Soundbrewing on small systems...

**TheBreweryPlan** · 07-12-2011, 09:52 AM

Well this sure is depressing...
This is from soundbrew.com and is there feelings on us smaller guys starting out. I'm not sure how much stock I put into it though, because I know a guy who's growing his brewery using nothing more than a 1/2bbl system and brewing like mad all day every day....do you guys believe what soundbrew is saying below or is it a seller trying to push for a bigger sale?

"1. In 24 years in this industry, we have seen NO evidence that a start-up microbrewery (meaning primarily wholesale sales, NOT a brewpub) is a viable business at less than 10 barrel size, and more realistically 15 barrel MINIMUM size. A micro will not become consistently profitable until it produces some thousands of barrels per year...3,000 or so is a ballpark number. You can't get there with a 3 or 4 barrel system. Do the math.

2. A start-up brewpub needs to be scaled to produce and sell 500+ barrels of beer in house to be successful. We believe this requires a minimum 7 barrel system. While smaller systems can sometimes produce this much, the labor cost on a 3 or 4 barrel system is often too high to make a decent profit. The cost of beer production on a 3 barrel system will approach the cost of buying wholesale microbrewed keg beer from a distributor. Given that, why go through all the licensing and regulatory headaches to make the same money? Open an alehouse instead.

3. Tiny systems like 2 barrel plants are for the most part good only as pilot plants or hobbies (as in big home breweries). They are not commercially viable for even a tiny brewpub.

4. A 3 or 4 barrel microbrewery (wholesale production) is doomed to either fail, or enslave its operator with interminable hours and little compensation until he can upgrade his equipment to a large enough system to become profitable on. In many instances the venture self destructs and visits financial ruin upon the owner.

5. Mini-Micro systems are useful for a multi-unit brewpub operator (brewpub chain) in some instances. These include opportunities to open satellite locations which (A) do not need to make all their own beer on premises but (B) do need a brewery to get the license due to state laws. In those states where this scenario applies, brewpubs are permitted to transfer beer from one location to another. The Mini-Micro brewery becomes more of a decorative piece that sees occasional use, and, of course, qualifies the establishment for a brewpub license. Some of these establishments may brew as little as once a year to comply with the laws, others use them for experimental or exotic brews like Belgian styles.

6. Incrementally, a Mini-Micro system is the most costly to buy of any size and even more costly to operate. A 7 barrel system of comparable quality is not twice the cost of a 3 barrel system but it has far more potential expansion capacity. Buying a Mini-Micro system and replacing it later is very costly.

7. We have seen many times that adding a brewery to an existing restaurant or bar usually does not work. A brewpub needs to be created from scratch, not added on to an existing establishment. It is axiomatic that adding a brewery will not "fix" an establishment that is "busted" (i.e. not successful), nor will it add meaningful value to one that IS successful.

MORE FACTS TO BE AWARE OF ABOUT SMALL SYSTEMS:

8. The amount of labor and time it takes to produce a small batch like 3 barrels is no less than the amount required to make much larger batches. Cost of production is therefore much higher on a per barrel basis in a small plant. Too high, in most cases, to make brewing on this scale profitable, whether in a brewpub or a wholesale microbrewery.

9. The cost of ingredients purchased in small quantities is significantly higher than in larger quantities. Shipping costs on small orders accentuate this disparity even more.

10. It is likely that the TRUE cost of brewing beer in less than 7 barrel size batches will equal or exceed the wholesale price of craft brewed beer bought from a distributor. If your cost of production is greater than wholesale, where is the profit?

11. On a dollar per barrel of capacity basis, small systems are by far the most expensive out there. Cost versus capacity drops precipitously as size increases.

12. Many microbreweries (meaning wholesale production breweries as opposed to brewpubs) that start up with smaller than 10 barrel systems fail within 2 years. Those that don’t quickly run out of capacity and find they need to replace their equipment and/or build a new facility–an expensive proposition.

13. Most brewpubs that start up with smaller than 7 barrel systems find they either cannot meet their demand (and have to replace their equipment and upsize, a very expensive and disruptive process) or that they cannot offer enough variety or consistency to be successful, and then they simply close.

14. The only applications we believe these small systems are appropriate for are:
(a) A regional brewpub chain that is opening a satellite store, AND has the ability to supply beer from other brewing locations, and therefore only needs the brewery in place to comply with licensing laws. In that situation, where the brewery will be operated occasionally to make specialties and one-off brews, small systems are appropriate.
(b) Rarely, as a pilot plant for an established regional brewery. This rarely works because the brewing capabilities of these systems are usually quite limited.

We can’t think of any other applications where they make sense, either financially or logically.

We have a love-hate relationship with small systems. This is because:

15. They inherently generate more inquiries for us than all other sizes combined, but most of the shoppers don’t have the funds to buy a system. They consume a lot of our time and energy for a very modest income they produce. The buyers who pursue small systems tend to be the least informed, the least business savvy, and the most likely to have problems with every stage of their project.

16. We resell the same small systems, over and over again, due to failures and the realization that they are too small to sustain a successful commercial operation. In that way, they are a form of job security for us, although one we would just as soon do without, for reasons already mentioned. We have sold and re-sold certain 3 and 4 barrel systems a total of FOUR!! yes, FOUR!! TIMES!!

17. With a small system, you are damned if you succeed and damned if you fail. If you sell all the beer you can make you will (absolutely guaranteed) run out of capacity and have to start over.

We are willing to sell a buyer any size system that he wants, if we have it available. But we see a lot of start-up brewers buying systems that are hopelessly undersized for any kind of commercial success. We'd much rather see our customers be successful than not. Often, we end up selling the same systems multiple times because they were not part of a viable business plan and the business fails.

A lot of Mini-Micro systems were sold to restaurant operators during the big industry boom of the late 1990s. The fad mentality convinced many that they needed to add a brewery to their restaurant to stay on the "novelty curve." Most found that the brewery didn't add anything to the bottom line and in many cases subtracted from it (especially when they lost seats to make space for the brewery). A lot of them didn't understand brewing at all and treated the brewing end as a gimmick, with predictably bad results. News Flash! A prep cook is not a brewer. Most of the Mini-Micro systems originally sold to restaurateurs have by now changed hands, some of them several times since they were new. In our view, the manufacturers who sold these systems were simply practicing opportunism and did the industry a disservice by building and selling them at all.

OK, so you’ve read all this and you still want to set up a 3bbl or 4bbl brewery. We will be pleased to sell you equipment we have available. We have done our duty and warned you of many of the pitfalls. We don't offer technical support or warranties on used systems--you are on your own. And we sincerely wish you good luck in spite of the minefield that awaits you. Please hang on to our contact info, we will be happy to assist you when it’s time to expand with bigger equipment and time to sell that little system that you can’t wait to replace. "

**HinduKush** · 07-12-2011, 10:09 AM

I agree with the majority of the comments.

**Bierkoenig** · 07-12-2011, 10:31 AM

Vince is very opinionated and has a narrow view of how things must be done to be successful. Fortunately, his assertions aren't supported by actual practice these days. They may have been more valid 15 years ago, but it's simply not the reality of craft beer today. There are many small breweries doing quite well that defy the parameters of his manifesto. It depends a great deal on your location (customer base for craft/local beer, ability to self-distribute, etc.). As you know from your numerous threads, you get a lot more discouraging words on this forum than encouraging ones, but it's the exception to the rule--in the real world, I've yet to meet a brewer who wasn't positive about someone new starting a brewery. That's not to say that folks aren't helpful on this forum, because they are, I'm merely referring the cynicism towards startups.

**fa50driver** · 07-12-2011, 11:26 AM

From my experience in my first year of operation - We operate on a shoe-string budget, selling about 10 to 15 bbls per week. 80% of our sales are growler fills averaging $9 per fill. We have no debt service, our only expenses are cheap rent, utilities, and ingredients. We have little to no payroll. We are not making a profit yet at this level. So, if we were running a 1bbl system, we would be brewing 10 to 15X's per week and not making a profit (using our business model). The saving grace is that we are brewing on a 20bbl system (once per week), thus we have lots of room for growth. If we only had a 1bbl system, we would indeed be enslaved to a non-profitable business model as it currently is set up.

Now, if we were able to sell by the pint at $5 each, we could probably double our gross revenues but I still don't believe that it would be enough income to cover the labor of brewing 15X's per week, produce enough surplus income to re-invest into the company for expansion, and pay the owners a decent wage - but it may do ok depending on your efficiencies.

Thus, I would agree with Vince in that if you are wholesaling beer, 3000 bbls per year is a good bench mark for profitability. If you are selling by the growler, you could probably cut that in half. If you are selling by the pint, you might be able to make money at 600 bbls per year, but your labor costs would be pretty high just in brewing alone.

Bottom line - Brewing beer commercially is fun and exciting at first, but the novelty wears off soon and then it better make you some money. Run the numbers over and over again, and try to get realistic figures for costs. You will likely be able to sell everything that you can brew on a 1bbl system, so focus on getting your costs of production as accurate as possible.

kyle.carbaugh · 07-12-2011, 12:18 PM

I'm curious to get some feedback on how people are defining profitable --

Much like HobKnob, I'm an aspiring nano-brewer. However, my day job has contributed quite different experiences than those exclusively in the brewing industry. I'm a CPA, worked in public accounting analyzing all sorts of financial statements for companies ranging from "profitable", 100+ year old public companies to start-up, unprofitable companies with a glimmer of hope of being "profitable" someday. Herein lies the difference:

The company I'm currently at required huge capital investment (to the tune of $25+ billion). Will their income statement ever produce a "profit"? Maybe - the cash outlay and depreciation associated with that kind of investment puts you in the red before you turn a dollar in revenue, and will likely be difficult to come out of given the nature of the industry. However, the company generates $800M in unlevered (before paying interest on debt) cash flow. Company and industry specifics presents other challenges that prevent that cash from going straight back to investors, but the point is there:

How you determine profitability is key --

Can sell enough to cover your variable operating costs and fixed overhead? That's a start... Can you sell enough to cover your variable operating costs, fixed overhead, and depreciation on invested capital? That gives you some hope of replacing equipment after their "assessed useful life"... Can you sell enough to cover your variable operating costs, fixed overhead, depreciation on invested capital and your necessary capital outlay to cover equipment failures, as well as produce a return on the amount you / investors put into the brewery in addition to paying back any bank debt? Now we're talking...

Now, enough hypothetical rambling from someone that's on the verge of "doing it" -- what's the measure of profitablity for the go / no-go on starting up your brewery? Is it to earn enough to quit your day job, make the salary you would have if you didn't quit the day job and have tons of $$$ in the bank come the day you want to step away?

Any thoguhts / criticism are greatly appreciated! Cheers!

**fa50driver** · 07-12-2011, 12:55 PM

Great points Kyle -

I would venture to gamble that a lot of people aren't using "reserves" in their business models to cover depreciation and expansion when determining profitability.

I would also venture to gamble that many folks (like myself) actually just ignore the numbers and figure that they will make it work somehow and figure it out as they go. The idea of starting a micro-brewery is exciting, and once you get the bug, you don't necessarily want to listen to reason.

My initial idea of achieving profitability was to get to a point where I get a decent return on my investment, make a decent salary, and grow equity in a business that I can someday sell - all before I burn out. Having worked on this project for the last three years I can say that I might not be able to achieve all of this before I burnout -

Brewing is hard work and capital intensive - I would say that there are much easier ways to make money. I certainly don't want to be the one shoveling out the mash tun 5 years from now...

**South County** · 07-12-2011, 04:25 PM

Vince knows what hes talking about! He has the right to sound cynical (hes been doing it for over 2 decades) and when he gets 100 calls a day for equipment pricing from folks who aren't remotely close to affording it and unfortunately are no where near qualified to run a small business much less a brewery, you could see his annoyance. If you have read the soundbrew article about nano'ing and are still hell bent to go for it, then do so. Why sit here and get defensive (no one specific to this post) about a dose of reality. With that said we are in a craft upswell, and just because xyz brewing is booming, and start out with "x" story (usually the incorrectly romanticized dogfish head story) has no relevance to any other venture. Ask your self this question, take any other business startup scenario, remove your emotional partiality to brewing, and instead insert your credibility/financial equity to run that type of business and ask your self if you would still move forward, much less get money for it from banks or investors. There's plenty of room in the world for fantastic well run breweries of any size and very little room for hap-hazard dreams that miss the mark.

**CopperKettle** · 07-12-2011, 08:32 PM

Make sure your brewery is in a decent location and has good potential tap room traffic and you are fine at well below 10BBL sizing for a brewhouse. We started three months ago on a 3BBL Premier Stainless system and are selling beer already faster than we can make it entirely at retail at the tap room. We have beers we sell for almost $1700/BBL at retail and sell out before we have time to make them again. We're talking a 3BBL fermenter with roughly $5k in beer in it that cost like $300 in materials to make not including labor or fixed costs like rent and debt service. We are already purchasing 10BBL unitanks so we can start doing distribution but the tap room pays the bills. Sending kegs to accounts isn't to make money, it's to build awareness and drive more tap room sales. Distribution is a "go big or go home" strategy but there are more sensible ways to get started for people without million dollar startup budgets. For small guys sell at retail and don't distribute till the tap room has funded growth to distribution scale.

If you don't think it can work come to our tap room on a Saturday night when there are 40-50 people drinking $5 pints and $6 10oz specialty beers. I'd much rather be selling beer at retail than be a slave to a distributor. We were in the black for the YEAR in our first 8-10 weeks of being in business based on estimated fixed expenses. Tell me another business model that can say that.

kyle.carbaugh · 07-12-2011, 11:51 PM

Vince makes excellent points. He sees a side of the industry that most who post here don't see, or see for a very limited time and scope. I also think the remarks about how much money you can expect to make going the nano route are well founded in reality and observances of those who didn't make it work -- then again, the age old adage of "if you want to be a millionaire in the brewing industry, start with two (million)" has been said to those opening any brewery, not just a nano.

That said, I also agree with South County in that those who want to start a brewery with little business sense or a limited view on what it takes to operate your own business (flower shop, bike repair or brewery) will have difficulty finding success in the brewing industry.

One point of debate that I think is worth raising more so than the inherent issues with the nano-brewing business model, is the dynamics of the individuals starting down the path of opening a nano. I think this is truly what comes across in Vince's message, as well as those with similar sentiments regarding hopeful nano-breweries and their would-be owners. Many of the folks that I've talked to (and have read their posts on here and in other foums) in the 3+ years of research leading up to today that have mentioned starting a nano (and are still in the process) are generally dreamers seeking investors and banks to put up the cash for the brewery with minimal personal investment (other than time and the homebrew system they've pieced together from illegitimate keg procurement and banjo burners). Those that have gotten investors and banks to provide funding on the basis of said homebrew system should teach classes on persuading others to give up of their wallets!

Needless to say, I think the majority of dreamers heading down the nano route have put a sour taste in the mouths of industry veterans not because they are seeking to start a nano brewery, but simply because they end up wasting time (as previously mentioned), are argumentative in getting their poorly researched and half-conceptualized points across, or are unnecessarily piggy-backing on the hard work of those that laid the ground before them. I hope in my nano-brewery to 'big-boy brewery' pursuits I do none of the above -- and if I do, I hope those I'm talking to will be blunt enough to call me on it.

I think it fitting to also mention that the progress I've made on the brewery and the pitfalls I've avoided are solely the result of listening to (and heeding) the sound advice around me. Copper Kettle, Strange Brewing, Caution, Upslope, Left Hand / Jeff Mendel (to name a few) and all of the PB posters -- thanks! This is a great community and you've provided so much insight... surely wouldn't make it without you!

Cheers!

**Beersmith** · 07-13-2011, 07:59 AM

I have to concur with Soundbrew's (Vince's) thoughts on system sizing. He's not picking on anyone, he's just being honest. He is dead on about smaller systems not being sustainable in MOST cases. He's also right about the high cost of equipment and labor on small systems. Knowing what I do now after 15 years of planning, building and running a successful brewery, I would not start any brewery with less than a 7bbl brewhouse for on-premise and 15bbl for wholesale. IMHO going smaller than that is a recipe for long hours, low compensation and ultimately burn-out.

**BrewinLou** · 07-13-2011, 08:39 AM

I agree with Vince. You should be happy he offers free advice at all. Just b/c you do not want to hear what he has to say does not mean he is wrong. Does generic advise fit all occasions? NO! But Vince has the best free rule of thumb advise out there. He has years of wisdom in the biz, and has seen and helped a lot of breweries that made it and lots that did not. You could learn from a person with this much experience.

Well said South County.

**chaser** · 07-13-2011, 08:46 AM

Originally Posted by CopperKettle

Make sure your brewery is in a decent location and has good potential tap room traffic and you are fine at well below 10BBL sizing for a brewhouse. We started three months ago on a 3BBL Premier Stainless system and are selling beer already faster than we can make it entirely at retail at the tap room. We have beers we sell for almost $1700/BBL at retail and sell out before we have time to make them again. We're talking a 3BBL fermenter with roughly $5k in beer in it that cost like $300 in materials to make not including labor or fixed costs like rent and debt service. We are already purchasing 10BBL unitanks so we can start doing distribution but the tap room pays the bills. Sending kegs to accounts isn't to make money, it's to build awareness and drive more tap room sales. Distribution is a "go big or go home" strategy but there are more sensible ways to get started for people without million dollar startup budgets. For small guys sell at retail and don't distribute till the tap room has funded growth to distribution scale.

If you don't think it can work come to our tap room on a Saturday night when there are 40-50 people drinking $5 pints and $6 10oz specialty beers. I'd much rather be selling beer at retail than be a slave to a distributor. We were in the black for the YEAR in our first 8-10 weeks of being in business based on estimated fixed expenses. Tell me another business model that can say that.

You make a good point about tap room traffic. Good tap room sales are the bread and butter of any smaller brewery. You do however validate Vince's points by saying that you can't keep up with sales. Within three months of being open you have outgrown your system and probably will need to expand soon. Expansion is a headache, trust me I've been through a couple now. My personal advice to those considering buying a small system and opening a brewery is that if you have the balls to think you can succeed in your market then you should have the balls to buy a big enough system to make a decent quantity of beer with. On the other hand the story of breweries like Copper Kettle and Strange Brew are validation that you can open on a small scale and be successful, but if you are successful you are destined for the headache of expansion very soon after you've had the headache of opening a business. I'd rather kill two birds with one stone and open with a decent sized system.

**CopperKettle** · 07-13-2011, 09:31 AM

I wouldn't consider our expansion a headache, for us expansion isn't hard. Pop two 10BBL fermenters in (as we are) and triple batch and we have tripled our capacity with almost no changes to the brewery. If you start at 1BBL size (ala Strange Brewing and others) yes you need to do a major overhaul to get any "real" production volume but with a 3BBL system I can produce tremendous amounts of revenue at retail and have beer left over to get PAID to advertise my tap room (what I consider draft accounts) with reasonable labor investments. At retail the beer in the tank is worth as much or even more each time you brew than the tank cost to buy and we're talking brand new primo tanks from Premier, not dairy tank stuff here. I am guessing our project will be entirely debt free within two years then we can start saving up for the "headache" expansion when the 3BBL with triple batching system gets swapped out for a 10BBL single/double system.

So basically, I get a little miffed when I hear people (or manufacturers) say a <15BBL brewery can't work. If you can make a great product and have a location people want to come to you WILL put butts in seats and be profitable but you have to focus on tap room sales and it CAN be done without being a millionaire. Yes distribution is a losing battle till you have the economy of scale to make it work but not many people can start that big without selling their soul to investors. Keep the dream alive. And like our slogan, bring the LOCAL brewery back. The world needs more breweries where you know your customer's names and less people that want to be the next Sierra/Dogfish.

**fa50driver** · 07-13-2011, 10:44 AM

Copper Kettle - Congrats on your success! I suspect that you will find yourself hitting your max capacity much sooner than two years (and the headache of expansion). I think that is what the Soundbrew post was addressing - that even if you do experience success with a small system, you will have to expand sooner than later - so why not plan for success and save up the extra funds and size appropriately so that you aren't disrupting the flow of your brewery one or two years down the road. It may be worth saving up the extra $40k for a larger system and planning the square footage needs and utility needs ahead of time. But, as your story demonstrates - it is not 100% necessary for success.

**tarmadilo** · 07-13-2011, 01:54 PM

I was the brewer for a startup back in 1995 that brewed in batch sizes of 1.5 bbl, 3 bbl and 7 bbl, and one thing that became painfully obvious right away was that it took just as much time and energy to brew three kegs of beer as it did to brew 14 kegs of beer, but we could only sell the small batch for around 20% of the large batch. It's pretty straightforward mathematics.

I worked there for a little over a year, and quite frankly burned out so bad that I left brewing for two years, and when I did get back into it (for only one more year), the thrill was quite frankly gone...

Tim

edited to add: It's an absolutely straightforward thing: add up the amount of time (and don't be thinking "best case scenario", always factor in more time than optimum conditions would indicate) it'll take you do to EVERYTHING from turning on the lights at the beginning of the day to locking the door behind you. Not just the brewing, but the cleaning, the packaging, the record keeping, the sales calls, etc. Add in the cost of ingredients, the cost of equipment, the cost of overhead (rent and utilities), and anything else you'll need to pay for.

Now figure out how much beer you can brew and package and sell in a month. Remember that you'll have to do all the other jobs (sales, bookkeeping, cleaning, ordering, etc), so don't plan on brewing every day, all day or else you'll get suicidal pretty quickly! Figure out how much you can sell that beer for (and then subtract all relevant taxes!).

Now divide that figure by the number of hours you'll have to devote to the job.

You'll find that the smaller the batch size, the closer to zero the profit is.

Tim

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profit breakpoint: 15bbl/day system and 3000bbl production/year

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