The Cost to Profit of a Brewery
Cost and profit are prime considerations, whether you’re just looking into becoming a small-business beer entrepreneur or working to become an established microbrewer. Although start-up costs are considerable and it may take time to create a strong customer base, know that it is possible to realize a profit. Make it happen with a solid business plan, creative marketing strategies and by staying on top of your cost-to-profit ratio, more commonly known as a breakeven point.
Breakeven is the point at which you realize neither a profit nor a loss. Knowing how much you need to sell to reach breakeven is vital to making a bottom-line profit. It starts with a cost assessment in which you first list monthly fixed costs such as rent, wages and overhead, and expenses for utilities, insurance and consulting. Next, calculate the cost of raw materials, packaging, equipment repair, maintenance and advertising. Divide the result by the number of full 15.5-gallon kegs you expect to produce each month. If variable expenses total $7,000 and you plan to produce and fill 100 kegs each month, the variable cost allocated to each unit is $70 (Reference 1 and Reference 2-pdf page 2 and Reference 3).
Calculate wholesale breakeven after researching current market prices and deciding on an initial selling price for each full keg of beer. The formula for calculating breakeven is (fixed costs) / (unit selling price - variable cost per unit). If fixed costs are $18,000, the variable cost per unit is $70 and you set an initial wholesale selling price of $250 per keg, the point at which your business is neither realizing a profit nor incurring a loss is 100 kegs or 18,000/(250 - 70).
According to an estimated price of $250 per keg and scheduled monthly production of 100 kegs, you’ll need to decrease production costs, increase production or increase wholesale prices to realize a profit. Decreasing production costs may not be a viable option if it also means using inferior ingredients. Increasing production is a viable option but since it will also increase variable costs, you’ll need to recalculate a new breakeven point. If you choose to increase wholesale prices, set a standard gross profit margin before calculating breakeven again. For example, if you set a margin of 25 percent the new wholesale price will be $312.50 and your new breakeven point is 72 kegs or 18,000 / (312.50 - 70).
Cost-to-profit evaluations should involve considerations extending beyond breakeven point calculations. Whether your focus is on neighborhood bars or nightclubs, restaurants or local grocers, creative marketing plans drive sales revenues, which in turn affect cost-profit evaluations. Create interest for your products by establishing a website, using social media, getting involved in your local community, distributing fliers and by using promotional materials. Let the public know what sets your brewery apart from the competition, because even though you’re not selling directly to consumers, creating public awareness and interest in your business can help drive sales well beyond the breakeven point.