keg production. That really adds up over time! 

Standard keg dimensions and volumes. VBC will be using 1/6 Barrel and 1/2 Barrel kegs.
Standard keg dimensions and volumes. VBC will be using 1/6 Barrel and 1/2 Barrel kegs.

There are a few options when it comes to procuring kegs. One is to simply purchase new kegs from well-known manufacturers like Franke or Schaefer, or from companies that resell kegs from China and other places. There are some used kegs available for purchase as well, but prices are generally high (everybody is looking for kegs!) and you never know how well the kegs have been treated/cleaned over time.

One of the industries that has benefited most from the enormous growth of craft beer is the keg leasing industry. There are multiple companies (like Keg Credit, Keg Logistics, and Atlas Keg) that offer daily lease rates for new kegs. Most offer either set term leases or lease-to-own programs that include a purchase option after a certain period. Some companies, like Microstar Keg Management, go even further and integrate the logistics of the packaging process into the keg lease. Microstar provides breweries with as many kegs as they want from a pooled set of kegs, and once those kegs are filled and shipped to a wholesaler the tracking and return is completely handled by Microstar.

Every brewery handles their keg needs differently depending on a multitude of factors. We are currently considering each of the options laid out here and are planning to make a decision within the next month or so. At least we get to put together another spreadsheet to help evaluate our options! It's like we never left the world of finance. But it's better to be evaluating kegs instead of hedge fund performance!

U.S. Craft Beer Exports

One of the concerns most often cited when discussing the growth of craft beer is the somewhat finite availability of shelf space and tap handles. Retailers have shown great flexibility in terms of increasing shelves and handles dedicated to craft beer, but the reality is that at some point we will reach full capacity. To continue growing, craft breweries will have to seek alternate outlets for their products.

edp-growth.jpg

The total U.S. beer market is around 200 million barrels. That seems like a lot of beer until you consider the size of the global beer market: close to 1.68 billion barrels! Craft breweries have only recently started to take advantage of the huge market opportunity outside of this country. In 2013, exports of U.S. craft beer increased 49.5% to 282,526 barrels worth an estimated $73 million. The top five overall markets outside of the U.S. were Canada, Sweden, the United Kingdom, Australia, and Japan. The fastest growing markets in 2013 were Singapore, Hong Kong, and Thailand.

The Brewers Association recently released figures for 2014, which show exports growing by 35.7% to 383,422 barrels worth $99.7 million. The top four markets remained the same, followed by Korea passing Japan as the fifth largest market. Canada accounts for a shockingly large percentage of U.S. craft beer exports: 53% (must be all of that beer they are drinking up in Winnipeg)! The highest growth rate in 2014 was the Brazilian market, followed by the Asia-Pacific region and Western Europe.

The Export Development Program (EDP) of the Brewers Association is tasked with promoting and assisting with the export of U.S. craft beers. According to the EDP, there are now 80 craft breweries exporting beer outside of the country. Membership in the EDP requires additional fees outside of the standard BA membership, but we are planning to become a member in early 2016. 

Despite our future membership in the EDP, we have no immediate plans to export beer out of the country. Most of the 80 craft breweries that export (Sierra Nevada, Green Flash, Ballast Point, and Stone, to name a few) have something in common: size and scale. Those breweries have the ability to satisfy demand in their home markets, meet the requests of their distributors in other states, and the equipment to package beer that will maintain its quality long enough that it can be sent halfway around the world.

Our focus is growing our brand and our business first in our home market, and then across the entire Commonwealth. Like many startup breweries, we hope that we will one day have the ability to share our beer with a wider audience. When that day comes, our participation in the EDP will ensure that we are primed and ready! 

2014 Craft Beer Growth

In May of 2014 I posted a blog entry titled "The Growth of Craft Beer." In that entry I wrote the following: 

"The recently released figures for 2013 show craft beer holding a volume share of 7.8% and a dollar share of 14.3%! 2,768 craft breweries contributed to the 18% volume growth and 20% dollar growth that occurred during the year. This growth is astounding when viewed from any angle."

The preliminary 2014 data recently released by the Brewers Association proves that 2013 was no fluke. As of the end of 2014, craft beer now holds a volume share of 11% and a dollar share of 19.3%. That calculates to 18% volume growth and 22% dollar growth over the 2013 figures! The fact that the total beer market in the United States only grew 0.5% in 2014 makes the continued growth of craft beer even more impressive. 

A 19% increase in the number of operating craft breweries (from 2,863 to 3,418) resulted in production increasing from 15.6 million barrels in 2013 to 22.2 million barrels in 2014. Of those 3,418 craft breweries, 1,871 are considered microbreweries, 1,412 are brewpubs, and 135 are regional craft breweries. Total new openings during 2014 totaled 615, while only 46 previously operating craft breweries closed their doors. 

The Brewers Association typically releases finalized data following the Craft Brewers Conference (April 14-17 in Portland, Oregon). Data for individual states is also released at that time; Virginia's growth should mirror or even outpace what we are seeing on the national level. Check back next month for a look at those figures! The likelihood of reaching the Brewers Association's stated goal of 20% volume share by 2020 definitely increased with the success of craft beer in 2014!

Forward Hop Contracts

One of the things that people outside of the beer industry often overlook is the ingredient supply chain. Procuring raw ingredients to produce beer isn't a sexy part of the business, but it's obviously necessary and important for the continued operation of a brewery. Forethought and planning is required for every ingredient that ends up in a beer, but hops demand the bulk of the attention.

Hops are the female flowers of the Humulus lupulus plant. While traditionally used mostly as a bittering agent and a preservative, hops have more recently been utilized for their aroma qualities. You can thank hops for all of those great citrus or pine aromas you're getting from that IPA in your hand! As an agricultural product, hops are subject to the whims of Mother Nature. Harvests have been stable in recent years, but there is always the chance that a shortage could occur. One such event occurred in 2008 and it caused major issues for craft beer production in the US. 

As a result of the unpredictability of harvests and the ever-changing tastes of consumers, forecasting both the availability of certain hop varieties and the level of consumer interest is an extremely challenging exercise. Due to the high level of demand for hops, though, breweries routinely forecast their needs and enter into forward contracts for as many as five to seven years. An additional benefit of forward contracting is that hop farmers receive valuable signals about the direction of the market and adjust their acreage accordingly.

We are no different here at The Virginia Beer Company. Many startup breweries have a tough time purchasing certain high-demand varieties through the spot market. We didn't want to be caught in that position after years of testing recipes, so we entered into our first hop contracts for the 2014 harvest. We recently completed all of our contracting through the 2017 harvest! As I mentioned, forecasting our actual needs is challenging. Increasing production more quickly than anticipated and running out of hops would be a good problem to have, but it would still be a problem. If we've done our research and planning correctly (and nature cooperates...) we will be able to brew our recipes through 2018 without worrying about shortages!

Here are the key stats related to our hop contracts:

  • 4: Hop wholesalers with whom we have contracted.
  • 5: Countries where our hops will be grown (England, Australia, Germany, New Zealand, & the U.S.)
  • 6.35: The lowest priced variety of hops per pound, in dollars (2014 U.S. Columbus).
  • 11.66: The average price of all contracted hops per pound, in dollars.
  • 16: Unique varieties of hops that we will be purchasing.
  • 20.30: The highest priced variety of hops per pound, in dollars (2016 U.S. Sorachi Ace).

Financing A Craft Brewery

(NOTE: The upcoming blog post was written from a general point of view so as not to run afoul of applicable securities laws. This post does not constitute an offer to sell or a solicitation of an offer to buy securities.)

Financing a craft brewery can be a challenging task. There are multiple options available, but owners of new craft breweries typically finance the business by issuing debt or selling an equity stake. Below is a closer look at the most commonly used methods for financing a new craft brewery, listed from least common to most common...

Writing A Business Plan - The Numbers

Finally, the moment you've all been waiting for: more information about pro forma financial statements and financial analysis in a business plan! Don't everyone flock to this post all at once. Financial analysis can be dry and uninteresting but it is absolutely essential to understanding the viability of a potential business venture. The process of putting together financial statements begins with either revenue modeling or cost projections. The order of creation depends on whether you are an optimist or a pessimist!

We began compiling our financial projections by building a revenue model that consists of our sales channels, the planned sales mix within those channels, and product pricing estimates. Every input in our model is adjustable so that we can produce different revenue projections that account for increases or decreases in our pricing or changes in how much beer we sell out of our taproom vs. wholesale. We can project these figures using any level of monthly or annual production, which allows us to account for revenue seasonality as well. It's fun to project revenue generation at 200% of planned production levels! And then it's very sobering (but necessary) to project revenue generation at 50% of our planned production levels.

The next step for us was to review costs. This was a two step process. First, we researched prices and spoke with an unending stream of suppliers to determine the capital required to start the business. Examples of these costs include the brewing system, a glycol chiller, and furniture for our taproom. Second, we went through the same process to determine our ongoing expenses. Those monthly costs include rent, utilities, brewing ingredients, and labor. We built another model that adjusts in response to changes to any of our monthly "running" costs. For example, we can alter the model to account for unexpected inflation increases (and the resulting increases in salaries and related payroll tax payments) or a 10% rate increase from Dominion Power.

The two sides of the equation are brought together in the financial statements. The business plan for The Virginia Beer Company contains three year's worth of monthly Income Statements, Balance Sheets, and Statements of Cash Flows. It also includes those same three statements in an annual summary format to cover the first five years of operation. Our analysis of those statements includes projected financial ratios (comprising liquidity measurements, profitability indicators, operating performance measurements, and cash flow indicators), a break-even analysis, and an earnings sensitivity analysis, which measures the sensitivity of projected net income to changes in both gross margin and total operating expenses. The Financial Analysis section of the table of contents of our business plan is shown to the right - it's a total of sixteen pages!

Building adjustable models and incorporating them into our financial statements was one of our better time investments. We have a base set of projections for annual production, and all of the hard-coded financial figures in our business plan (like our chart detailing financial highlights for the first five years) are compiled using those projections. However, when we speak to investors we have the flexibility to share altered projections or answer important questions about the future financial health of the business. This is especially true when referring to cash on hand for operating the business. I would encourage anyone starting a brewery, or any type of small business, to build similar flexibility into your financial projections.

Presenting at the CBC!

Every year the Brewers Association asks member breweries to submit seminar ideas for the upcoming Craft Brewers Conference (see Robby's informative post about the conference here). In August 2013 we were beginning to plan our trip to Denver, Colorado, for CBC 2014 when the request for submissions arrived in our inbox. Having recently completed our business planning, we briefly considered the idea of submitting a proposal related to startup breweries. We felt like CBC veterans (having attended since San Diego 2012), but we were also keenly aware that we wouldn't be operational by the time the conference started.

A final call for submissions was issued in September 2013. We realized that we had information we really wanted to share with fellow startup breweries and began composing a seminar outline...

The Growth of Craft Beer

If you consume craft beer in any way, shape, or form, you've probably noticed that the industry as a whole has exploded over the past decade. In 2005 there were 1,394 craft breweries that, combined, accounted for only 3.1% of total U.S. beer sales by volume and 5.4% of sales by dollar value. By 2010 those figures had increased incrementally, with 1,600 craft breweries accounting for 4.4% of sales by volume and 7.6% of sales by dollar value. The "golden age" of craft beer really began in 2010...

Williamsburg's Craft Beer Consumers

Site of our future brewery. Not really.
Site of our future brewery. Not really.

In yesterday's post I gave an overview of how we ended up in Williamsburg, Virginia. Today I want to spend some time discussing the demographic profile of a typical craft beer consumer and how that profile matches up with the consumers in our local market. According to Nielsen research, the typical craft beer consumer lives in a cosmopolitan center, affluent suburbs, or a comfortable country setting. That consumer will likely fall between the ages of 21 and 67, where 90% of craft beer is consumed. The age groups that consume the most craft beer are Generation X (18.7% of population, 23.9% of craft beer volume), Millenials (26.1% of population, 32.9% of craft beer volume), and Baby Boomers (37% of population, 36.4% of craft beer volume).

Disregarding age and location, the consumer will likely be highly educated and earn an above-average salary; research has shown that craft beer consumption has a distinctly elevated income skew, with almost 78% of the total volume being consumed by households with incomes over $50,000. In terms of gender, men are responsible for 71.9% of overall craft beer consumption (which mirrors overall U.S. beer consumption by gender). We realize that there are many craft beer consumers that don't fall within some or all of the demographic profile created by the research noted here, and we will certainly be gearing our marketing efforts and outreach to serve those consumers as well. For example, female craft beer drinkers are among the fastest-growing consumer segments within the industry.

The City of Williamsburg and the surrounding counties (James City County and York County) have a growing, affluent population of almost 150,000 people. Of the 70,000 people located within a 5-mile radius of our desired location (more information on that topic soon, we hope!), 60% are between the ages of 21 and 67. That population is projected to grow to almost 76,000 by 2017, with a corresponding increase in average household income from $86,567 to $89,988. Over 62% of the roughly 27,000 households within the 5-mile radius have a household income over $50,000, 48% of the citizens possess at least a Bachelors degree, and 70% of the employed population have jobs classified by the census as “white collar.” Looking a bit wider, the greater Hampton Roads region is the second largest metropolitan area between Washington, D.C., and Atlanta, GA, with a total population of almost 1.7 million people. The median age is 35.4 and the average household income is $68,474; both are in the target demographic for craft beer.

As has likely become clear, the Williamsburg area has a population that matches up nicely with the demographic profile of a typical craft beer consumer. In future posts I will touch on our research related to market conditions as well as the legal considerations we took into account before selecting our location!

*Special thanks to Danny Brager for providing the Nielsen research used in this post, which was presented in a seminar titled, "The Who, What, Where, When, Why and How of the Craft Beer Consumer," during the 2013 Craft Brewers Conference in Washington, DC.