The Sanity of Math and the numbers to survival

[AToE]

I think we need to emphasize more the "fledgling" part of the mead industry. Wineries can age a big Cab for 3 years before release because they're still selling wine they made 3, 5, or 8 years ago. For mead, there is no 8 years ago, and often not even a 3 years ago. There simply isn't opportunity to cellar mead before sale because something has to pay the rent, and that something is the mead that was made a few months ago.

This shouldn't always be true, eventually the production scale will match demand (and more meaderies will exist as well), margins will be healthy enough to provide for some cash reserves, and each individual meadery will have been around for more than a few years so they can actually reach back into the cellar and find mead there. See the Polish 25-year meads (which apparently are now 6-year meads due to demand): they've been at it for generations.

You worded this a lot better and explained some of what was in my head. Obviously to just start up and wait around for a year while things age is nuts, you'd have to have some crazy investors. But if you can get to the point where Brad says he is now, where he's making more than there is demand for, it might be possible to start aging 5 or 10% of each batch, to be sold as a private reserve version of their regular releases (wineries do this all the time from what I can tell).

I fully appreciate that this is impossible until you've reached a size where you're making really good money. Until then you'll obviously want to try to sell your stock as fast as possible, especially since the whole industry is so young and the demand so small.

 

[tycoon]

Wine (and mead) is what in economics is called an "experience good", i.e. the true "value" of the product (i.e. the "utility" or "pleasure" derived from consuming it) is uncertain until the person actually tried the wine/mead in question.

That is why demanding people to pay upfront for an aged product or aging it at high cost will not work for mead: most people would not pay a large premium for someting they haven't tried yet. For example, how do you know the extra 5-10 quid somebody is asking for a wine/mead is "worth" it before trying it?. And if a winemaker miscalculates the sale price or the cost or both, he/she may end up with a loss.

With some wines, aging them in the cellar does pay. That is the case with several Spanish wines (e.g. Rioja, Sherry), which are aged for a minimum mandatory amount of time (e.g. a Rioja Gran Reserva is aged a minimum of two years in oak cask and 3 years in the bottle). The detail is that such production is heavily regulated by a regulatory council of the Denomination of Origin Rioja, and Rioja wines have a long-established market that knows and values the differences in cost-price. That's difficult to reproduce with other wines and with mead, I think.

 

[IanB]

You aren't doing your math homework

The Team here is not running the math. You are talking about a commercial operation. Grande Reserve is great, but here is some Math about what you are referring too.

22$ retail cost for 5 month aged mead.

Math says:

If you age for another 6 months a reserve-blend of 10 cases (probably the smallest batch you could do commercially because you would run out of stock if you did only a car boy or demijohn full) that is a 200l variable tank of mead tucked “out-of-the-way” from your normal operation.

Rent is 500$ a month, you are using about 1/20th of your space for this batch. So that is a cost of (500*6 = 3000) so 3000 * 1/20th = 150 dollars. Labels that say ‘Grand Reserve’ is 500$, a separate bottling run would have direct costs but let’s say 40 hours of your time is the cost to label, bottle, and then do tastings. Packaging material cost would be the same except the labels. Also your time to call the TTB and submit a new label design, work with the printer and get the labels approved 40 hrs. Total additional cost = 150$ + 500$ + 80 hours of your time = 650$ +80 hrs of your time.

Total effort 80 hrs of your time (remember, you have a full time job plus your ‘meadery’) so if you can only work 20 hours a week, then you have 4 weeks of work to get this ‘reserve’ batch out.

So, let’s talk prices. Reserve in the retail wine market (what your customers will use to compare your product against) means 5-15$ more. Let’s say in Mead you can get the full 15$ more. So, that is 38$ a bottle. (Vikings blood is about this price in my town). However, all your retailers work on percentage.

So, if you usually get about 15$ a bottle, and they mark it up 50%, you get 22$ a bottle. If you are expecting 38$ a bottle, you are in the area of 24$ a bottle, (10 dollars more ‘revenue’). So, you made 10 cases, and let’s do the math. 10 cases = 120 bottles = 120*10$ = 1200 dollars ‘more’ revenue after you sell all your ‘reserve’ mead.

1200$ is your ‘additional’ revenue. And your ‘additional’ costs were 650$ + 80 hrs of effort.
Gross Profit on your reserve is 550$ and 80 hours of your time. Taxes are 50% so you make 250$ ‘total’ additional profit and you tie up an additional 650$ in cash for 225$ in profit.

My assessment, is that reserve is not worth it. Change one of the estimates (such as make way more than 10 cases so your labeling costs are off-set) and you can make a case for it to work.

The real key though, is that I would rather grow my business with existing product, and get more customers with that product in those 80 hours, then spend those 80 hours of time making a reserve wine that only gets me 225$ more profit at the end of the day.

 

[AToE]

Thanks again for the hard numbers Ian. If any of us are ever nuts enough to start our own meadery this thread (and the others you've started) are going to be invaluable resources.

I had a rough idea of the extra costs involved in putting aside some for aging, but I was off by a fair bit.

 

[Meadieval]

I'm waiting until I win the lottery to open a meadery, then I won't have to worry about things like money.

Should be any day now...

 

[Jestig]

Awesome thread, really appreciate the info. Ian thank you so much for the hard numbers. It is really amazing how much you can over look. Question on the the business plan. How many years did you make your business plan for?
That's where I would assume you came up with most of your math.

 

[AToE]

I think he came up with the numbers by looking at his reciepts.



That said, that's an interesting question - when researching all this Ian, how closely did your original plan/estimates end up to what you actually spent in the end?

 

[Jestig]

I think he came up with the numbers by looking at his reciepts.



That said, that's an interesting question - when researching all this Ian, how closely did your original plan/estimates end up to what you actually spent in the end?

very true, like your question even better.

 

[IanB]

How to plan

When you are planning it all goes back to your batch size, how you can manage that much liquid, how 'commercial' you can make your equipment (IE: 300k gets you a perfect winery, 3k gets you through the first batch)

However, the final numbers were off about 25% after I knew what the batch size was going to be, however we had the wine ready 7 months earlier than 'originally' planned. And on the current batch size 3 months earlier than originally planned.

All and all, I wasn't to far off, but again, the estimate was 17k and we hit 26k or there about's (maybe slightly under).

The only way you can be 'on' the numbers is to have a good plan up-front. Then ALWAYS stick to the plan, or understand the financial impact of changing anything. Then decide if it is worth the investment to change (usually it is not worth the investment).

Business plan was done up for 5 years out into the future. This way investors could 'see' when the return would start coming in, and at what amount. I suggest you focus on the first year to understand your start-up costs, then forecast out your sales to show your returns using the cost numbers form the first year.

 

[Dragonslayer]

Let me add my thanks here as well. As someone who has put a lot of thought into getting serious in the mead making business, this sort of reality check is spot on, and really helps to put things into perspective. So, thanks!

One question though, in paragraph form! I've often noticed that when I'm doing something on a small scale, or just getting into it, it's a lot of fun. Take poker for example. When I started playing poker, I couldn't wait until the next game, totally loved it. So I read a bunch of books, and learned all about proper poker play, how to read tells, etc etc. The deeper I got into the hobby, the more it felt like a job, and the less fun I was having. End result: I no longer play poker.

So my question is, has starting a meadery turned you off at all to making mead?

A very wise man once told me, the same wind that blows out the match kindles the forest fire.

I almost had the same experience with scuba diving. I had so much fun doing it I thought about doing it professionally. The guy that ran the local dive shop told me that's what he did. After about a year of diving to the bottom of the ocean for weeks at a time to fix oil rigs and pipelines he didn't want to do it any more. His daughter talked him into buying the dive shop because she was a sport diver and still loved it.

I like to think starting a winery will be different. I have never been so passionate about something in my life. I have been working on this for almost two years now, buying or making equipment here and there, working on my business plan, talking to retailers, developing individual customers (I give away A LOT of wine and mead), etc.

Check out my next post for some of my projections.

 

[Dragonslayer]

Here are some projected costs for my winery. First I should confess that I am using about 500sf of my basement. I already have a 9x9 fermentation room and a 5x15 cold room. The rest is for production and storage. Here is the floor plan; http://www.webbergroup.com/home/Basement_Floor_Plan.pdf Rather than having to pay rent/lease on space I will get to claim this space on my taxes.

I already have about $1000 worth of equipment including four 44 gallon fermentors (food grade trash cans), two freezers, a Buon Vino Superjet filter, 2 dozen carboys, scales, a couple of pumps and various and assundry other pieces of lab equipment, etc. Most acquired through eBay or Craig's List. I have a list of about another $5K worth of equipment I need as a minimum to get started.

Once I get my Business License with the state I can get a Resellers Permit which allows me to set up wholesale accounts. With that I can get 750ml bottles at $0.78 a piece and corks at $0.08. I have an estimate on labels at $0.42 each (front and back).

For product I can get honey at $1.75 to $1.90 a pound bulk. Apples at $0.22/lb (hey, this is Washington. Apple capitol of the world), Elderberries, blueberries, rosehips all free, but I have to pick them. Actually, friends and family help a lot (for wine).

Here is a break down for one 80 gallon batch of Granny Smith's Apple Wine:
Apples $105
Sugar $86
Chemistry $53
Bottles $311
Corks $32
Labels $169
Wax $80 (instead of shrinks)
Taxes $83 (State & Federal Alcohol tax)
TOTAL $838

Retail $2400 @ $12/bottle (this is the cost to retailers. We will also do direct to consumer sales)

Profit $1562

This is per batch and is an average. Cost will vary depending on ingredients. For example our Elderberry Port, even though the elderberries are free, will still run $1600 for expenses so this will be a $25-$35 bottle of wine in the store.

We plan to do about 480 gallons our first year or six batches.
Cost $5028
Retail $14400
Profit $9372

I left out a few of the details just so you can get the overview. Feel free to comment on anything I may have left out. Keep in mind that cost will go down as we are able to make bigger batches. I can get bottles from Saxco for about a quarter each but you have to order a minimum $500 worth. That's a crap-ton of bottles!

 

[Dragonslayer]

Speaking of costs, an automated bottling is obviously out of the question, so I'm guessing both of your companies (Ian and Brad) are going the floor corker with a bunch of friends helping route? Or is there some inbetween option that's not insanely expensive?

At my level of production (15 cases/batch) I do everything by hand including labeling. It takes all day. I need a multi station bottle filler and semi-auto labeler which will speed up the process a lot, but it will be some time before I look at a fully automated bottling line.

I recently volunteered to help Sky River Mead do a bottling. They are about an hour and a half north of me. That day we did 800 cases. They had leased a mobile bottling line. The entire line is built into a 53' tractor trailer that the owner drives all over the state for such situations. It still took five of us 8 hours. I was told that before they started leasing this trailer it would take them three days to bottle that much mead. I think you have to be in the 20000+ cases per year range before you could justify an in house bottling line.

 

[Noe Palacios]

Here are some projected costs for my winery. First I should confess that I am using about 500sf of my basement. I already have a 9x9 fermentation room and a 5x15 cold room. The rest is for production and storage. Here is the floor plan; http://www.webbergroup.com/home/Basement_Floor_Plan.pdf Rather than having to pay rent/lease on space I will get to claim this space on my taxes.

I already have about $1000 worth of equipment including four 44 gallon fermentors (food grade trash cans), two freezers, a Buon Vino Superjet filter, 2 dozen carboys, scales, a couple of pumps and various and assundry other pieces of lab equipment, etc. Most acquired through eBay or Craig's List. I have a list of about another $5K worth of equipment I need as a minimum to get started.

Once I get my Business License with the state I can get a Resellers Permit which allows me to set up wholesale accounts. With that I can get 750ml bottles at $0.78 a piece and corks at $0.08. I have an estimate on labels at $0.42 each (front and back).

For product I can get honey at $1.75 to $1.90 a pound bulk. Apples at $0.22/lb (hey, this is Washington. Apple capitol of the world), Elderberries, blueberries, rosehips all free, but I have to pick them. Actually, friends and family help a lot (for wine).

Here is a break down for one 80 gallon batch of Granny Smith's Apple Wine:
Apples $105
Sugar $86
Chemistry $53
Bottles $311
Corks $32
Labels $169
Wax $80 (instead of shrinks)
Taxes $83 (State & Federal Alcohol tax)
TOTAL $838

Retail $2400 @ $12/bottle (this is the cost to retailers. We will also do direct to consumer sales)

Profit $1562

This is per batch and is an average. Cost will vary depending on ingredients. For example our Elderberry Port, even though the elderberries are free, will still run $1600 for expenses so this will be a $25-$35 bottle of wine in the store.

We plan to do about 480 gallons our first year or six batches.
Cost $5028
Retail $14400
Profit $9372

I left out a few of the details just so you can get the overview. Feel free to comment on anything I may have left out. Keep in mind that cost will go down as we are able to make bigger batches. I can get bottles from Saxco for about a quarter each but you have to order a minimum $500 worth. That's a crap-ton of bottles!

Hi Dragonslayer:

My advice, before any number, before purchasing anything, before ... your formula, then do a process flowchart, then in every step of your process you should ask "where and how I'll do this?" after this excersice you'll be able to know your needs. Remember, investment = low production costs.

The how question is very important, there shouldn't be shrinkage, for me shrinkage is every drop that din't fall into the bottle.

But be carefully, investment should be reasonable to. For example, I'm designing my new chiller, I'm giong to invest 2,000 but it will mean that my production cost will be 33% lower, this is my first task in my to do list.

Remember: Investment = low production cost

Saludos,

 

[Dragonslayer]

But....If you read any business book 101, you will find that the mead 'industry' is creating it's own demand by pounding the pavement. It is EXTREMELY difficult (read expensive) to educate a market about a new product. That is why most (Even micro sized) wineries do not create mead, they don't have the time to educate the market.

However, I am not a baker, or an auto-mechanic, so mead making is what I do even if it means climbing the steepest slope on the hill.

As to whether we have customers, I'll be lucky to sell 10 cases a month in 10-15 stores (while we do tastings and other events at those same stores). We create our own niche and demand (sounds like Brad is still doing this too, to the benefit of ALL of us in the business and the hobby!)

Even though GotMead shows some 150 commercial mead makers out there, by my estimation we haven't even scratched the surface. I already have it built into my business plan to educate the public. Here in the Pacific Northwest it seems there is a lot of familiarity with mead. That may be because of Sky River Mead who has been here since 1997 or because of an active SCA community. Regardless I still have to do a great deal of educating in this the second largest wine producing state in the union.

I want to thank you, Ian, and Brad and the brothers Drake and Denice at Sky River and and Dan and all the rest of you who have been breaking trail for the rest of us. Just so you know I am taking notes. See you on the trail.

 

[brian92fs]

Have you checked with your City/County on zoning laws? You need to ask if they will allow you to operate a bonded winery in the basement. I mention this because I was considering a similar setup with my detached garage. I live within the city limits of Sacramento, CA. In my case, local zoning laws do not allow me to do this. I'd have to petition for a zone change/variance which is costly and likely to be denied.

 

[Dragonslayer]

Have you checked with your City/County on zoning laws? You need to ask if they will allow you to operate a bonded winery in the basement. I mention this because I was considering a similar setup with my detached garage. I live within the city limits of Sacramento, CA. In my case, local zoning laws do not allow me to do this. I'd have to petition for a zone change/variance which is costly and likely to be denied.

In fact I did go to the city first. Fortunately my neighborhood is zoned for a home based business. They said I could use up to 600sf for such a purpose and since there were no specific restriction against a winery they didn't say no. Their main concerns were CO2 abatement, waste disposal and increased traffic.

For CO2 I was able to assure them that fermenting 80 gallons of mead produces about the same amout of CO2 as two people just sitting in the same space. I put in a CO2 detector and exhaust fan anyway. It took quite a while to get them to understand that mead has virtually no residue. At least stuff that can't be reused or recycled anyway. And since I was not planning on putting in a tasting room or giving tours the traffic increase would be hardly more than the occasional UPS/FEDEX delivery or pick up.

As soon as I get my business plan all updated I will go back to them and get my license. Doesn't make much sense not to since they have the ability to deny my state license.

 

[IanB]

Dragon

Welcome to the chaos that is the mead-commercial life.

Glad you checked with your local people, however, they meand VERY LITTLE. You need to speak with someone else in your state who runs a winery at their home/garage. Ask them what the state inspector looked for when they came to the location.

The TTB (feds) will not visit your winery (most likely) so you don't need to worry about what your space looks like, as long as you have two points of egress (escape) and you have a sink with a proper drain.

Now, the state may not care one bit if you run this out of your garage, but honestly, the cheapest and most profitable approach is to become a 'salesman' of the other meadery north of you (Sky River), then produce your mead with their equipment and space and pay them a fee for using it. (usually referred to as contract brewing/meadmaking) Then when the mead is bottled, you can just drive it down to your house and start selling.

However, if you go your 'own way' you will find that the State inspection is your biggest hurdle. They will not respond to your calls or official mail, or anything you send them (unless it is a bonded winery application). And you can't send them your application without the feds application being completed. In your case, the VERY NEXT STEP you should take is to start your federal application process, and submit your forms. It takes about 6 months from submission to completion of your license, and the cost is no more than 300$ for the wine bond (another PITA) and your mail fee's.

Oh yeah, and make good mead in the meantime!

 

[Noe Palacios]

Welcome to the chaos that is the mead-commercial life.

Glad you checked with your local people, however, they meand VERY LITTLE. You need to speak with someone else in your state who runs a winery at their home/garage. Ask them what the state inspector looked for when they came to the location.

The TTB (feds) will not visit your winery (most likely) so you don't need to worry about what your space looks like, as long as you have two points of egress (escape) and you have a sink with a proper drain.

Here in Nicaragua the process it is divided in two parts:

• Facilities: Sink, drains, toilet, walls, floors, lights, ventilation, pest control plan (certificates if a third party do it for you), equipment, manteinance plan, workers' health certificates, cleaning and sanitazing procedures manual, good manufacturing practices manual and the related documentation. (They may repeat the visit, or not. In my case they do visit me 3 or 4 times yearly, mostly to verify my pest control and health certificates).
  .
  At this moment you obtain an operational license, which means you can start to produce. But if you want to sell your products you have to register them, in order to resgister them at the Health Ministry you have to:
  .
• Analyze your Products at the Health Ministry Labs. Your products are registered if they meet the international standards (usually US and EU standards). Then your are ready to sell your products.

People that do this for the first time usually get angry. That was not my case, I worked for our meat industry for several years and I get used to this processes and thanks that when I built my facilities I knew how it should be done and that is why it took me only two months to obtain my license and resgisters. This year I have to do all again, but is Ok.

Saludos

 

[IanB]

Just wanted to post an update

So we did the taxes for 2011, and the meadery 'technically' lost 4k dollars. We have about 30 accounts, with 10 really active accounts, we do tastings at least 2x a month, and we sell about 150 cases a year.

The good news is that we are making changes (since you can't keep losing money forever right?) and one of the things that has been good has been to perform smaller batches.

The reason you do smaller batches isn't to leverage any cost efficiencies, we make smaller batches right now because we need to understand and learn about what people want to buy!

If you only have 3 products for a whole year, that inventory is all tied up in those three products, and if people don't want them, you are screwed. Also for the people that like your products, they only have three choices (think of an ice-cream stand, it is FAR easier to go back to an ice-cream stand that you love, that carries 58 flavors, than a stand you love, but only has 3 flavors. Maybe you don't want vanilla or chocolate or chocolate chip, maybe you want mango today? see what I mean?)

Design of your label and the 'look' of your product matters a lot. No idea 'how' to do this correctly, I guess it is just the 'special sauce' that people can pick individually for themselves, but if you get a good design, you will sell more.

Lastly, keep coming out with new stuff, all accounts like to buy new stuff. Then when you find something that is working, do variations on the new stuff that worked. For instance sweet mead sells better than dry for us, so we are taking our sweet and making a variation by carbonating it to make sparkling sweet. Get the idea?

Good luck fellow Mead Makers and I will update the next time some 'great' knowledge comes along to share!

 

[akueck]

Hopefully this isn't prying too much, but is there a story behind the "technically" part of the loss? Are you writing down R&D stuff, business investments, etc that are included in that? What kind of depreciation do you have on capital equipment?

Smaller batches seems like a good and bad idea at the same time. Yes, more variety. But also it's a lot more work for you. Do you see this taking up much more of your personal time, or is the payback in easier marketing offsetting that?