Data-driven decision making in beer brewing [expert Q&A]

As brewers ramp up production it’s critical they protect margins with data-driven decision making. Unleashed Software spoke with Maria Pearman, a Certified Public Accountant based in Portland, Oregon – the home of craft beer – who provides accounting expertise and deep operational knowledge to the brewing industry. Here she shares her views on the KPIs brewers need to track for success, brewery software features to look for, what brewers can expect from the industry as it grows, and how the brewery industry can prepare for the future. Craft breweries have particular inventory and accounting needs. Photo: Daria Shevtsova

You teach finance and accounting for craft brewers. How did you become involved in the beer manufacturing industry?

I became involved in breweries because I was a Certified Public Accountant at a standard public accounting firm in Portland, Oregan. And because Portland has a lot of breweries I was doing tax returns for breweries and I found that the breweries would spend more time getting their books clean at the end of the year in preparation for the return than they would spend on the return itself. So that showed me there was an opening in the market for a service where these beer manufacturers could have access to a higher-level skill-set, but not on a full-time basis. Maybe they just needed to talk to someone once a quarter for example.

A brewery accounting focus

So I took that idea and started my own company. And that idea caught on and then we started to provide tax returns and bookkeeping and other consultative services, but with a niche focus on craft brewing. And so it grew. And it was popular and I think it was popular because we really took the time to understand the operations behind the accounting. I ran that for seven years and then I transitioned that practice back into the original firm where I had started my career and now we're taking that same approach and services and able to reach a broader audience. Right now we have clients across the United States and in a couple of other countries as well and really focus on serving the beer industry at a very deep expert level.

Looking at the US brewing industry compared with Australian and New Zealand brewing, what are the similarities and differences?

I think the biggest similarity is the pattern of industry life cycle. If you were to graph the craft brewing industry life cycle you would see there’s this slow uptake and then a big curve that swings upward through really rapid growth of the industry. And then it kind of tops out and levels out, followed by a slow decline and then a more rapid decline until that industry’s life cycle is complete. So right now in the US we're still in the growth phase, but we're nearing the end of the growth phase. And I see the same thing playing out in other parts of the world, including Australia and New Zealand, but it’s just happening on a shorter time-frame. So where we may have experienced this over ten or 15 years overall I think that in other markets that are in the developing stage now and are a little earlier than we are, well maybe that stage will happen in seven or 10 years instead of 10-15. The craft beer industry in the US has forged a path for other markets. Photo: Nextvoyage

Beer industry consolidation and pivots

So it's the same trend. And I also see that there's a lot of consolidation going on – larger companies buying smaller ones – and also a pivot to a brewpub model. A lot of breweries are, because of this consolidation, pivoting towards brewpubs, because in general the margins that you get in brewpubs are much better than through wholesale. The net income is also usually better. So brewers are having to change their definition of success. So I think maybe five years ago a lot of people thought that they could be a really broad-based national beer brand that is consumed all across the country, but these days they are seeing the barriers to that because the competitive landscape increasingly is more crowded. So they are focusing on playing where they can win. And for a lot of us that means serving in your backyard and really gaining a loyal market share right in your hyper-local area

What are the key points brewers need to focus on to succeed, whether in the local environment or at the national level?

I think because the emerging markets are faster paced it's really important to treat craft brewing like a business right from the beginning. In the US there was a longer span of growth and really there was less pressure to treat it like a business, because the momentum of the industry would just carry you along. Some areas where you knew you could have improved operations it just went by the wayside because things were moving so fast that a) brewery owners didn't have time to do the best they could and b) you just didn't see the holes in the boat because there was enough margin to keep everyone moving along at a profitable level. But as things have gotten more competitive you really have to hone in on getting your business practices correct. Assembling an expert team early is key to craft brewery success. Photo: Elevate

Building a team for operational efficiency

I think one of the big points around getting your business right is building a team around you as early as possible. You need people who can look after the business. A lot of folks come into brewing because they have a love of the craft and they have an artistic mentality, and/or they come into it thinking that they have to bootstrap everything. So the founder will end up doing ten or 12 jobs at once and you end up with a situation where none of those are being done well, and it’s a really mediocre process, product and business So if you can really build a team around you they can take some of those areas of responsibility. The founder should be, in my opinion, still very well connected to the creative direction of the product as well as the creative direction of the market,m because that's so key to the heart and soul of the company. So they should be influencing those areas. But if it comes to human resources or IT or accounting those are functions that you don't necessarily have to be involved with as an owner. So build that team around you early.

Data-driven decision making

The second point is to invest in good data. If you can invest in the type of brewery software or process that allows you to analyse your performance, your manufacturing productivity, and answer the questions that you need the answer to move forward in the correct way, that is hugely important. It’s not only about having access to that data, but you need to commit to clean data – reviewing it in a timely manner. Ideally businesses should be looking at their performance on a monthly basis – about 5 to 10 days after the month closes – and reviewing what actually happened compared to what they budgeted, and then understanding why there are variances. And using that knowledge to make business decisions so that they can continue to improve. And along those lines once you get your final numbers for a month I am a big advocate of rolling forecasts. So you take your actual numbers from one month’s performance and you use that to influence how you’ll forecast for a year later. And it is this evolving annual, monthly forecast – so instead of having a static budget that you set in October and then you stick in a drawer and don't look at again, it becomes a rolling forecast that becomes a living document. It really influences behaviour changes so that you can constantly evolve and constantly tweak on the business to make it better. Successful breweries track the right KPIs for data-driven decision making. Photo: Elevate

What are the key KPIs breweries should monitor in their brewery software?

1. Gross Margin By Revenue Centre

One of the KPIs that I believe is crucial is Gross Margin By Revenue Centre. If you operate different types of businesses under the same roof – for example if you have a tasting room or brewpub, and a production facility – make sure they are separated. Because if you have a brewpub you're going to expect revenues and financial metrics that are really akin to a restaurant. Then if you’re measuring the performance of your production facility it's going to be a different normal net income and normal margin. So you need to make sure that what you're measuring against is common for that industry type of centre.

2. Margin By SKU

Your Margin By SKU is a way of measuring how much money you are making on every different type of product that you sell. Business owners should adopt the philosophy of having margin attached to everything that you sell. That's important to track.

3. EBITDA

EBITDA is Earnings Before Interest, Taxes, Depreciation and Amortization and it's a common metric that's used to measure the value of business by lots of investors. It kind of levels the playing ground for businesses. Even if you're not considering selling your company and it's perhaps just you as an individual owner who is tracking the performance, you should still have an eye to the value of the company and measuring that on a consistent basis through EBITDA.

4. Working Capital

There’s also Working Capital, which is a measure of the liquidity of the company. This is tightly related to available cash and current assets and your ability to take care of your obligations as they come due. It measures liquidity and the health of your company – it's related to your balance sheet items.

5. Brewery Inventory Turnover

The fifth point I encourage brewers to track is their inventory turnover. Inventory turnover measures how quickly you're moving through inventory and a higher number is better than a lower number. If you think about having a large amount of inventory on the floor of your warehouse that really is cash that's tied up that could be making a better return for you if it were deployed in other ways. Keeping inventory on the floor for as short a time as possible is really key to a healthy company.

Core range vs product innovation: What’s your view?

For craft brewers it depends on the business model. If you have a business model that’s highly focused on wholesale and through off-licence accounts – so your liquor stores and supermarkets, etc – it's really important to have flagships and things that are always in the market. Because that's what customers will come to recognise. It provides consistency in their experience and also for the retailer it makes it easier to manage. It is easier to manage having the same type of product and stock. However if you are more of a brewpub model then variety is definitely the spice of life and that's what keeps people interested in coming back. Consumer demand is getting ever more fickle over the years. As craft brewing gets further into the maturity of its life cycle people are expecting much more from those brewers – they want a new flavour or style at just an astounding frequency, it’s very hard to keep up with that. Consumer demand for new beer styles is a challenge for brewers. Photo: Amanda Klamrowski

Wholesale vs Retail in Brewing

Short production runs are hard to execute in the marketplace on a wholesale level, but if you have a brewpub it's really easy to do short-term turns and limited offerings. A lot of people will use social media to blow that up and create hype around it and they’ll sell out really quickly. They use social media to create demand for short supply products, therefore they can charge more for the product as well. In terms of core range versus innovation, most breweries I work at have a mix of both. The common practice in my area is to have maybe three or four flagship beers that are available all year, and then you've got a series of seasonals that support that. Then there are specialty beers that are kind of sprinkled in throughout the year. That’s the architecture in a nutshell, but it really should be honed in on your particular business.

What do brewers need to get right in short production runs?

It does make it more difficult to manage production when you have specialty one-off beers. However if you have a good technology system underneath – if the brewery software you're using is robust enough – it becomes fairly simple. That’s because most of these speciality beers are tweaks on other types of recipes. So within your software you can have a library of recipes and most brewery management software will allow you to easily copy a recipe and edit it. So if I have an IPA and an idea of ingredients that I want to add to that IPA to make it a specialty, I can simply go to my brewery software, make a copy, then make the edit that I want and it's fairly easy to manage. However if you're a brewery that is using spreadsheets, it's in theory the same type of practice, but it gets a little more cumbersome.

Protecting margin on short-run brews

Another thing about short runs is, because they're only in the marketplace for a very short time, without the right brewery software in place you really don't have the runway to tweak a recipe and make it more margin-rich. For example if you've got this great idea for a beer that's going to use, say, coconut and mango or something like that. You can go out and make it, but if you don't have the proper planning in place beforehand you may not realise that it's not making you very much money. Then when you hit the market if it's a limited release it may only be available for a month or so and then you've made it, you sold it, and you really didn't make much money on it. So was it worth it? And perhaps it was for the promo value attached, but it's hard to manage the business of it without the right software when it's so one-shot in nature.

Combining business models: brewpubs, tasting rooms and production breweries

In my experience the brewers who have gone on to open brewpubs – when the brewpub is a full restaurant experience – it's more difficult than a brewer who opens a tasting room. A tasting room is essentially a bar and you serve your own beer and then maybe a few other producers as well, but it's a simpler business model to execute. Restaurants really take a unique know-how. You really have to know how to run that well. You have the back-of-house responsibilities and the front-of-house responsibilities and you always have to have a certain number of people at the restaurant who can execute all the items on the men. So you have to carefully curate what you're going to offer and how you're going to manage the labour around that – it is a whole other endeavour. Creating a brewpub experience adds a complex business model to brewing. Photo credit: Elevate And the way restaurants measure their profitability, they're really looking at week-to-week performance as opposed to month-to-month performance. So, long story short, if you're going to do a brewpub you are really recommended to have someone on staff who has done it before; someone who can be a good general manager. I think a tasting room is a far more amenable way to get into a retail environment. I also encourage breweries who have a retail environment to really push the merchandising on their to-go beer. This is something that's becoming increasingly more common in the US: selling beer to-go out of your tap room. The margin on it is fantastic, so if you can position it and merchandise it in a really prominent way in your facility, then that may double your sales out of your tasting room. It's not uncommon for that to happen.

Food trucks and tasting rooms

Another business model that helps with the ease of having food in the equation is the food truck model. A lot of people will set up a tasting room and they’ll partner with a food truck that sits outside. It's sort of a beneficial relationship where your patrons can get their food from the food truck and bring it in, and that's really nice because then you don't have to worry about the management of the food side of things. It allows you to keep your costs pretty low in terms of overhead and it's just a really nice way to eat. The food is important because it does keep patrons sticking around for longer, so they're going to consume more beer. So overall, yes it's important to have food available, but you do have options. And I would advise you to know what you’re doing before opening a restaurant.

This Q&A was adapted and edited from an Unleashed Software podcast with specialist craft brewery accountant Maria Pearman