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!

York County Incentive Award

As noted in last week's articles, The Virginia Beer Company was recently awarded a $43,000 grant from the York County Economic Development Authority. In our presentation to the Board we requested funding for three specific projects. While the articles briefly touched on the projects, we'd like to provide more background on how York County's grant will assist us with opening our future brewery. Below is more detail on the three projects:

  • Site Work: York County and the Virginia Department of Transportation (VDOT) have mandated that one of the two existing curb cuts (entrances into the building's parking lot) be closed. This will not only keep the property in compliance with current codes, but it will also increase safety and allow for the construction of a patio off the front of the building (pending County approval).
  • Windows & Doors: The building's windows and doors were installed in 1960. The windows are single-pane and have very little thermal resistance. Many of them are cracked and some have even been replaced by plywood. The grant will cover an upgrade to highly efficient commercial storefront windows and doors that will both improve the overall appearance of the building and decrease our energy usage.
  • Wastewater: Brewery wastewater can potentially pose challenges for wastewater treatment facilities. In most breweries, wastewater (including acids and caustics used for cleaning) is sent into the sanitary sewer without any pre-treatment. The grant will cover the purchase of a clean-in-place system that will recapture most of the chemicals used for cleaning brewing and fermentation vessels, which will allow us to discharge wastewater that falls within an acceptable pH range. It will also assist with the purchase and installation of an in-ground solids separator that will allow us to send fewer suspended solids into the sanitary sewer.

We are extremely grateful to York County for the assistance they have provided The Virginia Beer Company. We are working hard to open our brewery and the receipt of the grant is a huge step towards making that happen. Starting a new business is a daunting, complex, and EXPENSIVE task, but we are really looking forward to making large capital investments, providing new sources of tax revenue, and creating highly-skilled, well-paid jobs in York County.

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.

Writing A Business Plan - The Text

Writing a business plan is a daunting exercise. There are no true standards for substance or length, but the documents often run between 30 and 60 pages and include content related to all aspects of the business and industry. The business plan for The Virginia Beer Company clocks in at 51 pages, including the text, financials, and an appendix. We began researching business plans in early 2011 in advance of making the final decision to pursue a new brewery. The actual writing process didn't begin until September of 2012, but by that time we had a very good idea of what would be included. We believed that the main task would be the consolidation of existing notes and emails that Robby and I had been sending back and forth. When pen hit paper (or whatever the technological equivalent would be) we were definitely surprised by how much work actually remained!

The two distinct portions of the business plan are the text section and the financials (although a good business plan always references financial figures in the Executive Summary and various other places). I'm going to cover the creation of financial statements in a separate post due to the complexity of that process. The first order of business for us was coming up with a rough table of contents...