Opportunity Cost, Part 2
And now, Opportunity Cost continued
As alluded to previously, there’s another big decision that hinges on Opportunity Cost: whether to sell, say, cans of a special beer through distribution and, if so, how much. Whereas last time the difference in profit was hiding in pushing a larger volume of another beer at the same price, this time the difference in profit comes from the obvious source: making different amounts of money for the same object through different departments
So, let’s start by quantifying this difference. While, as discussed last week, we can treat our margin in the tasting room as ~60%, and for reasons I may explain later, let’s take our distro margin as 15% (that number gets way better if you’re bigger - both by selling more, and with a lower production cost).
But! If the tasting room didn’t seem sexy enough for you, there’s another huge factor: distribution revenue is generally across the board way, way lower than tasting room revenue (even for cans, where you’d be crazy to charge PTR for a case in the tasting room).
An example would be kegs - last week we saw that revenue from a 1/2 BBL keg was ~$1,115, whereas in distro, good luck charging even a fifth of that for anything normal (even most IPAs). So your profit, being of course margin x revenue, is about (60%*$1,115)/(15%*$230) = ~20 times as high in the tasting room
That’s. That’s fucking wild. This doesn’t mean you shouldn’t distribute, but it does mean that if you sell out of a beer in the tasting room even a day early because you sold one 1/2 too many in distro, you probably lost out on some money - the longer the period, the worse the damage. And hell, even if your distro margin is a psycho, impossible 100%, the logic still holds. You’d have to have a taproom margin lower than, like, 10% in order to negate this effect.
So let’s consider two examples: running out of a popular beer, and selling cans
Sold out!
We have multiple popular beers, and we used to run out of them once in a while. Let’s say that we sell 60 pints per day of one such beer (~.200 BBL/day), and we sell a few too many to distro, resulting in a modest week-long outage. How bad is the damage?
Well, how many kegs is that in the tasting room? 7*.200*2 = 2.8 kegs. The lost revenue on this is, from last week, $1,340*1.4 = $1,876. Staggering.
And how much money was that in distro? If we our PTR was $230, with our margin of 15%, profit = $230*15%*2.8 = $97
So, you lost about $1,779 in one week. Holy shit! That’s a truckload of money. Don’t ever risk selling out of a popular beer in the taproom by selling too much to distribution accounts
Cans and the tasting room
Many taprooms sell cans both abroad and in the tasting room. Here’s a fun fact for you: our can revenue is strongly correlated to the number of options available, as can be seen here:
Pretty startling, right? In any case, the point is this: more can options = more revenue, and more rigidly than that monotonic condition, the relationship appears linear. Wild stuff
So, let’s play the same game - selling cans in distro means you drop from 4 options to 3 in the tasting room. Now, let’s say you sell a modest .05 BBL/week in the tasting room (half a case a day), so a week’s outage is a mere 3.5 cases. Let’s say a case has 6 4-packs for which you charge $15 in the tasting room, but your distro case price is a competitive $65/case.
While your distro profit is 3.5*$65*15% = $34, your tasting room profit would have been 3.5*6*$15*60% = $189, so even running out of a single can option for 7 days cost you $155. So try not to do this either. And for the record, given the super low labor of selling cans in the tasting room, the effective margin is likely higher, while distro’s labor is comparable for kegs and cans, if not identical (who buys cases and kegs?).
Final Words
I think there are three thoughts that summarize this vivid lesson:
1) Distro isn’t at all a bad idea, but it can cost you a ton of money if you prioritize it over the tasting room
2) Opportunity Cost is very, very real, and you can either build it into your business or lose thousands or more