Finance 101 - 10.28.2015

​How To Scale a Brewery: 15 Tips From Craft Brewing Pros

“The idea of opening a brewery was this romantic vision of making beer all day long in a warehouse, amongst barrels and bags of malted barley. That was always alluring to me,” says Josh Hare, founder of Austin’s also going Hops & Grain. “But I had no idea what I was getting into running a brewery.”

Such is the story we hear from entrepreneurs every day. The best part about working with small businesses who are ready to grow, is getting to know them - their challenges and triumphs, and all the lessons learned along the way.

As lovers of craft beer, we decided to tap into the Able Network and learn just what it takes to grow and succeed in the brewing industry. In addition to Josh, , we got first-hand advice from Jeff Heck, Co-Founder of Atlanta’s Monday Night Brewing, and from the team behind Local Libations Shipping Co., a new company that is helping breweries self-distribute, so brewers can maintain control of their breweries and their brands.

Knowing When To Scale

How does a garage brewer with early success put themselves in a position to scale?

1. Stay Skeptical

Jeff Heck says that Monday Night Brewing (MNB) developed its distinct brews by being inherently skeptical, critical people. “We were never happy with it. We were always trying to find ways to make it better. I tracked everything meticulously - all the drivers and influencers of taste.” In fact, Jeff still has the Excel sheet for every batch. “It tracked all of the variables, the process, and what was abnormal - like leaving something on the burner, or the water temperature being a touch too high.”

2. Foster Community

Social connection will lift and grow a brewery. As Josh Hare of Hops & Grain says, “One of my favorite things about running a brewery is being able to produce a product that ultimately brings people together over conversation.” For Jeff Heck of MNB, in fact, the conversation even pre-dated the beer - and in the most unpredictable of ways.

Nine years ago, Jeff was part of a 10-person bible study group that met at 6am. Since that felt a little early to talk about the meaning of life, the group decided to get together on Monday nights for some home brewing. Soon, he says, “we were brewing more beer than a bible study, in good conscience, could consume.” So, they started inviting friends and family to join them. After a few months? “The beer started to taste decent, which was kind of a revelation.” Willing to take it one step further, they put a business plan together and prepared to take the next steps, knowing they had built a community that stood ready to support them.

“One of my favorite things about running a brewery is being able to produce a product that ultimately brings people together over conversation. - Josh Hare”

3. Write Your Own Story

Imitation, especially of a narrative, is unlikely to grab an audience. “Customers buy the story,” Josh Hare says. “One of the biggest pieces of advice that I can offer up, especially in the brewing industry but really in any industry, is to be authentic. Create ideas that are your own, that you care about. Just because someone else has done something that is successful doesn’t mean that if you try to replicate that it’s going to be successful.” Jeff Heck serves as a good example. Rather than come up with a name that sounded extra cool or flashy, they simply named the brewery after their true origin: Monday Night Brewing. The name begs further question and allows Jeff and his team to tell the fun story of their inception.

Before You Scale

As you prepare to grow the business, educating yourself on context (like rules and regulations) will prevent delays - and streamlining the business will help the rocket ship fly once you launch it.

4. Know The Law

As you get started in building out a facility, the last thing you need is extra delays. It’s vital to know the law. Josh Hare says “our initial plan was to move our tasting room up to the front of the building in a new space that became available - but we got rejected because it didn’t share a wall with our current licensed space. TABC wouldn’t let us, even though it’s in the same building.”

5. Professionalize Your Business

As the brewery grows, so should the professional structure of your business. This doesn’t mean losing the heart and soul of the operation, just some thoughtful common sense changes. For example, Josh Hare cautions not to use your cell phone as your business number. “When I first opened the brewery, I was like ‘I’ll be fine - I’ll just deal with all of our raw material suppliers, all of our accounts - everyone through my cell phone.’ And then I realized about a year in that was terrible, so I had my cell number ported over to a landline, and got a new number. We still routinely get people that call the brewery asking for Josh.” Taking care of employees through benefits, good communication and appreciation is key. Creativity helps, too: Hops & Grain team members get compensated for riding their bikes to work.

6. Plan to Reuse And Re-purpose Waste Products

It’s not just green and sustainable; it can represent cost-savings and even income. “One of our commitments at the brewery is to reuse and re-purpose as much as we can,” Josh of Hops & Grain says. “Spent barley or spent grain is one of our largest waste products, and we have found them to be a fantastic source of nutrient in dog treats. We bake our own and we sell them in the tap room, give them out at all our events, feature them on our website. It’s been a great product for us.”

Getting the Money To Scale

As demand begins to outstrip supply and you start having to say “no,” it’s an obvious indicator that it could be time to grow. But, going from a 1-barrel system to a 15- or 30-barrel system to increase supply presents a real challenge. It will immediately become apparent that there are many facets to the business besides brewing beer. As you evaluate your options, try to get your head all the way around the breadth of the challenge.

7. Understand The Financial Requirements

“You realize very quickly how capital-intensive this industry is when you start to get pricing on equipment. Custom, stainless steel equipment runs in the hundreds of thousands of dollars,” Josh says. “We wanted a 15-barrel brewhouse that consisted of three fermentation vessels, enabling us to brew three to four batches a day consistently.” They also needed tanks for conditioning, packaging and carbonating the product, and both empty and full cans for loading up their distributors’ trucks. As Patrick Moore of Local Libations Shipping Co. points out, capital restraints aren’t just around equipment. “You also need capital to buy enough raw materials in advance to get you through an entire season of brewing. Plus, a lot of these raw materials have different collection periods. Having cash on hand is very important for the brewers we work with.”

8. Consider Contract Brewing First

Before diving in head first and purchasing big equipment of their own, MNB tried contract brewing as an intermediate step. They engaged a nearby brewery with extra capacity to brew MNB’s proprietary recipe. “It helped us see if we could scale the taste in larger batches,” Jeff says. “It also allowed us to develop a financial history as a business, which was a big help when we were raising more money.”

9. Plan Purchases Right

Because of the size of these investments, Jeff Heck says, “you have to get appropriately sized equipment so you can get scale out of it. You don’t want to go too small and then outgrow it.” The key, for example, is not to try to go from a 10-barrel brewhouse to a 15 barrel to a 30, but rather to plan to scale in substantive iterations, like going from 30 to 100. Of course, this means raising more cash up front. Which is a huge challenge because you have to…

“You have to get appropriately sized equipment so you can get scale out of it. You don’t want to go too small and then outgrow it.”

10. Accept That Banks Just Don’t Get It

An authentic story, a rabid fan base, great-tasting beer and a solid business plan aren’t enough for banks. Josh Hare describes a situation familiar to many brewers. “My thought was very simple. Approach a bank, they’ll fall in love with this fantastic, romantic vision that I have and they’ll lend me the money I need to get the brewery open.” No dice. “The bank told me they have no desire to own brewing equipment, so why would collateral for the loan be of any use to them? They didn’t see brewing as a viable industry. The banker said, ‘In 4 or 5 years when you’ve got some financial history, come back and talk to us and we’ll see what we can do.’” As is too often the case across all small businesses, banks simply turn their backs on entrepreneurs instead of trying to really understand their economics. So, you have to…

11. Find Alternative Sources of Funding

Luckily, there are other options. We’re proud that Josh Hare came to Able. Taking advantage of our unique model, Josh has been able to pull in $600,000. He recruited friends and family to commit to 25% of his loan - then, Able funded the other 75%. Josh’s proud backers get paid monthly interest, building a return on their money - and Josh keeps all of his equity. Able manages payments automatically, so he can focus on his business (and protect his relationships.) Able is also more than a loan. We created a video for Hops & Grain, threw a tasting event, connected him with other small business owners and brought press attention to the brewery. “With my Able loan,” Josh says, “I’ve increased production capacity by about 45%.”Jeff Heck of MNB involved friends and family at the beginning, but chose to sell some equity instead of borrowing the money. He focused on investors who could lose money without it being the end of the world, in case things went south, and stayed as picky as he could so he could be sure to retain control. Then, when MNB was ready to scale, he had a history of financials from contract brewing that allowed him to turn to the SBA. It was “a painful process that took about nine months,” Jeff reports. The SBA wouldn’t close until MNB had a lease on a space, but MNB couldn’t sign a lease without knowing they had the money to pay it. “It was frustrating, but we did get a really good rate.” One tip? “We took beer into our meeting with the loan officer.”

Once You Scale

The entrepreneurs of Local Libations partner with craft brewers around the country. One part of their job is saving people from signing their lives away to big distributors

12. Know Your Rights

“When you sign a territory over to a big distributor,” Patrick Moore of Local Libations says, “you’re giving them the right to distribute that beer for life.” As he describes, the sales pitch from the distributor goes something like: “We’ll take you up to Dallas, we’re in 1,000 accounts.” But, just because distributors can sell to these accounts, it doesn’t mean they will. Often, he says, breweries still wind up having to hire salespeople of their own. Moreover, salespeople from the distributor may actually be incentivized to sell a different beer instead of yours. “Large Distributors are anchored by multi-national breweries and it's their goal to move as much of that product as possible. These distributors may have thousands of SKUs that are each allocated different incentive points. It's very easy for the small brewer to get completely lost on that sales sheet.”

13. Self-Distribute - With Partners

As your brewery grows and distribution increases, suddenly you are buying, loading and driving trucks, when you want to be - and should be - focusing on what you do best: brewing beer and selling it by telling your story. According to Patrick at Local Libations, this is the #1 pain point for growing breweries.

In the past, breweries only had one other option: sign over to a big distributor, who will provide shipping and logistics. But, this means risking becoming just another brand on the spreadsheet.

Local Libations has stepped in with a new model. They help breweries self-distribute by doing all of the shipping and merchandising of the product, and provide a back-end dashboard for brewers to track and monitor the entire process. They deliver the beer to the account and then check the back stock, go into to the cold storage, check inventory levels, etc. Perhaps most importantly, Local Libations will work with brewers for as long - or as short - a time period as the brewers would like.

They still leave selling to the brewer. “They’re the ones who are going to preach the qualities of their beer better than anyone else to beer buyers who can stock them at major grocery chains.”

Each state has its own regulations on self-distribution. Texas law, for example, allows you to self-distribute 40,000 barrels. Most breweries distribute about 15,000, leaving plenty of breathing room.

14. Maintain Quality Of Product

According to Local Libations, “as breweries scale up, maintaining quality is where you see a lot of inexperienced brewers fall into a trap: maybe the recipe needs to change, or the process, or they need better quality control.”

Hops & Grains has left nothing to chance. “Our pure commitment to quality and my experience and interest in science led us to develop a full-time on-site lab,” Josh Hare says. “This allows us to analyze our product down to a very small level, including monitoring yeast health and viability.”

As breweries scale up, maintaining quality is where you see a lot of inexperienced brewers fall into a trap: maybe the recipe needs to change, or the process, or they need better quality control.

15. Maintain Quality Of Branding

As Local Libations points out, scaling your operation inherently means reaching a broader audience. This means you’re no longer talking only to craft beer heads, but also people with less specialized knowledge who want to try something new. Your brand needs to evolve to match that, without losing the authenticity and storytelling that have gotten you this far.

Takeaways?

Inquisitive, self-critical people who build strong communities, brew delicious beer and tell an authentic story will put themselves in a position to scale. By understanding the financial requirements of scaling, they will plan purchases intelligently and find sources of capital that understand their model. As these brewers grow, they will continue to succeed if they build sustainably, find good distribution partners, professionalize their operation and maintain the quality of both their beer and their branding. Happy brewing!

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