g n i n r Tu th e C OGS
he alcohol industry is incredibly unique. In what other industry can you take 90 cents WRITTEN worth of grain and yeast, put it in a $2 bottle with a 35 cent closure and a $1 label and sell it for $35? Obviously, it is more complicated than that, but high profit margins are possible for eager craft spirit entrepreneurs. To see what it takes, let’s explore a traditional Profit and Loss (P&L) business model for a bottle of bourbon, figure out how to calculate fair distributor pricing, examine what the traditional Cost of Goods Sold (COGS) is for a finished bottle, and see how a craft distillery can leverage the P&L to maximize profits in the future. In the business world, a normal P&L report is broken down into four major sections: Gross Revenue, Cost of Goods Sold, Operating Expenses, and Net Income. Gross Revenue tracks total cash from the sale of finished case goods. Cost of Goods Sold details the actual variable costs incurred from making the sold cases, including raw materials and Federal Excise Taxes on the spirits. Subtracting Total Cost of Goods Sold from Total Gross Revenue leaves Gross Profit. Operating Expenses track other fixed overhead expenses like sales, marketing and administrative expenses (SGA), fixed management salaries, rent, fixed utilities, depreciation, and other expenses of running the distillery. Subtracting Operating Expenses and income taxes from Gross Profit leaves the distillery’s Net Income. For the purposes of illustration, imagine a craft distillery that produces a two-year-old bourbon sold in six-bottle cases at 84 proof through a distributor, and direct to consumers through their tasting room. After an analysis of the market, this example distillery decides on a retail shelf price of $35/bottle. Retailers need at least a 25 percent margin to dedicate shelf space for a new brand and will expect to buy the bottle at no more than $26 from the distributor. The distributor will also want a 25 percent margin which means they will look to buy a bottle for no more than $17.50 from the distillery. Negotiating distributor pricing can be much more involved, including managing sample limits, chargebacks, freight allowances, promotion and incentive spending, but for this example, the simple pricing strategy above will work. If this distillery sold 1,500 cases to a distributor at $17.50/ bottle (or $105 per six-bottle case), and 250 cases direct from their gift shop to consumers at $35/bottle (or $210/case), they would have a Gross Revenue of $157,500 from the distributor and $52,500 from their gift shop sales, or $210,000 of total gross
revenue. The next step on the ER BY DONALD SNYD P&L would be to detail the variable Cost of Goods Sold for the cases. A six-bottle case of two-year-old bourbon at 84 Proof has approximately one proof gallon (PG) of alcohol per case. What all goes into a bottle of bourbon? Assume this example distillery is buying pre-milled corn and other grains shipped in bags. This distillery can buy milled corn for $15/bushel, milled rye for $20/bushel, and milled malted barley for $25/bushel. If a mash bill is 75 percent corn, 21 percent rye, and 4 percent malted barley, the weighted average for total $/bushel for grain would be $16.45/bushel ($15 x 75% + $20 x 21% + $25 x 4%). With good mashing and fermenting techniques and the correct yeast and enzymes, a distillery should be able to yield at least 3.5 proof gallons per bushel. This puts the grain cost at $4.70 per proof gallon ($16.45/bushel ÷ 3.5 PG/bushel). Including approximately 60 cents per proof gallon for yeast, enzymes, or nutrients, this distillery can make one proof gallon of bourbon distillate for approximately $5.30, excluding labor and utilities like water, steam, and natural gas. The next major cost for bourbon is the barrel. Bourbon must be aged in a new, white oak barrel. Assume this distillery can purchase new 53-gallon charred oak barrels for $250/barrel. By filling up a barrel with 53 gallons of 125 proof bourbon distillate, the Original Proof Gallons (OPG) for this barrel is 66.25 PG (53 gal x 125PF/100). The cost of the new empty barrel is an incremental $3.77 per proof gallon ($250/66.3PG). The total investment to fill and age a 53-gallon barrel for this distillery would be the cost of the empty barrel ($250) plus the cost of the grain and yeast to make 66.25 PG ($5.30/PG x 66.25 PG = $350), which is $600 per barrel excluding labor, handling, and utilities. If this barrel matures for two years, some of the spirit will evaporate as Angel’s Share. A general rule, depending on aging conditions, is that a barrel will lose 10 percent of its proof gallons the first year and 4 percent of the PG every year after. Using that evaporation rate over two years, this barrel would lose 14 percent of its original spirits. Dumping the barrel should yield approximately 57 (66.25 X [1 - 14%]) Recovered Proof Gallons (RPG). The cost per RPG after evaporation would be $10.53/PG ($600 total investment / 57 RPG). Now that the distillery has aged bourbon, it needs to bottle the WWW.ARTISANSPIRITMAG.COM
The magazine for craft distillers and their fans.