Research

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!

A History Lesson

The first five years of my post-college life were spent working for a large financial firm in New York City. Like many young people, I had long dreamed of life in the big city following graduation. Almost immediately, though, I knew it wasn't for me. During the rare moments when my corporate overlords allowed me to take a break from Excel, I would walk up and down Park Avenue considering how I was going to make my escape. The quite obvious end to this tale is that I decided to co-found The Virginia Beer Company. The second-place finisher in the derby is much harder to guess: teaching.

I almost certainly would have attempted to become a teacher if the idea opening a brewery had never germinated into a real business. And I know exactly what I would have taught: history! I fell in love with history in high school and entered William & Mary knowing that I would become a history major. I loved everything about my time studying history and still, to my fiction-loving wife's total disdain, choose historical non-fiction as my primary source of pleasure reading. I don't get to write about history very often anymore, so I am pretty excited to share some history as it relates to 401 Second Street!

Beer Distribution in VA

If you missed my introductory post last week, check it out for some basic information on beer distribution in the U.S. As I mentioned in that post, laws can vary widely between states as a result of the 21st Amendment. While Virginia's three-tier system is somewhat standard, breweries have a few ways to sell beer without using a wholesaler. Like most states, brewpubs (where the producer is also the retailer) are allowable in Virginia. Since the passage of Senate Bill 604 in 2012, craft breweries in Virginia have also had the right to sell products from a taproom for both on-premise and off-premise consumption. 

Virginia craft breweries are not totally limited to contracting with a wholesaler when it comes to selling beer to a retailer...

Beer Distribution - A Primer

The most frequently asked question we receive when discussing our brewery (outside of, "When will be able to drink you beer?!?") is about how we will distribute our products. If the interested party is expecting a short, simple answer, they are pretty much out of luck! Distribution is one of the most complicated topics for craft breweries, but also one of the most important decisions that will be made during the startup phase.

Beer distribution in the U.S. generally occurs through what is known as the three-tier system. Setup after the repeal of Prohibition, the three-tier system includes producers, wholesalers, and retailers. The structure can vary widely from state to state as a result of the 21st Amendment allowing each individual state to regulate alcohol as they see fit. In general, the system mandates that breweries can only sell to wholesalers, wholesalers can only sell to retailers, and retailers are the only tier that can sell to consumers. 

The introduction of the system was initially meant to decrease the possibility of monopolies...

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...

Hiring Employees - Fun with Taxes!

Did you see yesterday’s news on the blog, Twitter, Facebook, and Instagram? Team VBC is growing! We started laying the groundwork for this expansion about a month ago when we began researching the rules and regulations related to running a business that has actual employees. The Virginia Beer Company is registered as a limited liability corporation. As a result, Robby and I (as co-founders) are not counted as employees of the business; we are considered member-managers of the LLC and are subject to different laws and tax regulations than a standard employee.

Let’s just say that hiring our first employee has been an incredible amount of work. As we plan to hire many, many more, we are choosing to believe that the process gets easier over time. The challenges associated with being an employer are not brewery-specific...

License to Brew

This probably doesn't come as a surprise, but the production and sale of alcoholic beverages is heavily regulated in the United States. Regulation occurs on both the federal and state level and can cause significant headaches for small craft breweries. This is not to say that we disagree with the need for industry regulation, but sometimes we wish that the regulations in place were a bit more streamlined!

The Alcohol and Tobacco Tax and Trade Bureau (TTB), a bureau of the United States Department of the Treasury, is responsible for the oversight of brewing activities in the United States. The federal license required for brewing is called a Brewer’s Notice. The application for a Brewer’s Notice includes a great deal of paperwork related to company personnel, environmental information, water quality considerations, signing authority, sources of funds, the investor list, and property details. The TTB also requires a description of the premises and a layout of the facility. As a result, the application for a Brewer's Notice cannot be submitted until a building has been leased (or constructed) and equipment has been ordered. The TTB does a fantastic job reviewing the applications, especially given how many new breweries are opening in the United States. While experiences have varied for new craft breweries, the TTB typically completes the licensing process within 90-120 days. You often hear that nothing is free these days, but there is actually no cost associated with obtaining a Brewer’s Notice! Well, that's only true if you ignore the attorney's fees, the value of the time spent completing the application, etc.

Ingredients recently exempted from Formula Approval by the TTB.
Ingredients recently exempted from Formula Approval by the TTB.

There are a few ongoing requirements once the Brewer’s Notice is received. Any material changes to the business must be reported to the TTB within thirty days. This requirement most commonly relates to the purchase of new fermentation tanks or changes in LLC membership. More importantly, all new products packaged for public consumption must receive a Certificate of Label Approval from the TTB. This includes both keg collars and bottle or can labels. Some products that include unusual ingredients and non-standard brewing/aging processes even require formula approval! Until last month, most beers produced with an ingredient outside of water, malted grains, yeast, and hops required formula approval, which was adding about 75 days to the process of producing a new beer. Luckily the TTB recently exempted 30 new ingredients and the use of wood barrels that were previously used for wine or spirits from the formula approval process. This should significantly reduce time to market and give craft beer consumers even more options!

Every craft brewery is also required to register with the U.S. Food and Drug Administration (FDA) as a food facility under the Public Health Security and Bioterrorism Preparedness Act of 2002, more simply known as the Bioterrorism Act of 2002. The Act was passed in order to protect the public from a terror attack on the U.S. food supply and allows for an FDA inspection of a brewing facility at any time. Breweries must also keep records of the source and destination of food and food ingredients. The Food Safety Modernization Act (FSMA), passed in 2011, threatens to add even more onerous regulation for the craft brewing industry. The main issue is that the FDA has moved to regulate spent grain from the brewing process in the same manner as commercial animal feed. Brewers typically sell or donate spent grains to local farmers, and the new regulations would make that process far too expensive for small craft breweries. The Brewers Association, with the support of many members of Congress, has been successful in asking the FDA to review the proposed regulations. You can read more about the issues associated with the FSMA in the official statement from the Brewers Association.

As a brewery located in the Commonwealth of Virginia, VBC must also be licensed by the Virginia Department of Alcoholic Beverage Control (VA ABC). The licensing process includes submitting an application (a $65 fee), posting a notice on the front door of our building for ten to thirty days, and publishing a notice of the application twice in the local newspaper. A license can be issued within thirty days of the first published notice if no complaints or objections are received from local officials and citizens. The Virginia license for a brewery producing less than 10,000 barrels per year has an annual fee of $2,215. In most jurisdictions, including Virginia, the state license application can be submitted concurrently with the Brewer’s Notice application and marked as pending federal approval. This generally allows for a quick approval from the state licensing agency once the federal license has been granted. 

Industry regulation is a necessity in our modern world, and is of particular importance in the food and beverage industries. Regulations are in place to protect consumers by ensuring that qualified people are in charge of producing safe, non-contaminated products. We can't argue with that logic when the system operates efficiently! Working with the TTB, FDA, and VA ABC is simply a necessary step in opening and running a brewery, a step which we are more than happy to take if it means producing great beer for Williamsburg, the Commonwealth of Virginia, and beyond!