Hops and Grain: Gold Medal winning craft brewery in Austin, Texas

What does your company do?

Hops & Grain is a local Texas brewery. We brew and package all of our beers on-site and sell them throughout Austin and the surrounding areas. After 5 years of expansion in our current facility, we have finally reached max capacity and are now looking to double our capacity with a new brewery. The investment will be in a new LLC to develop the new tap room and brewery in San Marcos, TX.

Where will your company be in 5 years?

Since Day 1 our goal has been to craft high quality beers that tell a compelling story and go beyond our customers' expectations. We operate a full time on-site laboratory and craft some of the most exciting and innovative beers in Texas in pursuit of this goal - efforts we plan to double in San Marcos. And our customers love us: we've had 100% year over year growth in our first location since 2011.

What are you building?

After 5 years of rapid growth in our local market, we are setting out to build a second production facility and tasting room in San Marcos, TX with the goal of tripling our current production capacity and reaching a vibrant, fast growing market of young professionals. We plan to carry our attention to detail, adherence to quality standards and devotion to consistency to this new facility. We’ll be building a state of the art brewery and a large tasting room and event space for private events as well as weekly hours for sampling and tours. Our expansion to San Marcos will enable us to reach more people, introduce new products and bring our capacity from 13,000 barrels to 33,000.

How did you get started?

My background in beer began in college as a young biology student. I attended small university that didn’t allow alcohol consumption during your tenure so my buddies and I found that you could purchase all the ingredients to make beer without being legal drinking age. It began as more of an experiment and ultimately turned into a pretty elaborate homebrew operation. Years later, I was just as in love with homebrewing as when I started. So I began pitching this idea of building a brewery that not only makes great beer, but markets it to this huge community of people that love to get outside, love to eat good food, and love to support local.

Why open up in East Austin?

For the 11 years that I’ve lived in Austin I’ve always resided in East Austin. It’s a rapidly developing area that has seen a lot of changes in the 11 years that I’ve been here. Historically the neighborhood has been rooted in 3rd, 4th, 5th generation families that really, really love their neighborhood. They like the idea of not having to drive all the way across town to go to a grocery store. You kind of have everything, it’s a self sustaining community—but it lacked a brewery. Having lived there and fallen in love with the neighborhood, it seemed like a perfect fit for a brewery.

What do you think a local brewery adds to the community?

What I fell in love with was this romantic vision of a brewery in the middle of a neighborhood with huge vent stacks on the roof and steam coming out the top of it. The neighborhood brewery. As major cities like Austin and Denver continue to grow in numbers and space it’s becoming more and more important to provide access to what makes our cities great without having to drive an hour to get to them. Austin receives an incredible amount of tourism because of our reputation as such a locally committed city. Visitors say they love the local feel of Austin. The local feel that they recognize and enjoy in Austin is being in the middle of a neighborhood and popping into a restaurant or a bar or a brewery. So when it came to opening a brewery, there were no other options for me.

What makes your brand unique?

The beer that we produce is one component but the story that we tell is what brings people back time and again. For us, our story is about our focus on the community. We make beers that we believe are culturally relevant. Rather than going in and saying, “These are the beers that we like to drink, enjoy it or not.” We like to open our doors, invite people in, and hear what the community wants. There are elements of it that scream Austin. Our product is build on quality. Early on we made a huge investment in an onsite lab. You can get people to drink your beer once, but if you want them to drink it twice it needs to be consistent, and it needs to be high quality and it needs to taste great. Our lab is where we ensure that quality. At a brewery of our scale it’s unheard of to have the type of equipment that we have in our lab but I believe there’s no way you can scale a brand if you can’t make it over and over and over identical to the way that you did before, and continue to grow the quality.

Tell us about the beer lab.

The first one is our QA/QC lab where we test shelf stability, storage stability and multiple other data points that ensure we are producing a consistent and high quality product. We test every parameter that we can throughout our entire process. The second lab is our pilot brewery. Inside of our facility is this small scaled down replica of our main brew house that produces 100 gallons per batch. That’s the place where we churn out all kinds of experimental beers, test out new ingredients and train new staff. We only serve those products on-site and we really involve every customer that comes into our tasting room in that process.

How do you choose your beers and flavors?

I currently serve the role of brewmaster. I write all of our recipes and I oversee quality management. The recipes all really start from my conversations with people. Our product lineup is a reflection of our community. Once we dial in the concept for a new beer, that’s when I sit down and really start to dig into specific recipe formulation from water profiles all the way down to the specific malt and hop varieties. From there every beer starts on that small pilot system. We brew multiple batches on that system testing out different things, testing out feedback from our customers, before we ever decide to scale that up and actually put it into a package. During that trial and error process is when we start to involve our graphic designer. We involve him in the entire evolution of the brand, and the story of the brand, so that when he starts to put together those visual elements from can design, to tap handle, to inclusion into our website, it’s all consistent.

How had the business been doing up to now?

We did not anticipate the overwhelming response that we go when we started selling out beer. Our projections showed us selling the volume that we currently sell in our 10th year. We, almost overnight, were completely sold out. We basically doubled our production year over year for 4 straight years. Our current facility is just about maxed out on available space and capacity so we’ve started installing systems that enable us to yield a little bit more beer out of each tank. We are in year 5 and we still have not been able to expand outside of Austin. We’re not even able to supply the demand in Austin. It’s been an incredible experience but it’s also been a stressful experience just trying to balance it out. We’ve had to say no a lot over the past year with new accounts because I believe it’s critically important that we maintain inventory at all of our current accounts. It’s been frustratingly gratifying.

What percent of your revenue is from the tap house v. distributors?

95% of what we produce in gallons goes out to our wholesalers. Among that we’re pretty evenly split 50/50 between 6 packs of 12 oz cans and kegs for draft sales. We’ve got a really great presence in HEB, Whole Foods, Central Market, Trader Joe’s, Total Wine, Spec, all of the major chain stores here in Austin as well as almost 300 independent liquor stores and corner shops that love to showcase craft beer. We have a really great reach in the off-premise channels. Wit the on-premise side there are literally hundreds of restaurants and bars that are really committed to craft beer here in Austin and we service all of those as well. The other 5% of volume is what we pour in our tasting room. When you look at revenue though, 25% of our annual revenue comes from our tasting room.

What kind of margins do you get on beer sold on site v. distribution?

Our margins on the beer that goes out into the wholesale market is between 4-8%. Kegs are a little bit higher margin because of the lower packaging cost but all around the margins are very tight when you work with a wholesaler. We have to focus on volume to maintain profitability whereas when we make it in house and serve it in house our only overhead is our labor. Our margins are in the 60-65% when we sell it on-site. Because of our current model of selling a souvenir glass we have the cost of the glass that eats into our margins. After all is said and done our cost of goods for that $10 souvenir glass is nearly $2. Selling it by the glass and not having to sell the actual glass itself, but just the liquid, that should improve our profit margin another 10-12%.

Is selling beer on site or retail distribution more important to the business?

We get customers that are buying our beer out in the market, and then they look up our website and see we have a tasting room and then they come to visit. We also have people that find our tasting room first, come in and then realize that we also package our beer and the next time they’re at the grocery story they pick up a six pack. They really feed each other I think almost equally.

Why are you expanding and how did you choose the new location?

The plan for this new expansion is to enable our current facility to keep operating at full capacity. The new facility in San Marcos will also have an on-site tasting room and production space similar to our Austin facility. San Marcos as a city is much easier from a city code perspective than Austin which also heavily factored into the decision making. San Marcos is growing incredibly fast. There are almost 35,000 students there and a large population of young professionals. Because the cost of living is much cheaper than Austin, many people live there and commute into the city. We’ve been wanting to expand down into the San Antonio market, Houston, El Paso and then eventually Dallas/Ft. Worth. This second facility will enable us to service all of those new markets. The corridor between San Antonio and Austin is connecting more closely every year. San Marcos is perfectly positioned between the 2 cities and there is a lot of commuter traffic up and down that corridor.

How do you think about competition?

Competition is definitely ramping up in our industry, especially when you look at retail shelf space. There’s a lot of brands out there, a lot of choices, which is ultimately why people come to craft beer to begin with, because of those choices. We want to make beer that’s high quality, but it’s the beer that you have in your fridge all the time. That’s a big differentiator for us, our focus has not just been around making the whales, as our industry calls them. We make very consistent, very high quality, very reliable beer. From a competition standpoint we own that shelf space.

How fast have you been growing?

Last year we cleared just over $2 million in revenue and we should do $3.2 million this year. Because of our continued growth in our tasting room sales we’ve been able to continue that 75/25 revenue split each year. With our new efficiencies in raw materials purchasing as well as new production efficiencies, we’re able to get a little bit higher margin from our wholesale revenue. This year is where we’ll see our revenue will grow over 100% but our production volume will be around 80% growth. Something that we’ll take into this new facility is building those efficiencies in from the beginning so we can realize the raw material economies of scale ordering for both facilities.

Have you chosen the site for the new brewery yet?

We’ve been looking at a lot of properties in San Marcos and have a number of great potential sites. We’ve already met with the local city and building offices there and have a good idea for the construction timeframe. I already know exactly how long the brewing equipment takes to fabricate and make. Wrapping up the fundraising piece is the next step for us.

What are the risks and challenges?

The biggest thing that we’ve found, as far as the challenges, is finding and retaining good people. We’ve got an incredible management team in place in Austin that will be able to really help communicate the culture to the employees underneath them at both facilities. That’s the most important thing in retaining staff. Knowing that we don’t have to start from scratch on a management team at the new facility will really help mitigate some of the risk. Construction permitting is never as easy as you would like for it to be, so that’s a challenge as well. Building in a new city will be a learning experience, but knowing, and having a great general contractor that has done work in San Marcos definitely takes some of the load off. I would say some of the biggest challenges are going to be the staffing element, and then just getting through the initial construction permitting.

What are the backgrounds of your teammates?

Our operations manager’s background has been in farming and operations management. Being in an industry like beer where we produce an agricultural product he’s been a huge asset in really streamlining inventory management, staffing, and the day to day production and operations. Then we have our packaging manager who came to us from the petroleum industry working in demolition and excavation and is very operations focused. He manages everything from the beer going into kegs and cans all the way downstream to wholesalers picking up from us and managing their inventory. Our marketing manager came to us from Whole Foods. She was the marketing lead here in Austin. She’s got an incredible amount of experience both in digital marketing, and then also event marketing. She manages all of our digital channels, social media, monthly newsletter, Yelp, our Google Plus pages, all of those elements that ultimately tell our story. She also manages all of our on-site events. Our tap room manager came to us from from Boston where she had 10 years in bar management experience. Our sales manager spends most of his time out in the field managing both the sales team with our distributors, as well as doing higher level account management with our retailers. Our tap room manager has a great staff underneath her that tells the story directly to our customers. On the production side, having 2 people that are really focused around efficiency, and have a lot of experience in that has been huge. Because we’re dealing with farmers and growers all over the country, and brokers in the middle, and we’re at the mercy of mother nature, having people that have worked in industries that understand that and understand how to compensate for it has been huge.

What are your guiding principles?

Commitment to our industry, our community, and our environment. Any time we decide to do anything, be it hiring a new employee, changing raw materials suppliers, writing a new recipe, buying glassware for the tasting room, we always ask ourselves if we are going to add, or bring more, sustainability to all three of those areas with that decision. If we can say yes, then we move forward with that exploration and that’s a huge piece of what we stand for. We use 100% wind energy, we make dog treats out of our spent brewing grains and we divert all of our solid waste away from our waste water stream. We work with a local company that uses it for compost starter. We are a recognized platinum green business leader by the city of Austin for our sustainability initiatives.

1	2015 Revenue of first tap house: $1,916,091.
2	Investment: New tap room / brewery right next to Texas State Univ. (30,000 students).
3	Capacity of new facility: 20,000 barrels.
4	Powered 100% by wind energy.

1	Lack of market traction
2	Need to expand to further markets due to lack of market traction which would bring about additional shipping costs and potential lack of traction in new markets
3	Product spoilage requirement destroying the product. (insurance policy would cover raw material cost but time would be lost)
4	Fire or other weather extreme that could destroy the property and equipment (again, insurance would cover costs but lost time could result in product never gaining traction)
5	Inability to retain management staff, cost of hiring and training new employees
6	Construction cost beyond expectation/budget requiring additional fundraising or debt
7	Terminated employees stealing trade secrets (all staff is required to sign non-disclosure and non-compete but cost of attorney fees could be substantial)
8	Unexpected permitting time. If permits are held up then additional costs could be incurred
9	Death or terminal illness of manager
10	Construction theft (i.e. copper or other building materials)
11	Customer complaint or possibly lawsuit due to accidental injury
12	Customers leaving intoxicated and getting pulled over, potentially causing additional oversight by regulatory agencies.
13	The CEO currently has a full-time job and is not able to devote 100% of his time to running the business which could result in multiple issues.

Date	Amount	Security
08/2016	$1,000,000	Revenue Share
08/2016	$1,000,000	Loan

$50,000	With the minimum target, we have budgeted $40,000 for construction and finish out of the space, and $10,000 for marketing expenses during the first 2 years.
$100,000	With 100,000, we would add additional fermentation capacity and a few other pieces of equipment.
$250,000	Finish the entire build out of the Brew House to accommodate the new equipment.
$500,000	Purchase fermentation tanks and all other equiptment required for fermenting and packaging the beer.
$750,000	build out our lab for testing and quality assurance/control of beer, and purchase of a centrifuge to enhance shelf life and stability of the beer.
$1,000,000	Final interior design of the tasting room. Cold storage for the tap room kegs, patio construction etc.

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