We have mentioned many times that craft breweries are unique in that, right now, they appear to be failure-proof. This a wild oversimplification — that does not provide context into just how hard it is to actually start and run a good brewery — but those dedicated entrepreneurs are seeing a return on their elbow grease with significant customer demand and investor interest.
Don’t take our word for it, let the investors tell you their perspective. In this great MiBiz feature, we hear the story of Rockford Brewing, which, like many of the 4,000+ breweries out there now, wants to expand. And sure, they have been able to borrow from a bank, but that only goes so far. This next phase will require additional investors. And this is where newer, growing craft breweries can thank those pioneers that came before them — yes, especially including the ones now selling for $1 billion — because the segment has proven itself to be strong and built upon fundamentals that are just too good for an investor to pass up.
In part, breweries are attractive because of the diverse revenue paths they have in accessing consumers, said Clarence Rivette, president of The Wirt-Rivette Group, a Saginaw-based financing and equipment leasing firm. Beyond just selling beer, most breweries serve food, have an on-site retail presence and aim to grow the distribution of their products to other bars, restaurants and retail outlets.
Breweries also offer significantly higher margins than traditional restaurants, according to Rivette.
“I will say that banks — and ourselves — are pretty bullish about (craft breweries) because they’re using the model that it’s a restaurant, but it’s a restaurant with high margins,” Rivette said. “You look at a six buck pint, and it costs about a buck to make. The margins are very strong compared to a straight restaurant.”
Later in the article, Bill McGee, senior vice president of commercial real estate lending at Huntington National Bank, offered this perspective:
“We’ve had a lot of success with the (craft brewing) industry,” McGee said. “They’ve got different points of revenue and that’s a big part of the business. As they mature and grow distribution, that results in the biggest financial success.”
For some additional context into just how good things have been in the industry, we dig back into our archives. Here is Bart Watson from the Brewers Association:
Here are the long term figures. Based on the 2013 data, 51.5 percent of the brewpubs and 76 percent of the microbreweries that have opened in the modern era (since 1980) are still open (so failure rates of 48.5 percent and 24 percent respectively). At first glance, this is a remarkable success story, far higher than rates for comparable industries/new businesses. One of the best studies I have seen on the restaurant industry found a 60 percent failure rate over a three-year period. These numbers also hint at the added complexity of running a brewpub, which essentially means running two businesses plus the synergies between them.
Let’s give that some perspective. According to the U.S. Bureau of Labor Statistics: About half of all new establishments (i.e. small businesses) survive five years or more and about one-third survive 10 years or more. After that, the probability of survival increases with a company’s age. So, that makes the numbers above exceedingly impressive — a little too impressive really.
“I might make the point that these historical rates are a guarantee of nothing, and that new entrants will have to work harder than ever to differentiate — particularly in places that already have a high density of breweries,” said Watson (when we asked for his latest insights). “I still agree with the statement that, for a while, openings actually created more opportunities — by introducing beer lovers to the concept of fully-flavored local beer and growing the market — but there are certainly some signs that era is ending in certain markets and that competition is increasing. I still think we have a lot of run room nationally. There are over 8,000 wineries in the United States, and Americans drink a lot more beer than wine.”