Archives For Business Strategy

Kegs: Lease Vs. Own

NathanCowan —  August 16, 2012 — 1 Comment

During the last few months, even years, here at Eventide we have been planning our launch as well as forecasting our trajectory for the following five or so years.

There are a few companies which specialize in the sole business of leasing kegs to breweries, with MicroStar being one of the larger. The way it works is that the brewery pays a unit price for kegs to show up when they need them at their door, the brewery then fills and packages the kegs for shipment, and, then (here is the good part), does nothing except for fill more kegs that show up at their door when they need them. This is a great concept for a brewery but only if it is cost effective. New Belgium and Fluensee did a great break down on keg logistics discussed in this white paper. So what are the costs?

Keg Leasing:

  • Cost per fill

Keg Owning:

  • Initial purchase: Kegs cost about $95 for a 1/6 and 119 for a 1/2BBL. Figure that you get about 3.5 turns per keg per year and assume that a small craft brewery is running 20,000 BBL/year production and that brings you to about 11,500 kegs (assuming all 1/2 BBL). That quantity of kegs would be a capital expense of over 1.3 million dollars.
  • Housing: You have to have those kegs on hand and that takes real estate. Cheaper industrial leasing costs around $6 SF/year and that extra space only costs you money while offering no real return.
  • Maintenance and Loss: The industry keg loss rate is between 4-6% per turn. From the analogy above that is a loss of 1,610 to 2,415 kegs per year ($191,590 to $287,385 respectively).
  • Finance: Most small businesses, especially capitally intensive ones, have to start in the hole. SBA Loan rates are around 9% which is really a good number; however, 9% of a million dollars is $90,000 per year.

The analysis shakes out to about a 10% premium to lease kegs over owning “paid for” kegs. My guess is that is probably somewhere around where the profit margin is for leasing operations and close to the additional cost a brewery would accrue by hiring someone to track their kegs.  Is short Eventide is a capitally intensive start-up and you will probably be seeing a blue star painted on the side of our kegs.

Just a thought,

Nathan C.

 

 

 

 

There are a lot of factors and/or constraints that go in to designing a brewery but they mostly revolve around how much beer you plan to make. That question comes in two forms: how much do you want to make now and how much do you want to make later. Note: In the brewing industry in America, beer is measured in barrels (BBL) and one barrel is equivalent to 31 gallons.

The other big factor in designing a brewery is determining when you want to become profitable. Now, you would probably think that this would fall under the same umbrella as the first question of quantity and, to a certain extent, it does, however, profitability moves largely independent of quantity in that there are ways to make large amounts of beer and no profit at all.

The driver behind these two questions comes down to a few inputs; fixed costs (e.g., equipment and rent), variable costs (e.g., raw materials, utilities, and employment), unit sales, and unit profit. As the size of the brewery increases so do your fixed cost, and brewing equipment is expensive. If your fixed costs go up you have to produce more to recoup the expenses. Producing more increases variable costs and also expands your market which may drive you to need additional packaging options which means more capital investment and more fixed costs. The positive side of this is at some point you can make enough beer to breakeven and then move in the direction of making enough to become profitable.

So, how much do you have to make to become profitable? This has been the big question for Eventide for some time and we think that we have settled on a number. We are estimating that we will start with a 30 BBL brew house and 90 BBL fermentation tanks. We plan on entering the market at 180 BBL per month production and grow that to 24,000 BBL per year before we max out the system.  At that size system we will have to make 400 BBL per month just too breakeven, so it will be a bit of a struggle for the first couple of years. But, once we build a larger market base and stabilize our cost/profit flow, things will be looking up. Way up.

Cheers.