A conversation with Chris Farmand, CEO of Small Batch Standard
Running a distillery is no easy feat, it requires detailed planning, hard work, and dedication to make it successful. While there are certain goals that you may be focused on, such as building up inventory, aging your product, and developing a brand, profitability is a key factor for success. We sat down with Chris Farmand to discuss the fundamental financial numbers that every distillery owner should know and understand to maintain their profitability and achieve their goals.
First and foremost, understanding your cost of goods sold (COGS) is critical. COGS refers to the direct cost of producing your product, including ingredients, packaging, and labor. By using software you can track your COGS per style or SKU, allowing you to analyze your profit margins and determine whether the price you’re charging for your product makes sense. “A cost of goods sold benchmark for a case of spirits is going to be anywhere from like 19% to 25% of revenue sold,” says Chris. “So if you sell a case of spirits for $100, that case should cost you somewhere between $19 and $25 to make.”
Labor is also a significant expense for distilleries, and it’s essential to track it carefully. According to Chris it can be broken down into four categories: tasting room, administration, production, and outside sales. Tracking labor against revenue for each of these categories will give you a better understanding of your profitability and help you identify areas where you might be overspending on labor costs. For example, production labor should be measured against total spirit revenue as a percentage, and tasting labor should be benchmarked against your tasting room revenue.
Occupancy costs, which include rent and utilities, are another significant expense for distilleries. However, tasting room margins are much higher than other industries and so if the distillery has a good split between wholesale sales and tasting room sales then they aren’t dependent on becoming the a widely distributed product. “If we’re looking at dollars,” said Chris, “the healthiest businesses that I see are somewhere between a 60/40 to 40/60 split. By that, I mean on one end, the distillery is selling 60% wholesale, and on the other 40% retail out of their tap room tasting room, all the way to 40% wholesale and 60% retail out of their tasting room.”
Lastly, it’s important to track your inventory levels carefully. Distilleries can have long profitability runways while they build brand recognition, especially if they are aging spirits. Keeping track of the number of cases of inventory on hand, cases in barrels, and cases in various forms is critical to ensuring that you have enough stock to meet demand when your product is ready for sale. Tracking inventory levels also allows you to identify any areas where you might be overspending on raw materials or warehousing costs.
Running a successful distillery requires a keen understanding of your financial numbers. While profitability is important, it’s not the only factor to consider. By tracking your COGS, labor costs, wholesale to tasting room ratio, and inventory levels, you can make informed decisions that will maintain the profitability of your distillery. With careful planning and a focus on the key numbers, you can ensure your distillery is a success for years to come.