Owning a brewery is every homebrewer's dream. Turning that dream into a profitable reality takes serious planning. A Brewpub Feasibility Study Is the First Step to Liquid Gold
Originally Published by Mark Diebolt in Brewing Techniques (Volume 6, Number 2)
So, you're sitting in a tavern with a friend enjoying a nice microbrewed draft when it hits you. As a home brewer of many years, you already know the cost savings of brewing your own. Now, with some quick calculations scribbled on a napkin, you estimate that this pint of beer for which you just paid $5.00, if brewed on premise, could yield gross margins of up to 80% or 90%. Wow! Brewing beer and making money at the same time!
So it starts. Your idea turns into a discussion with a friend who's been in restaurant management. The two of you start dreaming of opening a brewpub. The steps you take from there on are the most important in determining whether your dreams transform into a successful business venture. The most important first step is the feasibility analysis.
A feasibility analysis is the first place to start in planning a brewpub venture. It may sound complicated, but it's not. It simply ensures that you do your homework before making any major monetary investment. The analysis forces you to take a look at all of the factors that can and will affect the success of a business. Without it, opening a business is like driving a beer truck by Braille.
The feasibility analysis looks at how the industry is doing, determines your market, and tells you whether it will still be there when you open. Do you know what market to go after, or who your competitors are? Are you located in the right place? What can you expect for sales volume?
Much of the process might seem like it should be common sense, but take some time and try to work it through. Keep in mind that the whole process is a lot like brewing beer. If you follow a recipe and use good ingredients and methods, you produce great beer. If you ignore good preparation and techniques, you produce swill.
This article shows you how to do your own feasibility analysis and where to find some of the information you will need. Asking, and answering, the right questions can lead you to the production of the beer and the business of your dreams.
First Steps -- Background Homework
Network: Talk to as many people as you can -- brewing professionals, business owners, distributors, consultants. Keep your ears open.
Education: Several institutions offer courses on how to open up a brewpub or microbrewery. One, the American Brewers Guild (ABG) in Davis, California, offers a course called "How to Open a Brewpub." The course provides a detailed look at what it will take to make a go of it, including equipment, finances, capital, site assessment, and more.
Plenty of books have been written on the subject as well.
American Brewers Guild
Offer a full brewer training program and frequent short courses on brewpub start-ups; publish a book, How to Open a Brewpub or Microbrewery.
Institute for Brewing Studies
National Restaurant Association Research Director
The Professional Brewers Page
Research: Once you have some background understanding of what it takes to run a brewpub, do some homework on the industry as a whole. Several organizations compile statistics on the brewing industry (see the box, "Information Resources," right, for some suggestions). One thing you will learn is that overall U.S. consumption of malt beverages has been stagnant for the past 10 years, and microbrews hold about 8% of the market. What does this bode for the industry? Is the pie going to get any bigger? If it doesn't, micros are going to have to take more of the majors' piece of it. Are you on the front or the back side of a bell curve? Are you riding the wave or just sucking suds?
Plenty of people apparently feel there's room for growth. The number of new brewpubs and microbreweries in the United States is still on the upswing. But optimism is not always enough, and, as with any business venture, failure is always a possibility. Brewpubs currently have a one-in-eight failure rate nationally (microbreweries are one in seven), though this is still much better than restaurants as a whole.
Bear in mind, however, that national, regional, and local markets perform differently. How healthy is the market in your region? Does your area have room for another microbrewery or brewpub? Many local distributors have this information available if you can convince them to part with it. State and Federal alcohol departments also keep statistics on consumption trends.
Location, Location, Location
As a brewer, you might be inclined to wax on about the brewery you'd have. But if you want to start a brewpub, remember one thing: A brewpub is first and foremost a restaurant. Yes, it has a brewery attached to it, but it is still a restaurant first and a brewery second. That means that the three most important rules of a successful restaurant apply here as well: 1) location, 2) location, and 3) location. I know this sounds painfully familiar, but I'm actually talking about three different concepts. When you're done looking at all three sides of location, you'll have what's technically referred to as a statistical market survey area, or SMSA, for your proposed business.
Location rule #1: Are you located in the right geographic area? You need people to buy your beer. Transporting your beer to them, or luring them to you, costs money. Try to locate your business near populated or popular areas. Many states have census bureaus that collect population data, and most city chambers of commerce have this information. Take an area map and mark target rings at 5-mile intervals from your proposed location. See what the population is at 5-, 10-, 15-, and 20-mile radii (the 5- and 10-mile radii are the most critical). Certain population minimums are recommended for brewpubs and breweries depending on the brewery's expected production output. The American Brewers Guild, for example, uses a guideline of 150,000 people in a 15-mile radius. The recommendations aren't etched in stone, of course, but you would not want to put a 15-bbl brewery system into a brewpub that was trying to service an SMSA of only 20,000 people.
Location rule #2: Are you located in the right demographic area? Not only should your location meet certain population requirements, but that population has to be within the right age group and income level. A low-income retirement community would not likely support a rocking brewpub selling $6.00 pints of beer, but even a small city could probably support several brewpubs if it was made up of predominantly middle-income professionals between 30- and 50-years-old.
Location rule #3: Does your location have the right exposure and access? Everyone hopes that their brewpub will be a destination -- "If you brew it, they will come." This dream may come true in some cases if you spend lots of your profits on marketing. Throw enough money at a problem and you can fix most anything. But while you're in the planning stages, you might as well be smart.
If you met rules #1 and #2, find a location that is easy for your clientele to find. Do a traffic survey during peak times, like lunch and rush hour. Are you on a well-traveled route? Is there a traffic light or intersection near your storefront that would make traffic stop for a minute?
Then there's access. You'll want plenty of well-lit parking. After all, most of your business will be done at night. A good test for any potential location is to ask yourself whether it is an area in which single women will travel unescorted at night. If not, reject the location. If you're lucky enough to start from scratch and buy land, make sure it has more than enough room for a parking lot. If not and you plan to locate in a city, do a parking survey of how many spaces are available within 300 feet of each entrance. Of these spaces, how many will be in demand for other businesses? Do these other businesses operate during the same hours as you? Are handicap spaces available? Are any parking garages nearby? Alternately, is public transportation or taxi service available within walking distance?
The box, "Site Assessment Survey," provides some important site characteristics compiled from studies of successful brewpubs.
Identify Your Potential Clientele
Once you have identified your market from your demographic surveys of the SMSA, it will further help to break it down into smaller, more readily identifiable segments to determine your prospective customers' frequenting habits. Consider, for example, whether -- and how many -- customers will come from the following segments: working professionals, shoppers, convention-goers, students, sports crowds, older couples, tourists, bar flies, arts crowds, families, beer enthusiasts, moviegoers, downtown residents, county residents, and special events participants. Chart or graph these segments to determine when they would be likely to frequent your establishment during lunch, dinner, happy hour, late night, weekends, and holidays.
The National Restaurant Association (NRA) offers a lot of information in this area (see "Information Resources," page 76). Contact them for assistance if needed. This information will help paint a picture of whether you have chosen the right area to locate your brewpub and will help you in your sales projections (more on that later).
Know Your Competition
Once you've found a reasonable area for a brewpub, it's time to assess the competition. Before you can determine how your business is going to succeed, you have to look at what others in the same line of work have done in the same area.
First, identify your competitors within your SMSA (remember the three rules of location?). Brewpub competition includes other brewpubs, nonbrewing restaurants, and bars. Find out who's offering good beer and how it's selling. The Yellow Pages, dining guides, and local newspapers are a good place to start. To locate breweries, check The Real Beer Page on the internet http://www.realbeer.com/search/brewtour/), or your state alcohol department for listings.
Once you have a complete listing, narrow it down to only those businesses that would be close to your profile. It doesn't make sense to survey your local McDonald's if you're opening a brewpub unless they have McBeer on the menu. Make up a survey list of everything about a restaurant that would affect business. Parking, exterior and interior appearance, seating capacity, hours of operation, menu, pricing, and service all factor into who goes where. Longevity is a strong sign of success, particularly in the high-turnover restaurant industry. If a restaurant has been operating for over five years, pay close attention to what they are doing and what contributes to their success. Is it value for the dollar, a theme, superior service, menu, entertainment, or something else? You can't argue with success.
Learning as much as possible about your competitors will also tell you a lot about your own future clientele. If your profile is close to theirs, adding a brewery could give you the upper hand, provided your area is not already saturated with brewpubs.
Project the Bottom Line
Sales volume projections: Here's where we start getting really serious and put all this information to work. If you think you understand your market, think you have found the right location, and know all about your competitors, you can start formulating sales volume projections. These sales volume numbers can determine whether sufficient business exists to support your proposed operation and how large that operation should be. From your competitive analysis you should be able to determine how many seats your SMSA can support. Do not overestimate this just because you love beer. Go with the statistics. Building a 200-seat brewpub in an area that would only support 50 seats will be deadly. By the same token, building a 50-seat brewpub in an area that will support 200 can be frustrating as well.
There is no simple formula for success. If you did your homework thoroughly and correctly, however, you will be making educated guesses rather than just throwing darts.
The NRA offers the following formula for quickly calculating revenues:
Turns X Seats X Average Check = Revenues
|*The NRA does not yet offer statistics on brewpubs, but it's safe to assume that your profit margin will be higher the more of your own beer you sell. The American Brewers Guild suggests the following percentages as guidelines: Food should represent 60% of gross sales, house beer should be 30%, and other sellable items such as souvenirs, bar goods, and so forth should be 10%.|
"Turns" refers to how many times the seating capacity is rolled over for a particular seating period (lunch, dinner, happy hour, and so forth). This is where the crystal ball comes in, along with the information from your competitive analysis. "Seats" is obvious, but if the lounge is used for seating during lunch but not for dinner the number may vary. "Average check" should be estimated from your detailed competitive analysis. Separate the food check from the beverage check; the profit margins are much different for each of these two categories.* Lunch and dinner checks will vary, so run the formula for both. You'll want to start with an average week during an average season. From here you can calculate an average month's revenues (see the box, "Calculation of Revenues," for an example). This will represent "monthly gross sales," the first line of any pro forma statement (pro forma statements are discussed later in the article).
Cost projections: Before you can estimate profitability, you need to figure out the cost of doing business. Estimating "cost of sales" should not be crystal ball work. Use statistics from the NRA for some rough guidelines; these are safe averages, organized by region and style of restaurant. In their reports you will find average costs for food and beverages plus operating expenses such as wages, utilities, entertainment, marketing, and more. In addition, many brewery equipment manufacturers offer potential clients formulation sheets describing the general costs of brewing an average beer. If you request a quotation for their equipment you can get their copy. The box, "Is Beer Liquid Gold?," gives some guidelines on calculating the profit margin on your beer. You can manipulate all of these averages based on your particular situation. Will your menu be up-scale or pub food? Will you have a full bar or serve only your own beers?
You'll probably want to take one further step and try to gauge how much it's all going to cost you. After all, the amount of profit that you get to take home will depend greatly on how big your bills are.
The building. Other important factors are your occupancy and equipment costs. Will you be renting, and if so, is the rent comparable to your competitors' costs? Are you planning to own your own building? Either way, try to keep this expense between 5% and 7% of gross sales. That should give you some kind of budget based on your sales projection to shop around with.
When you find a location for which you're willing to negotiate, consider hiring a broker to represent you. If you don't stick to your guns and negotiate for a reasonable rate, you may easily get taken. Furthermore, brokers can be real estate hound dogs for you, saving you time. Give them the parameters of what you're looking for and let them have at it. Many will do it free of charge.
The brewery. Then there's the other half of this equation -- how big should the brewery be? The brewery can be the single most expensive part of the brewpub. Estimating the correct size is crucial to an efficient operation. Many brewery equipment manufacturers will tell you they have a "rule of thumb" to go by that ranges from 7 to10 bbl maximum annual production per seat.
So let's say your sales volume projections have led you to plan a 200-seat brewpub:
200 seats X 7 bbl/seat = 1,400 bbl per year
If you have a 7-bbl brewery, you will be brewing 285 times in 52 weeks, or 5.49 times per week. Now remember, that figure represents the maximum consumption capacity. That means that if you have the perfect location, great marketing, and brew fantastic beer, life will be great and you might sell 7 bbl per seat. Being a conservative businessman myself, I like to use 5 bbl as a yardstick.
The number of brews per week and your brewing style and cycle will determine how many fermentors and serving tanks you will need, as well as what you need in the way of brewery personnel. If you are not a brewer and cannot figure this out, find someone who can immediately. Tanks can be expensive.
You also have to decide whether to buy new or used equipment. Cost differences between the two can be sizable. Some people have managed to set up functional breweries for $10,000 (or less!), but their operation looks like an overgrown home brewery. If you are going to brew professionally, be serious about the quality of your equipment. You are only as good as the tools that you work with. If you are a competent brewer, mechanically inclined, and you know what you are doing, used equipment can be a good alternative. Just remember, buyer beware.
Buying new equipment has its benefits despite the higher cost. Some manufacturers have great support programs (some, of course, only say they do). If you are not too experienced in professional brewing, this route can save you a lot of beer as well as your reputation. Nothing's worse than opening a new brewpub and serving off-flavored beer. Remember: You only get one chance to make a first impression. Make it a good one.
The restaurant. Furniture, fixtures, and restaurant equipment costs must also be detailed and priced out. Be conservative and don't go crazy. If you are not a public company and do not have several million dollars to put into a place, you have to set your priorities. Open first, expand and grow later.
The Pro Forma Statement
When you really feel you're ready to go out and drum up some support (read: cash) to fulfill your dream, you'll need to write up a business plan and plug all your estimates into a pro forma statement. I could write a book on pro forma statements, but many have already beat me to it. Consult bookstores, the NRA, or your CPA to help set this up. The pro forma statement should be very detailed and leave no room for error. It includes income statements, cash flow statements, and balance sheets. It takes your estimated gross sales revenues and applies to it all associated costs, expenses, taxes, fees, depreciation, and amortization.
Your pro forma has to be accurate -- not to mention realistic. Too good, and no one will believe you. Too bad, and no one will listen to you. Take a banker or two out to lunch sometime to consult with them on what they would be looking for from a pro forma statement. You can save yourself time and money if you can get it right the first time.
What's left over after calculating your pro forma statement may not be much, but it is profit (you hope). This statement will determine whether you should continue to pursue your dream. Remember all that beer and money you dreamed about while scribbling on a napkin? This is why we started this whole crazy idea. Make no mistake about it -- there is money in beer. Just ask Anheuser-Busch. You take some grain (only the second cheapest thing to water) and make a product for which people are willing to pay as much as $5 a pint. Not bad.
Don't Short Change Your Goals
The feasibility analysis is all about paying your dues. It should not and cannot be cut short. Many people are jumping into this field trying to "catch the wave" because it's trendy or it looks fun and easy. You need to do sound research before diving in. And you must be willing to walk away from it. If, after doing all your homework, you discover that you can't afford to open the brewpub, don't take out a loan on the house just to make it possible. Take a deep breath, order yourself a beer, and thank your lucky stars you did a feasibility study before you put yourself into financial jeopardy.
Starting any business is serious business. It usually takes lots of money, most of which will have to be borrowed. The better you do your homework, the more assured you can be that you will be capable of returning that investment with profit and a little extra beer. To get from dreams to reality takes dedication, perseverance, planning, and homework. Good luck.
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