Artisan Spirit: Spring 2016

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F R E S H APPR OACH &

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B U I LDI N G

BU S I NE SSE S

I N F O @ S P I R I T S C O N S U LT I N G .C O M

Donald Snyder is Founder and President of Whiskey Resources LLC and Whiskey Systems Online. For more information, visit www.whiskeysystems.com or www.whiskeyresources.com or call (815) 382-0021.

S P I R I T S CO N S U LT I N G .CO M

spirits. Here is an example packaging Bill of Material (BOM) for this six-bottle case of bourbon: six empty glass bottles at $2/bottle, six front-and-back label sets at $1/set, six cork caps at 20 cents/ closure, six capsule heat shrink sleeves at 15 cents/sleeve, one custom printed corrugated cardboard case and divider at $2/box. Total packaging in this example is $22.10/case. The Federal Excise Tax rate on most distilled spirits is $13.50/ Proof Gallon and is due when cases are withdrawn from the distillery’s bonded space. In this example, the liquid spirit costs for the case would be $10.53, packaging is $22.10 and Federal Excise Tax is $13.50, for a grand total COGS of $46.13 per case. This would equate to a Gross Profit Margin of 56 percent on sales to the distributor and a very healthy 78 percent margin on sales direct to consumers from the gift shop. In order to make $210,000 in revenue from the sale of 1,750 six-bottle cases, this distillery had to spend ($46.13/case x 1,750 cases) $80,727 in COGS leaving ($210,000 - $80,727) $129,273 in Gross Profit (a 62 percent Gross Profit Margin). Now the distillery needs to account for Operating Expenses. In this example, fixed expenses could include sales and marketing spending (example 10 percent of gross revenue) of $21,000 and salaries such as a head distiller at $45,000/year and an assistant distiller at $35,000/year. Subtracting Total Operating Expenses of $101,000 from the above Gross Profit leaves $28,273 in Annual Operating Income before other expenses like rent, interest expense, dividends to equity owners, and utilities. This example illuminates some worth-while considerations. How can an analysis of this distillery’s P&L help to make decisions to increase the profitability? Can the distillery leverage their existing equipment and fixed salaries to increase their sales to overcome their fixed operating expenses? Would an investment in larger equipment yield more cost-effective production? Can the distillery increase the retail price without pricing themselves out of the market? Is there a way to reduce their Cost of Goods Sold? Since the largest gross profit margins in this example came from direct to consumer sales, could the distillery increase their foot traffic and bottle sales? What other products can the distillery bring to market that would have a positive impact on net income? Craft distillery entrepreneurs can see the potential for healthy returns in the spirits industry, and there are very few industries that can boast more than 50 percent gross margins. However, it is very important to take a critical view of a distillery’s entire P&L model to make sure the bottom line is in the green. If a distillery can establish a fair and competitive pricing structure, keep a good handle of their COGS, ensure they are leveraging their fixed overhead expenses, and use all the available systems to optimize their net income, they can raise a glass to growth and profits for years to come.

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