Ryan Schradin
While many craft beer fans may look at the beer in their tulip, pint, pilsner or teku glass and only see delicious liquid gold, many businesspeople see something more – money and opportunity. That’s because, across America, craft beer brewing is big business. And there are few places in America where beer is a bigger business than in our region.
According to the Brewer’s Association, there are approximately 400 combined breweries in Virginia, Maryland and the District of Columbia. Those breweries combined to employ more than 22,000 people in 2018. But even more impressive was their combined economic impact, which the Brewer’s Association defines as being, “…derived from the total impact of beer brewed by craft brewers as it moves through the three-tier system, as well as all non-beer products like food and merchandise that brewpub restaurants and brewery taprooms sell.”
That number? A staggering $2,811,476,000.
With the craft beer market burgeoning across the country and in our own backyards, there are invariably going to be individuals that look to get in on it. And those individuals may seek you out for investment in their beer business. Or, you may look to get your own brewing company on the map.
So, you may be wondering, what kind of investment does it take to get a brewery off of the ground? What makes one brewery successful and others fail? And what kind of return can I expect from my brewery investment?
To help answer those questions, we turned to an investment and finance guru with a long history in the craft beer industry and a huge thirst for everything malty, hoppy and delicious – Chad Dally, a Senior Vice President and the Mid-Corporate and Middle Market Commercial Team Lead at TD Bank.
Let’s tilt one back and see what he had to say in part one of our two-part conversation:
Corporate Growth, Capital Style (CGCS): It’s hard to put an exact number on how many breweries are in the National Capital region, but I’ve seen estimates that say there’s more than 70 – and the Brewer’s Association says that there are about 400 combined in DC, Maryland and Virginia. That’s a lot of breweries. What is driving this incredible growth in the craft beer scene? Why are there so many breweries now?
Chad Dally: To fully understand what is driving current growth you actually have to go back and look at the history of beer. 200 years ago, in Europe, pubs were the social gathering spot. You poured a pint or two and socialized. Later in the US, post prohibition, blue-collar cities saw a large growth in your corner pubs where factory workers, miners, construction workers, and tradesmen of all sorts would gather for a beer and blow off steam about their day before heading home.
Beer is a social beverage. Over time and the rise of suburbia, beer drinking moved primarily to your casual dining locations, your weekend BBQs and sporting arenas. This allowed large breweries to form and ultimately lead to a decline in small batch beer served at local watering holes. Restrictive laws around food being tied to alcohol service, being able to brew but not serve and distribution requirements to sell alcohol led to an environment that did not foster start up growth.
Now, the modern day breweries that we see growing and popping up in every region or neighborhood are the only segment of the beer industry seeing growth according to recent industry data. We can attribute the loosening of legislation around brewing and serving beer as the catalyst for the initial growth of the nano and microbrewery. However, following that initial catalyst, there was a cultural shift back to its roots.
CGCS: So, the brewery is becoming the social gathering spot again?
Chad Dally: That’s correct. Microbreweries didn’t just create beer and follow the normal model of brewing and selling to a distributor. They created tap rooms that not only gave people a chance to try new beer, but also to enjoy a social setting.
These breweries are family friendly, pet friendly, often have large outdoor spaces with backyard-style games, and some even have full arcades of retro pinball and video games. They have become the new place for people to leave work or spend a weekend afternoon socializing, enjoying a hand-crafted beer and engaging in activities you normally would have done at home.
This has been especially attractive to a new generation. Millennials have helped with the growth of these breweries due to their preference for the social and active environment mentioned. They also tend to want to avoid the dark pub environment of the prior generations. While they have been attributed to the decline of the casual dining industry and the move to fast casual, they’re drawn to the brewery environment, which tends to provide partnership opportunities and host events with food trucks that cater to their tastes and preferences.
Today’s consumers are less price sensitive to craft beer costs, prefer socialization in vibrant locations, enjoy events like cornhole tournaments and singles nights, love the family- and pet- friendly atmosphere, and even work remotely on local WiFi while enjoying a favorite new beverage. Essentially, the brewery has become the backyard pub or coffee shop for the next generation of beer drinkers.
CGCS: How is the growth of microbreweries different from what we’re seeing from the larger, global brands – the macrobreweries, as they’re called?
Chad Dally: Microbreweries have high margins due to the favorable tax laws for the beer that they brew and sell on site or sell in to-go cans or bottles. Many brewers that I’ve spoken with in this region report margins as high as 600% on tap room-served beverages.
To maintain high margins, a majority of microbrewers favor growth in the form of new locations and “untapped” markets – pardon the pun – over the idea of building a larger facility with bigger distribution.
This is why satellite brewhouses or tasting rooms of several micro- and nanobreweries are opening in new markets regularly. Compare that to the growth and structure of macrobreweries, and you’ll see that they focus on building fewer, larger locations that distribute as much beer as possible to as wide of an area as possible.
CGCS: With many people self-quarantined to avoid the Coronavirus, and many nonessential businesses closed, we’re hearing stories about small hospitality businesses struggling to stay afloat. How is this impacting small craft breweries? How is this impacting their business and their model?
Chad Dally: That’s one of the strengths of the craft beer industry. These companies are small. They’re nimble. They’re agile. And they’re entrepreneurial. When challenges, such as the Coronavirus pandemic and resulting social distancing policies, make it difficult to generate revenue, they find ways to overcome and adapt.
For example, many of the brewery owners and brewers that I’ve talked to have taken the quarantine and social distancing guidance in stride and have worked to embrace that in their operations.
They’re switching from putting much of their beer in kegs for consumption in their tasting rooms and restaurants and are, instead, packaging their beer in bottles and cans. They’re running their canning lines and operations at full capacity. This agility is enabling them to adjust to the decreased revenue from their tasting rooms being shut down and allowing them to meet the increased demand for to-go beer. In fact, I’ve even seen some of the breweries that sell food begin to do take-out and delivery – Triple Crossing in Richmond, VA is bringing their pizza and beer up to 50 miles to people that can’t leave their homes, and Ocelot in Sterling, VA is offering curbside pickup of cans and growler fills. The list of these breweries adapting is ever-evolving along with our current virus responses.
Because of their small size and agility, craft breweries have the ability to make these changes to their business and business model quickly, and I think we’ll see that those breweries that adapt quickly to these new conditions will emerge on the other side.
To dive deeper into the startup costs for a new brewery, and look at the return that an investor in a brewery can expect within the first two or three years of operation, read part two of our conversation HERE.
Editor’s Note: This article should not be misconstrued as investment advice, either from Chad Dally or TD Bank. Rather, like all content on Corporate Growth…Capital Style, the purpose is to share general thought leadership about business trends in our region.