Friday, March 27, 2009

A Follow-Up On Pricing

On Wednesday I was sent an email by a Brewer who chooses to remain Anonymous, but it is very definitely pertinent to the conversation re: Pricing. I'll leave it (more or less) unedited:
CoGS for a case of our line-priced beer is $14.00. That cost includes labor, ingredients, glass & crown, packaging & shipping.

[ed note: two notes: 1) "line priced": all of the different "lines" or brands of beer are all priced the same - think of it as a "default price" - not everyone does this, but most do just because it's too weird for the consumers to have one brand from a brewery at one price and another similar (non-season/special) brand at a different price, plus it's hard for retailers to keep track of; and, 2) strictly, labor isn't considered COGS, but, as you'll see this isn't a conversation between accountants, it's just to give round numbers and it doesn't include all labor, just some of the brewery employees; 2a) for you non-business folks - "COGS" is "Cost of Goods Sold" and is basically the material costs of getting the product to a finished point - it does not typically include incidentals to sale like R&D, advertising, shipping, etc.]

We sell a case to the distributor for $20.25. Our margin is 30%.

Our distributor sells a case to the retailer for $29.00. Their margin is 30%, and is generally the same across the board.

[ed note: even aside from this particular brewery, markup from distributor to retail is pretty universal at 30%]

The retailer sells a case for $36.00 (assuming $8.99/six-pack on the shelf). Their margin is 25%. Sometimes, depending on whether or not they are competing on price or trying to get maximum dollar, you will see upwards of $9.49/six-pack or downwards of $8.49/six-pack, but 8.99 is a good bet.

So, we have $6.25/case with which to buy trucks, coolers, forklifts, computers, advertising and promotional items. With which to repair broken things. With which to conduct research and to develop new products. With which to buy gas, hotels and meals to participate in festivals and beer dinners. With which to turn on the lights, pay our rent, heat the building and make phone calls. WIth which to secure property for future growth. With which to pay for professional services like graphic design, law and accounting. With which to pay ourselves a very modest stipend (think "working check-out at the gas station part-time"). And so on.

As CoGS increases, so will the price of our, and everyone else's beer. Because we live in the margins. This is not a "woe-is-us" proclamation, but rather fair warning that the ten-dollar six-pack is right around the corner.

So, there you have it. With price increases in raw materials, do not be surprised to see $10 six-packs soon. It's hurting the bigger folks too. I'll talk about this more soon (either later today or Monday) but Leinie's put a hold on the well-received Big Eddy series purely because of raw material costs and availability.

Given all of this, I don't know why anyone who was just starting up would build their own brewery from day one - the numbers are just too risky and there's just too much slack in the current system that can be purchased for less than a mashtun and fermenter. It also creates a spiral whereby there's this constant need to grow, even if you can't maintain it sustainably, just to meet numbers/loans/equity expectations. Of course, the catch is that the more you grow, the faster you outgrow what you're already paying for and need to get additional loans for expansion, which adds to the loan requirements, which requires more growth, and round and round it goes.

Of course, numbers are different for brewpubs, but that should put some perspective on the $9 six-pack.

2 comments:

  1. Have to say, those markups are pretty normal, and shows how a small (dollar) increase in the CoGS translates into quite a big increase at the consumer level. I'd be interested to see if the cost of raw materials keeps going up, though, as the price of hops has leveled off, and might even be going down (although that is still questionable):

    http://www.capitalpress.info/main.asp?SectionID=67&SubSectionID=618&ArticleID=49989&TM=56989.24

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  2. Prices tend to be notoriously sticky - once they are up, they tend not to fall. But, given that there is big incentive for crafts to gain marketshare from macros by lowering prices (at least in the short term to ride a big wave of consumer awareness), lowered raw materials prices might actually end up in reduced retail prices.

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