The Economies of a Small Brewer

This is a blog post I wrote just about exactly a year ago. I felt very exposed writing it, and ultimately decided to leave it lying in a folder unused. We’ve just closed out our second year of trading and posted a profit. A small one, but it shows that the actions we took in our 2nd year were fundamentally sound and based upon good reason. I think this has given me the confidence in the convictions and reasonings that are detailed below to make this public. I hope you enjoy it.

 

The Economies of a Small Brewer
 

It’s taken me some time to come to terms with the following, for a number of reasons. As a bar owner (and going back further, bar manager) and a wholesaler for the elite of the UK beer scene, the trend towards packaging wholly or at least largely in keg has been a bone of contention.

We’ve seen Brewdog begin the trend (to much criticism). People like The Kernel start up and flat out refuse to do cask from the get go. Then the last year or so Buxton, Magic Rock and Beavertown either cease to do cask entirely or price it to the point where it equates to the same thing. I, like most, saw this as a way of shadowing the cool kids over in the US making great beer The UK, as it so often does, taking its influences in trends directly from what’s came before across the pond.

The last year however has opened my eyes and allowed me to see more sides to the argument, and to have a broader view as to what is currently going on in the UK beer scene when it comes to the keg vs cask debate. I’m still entirely unsure as to whether this is something I feel comfortable discussing in a public forum as unfortunately where the buck stops (as it so often does) is with price.

It’s with cost of product against achievable sale price. And it’s about an unwillingness of the new kids in the UK brewing scene to compromise their product and thereby lessen its cost to produce that is driving the huge shift towards keg packaging. I could be way off here, as I haven’t interviewed every brewer in the land, but let me share my experience on the matter to allow me to explain.

December 2014 Rich, Jack and I sat down together to discuss the beer we would produce, and the packaging we would use to present to market. We, as is fairly typical I believe, think that some beer style are better suited to keg and others to cask. We were very keen to present in both containers, and while some styles we would keg more of, others we would cask more of. Largely, I think we expected to end our first year with around a 50/50 split keg to cask. And we set off in that vein. We costed out beers before we produced them, but didn’t let cost dictate how we would brew and the ingredients we would use. We looked at our peers in the industry to try to figure out an achievable sale price for our beers, trying to set a fair price that would still allowed a margin to allow us to pay the bills at the end of the day. We are not trying to become millionaires, but we are trying to ensure we can eat! The thing that jumped out at us from day 1 was the difference in what we were going to be able to charge for our keg products than for our cask. We keg into 30L containers, and our casks are 41L. However when it came to our achievable sale price, they are almost the same. That’s a painful fact, and one that tells a painful story. If you take a cask from us you are getting 11L for free over the same purchase in keg. The immediate response to this is going to be a familiar one. 

KEGS A RIP OFF. These new craft breweries are charging an arm and a leg for their keg beers and taking advantage of the cool factor, pocketing a huge margin at the expense of the paying public!
This is a fair reading of the subject, if you look at it from only one perspective. That one perspective tells us that you buy a cask beer at tap for £2.50 and the same beer on tap for £3.50 that the brewery is ripping the bar off, that the bar is ripping the customer off, or probably a combination of both. In my experience, that is certainly not the case. See below an example of a beer we sell, translated from sale price from us to a bar, then translated from that point through to the customer.

£79 for the cask or keg, the bar aiming for a 61% gross profit, which is pretty low for a public house. Most would aim for 65% plus, but the one’s I have/do operate aim for low 60’s. The cask comes out at £3.30, the keg comes out at £4.74. Seems madness on the face of it, but for the bar to stay in business they need to hit these numbers (most bars operational/fixed costs run out at around 45 to 50% of their turnover). If they hit 60% on their sales they’ll leave themselves with 10 to 15% of their turnover as profit, or which they’ll lose 20% on corporation tax. If they have a great year they may turnover £500000. That will leave them with 10% so £50000 before tax, £40000 after. Great if the bar is owned by one person, but bars are usually not, so you are splitting your 40k between the group. It’s a lot of work for  small numbers) 

So what’s going wrong? The bars not ripping you off, so it must be the brewery, right? How can the achievable sales price on a cask and a keg be so vastly different?? And here is the rub. It’s not the keg that’s over priced, it’s our cask that is underpriced and undervalued. Sounds like an easy excuse, and an easy way to up your prices, pocket a fortune and ride off into the sunset in my gold plated ferrari. 

 Not my gold plated ferrari...

Not my gold plated ferrari...

Historically cask has been a relatively cheap product for pubs to get hold of. We still routinely get emails from breweries offering 41L casks to us for £50 a unit, or offering buy 2 get 1 free deals. The fact of the matter is that one cask does not cost the same to produce as another. The breweries that have been selling cask for many years at these low prices, and setting the expectation of the paying public are quite simply putting less ingredients, and ingredients of lower quality into their beers. Depressing the expected value at the tap with an average product. And that’s cool, as there are people out there that want that product. Not everyone wants a premium, full flavoured and vibrant beer. The bother is that publicans and consumers expect to pay the same for one as they do the other, despite the vastly different costs to produce. To put things in perspective once again with the figures.

In our first year of trading we lost £18000. It hurts to write that, as I find it embarrassing, but I am sure we are not the only one’s to set up a brewery full of expectation only to have the opening year deal them a very serious dose of reality. We sold more than we thought we would, we just made far less from those sales than we expected too! An example of the same beer I detailed above with the bar sale price as now detailed below from cost of production through our (average) sale price(while our list price is £79 we sell to 4 wholesalers around the UK who we need to discount to allow them to sell to market at around £79. 

Our average sale price (factoring in our sales to wholesalers) are vastly different between keg and cask. That’s part of what’s caught us out. Our wholesaler partners take far more cask than keg, meaning we are discounting more for that package than keg. We also have found that while we may stick a £79 price tag on our cask, the reality is that every customer wants to pay less. We are constantly in a state of fighting against the demand to sell cheaper. So while our average sales price on cask ends up over our first year being £68.23, our average sales price for keg is £77.01, very close to our actual list price (which is what we built all our projections on. If we were to go back and redo our first year and package everything into keg, we’d currently have profit in the bank.

That’s simplistic I know, we wouldn’t have sold as much). Our fixed/ operational costs in year one were just about 50% of our turnover, about what we expected. We expected our year 1 to be tight, and expected to clear about a 5% nett margin (to split 3 way) as our expected profit on sales was 55%. The difference in projected profit, to actual profit/loss, was all in cask. Our actual margin for cask was 43%, which means for every cask we sold we were losing 7%. We could have not bothered selling cask, halved out turnover and came out with more money (and a profit). I suspect that this is an experience that every small brewery in the country has came across over the last few years, and I suspect that this has also been behind the decisions to quit cask entirely, to increase prices or to cut back hugely production into cask.

I want to stress something at this point, as this blog is very cash/margin orientated. We don’t run a brewery for the cash, or the margin. We do it because we love beer, we love the industry, and we believe that we can bring something fresh to the party and help cement the UK beer scene as among the best in the world. 

To do that though, we need to make a profit. It’s a sore fact of business that there needs to be something left at the end to pay the bills. We’re not trying to get rich, and we are certainly not growing for an ABInbev sale, but we all quit jobs to do this. While we love cask, and we think that some of our beers are awesome in that format, we can’t do something that is pouring our cash and our hard work down the drain. So we are taking the stand that some great breweries before us have taken. We’ll still do cask, but we are going to be doing it in a far smaller quantity than before. We are also going to be raising the price so we are least breaking even when we sell it!

We sincerely hope that the quality, the care in the ingredients chosen and the processes used will convince people that the beer is worth the value we place on it. 

 

** As a final point to this, in 2016 we raised our cask pricing significantly so cask margins match keg margins. Our customers by and large supported us when we did so. We still cask both Pale and Lactose Tolerant, and when we do they sell out almost before they hit the stock list.