Do you remember what we talked about the last time we spoke?
Quick recap:
The idea was if you manufacture and sell a product to consumers, it’s in your best interest to know the margin siblings. The margin siblings are three calculations that any producer and seller of a product need to know in order to make sure they’re actually making money.
These siblings are:
- Gross margin
- Contribution margin
- Net margin
I also talked about how the average net margin on any wholesale product is somewhere between 1% and 5%.
What does this mean? It means that after all expenses are paid, you are going to keep between 1% and 5% on your wholesale products.
After we published our last email, an SBS client reached out to me and asked us to run his margins on a specific beer.
Music to my ears.
In-House vs. Contract Brewing
For context, the beer they asked us to run the margin analysis on is being made in-house and also contracted in half barrel SKUs.
We gathered all the necessary information and then ran it through our calculations.
When the numbers came back, the in-house beer had a net margin of -5.33%.
This is very common for a half barrel.
Half barrels are often a losing proposition. When you compare the selling price to production costs, they frequently result in a loss.
In this case, a -5.33% was par for the course.
But then I looked at the contracted half barrel of the same product.
It had a positive 15% net margin.
He was making 15% on every half barrel that was being contracted on this particular beer.
This got me thinking.
Did we allocate all the right expenses? So I broke it down:
- We have a gross margin. We know the current selling price for the beer. We know what the beer costs to make because the contractor gave us this information.
- Do we have a contribution margin? Well, no, because all the contribution is really built-in at the contractor level. We’re using their labor. We’re using their overhead. We’re using their materials. We’re using their maintenance.
- Is there any G&A that would help calculate the net margin? And I said, just for shits and giggles…let’s add $15 per half barrel in G&A.
To be clear: With adding $15 per half barrel to the calculation, I’m saying that it’s costing $15 per half barrel for selling, marketing, travel, and any other expense to help sell this SKU.
That’s a lot.
That’s $30 per barrel for sales and marketing for a beer. That’s insane.
When I ran it with $15 per half barrel, we were still at a 13% positive net margin.
I jumped on the phone with the client the next day to review the numbers, and I advised the client to call up the contractor and ask them to consider moving all of their half barrels of this SKU to their production facility.
Moral of the Story
What’s the moral of the story here?
If you can find someone who knows how to operate their overhead better than you, you may want to go have a conversation with them.
If you can find someone who has better operational efficiencies than you, you may want to go have a conversation with them.
And finally, if you produce and sell beer, you need to click here for a profit diagnostic.
This is completely free to you.
Our consultants will get on the phone and give you a quick understanding of what’s going on.
I know you won’t regret it.
Talk to you soon.
-cf
P.S. – You can find Part 1: Margin Siblings and Part 3: Margin Decisions on their respective pages.