For the past two months, our Juntos met and learned about the business of craft beer, with a focus on the Virginia craft brewery market. We have studied a range of topics including the craft beer market and segments, beer distribution, process of making beer and ingredients needed, and a case study of the Virginia Beer Company.
In 2014, the craft brewery market had revenues of $19.6 billion with an annual growth of 18.8% in the last five years. Specifically in Virginia, there are 78 craft breweries that produce 195,957 barrels of craft beer. Craft beer also has four market segments: microbreweries, brewpubs, contract brewery companies, and regional craft breweries. Microbreweries have less than 15,000 barrels produced per year. In Williamsburg, VA, there is currently only one microbrewery: Alewerks. We had the opportunity to travel to Alewerks and tour the facility to understand the making of beer. One takeaway from this experience was that the owners of Alewerks invested a starting capital of $200,000 to start the business.
Our class welcomed a guest speaker, Chris Smith, from the Virginia Beer Company to learn about the financial and legal issues entrepreneurs face when starting a microbrewery. Some key considerations were:
- Need a connection to the location of the brewery to help raise capital
- Types of beer, such as IPAs and Lagers
- Relationship with other beer companies
- Automatic bottling: $400K, automatic canning $150K, manual canning $16K
- Property taxes are about $9,000 per year
- Need attorneys that can cost $45,000
The process of making craft beer is made up of many steps, including mashing, boiling, wort filtration and cooling, fermentation, filtering, and packaging. The cost for the equipment can range from $100,000 for a 1 barrel system to $1,000,000 for 30 barrel systems.
Key ingredients in craft beer are: malt extract or wort, hops, yeast, water, and primary sugar. A dynamic part of making craft beer is hops, which are the female flowering seed cones of the humulus lupulus plants. Normally, hops are grown on small, independent farms and are labor and a time-intensive venture. Bines don’t maximize harvest until their third year, and an acre of hops cost over $68,000 to plant and harvest. An average price of hops per pound is $4.38. With the explosive growth of the craft beer industry, larger breweries have started to contract hops. This will lead to little excessive product from the small, independent farms and consequently, can make it difficult for start-up breweries to acquire hops.
Alcohol distribution has a three-tier system, which are brewers/importers, distributors, and retailers. This system allow smaller breweries to reach a range of retailers by providing the infrastructure, capital, and personnel.
Going forward, there are some considerations for the craft beer market. There will be continual industry growth with more locations in neighborhoods of bigger cities that lack of a brewpub/taproom. Craft beer has a goal of accounting for 20% of total market share. There will be more acquisitions because breweries are an attractive investment.
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