According to the Brewer’s Association, craft breweries made a significant contribution of over $70 billion to the U.S. economy in 2022. This thriving industry generated more than 460,000 jobs—with 190,000 of them directly within the breweries themselves. With such promising figures, it is evident that the beer creation realm continues to hold immense potential. However, for brewery entrepreneurs to capitalize on this potential, it is crucial for them to comprehend the key strategies to achieve profitability in the beer business.
Running a brewery entails navigating an economic landscape characterized by decent profit margins coupled with substantial costs. Consequently, it is common practice for breweries to reinvest their profits into vital areas such as equipment management. Maintaining a healthy cash flow is of utmost importance to ensure the sustainability of a brewery, with sustained profitability following suit.
While attracting customers to the taproom through the creation of exceptional beer is undoubtedly essential, achieving financial success in the beer business necessitates a comprehensive understanding of additional factors beyond customer acquisition. Integrated software solutions often provide the key to optimizing operations and revenue streams.
The Surging Popularity of Small Craft Breweries
Small craft breweries have surged in popularity for a multitude of reasons, captivating people not just within the bounds of a single brewery’s country, but across borders as well.The factors contributing to craft brewery popularity include consumer demand and the allure of the craft brewery counterculture.
Consumer Demand
Consumer demand plays a pivotal role in the surging popularity of breweries. Beer enthusiasts have developed a craving for hoppy IPAs and distinctive, palate-tickling sours. The sparseness of these unique and often pricier craft beers on the shelves of ordinary convenience stores has only fueled the desire for them. Scarcity breeds demand, and the allure of limited-edition ale varieties further drives interest and enthusiasm for brewery products.
Large corporate beermakers such as Anheuser-Busch and MillerCoors recognize the appeal of craft beers and have diversified their product portfolios. Names like Terrapin Beer and Goose Island are craft brews from these corporate giants. But connoisseurs of the best craft beers are looking for more, and smaller craft breweries are bringing it to them.
A Counterculture Movement
Craft breweries have emerged as a captivating counterculture movement, standing in opposition to mass-produced, cheap beer brands that prioritize marketing over product improvement. By offering unique and meticulously crafted brews, small breweries symbolize a departure from the homogeneity of mass-produced options. They represent a resurgence of freedom in beer production, where creativity, experimentation, and the pursuit of quality take center stage.
The economic aspect of breweries also contributes to their burgeoning popularity. The beer industry offers considerable financial opportunities, with breweries generally outperforming restaurants and bars in terms of profitability. Properly managed breweries can emerge as highly successful business ventures, boasting impressive profit margins of 25% or even higher. In stark contrast, the average profit margin for a restaurant typically hovers around a significantly lower 5%.
By incorporating a diverse range of factors, such as the growing consumer demand for unique brews, the countercultural appeal of small breweries, and the economic advantages they offer, it becomes clear why these establishments have become such a force to be reckoned with in the beer industry.
Tasting Room: The Golden Opportunity for Breweries
One popular method for generating revenue in the brewery business involves establishing tasting rooms, which allow breweries to connect directly with customers and bypass middlemen. While retail sales and distribution are advantageous for larger companies, smaller breweries can maximize their profits by minimizing outside contracted work and focusing on in-house operations.
Among the various sections of a brewery, the tasting room may emerge as the most profitable. Despite occupying minimal physical space, it serves as an effective marketing and distribution channel for customers.
For small brewers, relying solely on wholesale markets can prove challenging—making tasting rooms an invaluable asset that requires minimal overhead and distribution efforts. It can be likened to the farm-to-table movement, except in this case, it can be aptly called the brewery-to-pint glass movement.
Selling smaller portions of beer directly to patrons offers several advantages: customers are willing to pay a premium and distribution costs are reduced, even when it comes to growlers or pony kegs that don’t require delivery.
Additionally, tasting rooms provide opportunities for customers to purchase merchandise, order food, or join the brewery club, all of which serve as potential sources of increased income with proper pricing strategies. By capitalizing on these revenue streams, breweries can further enhance their financial prospects.
The Economics of Beer
While tasting rooms can boost profits and offset equipment and maintenance costs, implementing sound business practices is crucial to maximize profitability and minimize expenses. The initial step entails identifying the most substantial expenses breweries typically incur, which include:
- Ingredient costs
- Real estate expenses
- Overhead costs
- Packaging expenditures
- Distribution expenses
For each brewery, there exists a unique set of optimal approaches to address these expenses. Gaining a comprehensive understanding of potential cost-saving opportunities is essential for assessing which measures are worthwhile and align with the specific circumstances of the brewery. By proactively exploring strategies to decrease these costs, breweries can optimize their financial performance and enhance their overall profitability.
Ingredient Costs
Water, grains, hops, and yeast stand as the primary raw ingredients in beer that offer opportunities for significant cost savings. Specialized software systems can help to track the costs of these ingredients but also how the ingredients are stored and used for quality control purposes.
Water
Despite its importance, water savings often go overlooked once a brewery has installed its initial water treatment process. However, investing in steam heat brewing vessels that recycle condensate can drastically reduce water usage. Reusing this condensate, which closely resembles distilled water, not only conserves water but also minimizes equipment wear and tear. Condensate presents a favorable alternative to water with a high solid mineral content that requires softening to prevent scale and corrosion.
Grains
When it comes to grains, such as malt, breweries can choose between purchasing pre-milled varieties or investing in their own milling equipment to cut down on costs. The scale of production typically dictates the decision to mill grain in-house, as it entails additional equipment and overhead expenses.
Hops
While specialized hops often serve as a unique selling point for craft brews, considering all options can be beneficial, not only for cost savings but also for innovation and the creation of new beer recipes.
Over the past couple of years, brewers have benefited from a growing spot hop market instead of having to contract their hop use for multiple years. This allows them to quickly adjust to changing consumer tastes instead of being locked into a specific hop for multiple years.
Yeast
For many breweries, yeast management presents the most logical pathway to cost savings on beer ingredients. Reusing yeast multiple times, whether it’s four or twenty times, can lead to significant savings. Additionally, reusing yeast can impart distinct flavors and fermentation characteristics. Extending the lifespan of yeast is a common practice among breweries seeking to reduce costs, but it’s important to find the optimal threshold for reuse. Tracking fermentation history is instrumental in making yeast management decisions.
Real Estate Expenses
The choice of real estate can greatly impact the success of a brewery—especially its tasting room venture. When considering starting a tasting room, the selection of real estate becomes a crucial factor. Breweries situated in industrial properties may save money on rent, but they often lack the desired foot traffic. This can be acceptable—if the facility transforms into a highly sought-after destination with the added advantage of convenient parking.
On the other hand, opting for a downtown location for a tasting room offers increased visibility and foot traffic. The tasting room serves not only as a place to serve beer to patrons but also as a powerful marketing tool. Downtown real estate tends to come with higher costs, but it provides a dual-purpose benefit, serving as both a brewing location and an eye-catching advertisement display for the business. Weighing these costs and benefits is essential when determining the optimal location for your brewery and its tasting room.
Ultimately, the decision should consider the potential trade-off between lower rent in an industrial area versus the heightened exposure and marketing advantages that come with a downtown location. Striking the right balance between costs and benefits will be instrumental in positioning the brewery and tasting room for success.
Overhead Costs
Employees represent a significant expense in any business, but they are also a valuable asset. In the case of new breweries, founders often shoulder various tasks, including tank cleaning and keg washing, until the business generates sufficient cash flow to support additional staff. However, it is important to recognize that these business owners may be better suited to focus on activities that drive greater profitability for the business.
Attracting and retaining high-quality employees requires offering competitive compensation and incentives. Breweries must provide appealing incentives to attract the kind of employees who will uphold the quality of their products. Investing in skilled and dedicated staff members is crucial to maintaining product consistency, customer satisfaction, and overall business success.
While the cost of employing capable personnel may seem significant, it is essential to view it as an investment rather than a mere expense. Quality employees contribute to the growth and reputation of the brewery, ultimately driving profitability. By offering competitive compensation packages and creating a positive work environment, breweries can attract and retain top talent, ensuring the ongoing quality and success of their products.
Packaging and Distribution
Packaging and distribution channels pose significant costs, particularly for emerging breweries that may have limited cash flow. In the early stages of a brewery’s life, hand-bottling efforts often present the most affordable option. However, even established brewers are increasingly favoring cans over bottles. They recognize that cans are more cost-effective, cool quickly, and offer superior light-blocking properties to preserve beer quality.
Navigating distribution can also present challenges. While establishing contracts with distributors can simplify the process and reduce complexity, it may also diminish direct quality control efforts. On the other hand, self-distribution can be a more cost-effective option, particularly if it’s local. This approach involves distributing kegs at festivals and private events where their beer brand is prominently showcased. Some new breweries may choose to focus solely on keg distribution, especially when they receive advertising benefits.
Carefully considering packaging options and distribution strategies is essential for breweries aiming to balance cost-effectiveness, product quality, and brand visibility. Evaluating the long-term benefits and drawbacks of different packaging formats and distribution channels will allow breweries to make informed decisions that align with their goals and available resources.
Great Beer and Great Profits: The Importance of Data-Powered Brewery Management
In the craft brewing industry, understanding your business thoroughly requires accessible data. This data should be relevant and seamlessly integrated. When using separate accounting, POS, and brewery control systems, valuable information may be available, but the lack of aggregation can hinder the ability to make profitable decisions with ease.
Using a complete craft brewery system allows decision-makers within a craft brewery to have more opportunities for information gathering. That information can be evaluated from a systems approach, offering a data-powered, holistic view of business operations and a clear understanding of the bigger picture. The most successful craft breweries are using and benefitting from a comprehensive brewery management system that seamlessly integrates data for various components—including many discussed above— to streamline operations, foster efficiency, and enable data-backed decisions that will impact your brewery’s bottom line.
Use the Right Technology to Power Your Brewery with Data and Make Money in the Beer Business
Breweries face the responsibility of preserving a distinctive image and reputation for quality. Consequently, their approaches to generating revenue may revolve around strategies like reducing ingredient costs or expanding their business through the sale of merchandise, food offerings, or brewery club memberships. Effective cash flow management plays a crucial role in determining the most viable income strategy to maximize profits.
Implementing appropriate software solutions can greatly enhance transparency by tracking costs, income streams, and various other financial aspects. With the aid of such software, brewery owners can gain clearer visibility into their financial operations, enabling them to adopt the best business practices tailored to their specific requirements.
By leveraging the right software tools, breweries can streamline their financial processes, identify areas of potential cost savings, and seize opportunities to optimize revenue generation. This increased transparency and data-driven decision-making empower business owners to make informed choices that align with their unique needs, ultimately bolstering their profitability and maintaining their commitment to quality and image. Ekos software provides software solutions for every aspect of craft brewing operations. Our integrated inventory and production management systems automate essential tasks such as TTB reports, sales orders, and employee training. Find out how Ekos can improve your craft brewery operations by booking a demo today.
