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THE 456

The what?



*There are strategies discussed here specifically related to Epidemic Ales as a brewery. Do not take the opinions given here as investment advice. If we’re wrong and you come to us with a sob story, we may offer you a pint and a shoulder to cry on but we cannot take responsibility.


456 is a special number. It represents the lowest priced pint in our taproom at $4.56 that is NOT a happy hour or limited price, this is all day every day. This has remained the same since we opened our doors to the public in 2016. We did tier the pricing at some point to reflect that some beers cost more – they require more grain, hops or more exclusive (i.e. expensive) hops and yeast or even seasonal ingredients (fruit) that need to be project managed and overall take additional time and effort. In other words, we’ve been focused on value added increases, where if you pay more you get more. Our focus has not been on increases to existing products in able to make up for supply chain increases or to cover operational shortfalls. Through all this we’ve always made it a point to keep some beers at $4.56. The sign actually says $5 but that’s because it’s tax included (we’ve picked up tax on beer purchases since day 1, tax rates going up has not changed the final price either). If you look closer at your receipt it’s tax included on all beers period, what you drink on-site (pints, tasters, flights, short pours) as well as to-go beers (4-packs, crowlers, growler fills). There’s a certain nostalgia with having tax already being included in the price of your beer.



SURVIVAL


At some point it seems more and more establishments are passing on the tax for beer to the customers, if they’re listing $8 for a pint they’re really charging you $8.78. Have you noticed?


What’s also crept up over the years is a growing list of fees, a “dine-in fee” or sometimes a “wellness fee” or “city mandate” or one of the many fees named after whatever is adding to the cost to do business. Many times, these are listed somewhere in fine print or could even be unknown until the bill comes. The fees added during the pandemic are trying to cover additional expenses, falling revenue, and the rising costs of a continuously struggling and more expensive supply chain. In an unusual scenario it’s possible to end up being charged $8 for your pint, nearly $2 per person to sit indoors, 3.5% for a fee, 1.5% for another fee. Suddenly, if you only have that 1 pint, it’s $11.18 before tip on your $8 pint. If you’re in a larger city you’ve seen this and are probably used to the sticker shock already.


We get it, and you get it too hopefully why sometimes these decisions are made. It is already extremely challenging to run a business and then in addition it's increasingly difficult every day to make ends meet. As every small business owner will tell you, the myth of the business owner looking like the Monopoly man with his mustache and top hat running around for no reason carrying bags of money is quite the opposite. Money is often so tight business owners are putting in more than 40 hours, are on-call 24/7, and usually end up being one of the lowest paid on payroll because that's all they're willing to take, or sometimes they end up doing the job themselves if it came to that.


There are many factors that go into deciding what prices to charge, and then what’s included and what’s not. At the end of the day, all finances come down to a handful of key numbers and sometimes there’s a gap to close. Revenue minus expense equals (hopefully) a positive number. Start with the idea that no business would intentionally do something that hinders anything but a perfect experience for its customers, so whether that gap is closed by charging fees or by raising prices directly, it depends on what is believed to yield a better relationship with you, the customer. We had long made the decision to not charge any added fees, anything we need to operate is included in the price we list. We've come a long way with this strategy and we aren't about to change it.




Every business carefully considers price increases as it is an important decision that greatly affects its ability to compete. Assuming the purchasing strategy has already been reviewed, a business that’s operationally negative should raise prices as no business can be operationally negative for an extended period of time. Product quality should never be tampered with, especially for a craft brewery as each product makes up a significant portion of the brewery’s identity.


There’s also the element that not everyone operates with the same sunk costs. In the past few years there have been several brewery openings in the SF Bay Area costing anywhere between $1 million to $3 million. This startup money has to be made back somehow, if the origin of the money is investors they won’t wait around forever. That nice custom furniture, that modern décor, in a roundabout way you’re the one paying for it. In essence, if you sit down at a nicer place your beer is going to cost more because it has to!


In October 2021, the inflation was the highest it’s been in 30 years at 6.2% and by November it was a staggering 6.8%, the highest in 39 years. December was 7%, the highest in 40 years. As the economy lurches forward, pulling out from the effects of shutdown and the pandemic in general, this is a significantly different problem than the COVID restrictions that have become part of everyday life for nearly 2 years. Through the pandemic all businesses have been trying our best to navigate this new landscape.


This is very quietly becoming Chapter 2 of the pandemic story, following right behind a long and arduous Chapter 1. The difference this time around is there’s little media attention, there’s no special funding, and generally there’s less noise. The battered supply chain and astronomical inflation has already been doing damage and it’s not done yet.


We’re finally close to being able to do business normally but there are now massive supply chain issues (2021’s ultimate catch phrase) and everything costs more. The same shipping container that cost us $5k to ship 3 years ago now costs $16k. How is such a daunting financial gap expected to be closed? The craft brewing industry was already slowing down pre-COVID, on top of the challenges of staying relevant, are we all ready to weather this storm? Should we be fearful of what’s to come?


The Fear


Chaos churning chaos swarming

Thick air smells of wretched burning

And then I saw my fear that day

And then I eyed it no words to say

And then I hoped it remained where it lay

Ebbing freely motionless and still, kept at bay

For between boughs of trees and falling leaves

It looked at me like the calmest eaves

Wrath exploding hair flailing I screamed - “NOT TODAY!”

Chaos calming burning ceasing, and then my fear went away


When an earthquake occurs the data on the time, location, and magnitude is available right away. However, one statistic that’s not released is duration. The reason is there are many different interpretations of duration (is it the duration of the largest shake, does it include aftershocks, how much of a shake keeps the duration timer going, etc). So even though duration contributes to the amount of damage caused, it is not a reported statistic because there isn’t a concise way to measure it


This is similar in terms of financial data. As companies make it through Chapter 1 (restrictions galore), they will now need to make it through Chapter 2 (supply chain issues, uncontrollable inflation, and the rise of Omicron). Duration plays a big role on the survivability of a business through these hardships. How long will the disaster last? When do we start and stop for each industry or even per business when measuring the duration of a financial disaster? How can guidelines be set to predict the survivability of a particular business? Or the survivability of an entire industry or the whole economy? Some businesses have unintentionally profited from the pandemic, can that in some cases offset losses elsewhere within that particular industry and for how long, again a duration question. Duration is a key focus in Chapter 2.

When there are so many challenges and so many unknowns, what has been the core strategy we’ve abided by?



THE IRRELEVANCE


How should we, or any other craft brewery, be measuring relevancy? Everyone wants to make impactful decisions. Everyone wants their efforts to be experienced and milestones to be reached. It’s respectively difficult to gauge, difficult to translate, and difficult to attain. One thing is for certain is nobody wants to become irrelevant. But how do we know we’re making the correct decisions? It is no longer enough to make great beer. Great beer is par for the course and is the minimum cost of entry. In a competitive market like this one, there is growing importance on what is done in addition to making great beer.


As customers how important is value for your money? Do you notice when a business has an aggressive pricing strategy that favors you as the consumer? The only way that holding prices steady through the worst inflation in 40 years is if it brings more business to offset increased expenses (remember Revenue minus Expense). Does our stance bring you into the taproom more often? When you see us on tap elsewhere do you have a pint?


This is not a great example in comparison since gas is an inelastic good. But if a gas station was able to sell gas at the same price from years ago, absorbing the increases by design - will they have earned your future business? Financially they’ll have to or the math doesn’t work out.


Staying relevant may be the most important dynamic in Chapter 2. As competition stiffens, wallets get leaner, costs rise, what’s the best approach to incorporating being relevant in our strategy?


Have we as a brewery made the right decisions to stay relevant to you?






WALK THE TALK


“You can't just talk the talk and walk the walk;

you've got to walk the talk.”


- Cecil Williams, Co-Founder, Glide Foundation



The current inflation isn’t due to actual economic growth, the effects should taper off at some point and start to recover. Let’s say if you had to run 10 miles to get somewhere running a mile a day. But for the first 9 days you hurt your ankle and sat on the couch watching SportsCenter reruns. Suddenly the last day you have to run all 10 miles, you do it but you’re exhausted, you’re more tired than ever. Does that mean you ran farther or did you just have to work harder to make up for the first 9 days. After working harder, it’s assumed your recovery will look a bit different. What if in your lifetime you’ve rarely had to do this, will there be some element of known but also elements of unknown? There are 206 bones, 360 joints, 600 muscles, 78 organs, and over 10 billion capillaries in the human body. Is there any way to truly predict what will happen to every part of your body after an experience like that? The US population is over 330 million strong and there are nearly 29 million businesses. Can anybody or any group of people know exactly what will happen?


Our economy is so complex sometimes it’s a wait and see. The Feds have been waiting to make any major decisions. This could be a show they believe the effects of the pandemic are expected to calm down to a certain extent without interference. In theory things should settle a bit, but can it settle fast enough (another duration question). It’s also unknown whether prices can come back down to pre-pandemic levels or at least be on the expected trajectory had the pandemic not happened. The foods that have become pandemic staples are crashing, 98 cents for 18 eggs, 95 cents a lb for ham, 48 cents for a 5 lb bag of potatoes (10 cents a lb!), 39 cents for a yogurt, 50 cents for a pound of pasta. Remember not long ago when these items could not be found anywhere? And now all of this in one of the most expensive areas in the entire country. How much of this is holiday wind down and how much is pandemic related? These items are traveling in reverse and this may be indication there are still movements, voluntary or involuntary that will start to rightsize. It seems wise to allow it to shake out a bit before intervening, as interventions in such a giant economic machine don’t always achieve exactly the expected results. There does seem to be some momentum building that something might happen at the end of this quarter or early next quarter. Interest rates will probably be raised to slow down the economy (except remember the numbers are thrown off due to such a long sprint and rapid recovery).


As a population we're in a very favorable position as our economy has great importance to the global economy. Do a search for “role of US economy” and you will see the number of articles that mention the global economy and how we are tied to it, and how much we are responsible for it without even realizing it. Do the same search with any other country and the items coming up will often talk about the stats or the makeup of that country’s economy, what its economy is known for as far as import/export, or some history to its development. It does not talk about its global importance. This is how great our economy is and how lucky we are.


Production-wise the brewery has been on a full sprint since March 2021 as we’ve viewed this period of economic recovery as a land grab. Get everything we can and then it’s time to prepare for the next storm. We’ve only ratcheted down recently because of a natural slowdown due to the winter season. Over the last several weeks we’ve slowed operations a bit due to a 15-18% decline in revenue, which is pretty good considering winter months have the potential of hitting a 30% decline. A reminder to support small businesses during the harsh winter months and especially dry January (worst thing ever for a brewery - tell your friends they should get in shape some other way, don't stop drinking beer!).


The decision currently is we will not raise any beer prices, retail or wholesale. This is how we're walking the talk. The taproom is retail and wholesale is when we sell kegs and cans to bars, restaurants, bottle shops, liquor stores, etc. We have a built-in financial buffer that we tapped into in order to keep all staff employed during SIP and the subsequent restriction phases (no layoffs). We’ve since been focused on restocking it and therefore we’ve earned the right to be watchful first before reacting. Our staff benefited from this the last time, this time you as customers will benefit. And if you’re a wholesale account that buys kegs or cans, this will help your margin.


For items that are a direct resale, like taproom snacks or merchandise, we may consider a nominal increase if the vendor is raising their prices. But the increase will be much smaller than what we’re absorbing. So far we have continued to purchase these goods despite the price increases and a shrinking profit margin on our end in an effort to support our vendors through this tough time, many have been with us for years. We will do quarterly reviews of how each item performs and are looking to give at least a 6 month buffer before any decisions are made.



“For small brewers, they are going to face a choice: You either need to take on those supply chain costs and get lower margin, which many are going to have a tough time accepting, or find a way to pass those costs on to customers. There's only so long that brewers can take on those lower margins and stay in business, particularly given how challenging a year it’s been.”


-Bloomberg: (https://www.bloomberg.com/news/articles/2021-10-29/it-s-last-call-for-cheap-beer)



For the time being, we will be taking lower margins across the board and making that up with an expansion of operations, namely the capital projects mentioned in a previous blog post PRODUCTION: TURN DOWN FOR WHAT (https://www.epidemicales.com/post/production-turn-down-for-what).


The DMV handbook says while driving, the general rule of thumb is to scan ahead 12-15 seconds or roughly a quarter mile. When managing finances, the strategy is similar. We’ve always left ourselves lots of running room, and we fully take advantage of it by watching and being aware of our surroundings. We had several large purchases right before the supply chain crunch and well before the inflation ran wild. By being watchful and keeping the door open for possibilities such as this (that turned to reality), we were able to act early and dodge a couple bullets.



YOUR VOTE MATTERS


Every time you spend money at a business you’re casting a vote that that business is there the next time you decide to spend money at the business again. The stronger you feel about a business the more votes you cast. Small businesses depend on their communities, this can’t be changed because it is built right into the business plan. Every good business plan of a small business includes a section regarding the amount of support they hope to achieve from the local community, and why it’s important financially to achieve that. Craft breweries are especially community driven. There is also no industry quite like the craft brewing industry where competitors are more than happy to lend each other a helping hand. Did you know there are several large online networks where breweries can ask each other for help, anything from advice on equipment to emergency asks like being short bags of grain or needing empty crowler cans, lids, etc? And once a post goes up, if it's an ask of something common the amount of responses is often overwhelming – everyone is eager to help out. This is a time when your local breweries and the small businesses in your life need your support.


The 456 may not always be 456. The reality is at some point in the future we may eventually have to raise it. But the concept will always be the same. To us it represents our dedication to run the best operation so you can recognize the most value for your money. That you’re able to connect with our brand and develop a personal experience and have a personal relationship with us. We want you to feel your time with us is well spent. You know we will work hard, be frugal, be well prepared, and have you in mind as we work through the processes. The 456 as a concept and everything else tied to it is the basis that drives our operations and our company culture.





What does the 456 mean to you?


“People eat because they are hungry;

I want to make food that makes people stop eating.

I don't want my restaurant to be a place where people sit and eat.

I want people to sit at that table and be sick with longing.”


-Bradley Cooper as Adam Jones in feature film Burnt



How many breweries in your lifetime get you to stop and think of the story behind the beer? As you sip a pint and you hold it up marveling at its tantalizing rising bubbles, does it seduce you into pondering the intricacies that went into it?


In the movies everything builds towards a climax. It builds and builds like stones stacking on the upper end of a seesaw, until that moment when the last stone rests upon the others and it releases, everything comes crashing down. The plot rapidly unwinds and the climax unleashes its monstrosity. At the conclusion of the climax, the protagonist is on their knees, face buried in their strained upturned hands, in an incredible show of glorious agony, physically and emotionally spent. The clouds magically go dark and unleash cascading sheets of rain in this sudden mix of sorrow and triumph. Sorrow for having to have gone through it, and triumph for having accomplished it. Then after that comes the falling action where calmness is attained and resolution achieved.


There is no glory anywhere like this in what we do. Every day we put one foot in front of the other and we do our jobs, we know every day things will come up that sucks but we know we have to do it. We take a moment to make sure we’re taking care of things the right way, take a moment to look out for one another, take a moment to set each other up for success. And then at the end of the day, as long as we’re a bit closer to bettering the task at hand, bettering ourselves; that we’re solving different problems than what we started with, and it ends with you drinking our beer and knowing what went into it - then that is our triumph. That is our reward. We give ourselves a nod or a fist bump for a job well done, and then we do it a little bit better each time.



 

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