SYWTOABP 6.5: More on market research and cashflows
This isn’t the post I wanted to write or at least planned to write this week. The plan called for another dull list of equipment you (I) need to price out, this time for a commercial brewing operation of a size suitable for our hypothetical brew pub. The post I wanted to write was something in my mind that I’ve dubbed “A day in the life of a brew pub brewmaster”. To that end, I’ve been beating the cyber bushes for a brew pub brewmaster who is willing to talk about their job and duties. That post, whatever number it ends up being, will happen before the series draws to a close. I’ve been putting off doing the list of brewing equipment until after my little chat with a working brew pub brewmaster, which made sense, but has meant publishing delays…
One of the things I’ve lamented during this series is the lack of a definitive location and size. Everyone reading this series has been in a brew pub, probably several in BC and I think some of the more well known ones are just plain bigger than the 100+ head count/seat license I’ve been working with. 100+ seems big to me, bigger than most any restaurant or cafe business plan I’ve looked at in detail, but it isn’t that large for say Granville Entertainment District. I worry a brew pub needs to be larger than I’ve been estimating in order to be a financial success. I’m against changing the size of the hypothetical pub part way through this series and people who want to build a bigger pub can adjust the spreadsheets easily enough to have twice as many grills, ovens, or glasses. However this morning I was thinking about the market size estimates and possible sales estimates I worked through early in the series and I still wonder how accurate or realistic are they?
1% of domestically brewed draft sales in BC doesn’t seem completely unrealistic for a more successful brew pub or craft brewer in the province, however for a brew pub located in a smaller community, say Tofino, it is probably unattainable. It can still serve a purpose as an upper bound for sales and production, but I’d hesitate going to a bank claiming your brew pub would capture that large of market share any time soon, perhaps in five years you might reach that sales volume.
Estimating market size then basing sales on a percentage of that market size is used in most business plans, but for retail establishments which includes cafes, restaurants, and even brew pubs, another method is often used in addition. One of the publicans at Longwood Brewpub who answered my questionnaire concerning opening a brew pub stressed location. The right location can make or break a retail business. So for the purpose of this exercise and providing yet more numbers and another little spreadsheet to play with I’ve decided to temporarily give the hypothetical brew pub a location.
Location, location, location….is there a large enough demographic to service your debt load?
If you have a potential location for your retail business, you can perform estimates and analysis based on foot traffic. In fact you’ll often see developers or real estate agents quote pedestrian foot traffic numbers for their space/development. The W2 Media Cafe was given some numbers by the developer (Westbank) or architect (Henriquez Partners), numbers which staff haven’t seen materialize truth be told, but are still potentially possible when all the space is leased, all the students are in session, all the condos are occupied etc. I’m not sure who was hired to produce this number, which was 5500 people through the atrium per day. In the W2 business plan and spreadsheet we didn’t make much use of that number, we based our sales on numbers from another cafe at another location.
The comparison method isn’t available to everyone, but it is a common way to value a business or a piece of real estate. Any book or market research professor will tell you the same thing about counting walk-by traffic and even surveying walk-by traffic about the possibility of them supporting a business like the one you propose, blah blah blah. One thing I did do, was go and sit in a competitor’s cafe and counted how many actual customers came in off the street and went up to their counter in an hour. Researching your competitors isn’t spying. I was a paying customer and a regular paying customer of this cafe. But based on estimates of their sales figures, I could refine the estimates for the W2 Media Cafe while the whole Woodward’s complex was under construction.
The point of this post, is to pick a location, walk through these calculations, create a token spreadsheet, so both my loyal readers can perform similar calculations and estimates themselves. Ideally your proposed brew pub location already exists and has neighboring businesses you can talk to or at least estimate the number of customers and walk-bys they get. I prefer counting customers or people who walk into an establishment as a potential sale rather than walk-bys. I walk by plenty of businesses myself that I’ve never set foot in or purchased their product or service.
Before I post a link to the spreadsheet I ended up building, here is the location and logic behind choosing it, which I came up with on Sunday morning. There are always real estate developments in Vancouver, one getting a lot of negative feedback especially in cyberspace is Rize’s proposed tower at Kingsway and Broadway. I haven’t given the building a lot of thought, I’m not part of the official opposition, I don’t know any of parties involved, etc. etc. I do however live in the neighborhood and walk and bike by the proposed development location daily. I haven’t even read the development proposal or the revised one, just some of the negative feedback in print and online. This location when it is redeveloped will include new retail units and I think a restaurant or brew pub could do well here, it is accessible by transit, has plenty of residents who live nearby and the nearest brewpub is in another neighborhood. Even better, there are retail establishments nearby, so I went to Our Town Cafe to count customers and finish off this post.
Our Town Cafe actually serves draft beer, locally made draft beer; R&B Sun God and Raven Cream Ale to be exact. It should go without saying that the authors of this blog have no affiliation with Rize, merely being residents, who would undoubtedly frequent any establishment that opened at this location when all the development brouhaha resolves itself. The final count of customers that came to Our Town’s counter, on a sleepy Sunday afternoon during the hour between 1:00 & 2:00, was thirty. You can use any number you like in the spreadsheet.
Even with just 30 customers per hour, the hypothetical brew pub at Kingsway and Broadway could make a daily gross profit of $6,480. That doesn’t seem so bad. I suspect a really well done destination brew pub at this location would make even more. I had my average customer having two beers and a burger which sold for $6.50 and $12, respectively. I completely made up the margins, but a sixty/forty split isn’t unattainable for food. And beer brewed in volume, could actually have a lower COGS. The espresso and cream that goes into a cappuccino is about 30% of the end retail price, a lot less for a giant like Starbucks, so my numbers aren’t completely from outer space. The good news is, yearly sales revenue comes out to be $3.2 million which certainly seems like enough to cover ongoing operating expenses and still turn a profit. It also doesn’t seem out of line with my previous estimates based on total market size. I did, however, break my word, as sitting in Our Town Cafe and counting people counts as primary market research. You really should do your own primary market research at your own potential brew pub location.
Here’s a bonus link I found on cost of goods sold at nightclubs and bars, which apparently have their own forum, or their owners do. Again, as the manufacturer of the draft beer, you have even more ability to control the costs. But ultimately, input prices will be determined by the market.
Additional Research Links
I’ve continued to do more market research into food and alcohol consumption. The forum linked to above still hasn’t approved my account so that I can post comments and links, which really makes it less useful to folks reading this series that have questions they want to ask. Canada has an industry organization that restaurants and pubs can belong to, called CRFA (Canadian Restaurant and Foodservices Association). They conduct market and industry research and make the results available, often for a fee, to members and sometimes non-members. For instance according to their latest research food costs average 35.5% throughout the industry. Their research and mine seems to verify my own assumptions and estimates used in the spreadsheet.
During the business planning phase you need to keep on top of the latest consumer and industry trends, it is great when another organization with more money, time, and resources than yourself publishes numbers that support those in your business plan and spreadsheet. Stats Canada is another obvious source of information about Canadian consumption and industry statistics. Some of the numbers CRFA quotes come from Stats Canada publications.