Karbach expanding....

Not surprised at all with there success. Congrats to Karbach!

 

Awesome. Cool looking building too

 

Best news I've read all day.

 

So.... how much room will now be available for barrel aging!!!!!!!!!!!!!

Congrats Karbach.

 

More FUN for everyone! BBA Hellfighter soon to be shelf turd.

 

Good for Karbach!

I'm curious, what kind of backing does Karbach have? You typically don't just come up with $15 million after a few years of brewing...

 

I saw Karbach being sold at ACE Hardware. Now that's expanding.

 

If they still aren't in Austin next year (officially... not through Spec's doing store transfers) we'll know that they're actively TRYING to avoid us, lol.

30,000 barrels this year? Wow. I think I'm correct in saying that already makes them the #3 craft brewery in Texas, volume-wise? (behind Shiner & Saint Arnold)

 

This is just conjecture, I'm sure the reality is a hybrid of this with other details layered over the top, but this isn't Eric Warner's first rodeo. He has been able to leverage substantial industry connections since day 1, and having such a great track record makes lenders/investors a lot more willing to accept your interest payments.

 

I believe Real Ale is actually above 40,000 barrels.

 

Ah, I did not realize they were that big. Dat Fireman's 4.

 

Yeah the brewer mentioned that at their beer dinner I went to and I was blown away they were doing that kind of volume in TX. I also didn't realize Karbach was doing that high of volume basically only in Houston, super impressive.

 

It pretty much is in SA

 

Karbach, from my understanding when I was volunteering there regularly, has a number of large investors tied to the medical center in some way. It was joked about that "it was a bunch of doctors looking for something to do with their money"....

the other source of their money came from the sale of a distribution company. two of the investors previously owned a small distro business... and the current Karbach location - which was their houston warehouse (most of their distro was done around college station, but they had some brands they distro'ed for in H-town).

They sold the distro, found a bunch of additional investors (the doctors), bought some equipment, signed on Mr. Warner, and... from there we all know the story....

 

I don't want to feed into the "craft beer bubble" talk (which is simply wrong, economically), but I hope that Karbach is equity-financed and not debt-financed. Having to pay notes of that magnitude shortly after a massive expansion could have a serious negative consequence both for the brewery and the quality of their product. Slow and steady growth is easily sustainable, massive sudden growth is generally not.

And feel free to disagree with me, but Karbach doesn't make a Heady Topper or Zombie Dust type product that cannot sit on shelves. Everything they make, even the F.U.N. stuff, has a limit to demand. Distribution expansion could help the increased capacity make sense, but that only goes so far. And probably, only within Texas. I can't actually imagine Karbach being highly successful in places like Colorado.

Math time:
tl;dr: These numbers don't seem to work out without crazy growth projection assumptions.

Let's pretend an unreasonably high profit margin of $1 per pint (which, again, is outrageously high) for Karbach (i.e. payment from distributor minus cost = $1/pint).

That would be a profit of $252 per barrel (again, obviously outrageously high - a retail half barrel keg of Hopadillo is $180, which means retail prices per barrel are $360. 70% profit margins are insane. SAM reports about 12% profit margins, which is nice, but they're huge. Even at those numbers, you're talking $43 profit per barrel at retail prices, which is obviously wrong. Real profit could be closer to $35 per barrel, for SAM (see note below, even this is high). Probably lower for a younger, less-efficient, smaller brewery with more staff, etc. But I digress.)

At this outrageous profit, their production of 19000 barrels in 2013 would net Karbach $4,788,000 in profits. At a slightly more realistic $35 profit per barrel, you're seeing $665,000. [See note below if this number looks too small.]

Taking our unreasonably high number, that means it would take only about 3 years to pay back $15mm at 0 interest, about 3.5 years at 6.5%. Obviously there's no 0% loans, and obviously you can't devote all your profits to loan repayment, or you're in serious trouble should anything bad happen. On the flip side, of course, production will increase, which means more revenue, and therefore (ideally) more profit, so loan repayment becomes easier. Perhaps you can find lenders willing to structure a loan such that payment goes up over time, in which case, this would all be a little easier to do if your assumptions about increased production hold true. If, for some reason, however, they do not, you're looking at increasing payments during a time of steady (non-increasing) or slower-increasing profits. And if that happens, you have to increase margins, which means decrease of product quality, fewer employees, etc.

Now, plug all those assumptions into a world where Karbach nets less than $1mm a year, using our still-inflated 665,000 number above. Let's pretend they use ALL their profits to pay back this loan, not saving anything for even a single bad batch or whatever. They could never repay the loan. (Interest compounds fast, y'all.)

Unless, of course, they have loan terms that take into consideration massive growth projections. And I can't imagine a lender that would allow such an assumption. So in conclusion, I hope they are equity-financed by investors with a large risk-appetite who don't want immediate returns. If not, I just don't see how the numbers work.

Note on "small" numbers: A quick case study on Brooklyn Brewery, much smaller than SAM but still much larger than Karbach can show us a realistic profit number. Brooklyn made, in 2012, $40mm in revenue on about 205 thousand barrels of production. That's almost $200 revenue per barrel. On a generous 12% profit margin, that works out to $4.8mm total, or $24 per barrel. At 19000 barrels, that's only $456,000 profit for Karbach. That is to say, even $665,000 is likely generous. (One last point on this: SAM reports that they make about $22 per barrel in profit. That works out to only $418,000 for Karbach.)

 

Glad to see Karbach expanding. I enjoy most of the beers they make and cannot wait to see what happens after the expansion. Bring on some more barrel aged goodness.

 

While larger breweries benefit from economies of scale, they also have additional expenses not applicable to smaller breweries. For instance, SAM spent $169MM on advertising in 2012 - about $65 per barrel. I'd estimate most small to mid-sized breweries pay $0 - $10 per barrel.

Another big difference is the Federal Excise Tax rate, which is $7 per barrel for the first 60,000 barrels and $18 for everything over that.

 

Everyone forgets about Real Ale, which speaks more to the infatuation with the new that humans have, and less to the quality of their product, which is outstanding.

 

I agree that there's an infatuation with the new rather than the good (which I think contributes to the impression that there's a "craft beer bubble"), but disagree that it's the reason people forget about Real Ale.