The Economics of a Taproom vs. Distribution for Craft Breweries
By now, everyone knows that the taproom is the most profitable part of your brewery, but unless your financial systems are set up to track and report on the taproom business separately, you don’t know how much money you’re making (or could be making). On average, you can sell a 1/2 barrel of beer for $600 through the taproom, compared to a $150 sale to the distributor. In simple math, you’ll make four to five times more revenue on the same volume of beer by selling to the consumer directly.
In this article we’ll look at the financial metrics of the taproom compared to distribution. We’ll also give some tips on how to set up your financial reporting so that you can see the actual profitability of your taproom. Assuming that you’re profitable is one thing, but seeing is believing.
- Taproom financial metrics
- Distribution financial metrics
- Set up your financials to track tap room results
Taproom financial metrics
The primary financial metrics for brewery operations are revenue, gross margin and EBITDA per brewer barrel (31 gallons). These metrics can further be broken down and used to measure your taproom and distribution business separately. Below are the key financial metrics in each category.
Revenue per barrel
- Total beer sold in $ divided by beer sold in barrel
- Example: $100,000 sales divided by 100 barrels = $1,000 revenue per barrel
- Develop revenue expectations based on how the beer is sold and the pricing: full pints, samples, growlers, etc.
Gross margin per barrel
- Total margin $ divided by total beer barrel sales
- Example: $80,000 margin divided by 100 barrels sold = $800 margin per barrel
- Gross margin is the difference between revenue and cost of goods (beer). Develop a margin expectation based on the cost of the beer.
EBITDA per barrel
- Total EBITDA $ divided by total beer barrel sales
- Example: $40,000 EBITDA $ divided by 100 barrels sold = $400 EBITDA per barrel
- EBITDA is Earnings Before Interest, Taxes, Depreciation and Amortization. It’s the difference between Gross Margin and Operating Expenses to run your taproom.
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Revenue, margin and EBITDA will vary greatly based on brewery size, market conditions and operating structure. Industry numbers can be a useful guide, but in my experience it is more relevant to measure and benchmark against your own taproom results. Merchandise and swag sales will influence the number as well. Track these revenue lines separately so as not to distort beer sales per barrel. Set up a spreadsheet to track these taproom metrics: revenue per barrel, gross margin per barrel and EBITDA per barrel. Compare the numbers to historical results and industry averages and see where you fall within the $/barrel range.
Distribution financial metrics
Taproom sales have great margins and profitability, but are limited by the size of your space and the number of customers you can serve. Selling to wholesalers provides the ability to scale your operation and leverage the distributor’s sales, marketing and delivery expertise The distributor volume growth does come at a cost however, as you’ll give up a lot of gross margin (aka gross profit) compared to taproom sales. Distribution financial metrics are the same as the taproom: revenue, margin and EBITDA per barrel:
Revenue per barrel
- Total beer sold in $ divided by beer sold in barrel
- Example: $30,000 sales divided by 100 barrels = $300 revenue per barrel
- Develop expectations based on pricing to distributor and draft/package mix. Say, $150 per 1/2 barrel and $35 per case.
Gross margin per barrel
- Total margin $ divided by total beer barrel sales
- Example: $15,000 margin divided by 100 barrels sold = $150 margin per barrel
- Gross margin is the difference between revenue and cost of goods (beer). Develop a margin expectation based on the cost of the beer compared to the price you sell to the distributor.
EBITDA per barrel
- Total EBITDA $ divided by total beer barrel sales
- Example: $9,000 EBITDA $ divided by 100 barrels sold = $90 EBITDA per barrel
- EBITDA is Earnings Before Interest, Taxes, Depreciation and Amortization. It’s the difference between gross margin on sales to distributors and operating expenses to run your brewery.
Sales to distributors provides scale and volume for your brands. However, the margins on these sales are not nearly as exciting as tap room margins. Do the math, make sure your pricing is correct as your margin for error is much lower on sales to distributors.
Set up the financials to track taproom results
The taproom and distributor sales are two different businesses within your brewery. To understand the profitability of each business unit, set up your general ledger to capture the results of each one. Revenues, expenses, and EBITDA need to be separately identifiable for taproom and distributor results. Otherwise, you’ll never really know how profitable each business is (or whether you’re profitable at all).
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The general ledger chart of accounts sets the structure for your financial reporting. The chart of accounts is basically a listing of all the income and expense items you want to track and report on. All the revenue and expenses of the taproom should be listed and have their own accounts. Likewise, all the revenue and expenses of the distribution business should have its own accounts. A common mistake that breweries make is to combine all the results together. This makes it difficult if not impossible to determine exactly what the profit is for taproom vs. distribution. These are separate businesses — treat them that way and set up separate accounts in your financial system.
Wrap up + action items
Taproom and distribution metrics provide an easy way to view revenue, margin and EBITDA per barrel. These metrics can then be compared against industry averages and your own historical results so that you can see whether you’re improving or in need of improvement. To get started, calculate your taproom and distribution metrics using the bullet points above. Review your current financial reporting. Does your chart of accounts allow you to separately report on financial results in from the taproom business and the distribution business? If not, it’s time to beef up your general ledger and financial reporting. What you don’t know can hurt you. Use the brewery metrics and set up a P&L to track results. Seeing is believing.