Federation Brewing Investor Update-- May 7, 2020
First, our apologies for such a long period of radio silence. We were planning on an update at year-end after we had executed the expansion from our last crowdfunding campaign, and were already kicking off some of the growth initiatives at the beginning of this year, then… well, you know what hit…
So, first, let's start with where we were trending upwards at the end of 2019 and what we did to expand the brewery, plus a few new initiatives in Q1 2020. Then, to our quick pivot once the shutdown hit- happy spoiler alert, while obviously not at the same level as pre-shutdown, we're seeing very good numbers, better than we expected.
Even prior to the expansion of production capacity, 2019 saw a 52% increase in revenue over 2018, primarily in the wholesale (bars and restaurant) side of the business, which grew from $185K to $379K. That growth was due to great performance of two new sales reps in the East Bay at the beginning of 2019; at the beginning of 2020, we added a third rep for the west side from SF down to San Jose. Based on his initial success, and continued East Bay growth, 2020 wholesale growth in Q1 (only 11 of the 13 weeks due to SIP on March 15) was already up 70% over full Q1 2019. During 2019, the tasting room was essentially flat, and we targeted that for several new sales initiatives in 2020.
In spite of the encouraging revenue growth, we still had a long ways to go to hit profitability. This basically reflects having put in a cost structure of space/rent, staffing, and expensing a lot of the smaller, one-time expansion costs needed to support a much higher revenue level. The imperative for 2020 was to now grow the revenues to cover our new level of recurring monthly expenses.
In early 2020, along with adding the new sales rep, we also initiated a relationship with the Bay Area region of BevMo (for non- West Coasters, BevMo is a chain of 100 large liquor stores in CA and AZ). Before the shutdown hit, we were selling to 15 of the 30 Bay Area stores; they are continuing to carry us through the shutdown, and we're in a good position to expand to more locations once more things re-open. We also are close to having similar relationships with one region of a large grocery store chain (we are not looking to get into the incredibly low margin and brutal world of Safeways and other mega chains at that level); some local grocery chains with stores in the single digits are also expressing interest. This focus on canned product, which we had already kicked off well before the shutdown, really positioned us well, as draft sales to bars and restaurants have now dropped to about 10% of the pre-shutdown level.
Another very fortuitous move in Q1 (it's better to be lucky than smart) was an opening with one of the few remaining independent distributors in the Bay Area (another subject, but small and mid-sized distributors are being snapped up by well-capitalized large ones, leaving small breweries few options). About two weeks after the shutdown, we inked the deal with Chrissa Imports, in business for over 50 years, and covering SF through Monterey. We're already selling into their list of hundreds of grocery and liquor stores, and when restaurants re-open, we can call on their even larger list of those. (Huge shout out to Mark Cabrera, long-time beverage pro and now hop farmer, who's spearheading this whole initiative into the retail stores and distributors.)
So, just before the Shelter in Place happened, these are initiatives we had already started, and had several more queued up relating to new products, additional sales channels, and possibly another tasting room location. Before updating all that post-shutdown, first a review of what we spent the investment money on and the positive places it (still) puts us in.
The expansion we undertook last year included a significant increase in fermentation capacity via the acquisition of new 30 barrel tanks, to supplement our original 15 barrel tanks. All said, we now have brewing capacity to handle any conceivable production growth for the next 5 years. The way craft breweries typically expand is by adding fermentation equipment; we can brew beer every day, multiple times per day, weekends, whatever…it only takes about 4 hours per batch. The limiting factor is having enough tanks to put the beer into for 2 to 3 weeks. So, now, depending on the amount of beer we need for the market, Aram and Manny can simply increase the brewing schedule. Last year, they were juggling and wrangling fermentation space, sometimes creating shortages of certain products in demand.
We also picked up a brand new, 3 head keg washer to replace the tired and constantly breaking down used one we had borrowed. Staff efficiency and smiles way improved. We're no longer scrambling to have kegs available when the beer is ready. The production space also needed to have an expanded raised and sloped floor as well as electrical and plumbing enhancements to accommodate the new tanks.
The tasting room also got a new refrigerated walk-in tap system, which is more efficient, easier for staff to use, and wastes substantially less beer compared to the old, too foamy, kegerator.
Operations Since the Shelter in Place Order
With all this in place, Sunday March 15 basically felt like the ice bucket challenge. The three of us were literally half-way through a 2 hour call setting up new safety protocols for the tasting room when Aram got a text announcing the governor's shutdown. Along with everyone else in or related to the hospitality industry, things pretty much closed down 100% in 48 hours. Kudos to Aram and Matt for pivoting immediately. By Saturday, we had an e-Commerce Direct to Consumer (DTC) site up and did over $900 that day in takeout (we probably expected maybe $100). It has gotten better from there, also including free delivery in 5 BayArea counties and shipping throughout California (legal restrictions make out-of-state shipping very challenging). We also did a push to our restaurant customers doing takeout, which during the shutdown are allowed to sell takeout alcohol and that made a nice, though small, dent in that segment. Add to this, the continued sales to liquor stores, BevMo, and the first big order from Chrissa, and April was not the disaster we were expecting.
During April 2020, our DTC business actually exceeded the tasting room revenues from April 2019 by 24%. And despite about a 70% drop in wholesale revenues, our total revenues for April came in at 60% of the same month in 2019. While obviously not what we need to be sustainable, it is a much better base to work from than we could have possibly guessed two months ago.
The other good news was that we were successful in obtaining a Payroll Protection Program (PPP) loan from the SBA/ CARES Act. (Shout out to Mechanics Bank for getting our loan pushed through and funded about 48 hours before the funds ran out.) This enabled us to rehire all the staff we were forced to furlough in March, at least for 8 weeks until the funds are used up. That meant we can now open the tasting room for curbside to-go sales every day, and our sales reps are on the phone with existing customers and our new Chrissa prospects, hopefully building an even better revenue stream for the post-PPP phase.
“It's tough to make predictions, especially about the future.” - Yogi Berra
There are SO many unknowns- which revenue channels will open up when and at what levels, what consumer behavior will be during the governor's roll-out phases of re-opening, what if any additional federal support there will be for small business… and more. So, we are not waiting for anyone to hand us a life raft-- we'll take anything offered-- but we're starting to plan for a few different scenarios of what re-opening may or may not look like, and how we prepare now for those possibilities. We were very fortunate to have been positioned with an in-place canning program right when draft “died,” and the expansions into chain stores and distributors were in motion. We won't make every correct call, but as we learned the week after the shutdown, the key is to pivot quickly and not get discouraged. Our people are back for now and energized, management is focussed on the future, never mind the past-- you know the saying: sunk costs are sunk costs. The new normal, whatever that is and whenever it gets here, is going to be bumpy for everyone. We'll just have to get used to that.
Federation is going forward. Going where no one has gone before. How appropriate.
Please feel free to reach out to us with any questions on any of this.
Aram, Matt, and Larry
Oh, and if you're in California and need some beer, click here https://www.federationbrewing.com
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