Q&A: How Data Insight and Lending Can Help Brewers Weather COVID-19 Volatility

A version of this article is published in the January/February 2021 edition of  Spirited Magazine.

As industry requirements, economic conditions, and consumer demands continue to shift, many craft breweries are seeking additional financial support to adapt their operations and remain competitive.

Partner Michael Parker from Moss Adams sat down with Vice President Randall Behrens from Live Oak Bank to talk about the importance of data integration when lending to craft breweries during disruptive times.

What’s the current lending appetite for craft beer, and how has this changed with COVID-19 disruption?

 

Randall Behrens: When the shutdowns were first implemented, our lending strategy completely shifted from new loan origination to protecting small businesses. We reached out to every one of our customers to see how they were doing—not just financially, but also emotionally.

That exercise confirmed what we thought: We have some of the most resilient, creative, and passionate customers in the country. While the shutdowns did have a substantial, negative impact in the short term, most of our craft beverage customers were able to make the adjustments necessary to not only survive, but, in some cases, thrive during the pandemic. 

Live Oak’s participation in the Paycheck Protection Program (PPP) as well as the Coronavirus Aid, Relief, and Economic Security (CARES) Act stimulus package—which included six months of payments made on every outstanding Small Business Administration (SBA) loan—helped many breweries survive the pandemic. In some cases, our customers are doing better than ever.

We realized this crisis could ultimately create an opportunity for stronger operators. Once we had verified that our customer base was secure, we started reaching out and looking for opportunities to partner with new brewery customers who were well positioned to succeed through the pandemic and beyond. We're still actively lending to craft breweries throughout the country, on a select basis.

In your opinion, which characteristics are helping craft breweries successfully navigate the impacts of COVID-19? What are these breweries doing that you view as successful, unique, or innovative?

 

Behrens: It starts with great beer. It's no coincidence that the breweries doing well in the pandemic all have one similar characteristic: They make exceptional beer.

Of course, that's not always enough—especially in challenging times. During times like this, the need to better manage the business is at an all-time high. Breweries can do this by driving down costs and improving visibility across the business, from sales and production through financials. Our outreach also uncovered another common thread, which is having a connection with the customer.

In the first 30 days of Shelter in Place (SIP), breweries that were doing well on direct-to-customer (DTC) sales did a couple of things: First, they shifted to online sales and delivery. We have a customer that had never sold an ounce of liquid online before COVID-19. In their first month of providing this new sales channel, they grossed over $100,000 in just online DTC sales.

Second, they made the pick-up process a positive experience. We talked with customers who were installing outdoor lighting, playing upbeat music, and having their best bartenders on-site to speak with the customer about the various special releases they had available in cans. In many cases, the customer would come in to pick up a cheeseburger and leave with a $100 case of beer to consume at home. This isn’t only generating high-margin revenue; it's also further cementing the customer connection and building brand loyalty. 

On the wholesale side, it became clear very early that those breweries that had strong relationships with their distributors were at a significant advantage. With on-premise sales dropping to $0 in some cases, breweries with the resources to pivot from draft to package quickly were able to stabilize revenues in April and May. In many cases, the total volume increased in year-over-year (YoY) sales for third quarter. The margins on packaged beer aren’t as favorable as on-premise draft sales, but shifting the sales channel allowed many breweries to keep staff busy and stay in front of the consumer. 

The pandemic has created a flight back towards brands that consumers know and trust. I think this will continue to resonate post-COVID-19, and it’s one of the silver linings that will likely benefit stronger operators. 

Michael Parker: I agree. And, to add to that, as tasting rooms closed and distribution channels were disrupted, successful breweries quickly pivoted their business models making it clear how important it is for breweries to stay nimble and have access to adequate technology. Specifically, access to data across departments and locations can increase efficiencies—even as market conditions fluctuate—and help management base their decisions on facts instead of feelings.

To stay competitive during this time and potentially capitalize on new opportunities, breweries will need to unify their product development, supply chains, manufacturing processes, and distribution networks. If they don’t, they could risk getting lost in the industry’s increasingly competitive markets.

Many brewery-based businesses have likely risen to the top by focusing on strong operations, an agile business strategy, and access to reliable data that can help control costs. They could’ve also done this by redirecting their focus—pursuing new revenue streams, distribution networks, and new ways of marketing to consumers.

As breweries redirect their focus and create stronger business processes, it can create a ripple effect: New efficiencies bring processes and products into focus, which lets management direct energy toward other parts of the business. Owners and leadership can then spend more time improving strategies and less time on maintaining manual processes, managing multiple software systems, and updating spreadsheets. All in all, streamlining operations is crucial to success for new product development, supplier management, and data-driven business decisions—especially during times of uncertainty.

As we move into 2021, what’s Live Oak Bank looking for when it considers loaning to a brewery? How important is it to demonstrate strong financial health and forecasted costs and sales?

 

Behrens: Our core analysis hasn't changed much. We're still looking to partner with well-managed breweries that have demonstrated consistent growth trends and have strong financial controls in place. We use both return merchandise authorization (RMA) data and our internal data to match up gross and net margins against industry averages to make sure the brewery is growing, the growth is healthy, and management controls their financials.

Our ideal brewery customer is one that has maxed out current production capacity and needs additional capital to increase production capacity and meet excess demand. Due to COVID-19, we ask a few more questions about current and forecasted sales channels. We've been asking for more granularity on both historical operating results and projected revenue streams to verify that the brewery is in a position to continue to succeed should the pandemic last longer than expected. We’re still actively lending, and our criteria hasn't changed much.

Parker: A brewery’s financial data can provide some real reassurance to lenders. Strong breweries understand their business and can better use—and represent—data to manage it on both a day-to-day and forward-looking basis.

In the current economic environment, it’s essential to understand and control costs. Having real-time visibility into channels, products, and costs has helped many of our brewery clients understand where to increase their efforts and where to pivot away. Having strong systems that help manage and translate these costs can make the difference between surviving and being a high-performing brewery.

What insights can the information derived from an integrated enterprise resource planning (ERP), like Barrel ERP, provide lenders?

 

Behrens: From a lender's perspective, business management software, like an ERP, is important to Live Oak Bank. While we don't require that our customers use it, we have found that those breweries using an ERP system tend to report higher, more consistent operating margins.

Most of the breweries we partner with are coming to us for expansion capital. When we evaluate a business plan, we want to be sure that forecasted growth and margins are consistent with what they've done historically, and the business plan reconciles with their historical operating results.

Those breweries that use an ERP system have much better data to lean on when preparing their forecast and understanding and managing their costs, which adds merit to those projections. This is especially important when we're relying on the projected income to service the proposed debt. We are huge proponents of ERP systems. 

Parker: Absolutely. Understanding a brewery’s bottom line and how the business makes money is integral to its success. As an example, an ERP like Barrel ERP is industry specific, cloud based, and mobile ready. It can provide real-time insight into a brewery’s operations—supplying customized, financial reports on sales, production, inventory, and cost of goods sold (COGS). It can also help breweries decrease operating costs by revealing financial metrics, accurate net-operating profits, and production capacity and efficiency.

By increasing visibility and automating processes, breweries can often decrease daily costs, increase control, and better manage the business. This, along with dynamic revenue analysis, can help them make better-informed business decisions—and these decisions can lead to consistent gains over time.  

In the best of times, poor data, manual or broken processes, minimal operations visibility, and changes to regulations can get in the way of growth. How do you suggest breweries overcome these challenges in today's market?

 

Behrens: It's always important to control costs and make sure your capital is allocated towards your most profitable revenue streams. It's challenging times that remind us just how important this is. The time and cost of implementing internal systems to monitor and control the sales cycle and can help management increase profitability and build cash reserves.

It also allows transparency to employees. Many successful craft breweries operate like a family and sharing these metrics with the team will usually build morale and help everybody work towards the common goal of building a healthy, sustainable brewery. Partnerships are also important; having a lender and professional service providers who have a deep understanding of this unique industry will pay off as you grow or when times get tough.

Parker: Innovation through data-driven insight has been key for keeping up with challenges. The pandemic has decimated draft sales from taprooms and intensified sales of prepackaged beer. At the same time, the beverage industry at large is facing a shortage of aluminum cans as demands rapidly shift from beer served in taprooms, bars, and restaurants towards drinking beer at home. Supply chains are also strained.

Although COVID-19 is currently top of mind, it isn’t the only disruptor impacting the industry. Brewers still face other pre-existing challenges with distribution, marketing, and employee retention. That said, when brewers have excess capacity, we’re seeing them really step up to support each other.

As an example, some brewers are shifting some of their tanks for contract brewing—brewing other breweries’ recipes on their behalf. Being able to quickly make these important and impactful business decisions takes reliable information supported by operational and financial data. But doing so strengthens individual breweries, and it’s an amazing testament to the existing strength of the industry at large.   

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Additional Resources

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