Beer Business Basics: Occasional Drinking

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Occasional drinking isn’t a ‘once in a while’ thing, but an ‘every time’ thing; here’s why

The English Language is fun. Occasional Drinking doesn’t refer to infrequently drinking, but instead describes drinking in conjunction with a specific occasion. With this definition in mind, being the preferred beer for a given occasion can be critical for success, and also help you define your brand. Some great examples of a single brand owning an occasion are Corona being the beer you drink on the beach and Guinness as the beer for St. Patrick’s Day. Other occasions have strong affiliations with beers, such as marzens during Oktoberfest, pumpkin spice everything in the fall, a beer at the baseball game, or regional traditions like standing in line for the Goose Island Bourbon County stout.

Many of these occasions were built by years of cultural tradition, consumer trends, or millions (sometimes billions) of ad dollars. While performing well for established and widespread drinking occasions is important, so is selecting a few ‘grounded,’ day-to-day occasions to win. Let’s take a look at three ‘daily’ occasions and how breweries/beverage companies try to win these.

From Dry River Brewing: Link

From Dry River Brewing: Link

Brunch

Culture demands we have beverages with our brunch. These beverages are typically bloody marys and mimosas, but rosé, micheladas, even Hennessy are trying to lay claim to this occasion.

Brunch is usually a ‘fancy’ occasion; one where people get dressed up, spend time with friends, and luxuriate in their day. It’s a mini-holiday that can happen every week, and associating your beers with brunch can be a way to suggest that your beverage is a bit of luxury or a way to relax.

Hennessy can also be a brunch beverage: Link

Hennessy can also be a brunch beverage: Link

Camping and Hiking

I love camping, hiking, backpacking, canoeing, and outdoor activities. For some people, camping is just going to a wooded area and drinking with friends. Often, when backpacking, people bring spirits, as they’re high in ABV (you need to pack in less weight/volume) and are fine at room temperature. Hiking and casual camping is a bit more forgiving with many rewarding hikes that are only a few hours, so a cold beverage, or even a cooler is possible. Several beers and ciders would like to win this occasion and build their image as part of an active lifestyle. This also helps a brand appear more ‘rugged,’ relatable, or even showcase their regional roots (think of redwoods signaling ‘California’ or cypress trees signaling ‘Florida’)

Sports

One of the biggest occasions is sports. People willingly (even if begrudgingly) pay as much as $19.25 for a beer at a baseball game (source: Sports Illustrated). Notably, some beers are only available at the stadium (Veza Sur in Miami, NY Mets’ on-site Mikkeller brewery, or Barrelman Ale in Milwaukee). Outside of baseball, there’s Saint Archer’s roots in skateboarding, Natural Light sponsoring the Big 12 conference, and Red Bull’s heavy involvement with extreme sports.

Throwing a watch party for the local team, offering discounts based on the outcome of a game, collecting used sporting equipment to benefit local youth teams, or simply putting your product in the hands of athletes or spectators can build the association and shape your brand image.

Mikkeller’s Brooklyn Citi Field beer: Source

Mikkeller’s Brooklyn Citi Field beer: Source

Are you in it to win it?

Winning an occasion is great! If you’re someone’s go-to beach beer, every time they go to the beach, you make a sale. If baseball in your town means it’s time for one of your beers, you can move a lot of beer and that can fund growth, pay down debt, or help launch new products. By showcasing occasions that your beers complement, you can ‘teach’ consumers how to enjoy your beers or stay top-of-mind.

Not every occasion will be part of someone’s life, yet the occasions you showcase your product in can still be useful. Very few of us jump out of balloons from record breaking heights, but Red Bull’s sponsorship of this activity strengthens their ‘extreme’ image. Similarly, not all consumers skateboard or surf, but if they want a ‘California beer,’ Saint Archer’s SoCal roots might make them choose their Mexican lager over one of the many available competitors. Lastly, while most of our meals may be more functional than glamorous, a beautifully set table, complete with Funky Buddha beer may elevate their beer to something worthy of high quality foods or your next dining experience.

Cider: is it More Like a Beer or a Wine?

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Cider: is it more similar to beer or wine? More importantly, does it matter?

Which do you think it is?

Let’s make an oversimplifying statement: we all know what beer and wine are. Cider, however, is more niche. As with any niche product, it is often explained in terms of more familiar products; in this case, wine and beer. So please take a few seconds (under 60, I promise) and share your perceptions by clicking below.

Now that you’ve voted, why does this matter?

Expectations vs. experience

Before we talk directly about ciders, let’s use the metaphor of burgers and spaghetti. When I bite into a burger, I expect a certain experience: bread, beef, probably cheese, and various toppings. If I bite into a burger and it’s stuffed with delicious spaghetti, I’m upset, or at the very least, confused. Why? Because, of the many toppings I like and expect, pasta isn’t one of them. Due to years of exposure to burgers, Italian food, TV, ads, friends’ BBQs, recipes, and culture in general, pasta and burgers are just two separate categories of things. Simply put, they don’t go together.

If I think about it, there’s no fundamental reason a burger and pasta couldn’t work (food experts, feel free to reach out and we can engineer this!). But that’s the thing; I have to think about it, it’s not natural. To abstract this situation, I have two, maybe three, sets of foods in the world: 1, things that are burger; 2, things that are not burger; 3, things that might be burger. A surprise french fry on this burger is ok, because french fries and burgers are in the ‘burger’ category. To bring objects from the ‘might’ or ‘not’ burger sets into the burger set, requires work. This work can be a waiter describing this chef creation, a friend suggesting it, or a table nearby having a transcendent burger experience. Aiding or hindering this work is atmosphere. If I’m at a friend’s backyard BBQ and there’s pasta on my burger, I’m a bit afraid they’re trying to make space in their fridge, while if I’m at a famous restaurant, I assume they know what they’re doing.

So let's now bring this back to cider. What is it? The true answer is it’s its own category of thing. But if you’re not familiar with the process, a bartender may say “cider is like apple wine” or this server may say “cider is like apple beer.” If the cider is described as ‘like beer’ than I expect carbonation. If I’m then served a still cider (no carbonation) then I’ve been set up to expect a burger, but I’ve gotten spaghetti. If I’m promised “apple champagne” and I get something sweet, I may be upset. So the way a relatively unknown product is described set expectations that can make or ruin an experience.

Comparison set

We’re constantly comparing things, it’s on our nature. For example, “that was a great movie!” implies that some movies aren’t very good; “this meal was great value” implies that other places aren’t offering as good value. When selecting, and evaluating anything, people create a “comparison set.” Essentially these are all the other things that your subject item are measured against. Going back to burgers and spaghetti, when rating your burger, you’re thinking of the burger spots around town, not the spaghetti spots. But when you’re thinking of your dining experience, you’re comparing the service quality at the burger joint, food quality, prices, convenience of parking, wait time, and a number of other things, and when evaluating the overall experience, you can compare burger and spaghetti dining experiences.

Comparing cider to beer or wine changes the comparison set. The comparison set is relevant while you’re drinking the cider (should it be carbonated, tannic, dry, sweet, sour, etc.), but it’ll also have many other effects. Should a cider be served in a 16oz shaker glass or a 6-8 oz stem glass? Should it come in 12 oz cans, like beer, or a 6-8 oz slim can, like wine? Does a 750 ml bottle of decent cider cost $10 like a beer or $15 like a decent wine? Where does it go on your menu or store shelves? Should it be cold or room temperature? These are some of the questions derived from which comparison set cider falls into. Ideally, cider is compared against other ciders (much like beer or wine is).

What does the industry do?

So if setting the right expectations and positioning cider in the right comparison set is so important, what do cider companies do? The short answer is there’s a spectrum; some ciders are nearly indistinguishable from beer, while others look just like wine brands. There are some brands that do both; positioning their standard ciders as beer-like products, while their specialty ciders and apple wines are packaged more like wine. Nearly all cider makers talk about the positioning challenge but then discuss education, because, in reality, cider is neither beer nor wine, it’s cider. With education, consumers can come to know cider as its own thing, and when they’re comparing cider to other products, they will do so in the same way that one might decide if they want a beer, cocktail, or wine.

P.S. as of 10/14/19, with 101 votes cast; 77% of people think cider is more like beer than wine.

What's the Value of My Running Club?

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What is a running (or any) club worth to a brewery?

I don’t listen to music while I run, so often I think about random things. This last run, aside from making wrong turns, I was thinking “What is the value of this club?” So let’s dive in and figure this out!

Sources of value

My running club meets every Monday night, the first Saturday of the month at the sponsoring bar (Mikkeller), the third Saturday at a different bar, and various ad-hoc events such as races, trail runs, etc. After our runs, we often gather for a beer or some food at the bar; on the first Saturday, that beer is even free! So, the first source of value will be the buts in seats of everyone coming to the bar, often during off-peak times.

In addition to showing up to the runs, we all festoon ourselves with Mikkeller running gear. Ignoring the potential merchandise profits, these shirts, hats, shorts, and other branded items act as mobile billboards for the bar. So the second value source is free advertising for the bar.

Next, outside of the times we are running, many club members will go to the bar for their various events, or just to hang out. Let’s call this additional patronage.

It’s also worth noting that the founders of Mikkeller have some strong personal feelings and sense of value from the running club (you can learn more about it in this excellent audio clip). Emotional value is certainly important; just think of someone who happily sinks money into their boat, car, or favorite money pit. Though emotional value is entirely valid, for the purposes of this exercise, we’ll ‘hand-waive’ it to zero.

Finally, by having a successful running club, the bar has access to the running community. This community value manifests whenever the running club goes to a race, interacts with other clubs, posts on Strava (activity tracking app/social media site), or other running community activity. Each member generates word-of-mouth for Mikkeller every time they tell a fellow runner to join them Mondays at 8 or signs up for a race under the MRC LA ‘team.’ Unlike the free advertising of running around DTLA with Mikkeller logos on our bodies, the run club lends credibility and relevance to a whole group of potential customers.

But first, what does it cost?

Before we look at the benefits, let’s briefly look at what this club costs Mikkeller.

Direct costs:

  • 1 beer per person, once a month

  • Signage, flags, other material for the club

Indirect costs:

  • Opportunity cost of reserving a space for the run club (if we’re sitting there, someone else can’t sit there)

  • Organizational effort

  • Brand image effects (what if someone’s a jerk or the brand isn’t compatible with a run club)

In general, these costs are fairly low. If the club has 50-100 people attend a run, the beer cost is less than a keg (a 1/2 barrel keg is about 124 pints), and a 6’ banner costs under $50. In all, you’re looking at about $100/month or less in direct costs.

The indirect costs are also generally low. At Mikkeller, Monday nights are typically slow, so we’re not displacing other customers, the club runs itself, and club members are nice. This is due to our great running club captains that both set a positive, friendly tone as well as manage social media, routes, and all the other logistics of the club. I’d estimate this effort is between 5 and 10 hours a week, so at a high end, this could cost about $800 of time per month (10 hrs/week * $20/hour * 4 weeks). This is not insubstantial, but as I mentioned, our club runs itself, so this is effectively $0 for Mikkeller.

So, what’s it worth?

Now for the best part, estimating the value! As reminder, we have buts in seats, free advertising, additional patronage, and community value (remember, emotional value is $0 for this exercise).

Buts in Seats

First, when our running club is at the bar after our runs, we buy drinks and food. Our typical runs are about 30-50 people, and about 25 people hang around after. If each of these people get a beer, and 5 of them get food, that’s $250 in beer revenue ($10/per beer *25 people) and $100 from food ($20/ticket *5 people). Assuming a 50% gross margin on beer and a 20% on food, the bar nets $145 per night our club is there. If we’re there 5 times a month (4 Mondays and 1 Saturday), the bar is getting $725/month of contribution, compared to our $100/month direct cost estimate above. Not too bad, but there’s another good reason to have our buts in the seats.

My mom refuses to eat at a restaurant that has no one in it, and for good reason. Restaurants can be empty because you went at the wrong time of day, or because the last customers are still fighting off their food poisoning. This empty restaurant phenomenon is even more impactful at a bar. Bars sell drinks, but mostly, they sell the environment and atmosphere in which you consume those drinks. Since most bars sell easily accessible products, getting the atmosphere right is all the more important and having people in the bar is often critical to this experience. Even when you’re not interacting directly with the running club, having a lively, packed table increases the energy of an otherwise empty bar. This encourages other customers to enjoy themselves or remember Mikkeller as a lively/fun place.

Free advertising (shirts, shorts, hats, etc.)

We’re all running around with Mikkeller Running Club gear, and since Mikkeller is in the name, this should be great for advertising, right? This gear is essentially ‘branded merch,' which is great for brand awareness. This awareness can generate new customers, increase customer loyalty, keep the bar top-of-mind, and more. But it probably won’t actively affect people’s purchasing habits. But, as the title states, it’s free, so any value is a net positive. There is a small amount of brand risk associated with people wearing your logo and being a jerk to factor in, but this hasn’t been an issue for our club.

Additional patronage

While each run is about 30-50 people, the running club has 100+ members when you include infrequent members. Let’s say there are 150 total members and 10% of them choose to go to the bar 1 additional time per month than they otherwise would. If these 15 people spend about $30 per visit at a 35% gross margin, the bar nets $157.50 per month.

Community value

Here’s where much of the running club value lies. Members of the club are frequently participating in races, events, attending other clubs’ runs, etc. This embeds the Mikkeller brand in that community, dramatically increasing brand awareness, and assuming the club is a good member of the community, creating a positive brand image within the community. Inside and outside the running community, Mikkeller is now a brand that’s associated with running, activity, fitness, healthy lifestyles, and related concepts. This opens up a lot of possibilities for Mikkeller. They can authentically sponsor races, release a beer marketed towards runners (they did), licence/sell running merch (they do), and more. In case you still aren’t convinced, Dogfish Head and Merrell just came out with a limited edition running shoe!

To a running enthusiast patron Mikkeller can demonstrate that they have shared values and this will increase brand affinity/perception. For non-running enthusiast patrons, there may be a halo effect as that patron may like the concept of running/activity and can vicariously engage in running through the club members over at their table.

The social media activity can also be a big boost, especially for bars that may not have an advertising budget. The Mikkeller Running Club LA posts on Facebook and Instagram at least once a week ahead of the Monday run, an often 3+ times a week. On Instagram, these posts go out to about 1,500 people, many of whom have never run with the club before (last night, we had 5 new runners join us, most of whom found the club on social media). If any of these new runners become regular patrons of Mikkeller, the customer acquisition cost is quite low; basically zero!

So is the club worth something? Final tally:

Short answer, yes! The club is likely a net positive for Mikkeller.

We estimated the club costs about $100/month. Aside from intangible value, the estimated direct additional contribution of the club is $725/month from direct sales after club runs and $157.50 from additional visits from club members. The resulting net ‘profitability’ of the club is $782.50/month. Not bad!

Beer Business Basics: Discounted Cash Flow

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DCF…What’s that?

Lets start with the basics, cash flow

Before I offer you a discount on your cash flow, let’s first figure out what cash flow is. To do so, let’s imagine I own a beer bar. Now let’s do a bit of math. It’s a really simple beer bar that has 2 expenses, rent and beer, and one source of revenue, selling beer. I have a fairly successful, but small beer bar that seats 10, but we’re always full. I’m not too fancy so we’re cash only and I pay all my bills out of the cash register We sell our beer for $5/bottle and get it for $2/bottle. Each customer buys 1 bottle of beer, and we’re open 20 nights a month. I have a really good distributor who is somehow able to supply me with beer whenever I need it, and I pay in cash every time I get delivery of a beer, but I have to pay my landlord at the first day of the month. Let’s look at my Cash Flow for the month.

Example 1: Basic Cash Flow

Example 1: Basic Cash Flow

The first day, I pay out $120, and I take in $50. But every day after that, I pay out only $20, I take in that same $50, for a net gain of $30 in the register.

For the whole month, I take in $1000 of sales, I pay out a total of $400 on beer (Cost Of Goods Sold; COGS), and I pay out $100 for rent; net $500. On the left is my Cash Flow Statement for the month.

As a bar owner, I’m making $500 of profit each month and that seems pretty good. But what about the flow of cash? What about days 1, 2, and 3 where I’m in the red? This is where your cash flow is very important. What if your patrons had a tab that they settled at the end of the month?

Example 2: Bar Tabs

Example 2: Bar Tabs

In this example, I’m still making $1000 in revenue, spending $500 on rent and beer, and making a $500 profit. The difference is there’s a lot more red. All of my income comes at the end of the month, so for days 1-19, I need to finance my operations. I can finance with last month’s profits, I can get a loan, or I can ask my landlord and distributor if I can pay them at the end of the month too. If I am able to manipulate when I pay my bills, I’m managing my cash flow.

Now that we have cash flow, let’s discount it

In Part 1, we discussed the “Time Value of Money,” where dollars today are worth more than dollars in the future. But how much more? How much would you pay right now to get $100 in the future? That number represents the “Net Present Value” or NPV. In our $100 bill example, there are 2 main factors that determine the NPV: how long you have to wait to get the $100, and what “discount rate” you use. This discount rate captures risk, inflation, and other factors. Calculating the exact discount rate is often quite complex, but a general ballpark is about 10% for a large, stable company and 15% for a smaller, riskier company. With the simple $100 payment, here’s the effect of time on the current value:

Capture.PNG

Let’s make an investment!

So let’s say a developer comes to me and says they can double my bar’s size for $20,000. In this example, to keep things simple, let’s look at monthly profits ($500) and use a discount rate of 15%. So our cash flow looks like the following

Capture.PNG

Is this a good investment? Well we can use a DCF analysis to see if the Net Present Value is greater than zero. If the NPV is greater than zero, then the deal creates value. Using a 15% discount rate, the NPV is about $10k, so this is a good investment.

How can you use this?

Discounted Cash Flow is something that gets quoted a lot. Essentially it’s boiling down all the ‘later’ money into today’s dollars. You can use this to evaluate investments that require up front payments, or to evaluate things that have payments both today and in the future. It helps you make apples to apples comparisons. To get you started, I’ve posted my excel worksheet, and feel free to play around.

Beer Business Basics: Time Value of Money (1 of 2)

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What is Time Value of Money (TVM)? And can you make beer puns to make this easier?

Pun alert!

The longer the payment is delayed, the lower the Net Present Value (NPV)

The longer the payment is delayed, the lower the Net Present Value (NPV)

What is Time Value of Money?

Let’s say I offer you $100 right now, or $100 one year from now. Which one would you prefer? Most people pick the $100 right now. This is the Time Value of Money (TVM).

Simply put, the idea basic concept is the $100 bill right now is worth more to you than that exact $100 bill tomorrow, in a week, or in a year. So the value of $100 right now is…$100. But the value of that $100 in one year is less than $100. Why is that?

Think of everything you can do with your $100 bill

With $100 (or a whole briefcase full of them), you can buy malt, hops, equipment, buy an ad, a really expensive glass of beer, or any number of things. If you have to wait to get your $100, you either have to wait patiently to do these things, or you need to find the $100 some other way, perhaps by borrowing it. If you borrowed that money, you’d probably have to pay an interest rate, so by the time you’re paying it back, you’ve ‘lost’ money compared to having it in your hand right now. Remember this borrowing rate, because it’s important in the next post about Discounted Cash Flow (DCF).

Think of inflation

Things get more expensive over time. CocaCola was famously only a nickle for many years, but now a Coke will run you $1 or more. So future money is worth less than current money because all the things you buy with it will be (on average) more expensive.

Inflation is also relevant to DCF, but it will often get built in to other factors.

Think of how likely it is you’ll actually get paid

If someone promised you $100 in 1 year, there’s a chance they may be lying. Even if they’re completely trustworthy, there’s a whole number of things that can happen to prevent them from paying you. They can go bankrupt, they can misplace your information and not know how to contact you, they may pay you late, it’s even possible that in a year, we’re no longer using US Dollars (not remotely likely, but not impossible). All of these factors can be combined into ‘risk.’ Essentially the riskier the entity offering you the $100 bill, the less it’s worth right now. So if your friend who’s bad with money makes the offer, it’s worth less than if your savvy, rich friend makes the offer.

So how does this affect my brewery, bar, or business?

Every day, you’re investing your money. Each time you buy ingredients, a case of beer, new furniture, or anything else, you’re hoping there will be a payoff in the future. You’re spending today’s dollars for the hope of even more of tomorrow’s dollars. But how many of tomorrow’s dollars do you need to make today’s investment worth it? If you’re cellaring a beer that costs $10 today, how much should you charge for that beer 1 year from now? Or what if you don’t have enough money right now to invest in everything you’d like to invest in? This is where Time Value of Money helps. TVM is the conceptual foundation of the ‘Discounted Cash Flow,’ a tool that helps you figure out what all of these opportunities are worth right now.

The next post will dive into DCF and how it pertains to your business.

Beer Business Basics: What is Beer Data and Why Should I Care?

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What is data?

As a former aerospace engineer, I am no stranger to data. I’ve analyzed stress data for a satellite structure under launch conditions or a jet engine blade on takeoff. This data is great if you enjoy satellite TV or ever fly in an airplane, but data can also help inform what’s the best way to market a brewery or what band to bring in to play tonight.

First, it’s important to understand what data is. Think of a data point like a puzzle piece. Each piece of data offers a little bit; some blue with a touch of green. Put enough of these together, you can see the picture is of a lake. When you have all the pieces in place, you see some fine details, such as the fact that this lake is in the mountains and has a swimming flock of ducks. Looking at a specific data point, you can’t really see much. Knowing there’s 40 people in your taproom at 8:17 PM isn’t very useful, but if you have data on the whole night, you’re putting the puzzle together. With more information you could see that you’re busiest between 8 and 9 and that an individual stays for 45 minutes on average.

Why is data helpful?

Unfortunately, in the real world, data isn’t exactly like a puzzle. There’s no photo on the box showing you what the completed puzzle should look like. In the example of number of people in the taproom, multiple data points throughout the night helps you build a picture of how long people stay. When you combine this with how many drinks were ordered, you can start to make specific business decisions. For example, if your bar is busiest from 8-9pm as the example above, you can use this to make staffing decisions.

That’s fairly simple, but what if parties of 2+ order more beers per person than single parties? This data can be used to design a promotion that attracts groups such as a cornhole tournament that requires teams of 2. Similarly, knowing that customers find you on online is useful, but finding out if they’re discovering your brewery through Google or Instagram can inform whether you spend money upgrading your website or creating a great photo spot in your taproom.

The goal is to make informed decisions. Every time you change something in your brewery, bar, taproom, recipe, packaging, etc. you’re running an experiment. People are seeing (or not seeing) the change, and making a purchasing decision based off of it. The data gives you a measurement of if the experiment was successful. If bringing in that band increased sales enough to offset their fee, if changing your can art increased sales, if advertising on Facebook actually lead to more young professionals discovering your brewery, etc.

How to get data?

If you’re a small brewery owner, you may be thinking data is too expensive or complicated to get. The good news is you have a ton of data already. If you’re at your taproom regularly, you see who walks through the door. You know how much beer is flowing. You know what kegs are selling, and what isn’t. This is all a great start. Taking some notes on how many people are stopping in on a given night can help you track whether a can release increases the taproom traffic or not.

Similarly, asking multiple customers the same questions can provide a good qualitative view across different groups. When a server asks if it’s anyone’s first time, they can follow up with “how did you hear about us?”

If you have a membership program, you can survey these members or invite them to comment on any changes you’re considering. These members are often your most committed customers and can have some great feedback. These are your unpaid brand ambassadors, and if they’re happy, they’ll carry your brewery’s flag amongst their friends and colleagues.

Finally, if your brewery has even more resources, you could always do some more formal data collection. This collection can include surveys, specific research, taste testing, focus groups, or customer profile tracking. It’s also possible your local brewers guild is collecting data or conducting research, so make sure to get involved with that.

Have questions, comments, or just not sure how this applies to your brewery? Reach out: ethan.siegler.2019@marshall.usc.edu