It’s been almost a year now since Eddie, Govs and myself put our love of beer to the ultimate test and opened our own brewery business, Black Hops.
As per our manifesto of being ‘the least covert operation in brewing’ we documented everything along the way, through blog posts, podcasts and our book Operation Brewery. The book was our warts and all account of our journey from craft beer drinkers to brewery owners. We wanted it to be the ultimate ‘how to’ manual on starting up a craft brewery on a budget.
But the book was finished before we opened the brewery, and we’ve learned a lot of important lessons since. Here are some of the top ones.
Making beer is expensive
As casual beer drinkers we often wondered what went into craft beer prices. Now that we’re fully fledged small-scale brewers, we can safely say that making good, fresh beer is definitely an expensive exercise!
Beer is a scale game, which means the more you make the cheaper it gets. If you want unique beer, brewed locally it comes at the cost associated with producing at a small scale. All of our beers are brewed using premium ingredients from quality suppliers, to make sure we achieve a consistent taste and quality that is reflective of our brand. We’re happy to pay more to make sure we get it right.
We have a small setup, so making (and particularly packaging) beer is expensive, but we have a lot of flexibility over what we make, hence the ‘core range’ of 9 beers.
For a full cost breakdown of our cartons and kegs, as well as the ingredients we use, check out this previous blog post.
As well as the cost of ingredients, selling our beer onsite at the brewery also incurs costs around labour, packaging and labelling, excise and overheads. It’s frightening sometimes to look at our monthly expenses and see just how much we have to make just to break even. We have been somewhere around break even most months, but every month is a strong effort to cover our costs.
A lot of the costs we estimated before opening were underestimated.
We have brewing costs including Excise, core ingredients, special ingredients, bottles, cans and packaging, water and keg rental. Then there’s running costs like bank fees, wages, consulting and accounting, contractors, events, freight, cold room and forklift hire, insurance, IT, bad debts, subscriptions, phones, travel, marketing, fuel, office expenses, printing, rent, maintenance and services, License and other things that come up randomly.
As we continue to expand our operations things won’t be getting any cheaper either. Sure at scale, beer is cheaper to make but getting there is an expensive process. To distribute beer around Australia and sell into bottle shops we’ll need to factor in costs around things like storage, transport costs, profit margins, packaging, launch events and potential breakage. The further our beer goes, the more it costs to get there.
This is an expensive and complicated business to run, which we probably didn’t have much of an appreciation for when we started.
Cashflow is a constant challenge
Not only is it expensive to make beer and run a brewery business, it’s also very challenging cash flow wise.
We pay for almost everything when or before we use it; wages, rent, ingredients, excise, transport, the list goes on. But in a lot of cases we don’t get paid for kegs until long after they leave the brewery. We’ve had more than one instance of bars going out of business and owing us thousands of dollars. Sometimes it can take months of time and effort to chase up bad payers before we finally get paid.
We are getting on top of accounts receivable by mandating direct debit for new venues and not selling beer to people who don’t pay, but that just creates a bigger sales challenge – more on that later.
The Taproom at the brewery also helps enormously with cash flow. Without that, we would have no chance of running a cash flow positive business.
We are also going to be selling beer online soon, which will help with cash flow. Just last week we put up 40 cartons of our new Pale Ale, and sold them all within 2 hours, so that is a promising sign.
Suffice to say, that cash flow is something that we are conscious of on a weekly, if not daily basis.
Shit breaks and stuff goes wrong
When we decided to get our equipment direct from China (the first from this manufacturer in Australia), we knew we were taking some risks. But we really didn’t have a choice and also figured that the significant savings in dollars would make the risk worth it. We expected some things to break and they did.
Here’s a quick list of things that have broken:
- During setup, our plastic welder we used to weld the Glycol pipes burned itself alive when we left it cranked up to max heat (the Chinese instructions saying not to do that, didn’t help us too much). The supplier sent another one so no big deal, it just slowed us down a bit.
- A few months after opening, our Glycol pump seal blew out and we lost a whole tank of Glycol. It cost thousands of dollars in repairs and Glycol alone. We filled the tank with ice from Coles while we waited for the pump to be fixed and managed to save all the beer we had fermenting.
- After opening, Govs made a habit of not leaving his babies (tanks) alone for more than a few hours at a time. After a few months, once things settled down, he decided to take a work trip for 2 days. The day after he left, one of the solenoids for one tank stopped working and no cooling fluid made it into the beer. We tried our best to save the beer, even delayed the decision of whether to keep it until after we’d bottled hundreds of cartons and kegged it. In the end we dumped the whole batch, costing thousands of dollars. We’ve since put a whole new system in for handling the Glycol piping (costing tens of thousands of dollars).
- The motor in the Lauter was upgraded, it didn’t have enough torque. Not urgent but had to be fixed.
- The Mill has broken twice. The first time we had an electrical issue, the last time we accidentally tipped it over and smashed the motor, whooooooooops.
- There were also some smaller things like the keg washer element melting, temp probes being faulty and the CIP pump didn’t have RCD installed.
There are probably more things but these are the main ones that come to mind. All in all, we’ve had a pretty good run with equipment once the brewery was set up, but it is something we have to be conscious of all the time, particularly with things that can affect entire batches of beer.
Selling beer is not easy
Another big lesson for us is that selling beer hasn’t been as easy as we thought. We didn’t struggle to sell our first contract-brewed batch of Eggnog Stout back in 2014, so we thought it would be that easy to sell our beer once we opened.
This is far from the case. Like cash flow, sales is something that we talk about every single day and probably gets more attention in the business than anything else.
Big pubs haven’t been easy. Tap ‘real estate’ is hot property, and the major brewers have most of them locked down through setup incentives with the venues and other discounts.
We’ve seen great support from smaller independent venues but we haven’t had much luck at all with the bigger venues.
We only have 1 full-time staff member and that’s Kris our sales guy and we are constantly at venues, doing events, or planning how to get our beer out there to more venues.
Sales is constant and our motto of “Always Be Closing” has gone from fun to “Actually guys, we literally do have to always be closing….”
Running a brewery is a lot of work
While running your own brewery is probably most beer lovers’ idea of ‘living the dream’, the truth is more a case of blood, sweat and beers! Yes we enjoy the occasional after (before, or during) work beverage, but it’s earned by everyone working for it. And when we aren’t working, we are thinking about it. Since launching we’ve sent 95,500 messages on the Black Hops Slack messaging app. That’s 130 messages a day for 2 years straight! There’s very rarely a period of more than about an hour between the hours of 7:00am and 11:00pm where there aren’t messages flying back and forth in the Black Hops Slack group.
We’ve had to hire people too, we just couldn’t do all the work ourselves. I was supposed to work 1 day a week, in reality I’m not far off full time. Eddie and Govs are full time. We’ve hired people to work the bar, to bottle the beer, for sales, for brewing and for admin. And outside of that, we’ve hired a lot of services for things like accounting, legal, town planning, design etc. We try where possible to do things ourselves but we can’t do everything. This obviously costs more money and puts more pressure on finances and cash flow.
To put it bluntly, there’s a shitload of work involved in getting our beers flowing through taps, into bottles and cans and down people’s throats!
Yes there’s the perks, like showing up at venues and sharing our beer love with the patrons. But for every event attended and beer sunk, there’s 101 other things to get done.
I for one, was way off in my expectations of how much work this was going to be.
Every authority has us in their sights
Before we opened the brewery, we dealt with a crap load of bureaucracy and jumped through a heap of hoops to ensure we were compliant with industry and government regulations. But if you thought we could breathe easy once we launched, well, wrong.
We’ve had visits from police, liquor licensing, council members, council staff, food and beverage departments, disgruntled neighbours, had audits from the ATO and more. Pretty much every group and authority you can think of has us in their sights.
We’ve managed to stay out of trouble and we’ve been very careful to not break the rules. If we do, we are constantly watched and will end up in hot water.
It’s not a major concern but it’s something we have to be very conscious of. For example, anyone playing basketball next to the taproom (we have a few hoops set up there) could trigger a noise complaint which would be investigated by licensing or council.
If we process an order at 6:01pm, those records can be sent to licensing and we can be in breach of our license.
If people are parking across driveways, council could be called in.
The list goes on.
Profitability is a constant challenge
I’ve talked about cash flow and how expensive beer is to make, but let’s dig into finances more. We obviously want to be running a profitable business. If we aren’t, then we are in a position where we need more money from investors, and retain less equity for ourselves. Or worse, we can’t raise money and the business fails.
We were able to have our first profitable quarter in the final quarter of 2016, which was only our second quarter in business. That was very encouraging, but maintaining profitability has not been easy, particularly since costs continue to go up and those are the 3 busiest months of the year.
Here are our major avenues for sales and how we go about trying to make each one profitable.
- Packaged beer sales: Bottling beer here on our manual 4-head machine is very expensive and time consuming. It’s almost impossible for us to package beer here and sell it to venues at a decent margin. We are working on this by going into canning with the release of our Pale Ale cans coming next month.
- Keg sales: It’s not a huge margin but if we can sell a keg for $270 and get paid reasonably quickly, we can make some money on kegs. We do have to sell a lot though, and as we mentioned before, sales is a constant challenge.
- Taproom beer sales: At our Taproom, we can sell beers for $8.50 each which means making close to $1,000 on a keg (eventually). Since we aren’t paying the overheads of a restaurant or bar, and the taproom was a small additional cost to the brewery setup, this is a very good margin for us. Without our Taproom, we’d really struggle to make a profit. Actually we simply would not be close to making a profit. We try to staff it ourselves every week so we don’t have to pay staff, so we can retain as much of the margin in the business.
- Taproom growlers and bottle / can sales: While it’s hard for us to make money by selling into bottle shops, we can do quite well if we sell the beer directly at our Taproom in takeaway packs. For example, we will be selling our Pale Ale 12 pack cartons for $46 which leaves us a reasonable margin on a beer that is well priced for the customer. We also sell beer in squealers and growlers with better margins because there are no packaging costs for us.
- Events and tours: While we aren’t doing any specific events at the brewery, we do run tours and charge $20, which includes a quick talk about the brewery and a tasting paddle. We also occasionally do offsite events and functions, which make us a bit of money too. We are looking into doing more paid sessions where we educate locals on various aspects of beer.
- Books and merchandise: We sell our book, Operation Brewery, as well as merchandise like Black Hops shirts for a reasonable margin. The books cost us about $9 directly (not including all the time and money and effort which went into writing it!), and we sell them for $20. The shirts cost around $13-$16 and we sell them for $30. We don’t make much on this, but it keeps ticking over.
Our big focus right now is smashing the launch of our pale ale, starting to sell beer interstate and being able to consistently sell more kegs. If we don’t sell enough kegs, it means we don’t operate at 100% of our capacity which means our effective costs are a lot higher.
Transparency has worked
To make an impact in business, sometimes you need to do things a bit differently. We’ve always been savvy in taking advantage of unique PR opportunities, such as partnering with games giant Activision to make the world’s first Call Of Duty beer.
As mentioned already, our book Operation Brewery laid out our formative story for all to see and learn from. And since then, we’ve continued to share our ongoing journey through podcasts, blog posts and getting out there, sharing our love of beer and our stories at venues that stock us. We’d like to think that this no bullshit, no agendas approach has helped us build respect and trust within the beer community.
Another plus in staying transparent is that it’s lead to plenty of interest in and coverage of what we do, very little of which we’ve had to actively chase. Since we’ve opened the doors we’ve received exposure from many places from local press outlets, to beer-specific publications and mainstream media like newspapers and TV stations.
This is effectively free marketing and when our marketing budget is virtually zero, it’s nice to have some effective marketing that doesn’t cost us anything.
The Taproom wins
As already discussed, the Taproom (aka Black Hops HQ) has played an important role in keeping us profitable. But equally as vital, it offers visitors a fun, local place to hang out, share a yarn and make new friends over the time honoured tradition of sinking a few beers.
Since we opened the doors last year, we’ve steadily built a regular clientele, many of whom are locals appreciative of drinking good beer within walking distance of home. We’ve made some good friends and met a lot of interesting people, and it’s this sense of mateship and community that has been one of the most rewarding parts of doing this.
It also gives us a great audience to chat with whenever something new is happening and gives us a vehicle for immediate feedback on all of our beers.
It’s hard to imagine owning a brewery without having the Taproom, both financially and also just from a day to day fun standpoint.
It’s not all bad
We didn’t really want this list to be totally negative, but it sort of ended up that way. The truth is, there are lots of positives as well, but they are all things we knew about before opening.
When you think of opening a brewery, all that comes to mind is beer on tap, hanging out with mates, living the dream.
For sure, there’s been plenty of that. It’s a lot of fun, we’ve hung out with a lot of great people, and we’ve enjoyed our fair share of beers. We feel like we are building something good for locals and feel like we are working towards something that will be valuable to us too.
It just hasn’t been easy, and in this post we wanted to make sure we set a realistic expectation for others going into it.
If you’d like to delve more into beer and business, check out our Ambassador group which is now close to 500 members. If you have any questions about our lessons learned, feel free to ask below.