Originally posted on Ekos.
The craft beer industry is changing so quickly it can be hard to keep up with all developments. Forces at play include the headwinds of COVID and its myriad downstream effects, such as supply-chain disruption. These issues have affected every industry worldwide, but craft beer has its own additional layer of complexity. The explosion that began in the early 2000s has slowed. This is a natural evolution, but it makes the process no less challenging for producers to survive and thrive.
Annual growth rates for the craft category have cooled from the double-digit, do-no-wrong pace experienced as recently as five years ago. Now breweries must work smarter, focus on efficiencies and get intentional about every business purpose. Many are reviewing their business models and pivoting to new opportunities. Subscription models are becoming a popular way to capture opportunity.
Subscription models take many forms, from casual mug clubs to expansive mail-order programs. The key tenet is that the program is comprised of members and there is a component of committed revenue. This post covers the pros and cons of the business model, logistics considerations and accounting aspects that differ from a production brewery or brewpub model.
PROS AND CONS OF SUBSCRIPTION PROGRAMS
The positive aspects of a subscription program are substantial. Chief among them is the impact to cash flow. Most subscription models have monthly or quarterly fees that are established, and the predictability of inflows is extremely helpful for cash flow planning. Breweries can take some of the variability out of cash flow forecasting. Likewise, it adds predictability to the production plan. The brewery knows in advance what brands it needs to make to fulfil subscription plan orders. Brands can also experience a huge lift in sales and brand awareness from the halo effect of members. Consumers spend more per transaction on a business with which it is a member versus a non-affiliated business, and data shows that they also stay loyal to that business. Meaning, there is a greater likelihood of repeat business from members versus non-members. Finally, people who are happy with member experiences are likely to share their story — thus, the halo effect. Members become advocates for a brand. They introduce new consumers to the product and help convert those targets who are in the sales cycle.
The upside is significant, but there can be complications to implementing these programs. Any member program — simple or complex — requires a high degree of organization and oversight, especially if the brewery plans to sell to consumers outside of its home state. First, true direct-to-consumer shipping is only allowed in about 25 percent of states at the time of writing. These regulations are changing rapidly, which is a blessing and a curse. If there is any component of shipping — in state or out of state — the brewery should have a dedicated employee on staff committed to the program’s compliance with federal and state rules.
Before starting a subscription program, businesses should check with a regulatory attorney to ensure that their planned subscription model will work with current laws. Next, a leader of the membership program should be identified. This person will be responsible for ensuring required compliance is met. Examples of this include registering with the secretary of state, reporting shipments as needed and paying any sales or excise tax.
Other complications can arise related to fulfilment. Whether coordinating a pickup at the brewery or shipments to the members’ homes, staff will be needed for shipping, handling and coordinating. If a program includes member perks (e.g., special events), this will require more manpower from the brewery’s team.
Inventory management also becomes more complex. Products allocated to the subscription program need to be segregated from the inventory available to sell. This can be easily achieved in Ekos by creating a separate warehouse in the software for subscription inventory only.
Subscription programs also affect accounting needs. First, customer payments received before goods have been shipped should be categorized as deferred revenue instead of income. Deferred revenue is a current liability account. Until the product has been delivered, the money received is considered an amount to be paid in the future because it has not been earned. At the moment product is delivered, the cash received becomes income. By shipping the product, the business has earned it. As a result, the company may not show income even though cash has been received. There is not a linear relationship between income and cash flow.
The gross margins for products sold through subscriptions may also be different than those sold through a wholesaler. When planning the brewery budget, remember to factor not only the product being sold but also the sales channel. Each sales channel will have a different sales price and cost structure.
The chart of accounts should also be updated to accommodate the subscription sales channel. Modify to add accounts for income and cost of goods sold (COGS) accounts that are unique to these goods. Add a deferred revenue current liability account if it does not already exist. If using classes or divisions to separate performance by revenue center, add one for subscriptions.
Subscription models can offer many strategic advantages, and they allow brands to connect with consumers in an ever-fractured market and can yield strong loyalty from members. But breweries should also be aware of the complexities and begin a program with eyes wide open, prepared for the additional muscle needed to pull it off.