Bartenders at Rockford Brewing Company Inc. have poured more pints of craft beer than expected in the company’s three years of operation.
With production at its taproom and brewhouse in Rockford maxed out at 800 barrels of beer annually, co-founder Seth Rivard said the craft brewery will need to look outside of its existing facility to add capacity.
“If we play our cards right, we can get a good-size facility that is 5,000 square feet and (create) a 30-barrel brewhouse,” Rivard said.
While Rockford Brewing wants first to wrap up the addition of an on-site kitchen and a small distillery to make spirits, it expects it will have no shortage of options when it comes time in about a year and a half to explore the possibilities for an off-site brewhouse, he said.
“We might look for investors instead of going to banks,” Rivard said. “The biggest piece that holds up (an expansion) is financial background. We have a great relationship with a bank we’ve used from the start, but there’s only so much money they’ll lend you. We need investors.”
Fortunately for Rivard, many financial companies and interested individuals are starting to embrace investing in craft breweries as the sector matures and continues on a growth spurt.
In part, breweries are attractive because of the diverse revenue paths they have in accessing consumers, said Clarence Rivette, president of The Wirt-Rivette Group, a Saginaw-based financing and equipment leasing firm. Beyond just selling beer, most breweries serve food, have an on-site retail presence and aim to grow the distribution of their products to other bars, restaurants and retail outlets.
Breweries also offer significantly higher margins than traditional restaurants, according to Rivette.
“I will say that banks — and ourselves — are pretty bullish about (craft breweries) because they’re using the model that it’s a restaurant, but it’s a restaurant with high margins,” Rivette said. “You look at a six buck pint, and it costs about a buck to make. The margins are very strong compared to a straight restaurant.”
Bill McGee couldn’t agree more.
The senior vice president of commercial real estate lending at Huntington National Bank has worked with a number of startup and later-stage craft breweries, including Rockford Brewing Company.
McGee acknowledges that the financial performance of breweries varies on a case-by-case basis, but overall the burgeoning craft beer market has become an attractive business for traditional lenders. That’s particularly true as breweries have continued to establish a track record in Michigan and nationwide.
“We’ve had a lot of success with the (craft brewing) industry,” McGee said. “They’ve got different points of revenue and that’s a big part of the business. As they mature and grow distribution, that results in the biggest financial success.”
Moreover, analysts tracking the craft brewery industry say the growth should persist and that craft beer will continue to cut into the sales of macrobreweries such as Anheuser-Busch InBev or MillerCoors.
“Craft breweries are looking more like restaurants and bars these days and when you look at the overall number of those in the country, I think there is almost endless run room — as long as craft breweries differentiate,” Bart Watson, chief economist of the Boulder, Colo.-based Brewers Association, told MiBiz for a previous report. “Craft beer right now is at 20 percent by dollars and 11 percent by volume. That suggests there’s a lot of growth room.”
Looking at options
Rivard said Rockford Brewing is still exploring its options to fund its future off-site production facility. However, for the long-planned 1,500-square-foot farm-to-table kitchen project that it hopes to complete by mid-2016, the brewery plans to search for investors or use bank financing. Rivard said the company may also try crowdfunding.
He anticipates the kitchen project will cost between $100,000 and $400,000 to complete. Importantly, it will likely double the company’s revenues and should only exacerbate the capacity constraints for Rockford Brewing’s beers, Rivard said.
“It’s going to make the demand for beer go higher,” he said of offering food at the taproom.
Rockford Brewing’s growth trajectory from startup to statewide distribution and continued expansion in many ways mirrors the surging economic impact for the state’s craft brewing industry over that same timeframe.
In 2014, craft brewing in Michigan contributed $1.85 billion in economic impact, up 84 percent from about $1.0 billion two years earlier, according to a November 2015 report from the Brewers Association. The study considered the value of beer as it moves through the three-tier distribution system and non-beer products (i.e., food and merchandise) sold by brewery taprooms. In Michigan, the sector was responsible for 14,773 full-time jobs and paid out $571.6 million in wages.
Rockford is also not alone among Michigan craft breweries in needing to go off-site for a production facility expansion in recent years.
Other producers that have done similar projects include The Mitten Brewing Company LLC in Grand Rapids, which recently expanded production to a facility kitty-corner to its original west side neighborhood brewhouse and taproom; Greenbush Brewing Co. in Sawyer, which opened the Greenbush Annex across the street from its taproom to serve as a production facility and overflow seating; and Pigeon Hill Brewing Co., which purchased and is renovating a building across the street from its taproom in downtown Muskegon, according to reports.
Since starting the craft brewery, Rivard said he has explored and experimented with myriad forms of financing. To start the company, for example, he tapped a Small Business Administration (SBA) 504 loan and later refinanced under the SBA’s 7(a) program.
While he credits the SBA program with helping get his business off the ground, he said the amount of time and overall regulations involved in the process means he probably won’t look to use it again.
His relationship with Huntington Bank remains solid and he said bank financing would be his preferred source of capital as he eyes expansion.
Overall, Rivard agreed with McGee and Rivette that banks are currently very open to working with startup and second-stage brewers. However, they are exercising caution and looking very closely at business plans and a company’s debt-to-equity ratio, he said, adding that they’re making sure the entrepreneur owners aren’t borrowing more than they can reasonably afford.
“They want to make sure you’re doing well,” Rivard said.
MiBiz Editor Joe Boomgaard contributed to this report.