In our previous article on Corporate Growth, Capital Style, we featured part one of a two-part Q&A interview with Chad Dally, a Senior Vice President and the Mid-Corporate and Middle Market Commercial Team Lead at TD Bank. Chad is a finance and investment expert with a soft-spot for one particular, high-growth industry in our region – craft beer.
Just how “high growth” is the craft beer industry in this part of the country? According to the Brewer’s Association, the approximately 400 breweries in Virginia, Maryland and the District of Columbia combined to employ more than 22,000 people had a combined economic impact of $2,811,476,000 in 2018, alone.
In the first part of our discussion, Chad described why he feels that craft breweries are growing so quickly, In part two of our conversation, we began to dig into some of the financial and investment information about starting a brewery for anyone that may be looking to profit from that growth by investing in or opening a startup brewery of their own.
Now, let’s tilt one back and see what Chad had to say in part two of our two-part conversation about the business of beer:
Corporate Growth, Capital Style (CGCS): This is obviously relative based on location, size and other factors, but is there an average or ballpark estimate for the startup costs for a brewery? How large of an investment is this?
Chad Dally: This depends heavily on the location of the facility. A brewery location in an established urban market with foot traffic is going to require more startup and operating capital than a facility in a revitalizing industrial area. If we look at the Richmond market for example, the Scott’s Addition area was a wasteland prior to Hardywood, Ardent, and The Veil moving into the area. Today, the Scott’s Addition area has more than 8 breweries, a retro tap house arcade, roof top bars and even a shuffleboard restaurant and bar. The cost to open in Scott’s Addition in 2011 to now has more than quadrupled.
However, while land in older industrial areas may cost less than in newly developed areas, it can require more capital in rehabilitation of the facility. Many brewers that I’ve spoken to have discussed facing cost overruns on water supply and sewage to support their operation. Upgrading sewage and water combined with the city permit process can be costly.
The final factor is the quality and size of the brew tanks. The stainless steel used on these tanks, valves and lines can be very costly. Having a USP-Grade Propylene Glycol system to maintain temperature can also be very costly compared to a so called “food grade” system. The proper system will maintain the life of the chiller system.
Ultimately $100k can create a good startup level, seven-barrel brewery. Add in tap room operations with minimal staff in an area that can generate the traffic for onsite sales, and fair estimates are $200k-$300k. If larger production runs or distribution are required, costs can quickly increase to above a $500k initial investment.
CGCS: For someone that may be looking to invest in a startup brewery, or someone that may be asked to invest in someone’s brewery, what are some of the questions that they should ask of the founder or owner?
Chad Dally: If I was to invest in a brewery, I need to ask myself if there is something I can add to the growth of the organization besides capital. Most startup breweries have partners that are invested in the total operation of the brewery.
Many breweries start up with partners that each add value. Some provide the system engineering, construction, buildout; others provide consulting on navigating government approvals and permitting processes. Some partners provide financial accounting and banking relationships. Even your tap room management may invest and run the front-of-house operations for a piece of equity.
If you are a capital provider only, the usual structure is a loan that may have convertible options to equity. Most brewery founders want all equity owners to have a personal stake in operating a portion of the business at some point. Understanding the role you play – not just the structure of your investment and the brewery’s business plan – is key to a good investment.
CGCS: As an investment expert and an individual with deep knowledge and experience with beer, what would you look for in a startup brewery to invest in? What characteristics are you looking for and why?
Chad Dally: I’d look at the location of the brewery and the saturation of the market and ask, does the brewery business plan have characteristics that will create revenue in that market? You can open a mediocre brewery in a market that is completely new to craft beer and the experience alone can sell beer.
I’ve been to many a brewery that makes average beer, however they are one of the best experiences for your time in that small town. I’ve also been to cities like Asheville, NC where amazing breweries are on every corner, but the tap room is empty at peak times. If the market is saturated, you must have something that differentiates the brewery – whether that’s activities, a known brewer with an impeccable reputation for making great beer, a cult-like following from another market or some other thing that sets you apart.
CGCS: This is also relative, I’m sure, but what kind of return could an investor expect from a brewery early on? How long do you think it would take to start getting a return on an investment?
Chad Dally: Given the short time frame to produce a beer once you open production, a brewery can have a relatively short period from startup to seeing revenue from the initial investment. Based on conversations that I’ve had with brewery owners, to see returns on your investment usually requires around 2-3 years. That is the point in which you will start to see either expansion or contraction for that brewery based on quality, location and experience.
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.