Scores, Spreadsheets, and Sleep Deprivation
Happy Wednesday everyone! I have some additional results from NHC to share. What I find hilarious is that the beer I wasn’t even going to bother entering did best and the one I thought had a chance to be a winner did worst. Lolz for days. The Schwarzbier did best with a score of 34.5. The Common scored 32.5 and IPA 30.5. Those all scored in the ‘Very Good’ zone of 30-37. Meanwhile, and in the words of Charles Barkley, the Helles did tuurrible. Seems it oxidized in the bottle and the judges didn’t like it otherwise (score of 23.5). This surprises me considering I solicited professional opinions before submitting it and those “judges” (one a professional brewer who makes killer lagers and another BJCP certified) did not detect any of the flaws the NHC judges did. Whatevs, you live and learn. I’ve now logged the scores in my excel-based Competition Results Manager for future lookup. As I mentioned in the prior post, nothing got through to finals this year, but the notes and objective scores are invaluable for recipe refinement and becoming a better brewer generally.
If you read my original post for the site I said that this blog would include posts about being a new dad as well as the brewery-in-planning process. So lets talk about those things. First, I’m pooped. Graham has hit his four-month sleep regression and we’re simultaneously trying hybrid swaddling approaches, as well as talking about long-term sleep training. The nightly interrupted sleep has really taken a toll on me. And that’s just from waking up multiple times per night. Jaimie must get up to feed him twice per night for 20 plus minutes at a time. I don’t know how she does it. I’ve always been more sensitive to sleep deprivation but she’s a bloody champion; and even it is beginning to take a toll on her. We are both exhausted, forgetful, and edgy. I’m unproductive at work, gaining weight, and have persistent brain fog. I don’t know how much longer this can go on until we just cut him off cold turkey in the middle of the night to cry it out and learn to sleep a consistent 8 to 11 hours per night. Sorry Graham, I know you’re still a little guy but you’re a full-fledged infant now, not a newborn. Act your age son.
Modeling A Brewery
Enough from whiny Kevin, lets talk about the brewery. It’s been many months since I last opened my Financial and Operational Model (six months to be exact) that I originally began building in the waning days of 2017. For those that may not know, my day job includes building excel models for public utilities to use in financial planning and rate design, so it was a no-brainer that I should build out my own model for the brewery. That original iteration of the model assumed a nano setup and I have since settled on, and adjusted the model for, a 7 or 10 BBL system. A nano sounded great at first because there would be the possibility of keeping a day job and brewing on the nights and weekends. Plus, the start-up costs and space requirements are minimal. But the downside is that you spend all your time brewing and before you know it you’re exhausted. And remember from the prior paragraph I’m already exhausted from this beautiful tiny human. Also, if you have success you’re immediately in a situation where you’re out of brewhouse capacity, out of space, and out of time. You’re sent scrambling for new facilitates and new funding. Obviously the flip is true too. If you go too big on the facility and the brewhouse capacity then you may be brewing too little, may have inventory lying around, must rely on a majority distribution model (which tanks your gross margins), and then you’re just trying to pay the bills. So, a traditional 7-10 BBL brew-pub sized system seems appropriate for what I’m trying to do which is a retail model, sizable and heavily trafficked taproom, and enough capacity to not spend every day double batching.
While the brewery won’t be nano I have tried to get to a nano scale on the excel model accounting for everything from $/therm if I run a gas powered brewhouse, to the ratio of lbs of hops/BBL of finished beer, to the minimum square footage requirements of the facility given different brewhouse capacities. And obviously since I live and work in a geographic area of expensive water, I’ve accounted for the cost of water and estimated water to finished beer ratio, among all sorts of other ratios! So lets break down the components of the cash flow model.
Capital Investment
I’ve attempted to account for most individual equipment components in the brewhouse, estimate some of the required tenant improvements (TI) on any building, and calculate build-out costs of the taproom. Without getting into each line item I estimate a capital requirement of $249k for the brewhouse, $156k for tenant improvements, and $75k for the taproom. The TI and taproom costs may be wildly off among themselves, but I am comfortable with combined total of approximately $250k on the brew side and $250k on the building/buildout. $500k all in for a 7-10 BBL brewery-taproom (no kitchen) in Santa Barbara seems conservative without being insane. I’m assuming that most of the capital will be financed in some manner whether that’s private investments with a guaranteed rate of return, a bank loan, or some other debt instrument. At roughly $500k, with a term of ten years and interest rate of 6%, I estimate the monthly payment at $5,700 per month.
Operating Expenses
That’s the capital side but of course there are ongoing operating costs associated with beer production, taproom labor and supplies, and administration/overhead. Don’t worry I’ve accounted for all those as well. The taproom and administrative costs are mostly fixed with big ticket expenses including rent and labor. The brewhouse expenses are highly variable and dictated by production and so the Month 1 expenses are pretty low and Month 12 are pretty high because hopefully I’m making and selling a lot more beer by then! For a reference point I have operating expenses estimated at $16,400 in month 12 ($6k brewhouse, $1k taproom, $9k rent and administration). If you’re interested in the expenditure detail reach out to me in the comments or by email because it’s too dull for the post.
Revenues
The expenses are the easy part. Estimating revenues is really like identifying all the mathematical inputs and then consulting Ms. Cleo to see how much beer you are going to sell. Again, I don’t want to get into the weeds in this post but I’ll summarize the steps in estimating revenues. First, I identified what the maximum number of beers (in pints) would be with the brewhouse at “full capacity”[1] and all beer sold retail in the taproom. That gives me my upper bound. Second, I made an educated guess on sales between taproom, wholesale and retail kegs, and wholesale and retail bottles/cans. The largest revenue source is from the taproom and I estimate an average sales price of $6 per pint. Third, I made educated guesses on the month-over-month growth in each of the sales areas and tried to be conservative. This is a total crap shoot and may end up being dictated by anything from time of year, to luck with equipment not breaking down, to getting a social media bump (or not) by some fellow brewery regardless of my own marketing, etc.
So, the growth forecasts are crap. Which reminds me of something my grad school statistics professor told us: “all models are crap, some are just better than others.” This is as true for climate models as it is for brewery financial plans. In any case my Month 1 estimate on revenues is $17k on about 2,000 taproom pints (and some miscellaneous sales) and Month 12 revenues is $57k on about 6,700 taproom pints. If you’re open five days a week that’s growth from 91 to 304 pints per day. If you’re open seven days per week that’s growth from 66 to 219 pints per day. Ambitious. I’ve checked and I can reduce these growth estimates by half and still cover all expenses and generate positive cash flow.
So WTF Is Next?
Next time I post about the brewery-in-planning I hope to focus on the brewery’s vision because without that you’re pretty lost. Particularly in a time when consumers are attracted to brand identity, a company’s mission, and their values. Millennials and the younger bunch care much less about the dollars and cents and much more about purpose, passion, and social responsibility. It will be important to convey that in both the finished beer and the space that gets built out and enjoyed.
I also need to get back in touch with the commercial real estate peeps in town and have a conversation with one or two of the established breweries about how many beers they pour in an average month to vet those revenue estimates. But first I need a nap.
[1] This is human capacity brewing 10 BBL batches 10 times per month. System capacity is significantly higher if you double or even triple batched or brewed more frequently. But I’m establishing a realistic capacity given my labor and turning beer from the kettle to the toilet.