SYWTOABP 3: Market Research
The third in our series on opening a brew pub deals with market research. Market research is the process of determining whether sufficient demand exists in the area of the province you hope to operate your establishment. Without sufficient sales volume you will not be able to keep your brew pub running, you need to convince yourself and your potential backers that sufficient demand exists for the products and services you propose to sell.
There are three types of research your should conduct. Market research can be further broken into two types, primary and secondary. Primary research is carried out by the prospective business owner, asking specific questions of potential customers, or observing say the walk-by traffic at a potential location. I won’t be doing any primary market research, but prospective brew pub owners definitely should. Secondary market research is data which you yourself do not collect. This includes all the information published on the Internet or in books. Secondary market research can be very accurate and useful, but does not completely replace the need for primary market research. The final research that needs to be undertaken is industry research. Market research covers the people who potentially buy your goods and services, Industry research covers everything else: competitors, suppliers, government regulations, etc.
The manufacturing and sale of alcoholic beverages is a fairly heavily regulated industry. The entire first post in this series was devoted to obtaining the key license to operate a brew pub.
One of the questions I asked current brew pub owners was “Knowing all you know now about opening and running a brew pub, would you do it all over again, and if so what would do differently?” Paul Hadfield’s response was:
The opportunities today are much greater than they were 27 – 28 years ago. The regulatory environment has changed dramatically over the years. We are all products of the constraints which control how we do business. Today, brewpubs are able to be production breweries at the same time. The food and beverage business is highly competitive and the brewery business is all about economies of scale. Efficiency is a key factor in long term success. Do a lot of research and build the best facility in the best location and build it to be the most efficient operation possible. Set yourself up for long term success.
If you Google enough, you will come up with some impressive facts, such as “Brewers Association of Canada members represent over 97% of all domestic beer sold in Canada and $14 billion a year in economic activity.” You’ve got permission to brew beer, figure you capture 1% of the $14 billion a year industry, that’s 140,000,000 in revenue. Bingo, bongo, bungo! Where do I sign up?
Although brew pubs make money brewing beer, their direct competitors are not the large scale breweries. A local brew pub in BC is not going to be able sell large volumes of beer in Ontario nor manufacture enough product to reach $140 million dollars in revenue. The numbers you need to research are beer sales in your local market and the competitors you need to research include not only all the other pubs and restaurants in the area, but other entertainment options too.
Local pubs compete against movie theaters, sports arenas, even local DVD rental stores. Any activity that an adult can spend their money on instead of coming to your brew pub is theoretically competition. That said you should focus your research efforts on your closest competitors just like you need to focus market research on local consumers, don’t be blinded by some huge figure on the Brewers Association of Canada webpage. They provide some granularity to the statistics, but you need to dig deeper and consider multiple sources.
For instances over the last half dozen years, sales of domestic beer in BC has averaged around 2.3 million hectolitres. So if you plan to capture one percent of that market you would eventually need the capacity to brew 23000 hectolitres of beer per year. Assuming you could manufacture and sell that much beer, and assuming you sold your beer at $6 per 750 ml glass, you would have revenue of $18.4 million dollars. Again this number seems too high and it doesn’t include food or other beverage sales. You need to keep researching and refining your assumptions until you’re confident demand exists and that your brew pub will be successful in capturing a portion of the market you’ve identified.
Brewing and selling 23000 hectolitres in your first year of operation is extremely unlikely.
Let’s consider another example of estimating market size and sales, this time based on the latest Liquor Distribution Branch quarterly report, they note that 150,000 hectolitres of domestic draft beer was sold in BC in the previous quarter. If you take that as the total market size for your brew pub and once again capture 1% of the market and continue to sell your 750ml glass of beer for six dollars, that’s $200,000 dollars in revenue, which seems a much more realistic number for draft beer sales of your proposed brew pub. However, that is a quarterly sales figure, so you could assume $800,000 in revenue from the sale of draft beer in your first year of operation.
Again this is one of many possible assumptions. You need to do your own research and then make your own assumptions and financial projections, not rely on some blogger. Don’t just focus on the biggest number, you need to research all your potential costs and estimate them as accurately as possible. Even if you manage over a million dollars a year in revenue, if your rent, labour costs, materials, leasing costs, and utilities are costing you 1.1 million dollars you’re not making much if any money.
Realbeer.com has a fairly accurate and up to date list of brew pubs in BC. However what you should do is drive/walk/bike around the neighbourhood and visit the pubs and restaurants in the area that are most similar to your proposed brew pub. You should note down some of their prices as well as other features of their establishment. Differentiation is the strategy most brew pubs pursue, so you have to figure out what makes your proposed brew pub different from all the existing options available to consumers? Will you be the only brew pub in town? Will you be the only pub to carry nothing but craft beer or Canadian beer? Will your brew pub offer proper pints? Will your brew pub have the most TVs or zero TVs?
By researching your competitors you can fine tune your concept to better fill a niche or gap you perceive to exist in the market.
You should also continue to learn about permits, fire laws, and things like Serving it Right and Food Safe. The more information you have at your disposal, the easier it will be to convince funders of the validity of your business plan and your team’s ability to execute.
A few more links
- Canada Craft-Brew Stats Follow-up
- B.C. beer sales still frothy
- Olympic beer battle
- Small Ales, Big Sales
- Canadian craft brewers turn passion into profit
I’d still like to ask a few more proprietors of existing brew pubs questions via email to get some more first hand insight. Thanks again to the staff of Longwood Brew Pub in Nanaimo and Spinnakers in Victoria for answering my questions and past hospitality when I’ve visited their establishments.