It’s summer.
The sun is warm on your skin as you cruise down the street with your sunroof open. The sound of the wind and your favorite song on the radio ease your mind. You roll up to the stoplight, all smiles. You’re happy. You’re at peace.
Until…
Another car pulls up next to you. A convertible. Somehow they look… happier.
And now, you can’t help but compare. Are they better off? Do I need what they have? Do I need more?
Very quickly, you’re transported out of the haven you were pleasantly enjoying just moments earlier. You’re officially playing the comparison game.
We’ve all been there. Our neighbor’s new car, our sister’s renovated house, the brother-in-law’s vacation home.
These are all examples of an upgraded lifestyle. But with that lifestyle, hidden from view, is the burden of an ever-increasing level of recurring costs. So often we see the glamour, and are blind to the price tag.
The point:
This is human nature.
While all of our examples, so far, are personal in nature, do you think your business is immune?
Customers expect consistent hours of operation when it comes to food. Before you reduce food hours, consider a targeted marketing campaign to boost attendance at your location. This campaign should highlight the food you serve, your space and the experience. Once you cut hours, you essentially begin to cut the trust of the customer.
What is Overhead Inflation?
The “lifestyle inflation” example we just walked through is actually quite similar to what can happen at the brewery, and it goes something like this: Compare yourself to the brewery down the street.
- See that they upgraded their space, installed new tanks, and started distributing kegs to a bunch of restaurants you know.
- Feel FOMO because you’re smaller and don’t have as many accounts.
- Decide to upgrade your brew system, hire a sales rep, canning line, ___ (fill in the blank).
- Figure the rest out later…
You’ll notice that, at no point during this chain reaction, are these decisions being made with any sort of thorough analysis to support them and understand the financial and operational implications.
Nope. Just feelings and blind optimism.
And the problem is, these “sunk cost” decisions aren’t easily reversible. So no matter how they turn out, they limit our ability to make financially wise choices because ultimately, we’re then justifying decisions we’ve already made.
This is what we call “overhead inflation.” Because with each successive decision to keep up, purchase equipment, or expand the team… even if you eventually back it off, there’s now an inflated baseline of expenses you’re committed to that is a royal pain in the butt to work down again.
It’s no accident that these are the exact habits breweries developed during the craft boom, that are now coming back to bite them during tougher times. More capacity, bigger teams, more beer. And unfortunately, there is still, to this day, a strong belief amongst most owners that this is the way to solve their business problems.
So what do we need to do instead?
Prevention First
This gets us to one of the basic tenets of personal finance and it’s directly applicable here:
Be very hesitant to add fixed costs, because it’s extremely difficult to reverse them.
Here’s a guidepost: when you feel FOMO, stop and focus on yourself. Instead of looking at what others are doing, turn your gaze inwards and start to ask questions. Your goal at this stage should be to disqualify whatever new shiny initiative you want to pursue as a protection against your natural inclination to keep up. This mindset shift is fundamental to the long-term success of the company and avoiding overhead inflation.
For example…
Say our taproom has been performing really well, and its time to tackle the next growth step. Our buddy down the street is doing well in distribution. Is that a green light to follow?
Let’s break it down.
Step 1: Understand the Model
Distribution is a low margin activity. When done well, increasing your production and sales volume enough to be successful requires a ton of investment in assets (larger brew system, tanks, canning line, etc.) as well as additional overhead costs (production and sales labor, increases in space and utility usage, repairs and maintenance, etc.) and inventory.
This is a different set of variables to consider than what it would take to sell beer through the taproom, or expand into food, or contract brew. And so it’s super important to understand what game you’re playing first, so that you know what additional overhead is needed.
From there we can ask:
If we pursue this, what steps do we need to take so we do not oversubscribe on overhead?
Step 2: Map Out Your Costs
Then, determine your direct and indirect costs, as well as the additional capital investment that would be required. This would be the COGS, labor (production, sales), and overhead (rent, utilities, distribution-specific supplies, etc.) required to produce and sell in distribution. Convert this to a per barrel cost, and subtract from your expected revenue per barrel for each SKU. Now you have an idea of the profit you could expect and can weight that against the energy required and the payback time on whatever new equipment and space you’ll need.
From here we can ask:
Are we thinking about this correctly? Is the juice worth the squeeze?
Step 3: Alternatives
Lastly, what alternatives could we pursue that wouldn’t require so many irreversible fixed cost decisions?
When it comes to expansion or buildout, think about expanding experimentally at first. If you are at capacity, could you contract out some to see if there’s potential before making a long-term commitment?
When looking at our labor costs, do you need another full-time employee, or could you expand with some part-time help as needed?
Figure out if there’s a test you can run first, and explore the opportunity cost of pursuing something new vs. continuing to focus on your current model.
Step 4: Decide
If we decide to go forward with a new commitment, we have to determine our ROI, and at what level of operations we can sustain our profitability.
What would we do if we couldn’t sustain that? How easy is it for us to reduce expenses as needed? Can our current business model endure added expense elements, or would we have to shift our strategy?
Only AFTER you’ve worked through that thought process should you green-light the additional expenses.
Reduction Second
Ideally, we are operating with this mindset from the get-go. But what if you’ve already committed? How can you cut back?
Some examples:
Payroll
- Look to see if your salaried employees can fill gaps in slower periods without hiring outside. In production, are you staffed for your full capacity year-round? Staff for your slowest period. Hire part-time when it gets busy. Be slow to rehire after turnover to see if that role can be absorbed.
- In the taproom, think about QR code ordering, counter service only, or how you could restructure your staffing to minimize roles that aren’t fully utilized.
- In admin, explore how existing positions could supplement your marketing or event coordination, which could drive additional revenue.
Occupancy
- If lease renewals are coming up, think about how much space you actually need and if you could give some back. Maybe the market rate in your area is increasing, and your landlord would be happy to find a partial tenant at a higher cost. What businesses in your area can’t afford their own space, but their brand aligns with yours and they’d fit in well in some space inside yours? Look to sublease.
- Maybe you have the space to host a private event every week. Make that a priority and give that objective to your taproom manager.
Other Expenses
- This category might seem vague at first, but it encompasses all the additional expenses that are essential for running the business, yet often go unnoticed. Now is the time to get scrappy and comb through every expense. Ask yourself: “Is this really necessary?” And then make the cut (yes, this will be painful). Look at taproom supplies, dues and subscriptions, meals and entertainment, and maintenance supplies. Shop around for benefits and insurance providers, and don’t be afraid to ask for a better rate.
- The key takeaway is not that these specific actions are required, but rather that a thorough examination of your current expenses can reveal creative opportunities to use your resources more efficiently.
What Will it Get You? (Exec Summary)
Let’s go back to the stoplight.
Worth repeating: It’s human nature to compare.
But before you take action, pause and follow the four steps listed above. I have provided you with a clear process for separating your business from emotions. Then, you can decide what’s next based on a thorough analysis, instead of wishful thinking.
We want to prevent overhead inflation, at any cost, so you have flexibility and freedom when making future decisions.
On the flip side, if the inflation is real, now is time to do the hard work of cutting back.
Remember what got you here, and that your journey does look different from the brewery next to you. After all, it is your unique perspective that led you to opening a brewery in the first place.