Leaving the Brewpub Model Behind: The Sequel

My original post on craft beer and brewpubs (it's here) drew a number of comments from a variety of places. You know you've struck a nerve of sorts when people are sending you emails about a blog post. There were also comments on the blog and on the blog's Facebook page. I'm not saying the post went viral and I got messages from Russia, but there was definitely some interest in the topic.

Just to summarize that post, I was simply pointing out that we are seeing an increasing number of craft beer production facilities that are not attached to a brewpub. This runs contrary to the business strategy upon which much of the country's craft beer industry is based. My question: Are we really prepared to leave that model behind?

The established, antiquated model

Counter-punch

The most common leverage point in favor of the evolving model is that beer is more profitable than food. The argument goes something like this: If your brewpub revenue is 60/40 in favor of food, more of your net profit is coming from beer because beer is more profitable than food. Using that logic, the new age breweries that have no food and limited tasting room hours will be just fine as long as they have good beer and they sell a lot of it. Hmmmm.

Survey says

I don't own or work in a brewpub, so I have no firsthand knowledge of profit ratios and net profit. So I went to the horse's mouth...someone who has run a successful brewpub for many years. I'm not going to identify this person because that's the way he/she prefers it. I'm simply going to say industry source. Here's what my source says:

You can't take cost/profit percentage to the bank. Beer is probably more profitable than food. But that slight difference in profit won't pay your bills in the long run. When a tasting room sells four customers 2 beers each at $4.00, they put $32 in the till. If those same four people come to my pub, we'll get the same $32, but maybe they each buy a burger for $10 each, and an additional beer each. Now we've put $88 in the till. Sure, there's more overhead, labor, equipment, food cost, etc. But the extra $56 we put in the till more than covers that cost. We also get the added benefit of all the additional business that comes in just to eat, whether breakfast, lunch or dinner. The tasting rooms don't see that business.

The new model...

The importance of daily cash flow has been covered before, notably by Sam Calagione (Dogfish Brewing) in his book Brewing up a Business: Adventures in Beer. In it, he talks about the easy (and daily) cash flow that a pub brings in. My source continues:

Most production breweries rely on wholesales sales to distributors. Distributors pay on a 14 day cycle. In our case, we have several distributors, only one of which pays on time. We typically get paid three weeks after they get the beer, potentially 5-6 weeks after we received the grain and other ingredients to make the beer. Most suppliers give us 30 days to pay bills because we're well-established...newer breweries may have less favorable terms. Anyway, without that extra money in the bank from restaurant sales we'd never have the cash flow to pay our beer ingredient suppliers on time.  

Elephant on the couch
Look, it's hardly a secret that craft beer has been on a growth tear in recent years. Growth seems to be open-ended. These new age, production breweries appear to be based on the premise that they can make a lot of quality beer and sell it for a good profit. Nonetheless, the overwhelming success of the brewpub model and questions about the viability of the brewery-only model ought to make you wonder why this route is being chosen.

Well, one of the reasons is financial. If you want to open a business of any kind today, chances are you're going to need financing. Even if you plan to borrow against your house or other assets, you will probably need help from a bank.

If you go to a bank with the idea of opening a restaurant, you aren't going to get a warm reception. Why? Because restaurants are regarded as one of the riskiest investments out there...they have a high failure rate even in a good economy.

However, if you go in with the idea of opening a brewery, the reception will be much warmer. Why? Because the Federal government regards breweries as manufacturing facilities, which are eligible for SBA (Small Business Administration) guaranteed loans. Here's how my industry source sums it up: 

In the current banking climate, banks don't like restaurants or pubs. But they love breweries. I'm working on two projects at the moment...a new pub and a production brewery. Even though I would create 25-30 jobs with the pub and only 7-8 with a new brewery, the bank would prefer to help me with the brewery due to the SBA guarantee. The pub would create more jobs, but everyone knows restaurants have the highest failure rate of any business, right?

So if you want to understand why so many production breweries are opening, it may be helpful to understand the realities of the financial climate. It's a good deal easier to get funding for the brewery-only arrangement, despite the historical success of the brewpub model. Manufacturing is king. Who knew?