By Scott Pillsbury
For the Oregon Beer Growler
Being successful in business is all about taking intelligent risk. Nobody likes to spend more money than required in any area, but it is important to look at the payoff of your spending — not just the cost. This mindset — thinking about return on investment - is common for business strategy professionals, but not always common for small and mid-sized breweries. I suggest we need to apply this thinking to every decision in our business. Luckily, with tools available today it is very easy to measure the impact of our decisions.
This article isn’t about accounting, but since numbers are the language of business, it is important to use a real example. This is based on many assumptions, and "your actual mileage may vary," but the concept is what we are looking at here:
Question: If you were to increase your label cost by 33 percent and that resulted in a 15 percent sales increase, would that be a good deal?
— Begin with sales of 1,000 bottles at $2 each
— Assume sales increase 15 percent due to investment
— Label cost increases from $0.15 to $0.20 each
— Assume 35 percent gross margin, before and after investment
Gross profit before investment - $2,000 x 0.35 = $700
Gross profit after investment - $2,300 x 0.35 = $805
Label cost before investment - 1000 at $0.15 = $150
Label cost after investment - 1150 at $0.20 = $230
Increased label cost - $80 ($230 - $150)
Increased profit - $105 ($805 - $700)
Invest $80 to return $105 = ($25/$80) = 31.5 percent return on investment!
Based on this calculation, every $1 you invest will return $1.31. By any measure, this is a great way to invest in your business. The example here is related to labels, because that is what I know best, but it could also relate to your advertising, website, kitchen upgrade or any other area in your business.
Investing strategically in your business is all about "pulling the right levers" — you can’t do everything at once, so you have to intelligently pick the right area to invest for maximum return. Luckily, with many of these targeted investments, like labels, you don’t need to make a massive shift. Try an upgraded label with metallic ink or embossing on a seasonal label and see what happens. There is very little risk in this type of limited trial. Try something new, measure the results, and adjust as needed. This will help keep your business and your brand moving forward.
If you want to begin your strategic investment with upgraded labels, please call us today — we would be happy to help. If another area is more important right now, please contact another B.I.N.G. Member — we have many products and services to help brewers grow.
Scott Pillsbury is president of Rose City Label, a fourth-generation family business in Portland. They print for more than 60 breweries and were recently recognized as the Oregon State University Austin Family Business of the Year for 2015. Besides running the company with his sister, Whitney, Scott writes about marketing at everythingworksalittle.com.
By MATTHEW DIMENT
With the craft beer business booming, there is continued increase in demand for product. Breweries continually face the challenge of being able to meet this ever-increasing demand. In such a capital intensive industry, there is often not a lot of free cash flow. So, how can a brewery expand? There are several solutions, each with their own pluses and minuses.
The easiest way to fund expansion is through utilization of free cash flow to fund capital purchases, including buying a new fermenter here or a used bottle line there as cash becomes available. This method can keep the company solvent by not acquiring debt or diluting the ownership through an equity offering. However, this can be a slow process and may make it impossible for a large scale expansion into a new facility.
To Debt, or Not to Debt?
Bank debt is probably the most common method for fueling a brewery’s expansion. This is a good way to spread out the cost over a longer period of time, depending on repayment terms. Debt financing can help with large expansions or transitions to new facilities. Some of the costs can be offset with potential tax savings related to large acquisitions of equipment. It’s important to be aware of covenants contained within the loan agreement. The bank may require certain financial ratios to be maintained or that CPA prepared financial statements be provided. Discussing these items with the lender up front can alleviate surprises later on.
A third method for funding expansion is through equity financing. This involves getting outside investors involved in exchange for a partial ownership in the company. This can work well because no additional debt is taken on and the monthly outflow of cash is not significantly affected. Any tax savings generated by the acquisition of equipment is unchanged in this type of funding. The potential downside for some owners, particularly where there is only one or two, is that it will dilute their ownership interest in the company. Outside investors may also want to see a quicker return on their money and may want to exert more control over the company to ensure that this happens.
Companies looking to expand should also look at other opportunities available to them and do their research in this area. Oftentimes, their city, county or state will have business incentive programs that may have grant money or very low interest options to encourage a stimulation of the local economy. Small Business Administration loans are another good way to fund a lower interest expansion. Both of these should be looked at on a stand-alone basis or in conjunction with the above options.
Before undertaking any type of business expansion, it is important to talk to your financial and legal advisors to understand all of the ramifications of the various options, as well as short term and long term advantages and disadvantages. It is always exciting to see breweries successfully expand and be able to fulfill the growing demand in the marketplace.