Distribution, Part I

Folks that come into the cidery usually have a set of questions they progress through when they’re here:

1. How long have you guys been open? (6 months)
2. What did this building used to be? (A pharmacy. A meeting place for the Oddfellows. A strip club).
3. Where else can we get your cider? (Nowhere. Yet…)

That third question always leads to more questions. The answer is – of course – more complicated than it seems. Here’s our attempt to explain the situation, in a two-part blog! Today is Part 1, which outlines the difference between self-distribution and working with a distributor.

First of all, the USA’s alcohol system is a ‘three tier system’, thanks, of course, to laws set up after the disaster that was Prohibition (where most weird alcohol laws come from). For more information about this system and its history, check out this great article over on Serious Eats.

• Tier one is the manufacturer of the product – these are your breweries, wineries, distilleries, and cideries. Us!
• Tier two is a distributor. These are companies that buy product from manufacturers at wholesale prices, and then sell them to retailers. In Indiana, we have Monarch Beverage, Cavalier, Zink, etc. who play this secondary role.
• The third tier is then the retailer. This is where you as customers can come to get a drink. Think bars, restaurants, liquor stores, grocery stores, etc.

Every state has different liquor laws. In Indiana, micro-breweries can cut out the distribution tier up to a point (based on volume). If you’re familiar with Indiana alcohol laws, last year, Sun King Brewing Co. fought to raise the limit so that microbreweries can self-distribute a greater volume of beer before having to work with a distributor. So, microbreweries can self-distribute, and while most of them start with self-distribution, many of them decide to sign on with a distributor well before they hit the self-distribution ceiling in Indiana. There are some great reasons for that:

Why You Would Self-Distribute

Self-distribution sounds like a great deal, especially at the start. You can hop in the car, put a keg or two of your product in the back seat, drive to a bar, say, “Hey, want this?”, and if the answer is yes, you can pick up a check and leave the beer. Bam, you’re on tap at a local restaurant and are already growing the market for your product. You get to collect the retail price for your beer and take it home to the bank. As a startup, that extra profit can help you expand a lot faster than selling at the wholesale rate. Also, in brand new businesses, one or two people could probably handle all the distribution needs.

Bottom Line: Quick way to reach more customers, higher profit margin for the business.

Why You Would Work with a Distributor

Eventually, if things go well, you’ll need quite a team to keep up with the demand for your products. A fleet of vehicles, someone on staff who visits accounts with the sole purpose of cleaning draft lines, sales people to bring in new business and keep current customers happy, and multiple delivery drivers, not to mention someone to handle all of the logistics that come along with so many moving parts. A distributor would handle all of that for you in exchange for a portion of your profits. They will also likely expand your footprint because they have a wider reach and access to more varied accounts because of the multiple different brands they represent.  

Bottom Line: At a certain point, most breweries will end up working with a distributor because the extra reach will make up for the chunk of profits and the staffing needed to support self-distribution.

So, Back to Us…

              We tricked you – none of these laws actually apply to us because we aren’t a micro-brewery! Our legal classification is a Farm Winery, and in Indiana, Farm Wineries aren’t allowed to self-distribute at all. This explains why you can’t find our ciders on tap at bars and restaurants yet.

              Since we opened, we’ve known that we’d need a distributor to grow. We’ve met with many, sussed them out (this is an important partnership, after all), and negotiated contracts. As of TODAY, we have finally signed the all-important paperwork, which means that the time for us to start popping up around the city is near. Like…a few days away!

Next week, we’ll post a blog about what YOU as a cider fan can do to help us grow our business.

Thanks for coming along on this wild ride with us!

How do you Finance a Craft Cidery?

Finances are a tricky thing. Talking about money is generally considered poor manners, and asking other people to give you money is straight uncomfortable, but if you want to start a business, you’re going to need some cash. There are a few ways to finance your business, including funding it yourself, bringing in investors, or taking out loans, and there are plusses and minuses to each option. Here’s a brief rundown of our thoughts and experiences with each of them.

Self-Funded - If you fund a business yourself, you have to either be wealthy, or you have to start on a small scale. This is especially true in the brewing/fermenting industry. While it’s possible to start on a shoe-string budget, you’d still need upwards of a couple hundred thousand dollars to be on the safe side. The amount of capital equipment you need to get started is expensive, and for the permitting process to even begin, you have to have a signed lease, meaning fronting at least 6 months of rent before you can make your first sale (unless you have a real estate agent who makes some good negotiations on your behalf). If you can manage to fund your business yourself, your growth can only occur by reinvesting your profits into the business. But one of the down sides of starting small is that you can only sell what you can make, and with small equipment, you probably won’t be able to make enough to grow quickly.

Pros: You own 100% of the business, and it’s a much less risky venture than the other options – in some ways! It might not feel less risky to put your life savings into a business, but at least if things go south, no creditors will come looking for you.

Cons: You’ll only be able to start as big as you can afford, and in this industry, that won’t be very big. Growth will be slow and there’s no room for error.

Investor-Funded – If you can’t finance the whole thing yourself, another option is to bring in investors who get a percentage of ownership of your business for the funds they give you. If you’re well-connected to people with both wealth and an entrepreneurial spirit, raising your funds this way can be relatively quick. If you aren’t, it may take a while to reach your target. Luckily, with the rise of successful craft breweries in Indianapolis, investors around here are familiar with the model and in some cases, are itching to get involved.

Pros: You’ll have more funds to get started, and it takes money to make money. You may also benefit from the networks of business contacts, accounting, legal services, etc. your investors bring to the table. In some cases, they can even act as a board of advisors.

Cons: You own less of your company, and someday when you hit it big, you only get a percentage of your earnings. If you don’t maintain majority ownership you could also run into conflict, or in the worst case, be cut out of the management of your company by the other owners.

Debt-Funded – Getting a loan to start your business is a feasible way to raise money, but in today’s climate, small-business loans are fewer and farther between than they have been in the past. Plus, with debt comes interest and repayment terms. One the plus side, the equipment needed for your business has a great re-sale value, which makes a loan a lot less risky from a bank’s perspective. If things go bad and you have to go out of business, you can sell all of your equipment for close to what you paid for it and may be able to walk away cleanly.

Pros: You don’t give away any equity in your business when you take out a loan, so you still own 100%. Banks can also be good partners for the future of your business, so establishing this relationship will help when you want to fund future expansion or get a line of credit opened.

Cons: Making debt repayments early-on, especially as you’re just getting started, can be a tough pill to swallow if you aren’t meeting your sales projections, and defaulting on a loan is scary business.

So what are we doing? Well…all three of course! We put a chunk of our own savings into the business to get things off the ground at the very beginning. We were able to cover the costs of hiring a graphic designer, a legal team, some expanded equipment for testing our recipes, and a fair amount of research and development (traveling to visit cideries and attend conferences). We have some investors on board who believe in our business and also see an opportunity to get a good return on their investment. Finally, we are working with lenders who think we’ll be a good addition to their portfolio.

We’re about 85% of the way funded now, which is happening at just the right time to take this show on the road.

The business side of small business ownership may not be as fascinating to everyone else as it is to us, but we’ve found it to be a constant and rewarding learning experience. If you enjoy learning about business startups, here are a few of the resources we've found valuable:

•  StartUp Podcast -  This podcast follows the ups and downs of starting a business.
• SCORE - A branch of the Small Business Association pairs retired former business executives with new business owners. Our SCORE mentor has been a huge help to us.
• Indy Chamber - The Indianapolis chapter of the Chamber of Commerce provides business support as well as networking opportunities with other business owners in the city. 

Here’s to getting fully-funded in the near future and to entrepreneurship!

What We Can't Do - Graphic Design

So far, the start-up phase of a business has really boiled down to making a lot of decisions.  Those decision can be summed up pretty simply: Do it ourselves and how? versus Have someone else do it and whom?  

Aaron and I both consider ourselves capable, and love saving money where we can, so we tend to try to do a lot ourselves. But from the beginning, there have been a few key areas that we’ve wanted to get right the first time. For example: forming an LLC? Lawyers can do that faster and better than we can. On the flip side, consultants offered to do market research or help us come up with a budget. Nah, we can do that. Research and math are our strong suits.

One thing we can’t do is graphic design. We have a lot of opinions about graphic design, and had a strong vision about the look and feel that we wanted, all of which drove us toward finding a designer who could bring it to life. Enter Amy McAdams, an AWESOME freelance graphic designer in Indy who had created logos and artwork for multiple local businesses. We knew we had our design partner.

When we changed our name to Ash & Elm (see previous blog about this), we were at a loss of what direction to go. Amy came up with a solid idea to have typeface only, and we loved the idea of laying it over a cross-section of a tree. Amy was in, and took it a step further, suggesting we find an actual piece of a tree and make a print instead of trying to create everything through technology.

This was our typeface logo which we used as a jumping off point. I called a tree-service company that had tree cuttings at their disposal and picked up a few cross-sections (also known as tree cookies!). Though I’d requested a piece of an Ash or Elm tree, they only had Cottonwood available (sad face).

Next, I went to a friends’ wood shop and sanded these bad boys down. I had a near death experience when my scarf got eaten by the sander while I was still wearing it, so this may have been something I should’ve had someone else do. I also took a blowtorch to the sanded cookie to make the rings really stand out (Google suggested this).

Then, Amy came over, we had coffee, rolled ink onto the cleaned cookies, and made multiple ink pressings. It took a while to find the ideal method (paper on top of inked cookie, rub with fingers over and over again, use just the right amount of ink, and carefully remove).

We took our best pressing and then Amy worked her magic by digitally scanning it in, correcting a few issues, and overlaying our typeface.

We love the finished product, and are so glad we called upon an expert in this case! Hopefully this logo and brand will become synonymous with great, hand-crafted, ciders put out by a company that is active and engaged in their community. 

Deciding to Start a Cidery

A lot of people ask us why we decided to start a business focused on cider. It’s off the beaten path just enough to assume there’s a reason other than, ‘We like it.’ To be honest, it’s true. Here’s how we came to the idea of starting Indianapolis’ first dedicated hard-cider company.

Like a lot of other cider-makers around the States, Aaron found his way to cider via the craft beer world. He went to grad school in the mid-2000s near San Francisco. While the craft beer boom hadn’t really hit in Indianapolis at that time, it was big business on the West Coast, and Aaron jumped in full-force, seeking out different beers and starting to homebrew. He moved back to Indianapolis in 2006 with a couple years of brewing under his belt and a desire to open a brewery. But, like a lot of other people, he had student loans and bills to worry about, so it wasn’t an option. A few years later, when craft beer started to pick up steam in Indy, he again had fantasies of opening a brewery, but wasn’t able to convince himself to take the risk.

Around that time,  Aaron and I got together. Aaron realized that, while he loved craft beer, his interest in exploring other beverages had grown. I was game for an adventure, and we brainstormed what skills we each had, what would be a good business idea, and what we were interested in. A few years before, we'd traveled to Ireland and had a cider unlike anything we'd ever had in the States, opening our eyes to the possibilities of different styles. We’d already been making wine, and added cider to the mix too. As we brainstormed about their business ideas in the spring of 2014, cider quickly rose to the top. The growth in the industry over the last couple years around the US was incredible, the skills from brewing beer and making wine transferred well to making cider, and, important to both of us, apple trees grow well in Indiana, meaning not only could we make a truly local product, we could support farmers in our community through the business. And of course, the fact that cider is delicious and we still had so much more to learn about it got us excited about the challenge ahead.

What followed were months of research: drinking as many ciders from around the world we could get their hands on and making batch after batch to perfect our recipes. We took trip to cider hotspots like Portland, Seattle, and Michigan. We visited local orchards to talk with farmers about their perspectives. We conducted market research. Each step along the way, all signs pointed to this being the right business idea at the right time.

It’s been a whirlwind trip already, and we haven’t even opened yet. We hope you’ll join us on the next phase of our journey!