Sunday, 18 September 2016

Reasonable return

Last month, there was an outbreak of debate in the blogosphere about whether small brewers were getting a reasonable return for their efforts. Now, it’s undoubtedly true that many struggle to make a decent living but, on the other hand, when the general view of drinkers is that beer in the pub is too dear anyway, it’s hard to argue that customers’ reluctance to pay a fair price is to blame.

So what are the reasons why it’s difficult to earn a reasonable return as a micro-brewer?

One obvious factor is that, for most micro-brewers, it is to some extent a labour of love. They have taken up commercial brewing because they’re interested in beer and brewing, not just as a money-making venture. Most have either previously been enthusiastic home-brewers, or have worked for another brewery before venturing out on their own. This doesn’t mean that they don’t take the business side seriously, but inevitably, across the whole population of brewers, there is a slightly less hard-headed commercial attitude.

If your prime objective in starting a small business is to maximise your profits, you probably won’t take up brewing, and it can’t be said that people run carpet-cleaning franchises because they’re fascinated by carpets. I’ve listened to quite a few “meet the brewer” presentations over the years and, while people’s motivation and level of business expertise obviously varies widely, there’s only one I can remember (which I won’t name) that really gave the impression of having all the commercial factors thoroughly nailed down.

Added to this, it has to be said that a significant proportion of micro-brewers don’t depend on their business to provide a proper full-time income, either because they are retired, have another job, a rich daddy, or a working partner. This isn’t a bad thing, and may mean they can be more experimental and take more risks, but it does mean they can afford to take a more relaxed attitude to pricing, which may irk those who do entirely depend on brewing for their income.

It certainly seems to be true at present that there are too many small brewers chasing not enough business. A lot of keen people have gone into the business without giving too much thought to where they’re going to find customers. The result is a lot of cut-throat competition, with some brewers complaining that others are selling beer for less than it costs them to make it, and several reports of beer being sold “off the books” without duty being charged. This can’t be healthy in the long term, and inevitably at some point in the future a shake-out will happen. The two trends of an ever-increasing number of breweries, and an ever-decreasing number of pubs, are bound to collide one day.

The prevailing culture of ever-rotating guest beers also makes it more difficult for brewers to establish any kind of brand premium. The varying beers are just seen as a homogenous, dispensable product. Even if your beer isn’t up to much, the pub probably won’t be having it on again, so it will be quickly forgotten. All cask beer certainly isn’t of broadly uniform quality, but when customers are confronted with an array of beers (and possibly breweries) that they have never heard of before, it’s well-nigh impossible for them to make an informed judgment.

Given that the underlying market conditions are unlikely to change significantly, the objective for brewers must be to develop their reputation, so that pubs are going to make repeat orders, and that customers perceive their beers – whether individual brands or the overall output of the brewery – as something they actively want to drink. There’s no magic bullet for achieving this, but that is what brewers need to aim for. Consistency, and having a product that stands out, not necessarily by being extremely distinctive, but by being of obvious quality, are vital factors.

There are plenty of examples of successful breweries who have achieved this. A very good example is Hawkshead, where many drinkers, on seeing a Hawkshead beer on the bar, will immediately go for it in preference to others. And brewers of a more mainstream bent such as Otter have prospered through providing a consistent, well-branded product that is instantly recognisable, and rarely disappoints the drinker.

35 comments:

  1. There is too much beer chasing too few customers, if you remove Punch, Enterprise, Admiral and Star from the potential stockists lists for a small brewer. Spoons may be tricky too in that the smaller brewer may not be able to deliver the volume requested.
    This partly explains why some startups look to open a brewery tap or multiple pubs, yet the skills required in the respective businesses are very different.

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    1. I wrote here about how running a free trade brewery and building up a tied estate are very different and indeed somewhat contradictory business models.

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  2. The Saltaire presentation the other week at the Gateway was also very impressive (mind you they have been around for 10 years now). Shame you missed it - I think you'd have been very interested to hear what they had to say about keg beers and bottle sizes.

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  3. There are definitely too many breweries. It’s sad, but I now tend to shake my head in disbelief, when I hear of yet another new start-up. Where do all these new entrants plan on selling their beers?

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  4. Thinking on my A level economics I recall the example of agriculture to explain economic growth and wealth my old shabby Economics master used to use. A nice chap who looked like Jeremy Corbyn though was an arch Thatcherite, far richer than he chose to dress and appear, and delighted in convincing his young left wing students that the facts of life were conservative. As you can imagine, quite an influence on the minds his bright working class students and the only teacher to come to the pub and put a round behind the bar on A level results day.

    There are only so many turnips a man can grow with a spade. It increases if he gets a plough. It increases if he gets a horse to pull the plough and increases further if his plough becomes a diesel powered tractor. Each stage of replacing human effort with machine effort causes the number of turnips produced per man of the agrarian economy to increase. The more turnips produced the richer the farmer is. He goes from hungry to full to having spare to trade and acquire things he cannot produce.

    Whilst simplistic it does offer a way of viewing brewing or any industrial process. Large scale breweries churning out consistent product with few applied man hours offer arguably the most efficient way of producing beer, producing more beer per man hour than any other system. Nor does the product have to be of a low quality as the large industrial breweries of Germany attest.

    To favour a system of thousands of cottage industry breweries is to accept a far lower output per man hour of labour. For this to be sustainable the product has to be so distinctive as to command a price in the market place several times higher than the factory produced output. A bitter quite different from the other big factory bitters.

    In the case of cars a hand built car would cost 10 times that of my factory built one. A bespoke hand stitched tailored suit several times that of my off the peg machine cut and stitched one. A bespoke carpentered table several times that of an IKEA dining table. There is a niche market for all these things.

    Yet when I go into a multi beer CAMRA award winning free house there is lots of beer by lots of cottage industry breweries and it is cheaper than my regional family brewer local and cheaper than a pint of Stella. It commands a lower price. A product that cost more man hours to make commands a lower price than an industrially produced one.

    Therefore if you want an artisanal bespoke craft brewing industry it would seem to me that the Clarkeys & Curtis’s, craft wankers that they are, who don’t wince at £7.50 pints are at least willing to pay for what they want. If you want one, then that is the cost.
    I am happy with my factory built car, off the peg clothes and mass produced beer, so I can laugh all I want at those that pay ten times as much. It doesn’t make me right any more than it makes others wrong because value is subjective and I like putting my cash in banks more than giving it to bar staff.

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    1. But if the farmer had a magic turnip maker which could produce an infinite number of turnips at no cost he wouldn't get infinitely rich. As that arch capitalist 'mudge will explain, in economics there has to be a balance between supply side and demand side

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    2. An increase in supply alters the supply curve, not the demand curve. You can never have enough turnips.

      For items where the supply is effectively infinite the price is free. The air you breathe.

      In countries with high pollution, people effectively pay for clean air through filtration systems.

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  5. "So what are the reasons why it’s difficult to earn a reasonable return as a micro-brewer?"

    Because brewing has significant economies of scale, so its virtually impossible for smaller brewers to compete. Its too inefficient.

    Its just about possible to make ends meet running a small brewery that is a 1-2 man job where you supply a handful of local pubs and bottle shops with casks and bottle conditioned beers, but if you want actually make any money at it, you need to grow to a certain size where it becomes viable to own your own bottling/kegging/canning system.

    Hand made tables tend to have a high quality (nicer finish, stronger construction) than one assembled from Ikea, but I see no evidence that a beer from Sierra Nevada (~ 1m barrels a year) is any lower quality than a beer from, say, Blue Monkey (1,600 barrels a year).

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  6. The 'economies of scale' argument suggests that beer from massive breweries should be cheaper than microbrewery beer, but it isn't. Part of the explanation must be pub company mark-ups (one licensee told me that it was not far off 100% for him), but I'm not convinced that's the sole reason.

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    1. No it doesn't. Price is determined by a number of factors other than marginal cost.

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    2. It really doesn't. That is not how value and price is determined.

      A bespoke suit may be generally priced more than an off the peg suit. However if I made you a bespoke suit it wouldn't. It would be crap.

      The tailor is making something requiring expertise that the customer values for a better fit giving it it's higher value.

      If there was a machine that scanned you like a sci-fi movie and made a one off bespoke suit that fitted you better than an off the peg one, that would also be a higher value product.

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  7. Bigger marketing spend, burgeoning head office functions , requirement to pay dividends and please shareholders, etc.

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    1. The micro brewer punting about doing endless meet the brewer evenings trying to get you lot to recognise his brand of beer is spending more per turnover, or per pint of beer, on marketing than Coors. The difference is Coors is big enough to obtain specialist talent for each functional area rather than require people to master multiple areas.

      He is also paying himself dividends.

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  8. Production cost is only a relatively small proportion of the retail price in the pub, though, and it could be argued that small brewers' relief more than compensates for the lack of economies of scale.

    Plus I'd say many small brewers aren't costing up their own labour at minimum wage.

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  9. If you're correct, Malcolm, then economies of scale don't exist after all.

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  10. Production economies certainly exist Nev, but the mega Brewers spend money that micros don't.
    The objective of marketing spend is, in large part, aimed at building a brand "equity" which produces higher than average profit margins.

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  11. I was reading "London Drinker" on the train home (more dull London beer in the main I'm afraid). Most of the content is about brewers, not pubs. The pub update details lots of new keg pubs, a few with Doom Bar and Pride, and not many serving the products of all these wonderful new breweries. The list of closures and pubs removing cask grows each month.

    Last week's launch of the Beer Guide saw massive publicity by CAMRA nationally and regionally about how many new breweries there are.

    As Malcolm says, too many breweries, too few customers (both outlets and drinkers).

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    1. That's London for you. The vast majority of London pubgoers (even the wealthy ones) are happy enough with branded lager. A small minority, but enough to keep the likes of Beavertown going, of hipster types will go for the Craft stuff. Cask Ale is all but dead in London, slain by the twin swords of poor cellaring and consumer indifference.

      My prediction is there will be virtually no pubs left in London by 2040. As any player of Sim City will tell you, as soon as land becomes valuable, the low-wealth businesses and residents are driven out and replaced with more remunerative replacements.

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    2. Matthew, your first paragraph is spot-on. I though the second was daft, but I was struck by how empty the pubs in The City were at lunchtime today compared to even 10 years ago; sandwich shops are where it's at.

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    3. It may well be the case that very few free-standing pubs survive inside the North and South Circulars unless they have listed building status, but there will still be bars alongside shop units on the ground floor of tall buildings.

      The dramatic decline of work-related lunchtime drinking, even in London, must be a major factor in the overall decline of the pub trade, though. I get the impression that work teams no longer go to the pub at all, even if just for soft drinks.

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  12. Economies of scale is only one method of increasing value per man hour of labour. Making more units.

    The other method is for Micro breweries to increase the value of their output if they still wish to be low volume. Higher value units.

    Some are doing this. They are producing keg products that price at or above levels of the Belgian, American & German imports. Craft wankers drink them for £7.50 a pint and lap it up.

    Much of the 15 handpumps in the CAMRA pub being sold is generic indistinguishable blonde ale. No different from the last one and no brand to remember and express a preference for next time.

    These brewers are engaged in economically low value labour. They are expending man hours to produce a low value product priced below the stuff made by the hectolitre by a bloke down the mega brewery plant who knows what sequence to press the coloured buttons in.

    Some of the handpumps is really good stuff. Better than the other 14. If you make it, how do you maximise the value of that and put it in the higher price bracket? Getting customers to recognise it, ask for it and be willing to pay a premium for it?

    Take this away from brewing to my own activity of IT. Lets say there are 3 areas of IT I could expend my time doing. I have only 8 hours in a day I wish to spend doing IT. The rest I wish to neck lager and watch TV. I have only myself and no capacity to duplicate myself. The 3 activities are priced £200, £400 & £600 per day respectively. What ought I spend my time doing?

    Answer : The highest value one I can, whatever the economic activity.

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  13. Craft beers are always going to be a labour of love to a point. There's still demand though.

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    1. Everything is a labour of love. If you don't love what you do, what is the point? You can do okay on the old king cole, as many of the workshy daytime drunk element of CAMRA we know and love would attest too. There is no actual need to do much of anything.

      Just because you love what you do is no reason not to appreciate the value of what you do and apply your limited resources to the highest value process you can. As Whitney said, the greatest love is loving yourself.

      Ever heard the phrase "winners don't quit"? Bandied around usually on TV reality shows where people in cheap suits get fired by Alan Sugar for failing to sell tat on a market stall. Quitting is one of the single most effective economic acts a person or business can do. Quit a low value, low price activity. Use that time to start a high price, high value activity.

      The best advice to give most micro breweries is "Stop doing that. Your bitter is okay but no better than any other. Try making something people pay top whack for"

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    2. But, staying in the pub line, what will people pay top whack for?

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    3. The horrible muck Clarkey & Curtis drink and pay through the nose for. If you are going to go to the bother of making beer, why bother with a £2,50 pint that Mudge thinks is not as good as Sams Smiths when Curtis drinks all manner of muck at £8 a pop?

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    4. I think that there is a very limited market for beer at £8 a pint.

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    5. Selling beer at £8 a pop probably brings in ~ five times the gross profit of selling beer at £3 a pop. So you only have to sell 20% of the total amount for it to be a good business plan. It just depends how many mugs you can persuade to consistently spend silly money on silly beer.

      *I might splash out on a half of some bleeding edge double impy stout aged in grapefruit husks once in a blue moon just to see what all the fuss is about, but the people who make this their regular drink have more money than sense.

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    6. Te point I was making is that if all the micro brewers decided to make unusual beers to sell at £8 there would be a gross oversupply which, I understand, would drive the price back down. Or put most of them out of work.

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    7. Well there is only a limited demand for any item, premium price beer is no exception. Rather than driving the price down of all premium price beer, what would probably happen would be that the new entrant would find themselves left with a load of barrels they couldn't shift, and would lose money that way. The whole point of premium price beer is that you are competing on some measure other than price - the £3 and £5 a pint markets are already highly competitive and oversupplied, you're not going to make much money by backing down into them at small volumes.


      £8 beers are a niche market, 5-10 years ago its was an unfulfilled niche and there was very much an opportunity for a good brewer with a good understanding of the market, a good line in marketing and distribution to get in on that market - look how Beavertown went from late entrants to near market leaders. But that market is now pretty bloody full.

      There are probably~3 vertically differentiated markets for beer - your 80p a can, £2.50 a pint budget market for your price-conscious boozer (mainly students and old men), your £1.50-£2 a bottle, £4-5 a pint PBA/premium lager/PKB market for your, everyday discerning drinker, and your top of the range £3 a can, £8 a pint cutting edge craft market for hipsters/genuine enthusiasts only.

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    8. 2 things to consider.

      A small micro brewery switching production from £3 swill to £8 muck with not significantly alter the supply curve. Each micro breweries output is not a significant part of total brewery output. All micro's doing this would shift maybe 5% of total output. Moving the supply curve to a slightly lower equilibrium price. (£7?)

      It is likely that £8 follows more a veblen good model than regular demand & supply. That beer geeks prize it for it's high price and a high price is a feature of how customers judge the quality. The way to compete may be to set the price at £9 to show it's better than the cheap swill hawked at £8

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    9. Py

      You suggest that there is no market for beers in the £2.50 to £4.00 price range. My experience is that most of the beer I see and drink in pubs is in that range

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  14. I don't think I did, although that's probably 2 slightly separate markets - you get a different product for £4 as you do for £2.50.

    I don't actually know anywhere in Cambridge that sells beer for under £3 a pint. £2.50 is a whole other niche market of cooking bitter.

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  15. Where is your evidence that an £8 pint generates x5 the GP of a £3 pint?

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    1. It was an estimate. If you assume that the pub adds 60% GP, a £3 pint costs £1.20 per pint from the brewer and a £8 pint costs £3.20 from the brewer.
      However, it doesn't cost almost 3 times as much to brew the more expensive beer, at very most it will cost twice as much.

      So lets say the cheaper pint can be brewed for around 80p a pint, leaving the brewer a 40p profit per pint, and the more expensive pint costs around £1.60 to brew, leaving the brewer a profit of £1.60, which is 4 times the GP. Some of this will be lost to tax - but that would probably hit the GP of the cheaper brewer harder - hence my estimate of 5 times the GP.

      You could argue the figures until the cows come home, but its in the right ball park.

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  16. First of all you've omitted to subtract VAT from the selling price.
    Secondly you've referred to tax (presumably duty) but got it the wrong way round, as the £8 pint will have a higher ABV so higher duty element.
    Thirdly if this £8 pint is in a KeyKeg, that will add 30p per pint to the production cost and wholesale price.
    Not sure your figures are in the right car park, let alone ball park.

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