Unraveling A Brewery’s True Profitability: Allocating Liquid Costs Accordingly

A-Bay Engineers , with the support of our good friends at Craft Beer Professionals, recently sat down with J. Dru Ernst of Dru Bru.

Dru Bru is a brewery, with taprooms in Cle Elum and Snoqualmie Pass, WA, brewing ~5000 BBLs annually, distributing in Washington, Oregon and Idaho.??

The goal of the webinar was to dive into how our Brewery Scorecards have transformed the way Dru is able to track the performance of his business. The scorecards have streamlined data management, identified cost-saving opportunities, fostered team collaboration, and are continually driving efficiencies at every levels of Dru Bru.

If you would like to view the webinar in its entirety please click here!

"Put yourself in the best position to understand what's happening in real time and make the best and swiftest decision to ensure that you mitigate losses and accelerate things that are going well.” -?Dru Ernst, Founder / President Dru Bru

During Jamie and Dru’s conversation, they dove into the importance of properly allocating the cost from a cost center (the production facility) to the profit centers (Taprooms and Distribution networks) of Dru Bru. Understanding the true profitability of each profit center has better identified growth opportunities for Dru.?

Through this process with Dru Bru, we found that the profit centers have been looking more profitable than they actually are.? We found that by allocating all of the production team's expenses to the point of sale of the profit center.? When broken down, the cost per BBL for the profit centers ended up more than doubling and here's how we did this.

Laying the Foundation

Let’s quickly talk about profit center vs cost center, both of which Quickbooks calls a Class. The main difference between the two is that a cost center is only generating costs without any revenue, while a profit center is responsible for both its revenues and costs, trying to achieve a profit.?

When looking at a brewery as a whole, all of the expenses typically show up properly. However, when we wanted to look at how profitable a specific profit center was, we needed to allocate 100% of the production cost center to the liquid being sold at the profit centers.?

Dru explains “100% of every expense that you have should be considered when you're thinking about how much does my liquid cost.”

A brewery is a complex blend of manufacturing, distribution, and hospitality. Managing these diverse aspects requires careful coordination, adaptability, and a deep understanding of the numbers behind the beer.

For Dru, this was magnified when he realized he wanted to track his performance more frequently and easily.? Allocating both the direct and indirect expenses of the liquid being sold to the proper location was needed, but also a massive burden to do.?

To truly grasp the profit margins across the various taprooms and distribution setups (Dru Bru’s profit centers), a comprehensive understanding of the driving forces behind Dru's EBITDA was imperative.

This meant meticulously monitoring performance while rapidly digesting information to pinpoint cost-saving opportunities and fuel profitable initiatives. Dru needed real time scorecards to fine-tune his brewery's performance while taking a huge burden off of his shoulders, hence the creation of our Brewery Scorecard!

Why It's Hard to See the Holistic Costs of the Liquid

Brewery production software alone was not enough to holistically understand the profitability of Dru Bru. For reference, many of Dru Bru’s softwares communicated with their accounting system but due to the complexity of Dru Bru, significant manual processes were needed to properly allocate indirect expenses. Dru was saddled with a time consuming process to compile the data every month that often led to outdated information.?

With Dru’s direction, we wanted to see how we could allocate indirect or non material expenses to the liquid being sold. Examples of these expenses are production labor, utilities, rent, repairs, excise taxes, inventory adjustments and yeast.

Without allocating these expenses to the liquid being sold, they would only be viewed on an overall business basis. This created a scenario that showed large losses in the production cost center and massive profits in the profit centers.

Dru Bru’s production facility creates incredibly delicious products, but it is a cost center since it does not generate any revenue on its own (some breweries contract brew and would change this).

Dru’s profit centers are his taprooms and distribution networks - such as self-distribution or wholesale through a distributor.?

These indirect costs are often overlooked. We believe the profit centers selling the liquid need to have a thorough understanding of their true costs.

Without the proper allocation of the production cost center, the profit centers were looking more profitable than they actually were. For instance, more than half of a pint's cost was coming from indirect costs from the production cost center.?

Allocating into Digestible Pieces

When calculating Dru’s true profitability of each profit center, 100% of his production expenses needed to be accounted for in the cost of his liquid. The indirect expenses of the production cost center were relevant to the liquid being sold.

The goal for Dru and our Brewery Scorecards were to have each profit center accurately show the costs associated with the revenue they were bringing in.??

Our process with Dru entailed breaking production expenses into one non-material cost per BBL with components of Labor, Misc (Supplies & Materials, Excise Taxes, Inventory Adjustments, Yeast, WIP Loss), and other Expenses (all other small expenses).?

We calculated this non-material cost per BBL and assigned these costs to the liquid sold in each profit center.

For Dru, this allowed him to see exactly how the indirect expenses were impacting their margin. When we allocated all of their expenses to the profit centers, not just the cost of the ingredients, we were left with the true profitability of each profit center.

We will dive into allocating what we call the business operations spend in our next newsletter!

After allocating all of the indirect expenses, we found that the profit centers were missing over half of the actual costs associated with the liquid they sold.?

From this exercise we learned there is a very good chance many breweries are underestimating the costs of their liquids due to the manual effort of these calculations and the challenges of taking these indirect expenses into account.

Having a firm grip on their margins allowed Dru to track data related to his costs to identify opportunities to improve.?

Dru explains “You can truly see how your taprooms are performing versus each other, how wholesale is performing. You can see what's contributing to your profitability at the end of the day”

Data Driven Decision Making

Understanding the complexities and details of both Dru’s profit and cost centers was crucial to making smart decisions to drive sustainable performance. This allows Dru and his team to forecast with confidence how changes to both direct and indirect expenses may impact margins.

Dru is able to compare the performance of both his taprooms and his distribution networks to make an informed decision on the best path forward to drive growth for Dru Bru.?

Our Brewery Scorecards are not a financial statement. They gave Dru the tools to properly break down and visualize the true health of his entire business. They gave him and his team the ability to properly see the performance of each profit center and make more informed decisions from there.??

The entire Dru Bru team can now better identify risks before they become out of control losses, while quickly assessing where profitable avenues are and lean into them to maximize their profits.

Let’s Discover Your True Profitability

Unlocking your brewery's full potential begins with understanding its profitability inside out. If you have questions or seek further insights, don't hesitate to reach out. We're just a message away on LinkedIn, or you can drop us a line at [email protected].?

As Q4 approaches, we have a few slots available to embark on your 2024 budgeting journey with us! If you're ready to keep score, rest assured it will be an investment worth every moment.