The ABC’s of Beer Costs

By: Kary Shumway, Craft Brewery Financial Training

Brewery success depends on making great beer and making great profits. Profitability depends on knowing what the beer costs. Craft breweries are small manufacturers. In the finance world, to properly account for the costs of a brewery, we need to use manufacturing accounting. No need to be an accountant, just need to learn a few commonsense concepts. This article will give you grounding in the ABCs of your product costs so that you can make great profits to go along with the great beer.

The ABCs of Product Costing

•    Know your costs: Why it’s important.

•    The Building Blocks: Direct Material, Direct Labor, Overhead.

•    How to Implement a Simple Product Costing system.

Know Your Costs

  As businesspeople, we constantly strive to get better prices on the things we buy for our business: cans, bottles, carriers, mother cartons, etc. If there is an opportunity to save 5% or 10% without sacrificing quality or service, we jump on it. That’s just good business.

  The process of Product Costing is similar; however, we widen the lens and focus on every cost that goes into your beer.

  When you know all the costs, you begin to understand how they work together. Next, you understand how you can influence those costs, so that you can gain control of expenses and improve profitability.

  As your business grows and the numbers become larger this concept becomes more important. Set the foundation now. Know your costs.

The Building Blocks of Product Costing

  As noted above, breweries are small manufacturers, so a basic understanding of manufacturing accounting is required to know your costs. Don’t panic, I will explain this in common sense language. No accounting mumbo jumbo.

  The building blocks of your product costs: direct labor, direct material, and overhead. In a nutshell, these represent the cost of ingredients and packaging, the time to put it all together, and the overhead costs to make sure the operation runs smoothly.

DIRECT LABOR: This is the amount of time and payroll it takes to make your beer. Add up how much time it takes to make the beer and multiply by the pay rate of the folks making the beer.

DIRECT MATERIAL: This is the cost of water, malt, hops, and other ingredients that make up the beer. It includes the cost of bottles or cans, carriers, and other materials used in packaged beer.

OVERHEAD: This is the cost of everything else needed to produce your beer. Examples include the cost of utilities, water/sewer, lease expense, and a portion of the cost of your brewing equipment (based on the depreciation expense).

  All of these items taken together make up what’s called the bill of materials – the beer recipe, and the time needed to make it. Tracking all this may seem like a lot of work. Below I’ll cover two easy steps to get you started.

How to Implement a Simple Product Costing System

  Do these two things to start: calculate your standard costs and count your inventory regularly. These two things are like the 80/20 rule of understanding and staying on top of your product costs.

  If you haven’t heard of it, the 80/20 rule, otherwise known as the Pareto principle or law of the vital few, says that, for many events, roughly 80% of the effects come from 20% of the causes. I estimate that 80% of your product cost effects (improvement) will come from these two causes.

The 80/20 of Product Costs

1.   Calculate your Standard Costs

2.   Count your inventory on a regular basis

3.   Calculate Standard Cost

  Standard costs are the expected costs to make and package your beer. You can also think of this as the average cost of your beer. The actual cost will vary somewhat from batch to batch, but standard cost is intended to provide a good average. This gives you a benchmark understanding of what your beer costs.

  With standard cost, there is no need to record all the time and materials every time you brew a batch of beer, just do it once, and calculate your Standard Cost. The simplest approach is to capture the total costs associated with a brewing and packaging cycle, and then present the costs however they are most meaningful.

  For example, if a 15-barrel batch of kegged beer costs $750, this works out to a standard cost of $50 per barrel. This cost per barrel is useful when pricing your kegs for sale. Packaged beer will have a different standard cost to include the cost of cans or bottles, carriers and cartons, and other packaging.

  To calculate standard costs, begin with the building blocks: direct labor, direct material and overhead. Add them all up, and this is your standard cost. Direct labor + Direct material + Overhead = Standard cost

Count Your Inventory Regularly

  Regular and consistent counts of your inventory are among the most important things you can do to control your product costs. Counts ensure that the materials you think are there are actually there.

  Counts also ensure you don’t end up with a nasty surprise in the form of missing inventory. Missing inventory equals a write off. A write off is an expense that lowers your net income. It’s bad for your brewing schedule and worse for your income statement.

  If you take nothing else away from this article, please remember this: count your inventory regularly, match it up to the records in your inventory system, and analyze any variances. I’ve been burned so many times on this issue, it would be a personal favor if you would do this. I thank you, and your income statement thanks you.

  In previous articles, I’ve written about the basics of a good count process. Your inventory has feet and can disappear. Few things will hurt your products cost more than poor inventory count practices. Use this template to get ideas for your count process.

Wrap Up & Action Items

  Profitability depends on understanding your product costs. Understand your costs so that you can gain control over them. If you can control your costs, you can control your profit, and perhaps your destiny.

Review the ABCs of product costing and try out the ideas in your brewery:

•    Know your costs

•    Learn the Building Blocks: Direct Material, Direct Labor, Overhead

•    Implement a Simple Product Costing system

  You’ve got great beer, now it’s time to work on great profits. After all, if you aren’t profitable, you won’t be making beer much longer. The world needs your beer, and you need to be profitable. Learn the ABC’s so we can all enjoy your beer for years to come.

For more information please visit…inventory-count-process-scorecard/

Breweries: How to Price your Beer

Receive a special $50 discount off of the Craft Brewery Financial Training annual subscription. Visit http://www.craftbreweryfinance.com – Use the discount code beveragemaster at checkout to claim savings.

I recently bought a book called Priceless, The Myth of Fair Value. The book is 300+ pages long and provides great information about pricing and the role of human psychology in how purchasing decisions are made.

While the book contains a lot of interesting stories, studies, and research, it doesn’t do much to help with the fundamental question: How should you price your products?

Ideally, to price your beer, you would determine the costs, add a healthy markup, and sell it to your wholesaler (or retailer) at a fat profit. Unfortunately, the market forces and your competitors have some influence here.

So, how do you price your products?

You can look at what everyone else is charging and follow suit. You can take a wild guess and hope it will work out profitably in the end. Or you can go along with what your beer wholesaler suggests for pricing.

Regardless of how you may have priced your beer in the past, today we’re going to talk about how you can price your products profitably for the future. To make the concepts easier to understand, we’ll use hypothetical pricing numbers and examples. And we’ll walk through a template you can use to make pricing easy. Best of all, you don’t have to read a 300-page book to find the answers.

Disclaimer: Since we are talking pricing, all examples listed are hypothetical only and used for illustrative and informational purposes. Prices, costs, and margins will vary widely based on market conditions and other factors.

How to Price Your Products

  • Pricing Terms: PTC, PTR, PTW
  • How Pricing Works in the Real World: Margin needed by the brewery, wholesaler, and retailer
  • Use the Pricing Model: Plug n’ play Pricing tool for your Beer

Pricing Terms

The typical beer sales cycle looks like this: the brewery sells to the wholesaler, who then sells to the retailer, who then sells to the end consumer.

At each stage in the sales cycle, there are different prices and markups that are charged. The Price to Wholesaler, or PTW, is the amount the brewery charges to the wholesaler. The Price to Retailer, or PTR, is the price the wholesaler charges to the retailer. Lastly, the Price to Consumer, or PTC, is the amount charged to the consumer. This is the amount listed on the store shelf for your beer.

You won’t be surprised to hear that the price the consumer pays for your beer is significantly higher than what you sold it to the wholesaler for. The reason, of course, is that each stakeholder in the sales cycle needs to make money. The brewery, the wholesaler and the retailer all have margins that they need on the sale of the beer in order to run their business profitably.

Those terms again…

  • PTW = Price to wholesaler
  • PTR = Price to retailer
  • PTC = Price to consumer

How Prices Work in the Real World

To properly price your beer, it may be useful to work backwards from the Price to Consumer. This is the price of the beer on the shelf at the retail account. If your competitor’s brand is selling for a hypothetical $12.99 a six-pack, you may want to price your beer accordingly.

The challenge is to figure out how much to charge your wholesaler, who then will charge the retailer, who then will price the beer at the $12.99 price point. How does all that math work? We’ll take this in small steps.

Here’s a hypothetical example. Let’s say you charge the wholesaler $25 for a case of beer. The wholesaler needs to make, for example, a 30% margin when they sell it to the retailer. To get a 30% margin, the wholesaler then charges the retailer $36 for the beer.

The math: $36 minus $25 = $11 Margin for the wholesaler. $11 divided by $36 = 30.5% Margin percentage.

Continuing the example, let’s say the retailer also needs to make 30% on the beer. Since they will sell it in six-packs, they markup the beer and charge the customer $12.99 per six-pack.

The math: 4 six-packs times $12.99 = $51.96 total sales to consumer for the case of beer. $51.96 minus $36 cost of beer = $15.96 margin.  $15.96 margin divided by $51.96 sales price = 30.7% margin percentage.

Each stakeholder needs to make their margins at each point in the sales cycle. This is what keeps the world going round, and the beer being sold. The numbers can get confusing fast. Thank goodness we have a Pricing Model that will do the math for you.

Use the Pricing Model: Plug n’ play Pricing for your Beer

There are many variables to consider when pricing your beer. You can break out the calculator, pen, and pencil, or you can use this Pricing Model spreadsheet. Below is a snapshot:

The first step is to determine what your beer costs to make. These costs include direct labor, direct material, and overhead. Next, determine the margin that your brewery needs to cover operating costs and realize a net profit.

In the example above, the total costs of the package are $14.80. The PTW, price to wholesaler is $25, and the brewery margin is 40.8%.

The next step is to understand the required margins for the wholesaler and retailer and expected price to consumer.

In the example above, the wholesaler sells to the retailer at $36 per case. The retailer then sells the case in four units (four six-packs) at $12.99 each. This is the price to consumer. 

The pricing model takes all the variables involved in setting the price and combines them into an easy-to-use spreadsheet. Simply enter a few numbers and you’ll have the information to get your beer on the shelf at a competitive price.

Wrap Up + Action Items
Read and understand the pricing terms – Price to Wholesaler (PTD), Price to Retailer (PTR) and Price to Consumer (PTC). Know that everyone needs to make money at each step in the sales cycle. The wholesaler needs to make their margin, and so does the retailer. Most importantly, so do you, the brewery owner.

Don’t guess or follow the herd when it comes to pricing. Use the pricing model to properly price your beer and achieve profitability. Your income statement will thank you.

You can download a copy of the pricing model at www.CraftBreweryFinancialTraining.com.

 

Breweries: How to Price your Beer

Take advantage of our 50% Reader Discount off of the Craft Brewery Financial Training annual subscription. Visit http://www.craftbreweryfinance.com. Use the discount code “beveragemaster” at checkout to claim your savings.

I recently bought a book called Priceless, The Myth of Fair Value. The book is 300+ pages long and provides great information about pricing and the role of human psychology in how purchasing decisions are made.

While the book contains a lot of interesting stories, studies, and research, it doesn’t do much to help with the fundamental question: How should you price your products?

Ideally, to price your beer, you would determine the costs, add a healthy markup, and sell it to your wholesaler (or retailer) at a fat profit. Unfortunately, the market forces and your competitors have some influence here.

So, how do you price your products?

You can look at what everyone else is charging and follow suit. You can take a wild guess and hope it will work out profitably in the end. Or you can go along with what your beer wholesaler suggests for pricing.

Regardless of how you may have priced your beer in the past, today we’re going to talk about how you can price your products profitably for the future. To make the concepts easier to understand, we’ll use hypothetical pricing numbers and examples. And we’ll walk through a template you can use to make pricing easy. Best of all, you don’t have to read a 300-page book to find the answers.

Disclaimer: Since we are talking pricing, all examples listed are hypothetical only and used for illustrative and informational purposes. Prices, costs, and margins will vary widely based on market conditions and other factors.

How to Price Your Products

  • Pricing Terms: PTC, PTR, PTW
  • How Pricing Works in the Real World: Margin needed by the brewery, wholesaler, and retailer
  • Use the Pricing Model: Plug n’ play Pricing tool for your Beer

Pricing Terms

The typical beer sales cycle looks like this: the brewery sells to the wholesaler, who then sells to the retailer, who then sells to the end consumer.

At each stage in the sales cycle, there are different prices and markups that are charged. The Price to Wholesaler, or PTW, is the amount the brewery charges to the wholesaler. The Price to Retailer, or PTR, is the price the wholesaler charges to the retailer. Lastly, the Price to Consumer, or PTC, is the amount charged to the consumer. This is the amount listed on the store shelf for your beer.

You won’t be surprised to hear that the price the consumer pays for your beer is significantly higher than what you sold it to the wholesaler for. The reason, of course, is that each stakeholder in the sales cycle needs to make money. The brewery, the wholesaler and the retailer all have margins that they need on the sale of the beer in order to run their business profitably.

Those terms again…

  • PTW = Price to wholesaler
  • PTR = Price to retailer
  • PTC = Price to consumer

How Prices Work in the Real World

To properly price your beer, it may be useful to work backwards from the Price to Consumer. This is the price of the beer on the shelf at the retail account. If your competitor’s brand is selling for a hypothetical $12.99 a six-pack, you may want to price your beer accordingly.

The challenge is to figure out how much to charge your wholesaler, who then will charge the retailer, who then will price the beer at the $12.99 price point. How does all that math work? We’ll take this in small steps.

Here’s a hypothetical example. Let’s say you charge the wholesaler $25 for a case of beer. The wholesaler needs to make, for example, a 30% margin when they sell it to the retailer. To get a 30% margin, the wholesaler then charges the retailer $36 for the beer.

The math: $36 minus $25 = $11 Margin for the wholesaler. $11 divided by $36 = 30.5% Margin percentage.

Continuing the example, let’s say the retailer also needs to make 30% on the beer. Since they will sell it in six-packs, they markup the beer and charge the customer $12.99 per six-pack.

The math: 4 six-packs times $12.99 = $51.96 total sales to consumer for the case of beer. $51.96 minus $36 cost of beer = $15.96 margin.  $15.96 margin divided by $51.96 sales price = 30.7% margin percentage.

Each stakeholder needs to make their margins at each point in the sales cycle. This is what keeps the world going round, and the beer being sold. The numbers can get confusing fast. Thank goodness we have a Pricing Model that will do the math for you.

Use the Pricing Model: Plug n’ play Pricing for your Beer

There are many variables to consider when pricing your beer. You can break out the calculator, pen, and pencil, or you can use this Pricing Model spreadsheet. Below is a snapshot:

The first step is to determine what your beer costs to make. These costs include direct labor, direct material, and overhead. Next, determine the margin that your brewery needs to cover operating costs and realize a net profit.

In the example above, the total costs of the package are $14.80. The PTW, price to wholesaler is $25, and the brewery margin is 40.8%.

The next step is to understand the required margins for the wholesaler and retailer and expected price to consumer.

In the example above, the wholesaler sells to the retailer at $36 per case. The retailer then sells the case in four units (four six-packs) at $12.99 each. This is the price to consumer. 

The pricing model takes all the variables involved in setting the price and combines them into an easy-to-use spreadsheet. Simply enter a few numbers and you’ll have the information to get your beer on the shelf at a competitive price.

Wrap Up + Action Items
Read and understand the pricing terms – Price to Wholesaler (PTD), Price to Retailer (PTR) and Price to Consumer (PTC). Know that everyone needs to make money at each step in the sales cycle. The wholesaler needs to make their margin, and so does the retailer. Most importantly, so do you, the brewery owner.

Don’t guess or follow the herd when it comes to pricing. Use the pricing model to properly price your beer and achieve profitability. Your income statement will thank you.

You can download a copy of the pricing model at www.CraftBreweryFinancialTraining.com.

How to Improve SKU Management

Beer Business Finance

Financial Intel for Beer Distributors

“The more inventory a company has, the less likely they have what they need.” Taiichi Ohno

Inventory is the life blood of a wholesaler. Brands and products help define your identity as a business. However, if not properly managed, these same brands can bury you in expenses.

Purchasing inventory is the single biggest outlay of cash that your company incurs each year. In a $50 million company, more than $35 million is spent on inventory.

That is big dough. It’s also a big opportunity to enhance company financial performance by improving your portfolio management and SKU review process.

Managing inventory is a mixture of art and science. It’s a blend of subjective and objective information. There are the numbers (the objective information, the science) and then there’s your gut (the subjective information, the art) The idea is to combine the two and make the best decisions possible for your inventory portfolio and your bottom line.

The New SKU Management Course and this article will provide guidance and strategy on how to manage your inventory portfolio, monitor your key metrics and trim your un-profitable SKUs so that you can improve profit and cash flow.

The road to better SKU Management is just ahead. Let’s go.

SKU Management: Overview

  1. SKU Landscape – Then and Now
  2. Total inventory carrying costs, quantify the problem, fixed + variable, template to capture your costs
  3. The Inventory Scoreboard, Key Metrics
  4. SKU Management Fundamentals: Philosophy + Process
  5. How to identify under-performing SKUs and Fix, Sell or Close

SKU Management: Then and Now

It used to be a lot simpler. Just a few decades ago, beer wholesalers carried 100 SKUs on average. Today, the average is well over 1,000. A ten-fold increase in a short period of time.

In addition to SKU count growth, the number of craft breweries has increased five-fold in the last ten years from 1,500 to over 7,000.

The growth in both areas has created a phenomenon called SKU ‘intensity’ – the increase in package types per brand. In the past, a beer brand might be available in half-barrels and 4/6 pack bottles.

Today, beer is being packaged in 12oz cans, 16oz cans, 6packs, 12packs, 15packs, and so on. You might have five or ten different packages for the same beer. Now, that’s intense.

Non-beer SKUs are also being added to the mix: Wine, Non-Alcohol, and snacks for example. These fill up the delivery truck and can help get you more profitable stops. They also fill up the warehouse and create additional challenges to manage the inventory.

How did this happen?

You know how it happened…

Consumers demand a wide variety of choices. They want what’s new and what’s different.In order to keep up with ‘new and different’ you have to carry new breweries, new packages, and new styles.

New and different drives the growth of SKU’s in your portfolio. The simpler times of consumer brand loyalty is on a hiatus.

Distributors and retailers scrambling to meet the demands, sometimes managing by FOMO – Fear of Missing Out on the next big thing. As a result, distributors take on more brands, the SKU count goes up, and your cash flow goes down.

Distributor Evolution

In response to all this change, distributors have needed to evolve.

Specialized sales teams have been added to focus on craft. Sophisticated warehouse and inventory systems have been installed to keep track of all the new SKUs. And higher skills and new training for employees has been needed to keep pace with these new systems.

Change is nothing new for distributors, and the evolution of the business has been constant. The SKU challenge is just one more in a series of changes.

SKU Carrying Costs

So, let’s get into the nitty gritty: What is the cost to your business of these SKU increases?

In other words, how much more does it cost if you have 500 SKUs or 1,000? How about 1,500 SKUs or 5,000?

To answer the question, we’ll begin an assessment and calculation of Cost to Carry. This metric captures all costs that are included in managing, maintaining and holding your inventory.

Interestingly, studies show that 65% of companies don’t calculate carrying costs. If you don’t know your costs it is difficult to manage and improve them.

The main purpose of calculating your Cost to Carry is to identify controllable costs, and use this information as a basis for making decisions on managing breweries, brands and SKUs.

SKU Carrying Costs: Rules of Thumb

The average cost to carry inventory is 25% of inventory value. The number varies greatly from company to company, with percentages ranging from 18 to 75%.

The calculation works like this:

Add up all the expenses to manage, maintain and hold your inventory, then divide by the average on-hand inventory value.

Total Costs to Carry $500,000 divided by Inventory Value of $2,000,000 = 25%

SKU Carrying Costs: What’s Included

Below is a listing of costs that are typically included in the calculation:

  • Rent / Lease expense
  • Utilities
  • Wages: Operations Team
  • Wages: Admin Team
  • Breakage, Out of Code, Shrinkage
  • Destruction Costs
  • Insurance
  • Depreciation
  • Cost of capital (interest)
  • Transportation / Handling
  • Taxes

SKU Carrying Cost Template

To create your schedule of carrying costs, follow the steps below:

  1. List out costs associated with holding inventory. Use the list above, add/subtract based on the specifics of your beer business.
  2. Identify the basis for the cost – those factors that drive the cost. For example, hours and labor rates drive the wages, and square footage drives lease costs.
  3. Quantify the total annual cost for each item.
  4. Identify fixed costs and variable costs. Fixed costs are those that stay the same if you have 100 SKUs or 1,000.Variable costs will increase or decrease depending on the amount of inventory.
  5. Highlight those costs you can control/reduce.
  6. Calculate and input your average on-hand inventory value.

SKU Carrying Costs: Hard Costs vs Soft Costs

The items above are the Hard Costs, the actual dollars, spent on carrying inventory. There are soft costs to consider as well.

Soft Costs:

  • Opportunity costs: ‘the loss of potential gain when one alternative is chosen over another’. We have finite resources, so when dollars are invested in one brand or one SKU they aren’t available to invest in something else (other brands, other business opportunities, etc.)
  • Focus costs: The sales team can only handle so much, overload, distraction, and confusion costs money. Too many SKU’s and brands can become too much to focus on.

Soft costs are difficult to quantify, and don’t show up clearly on the income statement. But they do affect the price you pay to manage inventory.

SKU Inventory Metrics

Management of inventory can become a game of don’t run out, but don’t have too much on hand. Set proper expectations and use numbers to measure those expectations.

SKU Inventory Metrics help quantify what good inventory management looks like.

The Four Key Metrics of Inventory Management

  1. Days on Hand. Measures “Don’t have too much.”
  2. Out of Stocks. Measures “Don’t run out.”
  3. Out of Code. Watch and manage code dates.
  4. Inventory Variances. Count and safeguard your inventory.

Sign up for the New SKU Management course to get the presentation video, full Guide book, and spreadsheet templates. Your cash flow will thank you.

Yours in SKU Management,

Kary

How Your Intellectual Property Can Make or Break a Merger

By: Ashley Earle, Attorney, Dinsmore & Shohl

Like a good recipe, a good brand name for a beer, wine, or other beverage can drive sales. That recipe, distilling process, bottle design, or logo is all a form of intellectual property that helps define who you are in the industry. It can also be a defining and important part of any transaction.

  In today’s COVID world, breweries, wineries and distilleries of all types are doing what they have to in order to survive and one day thrive. Some are turning to mergers and acquisitions as potential strategies for survival and success. It’s important to know how your intellectual property (IP) can make a difference, good and bad, to a potential deal. Below are the five things you need to know about IP in a merger or acquisition. 

What Is IP?

  Before we get there, it’s important to quickly define the different types of IP that exist:

•    Trademarks: A trademark is the most common form of IP protection in the alcoholic beverage industry. It protects anything that functions as a source identifier, (product names, company names, logos like the NBC peacock, bottle or can designs like the Coca-Cola bottle, or even sounds like the ESPN tones). Trademarks can be registered and unregistered, though unregistered marks are limited in geographic scope.

•    Patents: This protects a unique invention (a brewing process, a novel distillation column), a unique design (bottle designs), or a unique plant (strains of yeast or grapes). Patents must be registered and issued to be enforceable, though pending applications will be relevant in an M&A deal.

•    Copyrights: Copyright protection arises automatically as soon as an original work of authorship is “fixed” into something tangible. Basically, once you draw the artwork for your bottle or can, write the code for your website, or draft up a piece of marketing material, it is protected by copyright. Registration affords several key benefits but is not required to claim ownership in a work.

•    Trade secrets: A trade secret is something that gives you value because it is secret. Examples include customer or vendor lists and recipes.

  Additionally, when you go through a merger or acquisition, you will often be asked to list out all of your domain names, social media, and in some cases, any software that is material to your business. It is important to make sure you keep a list of these assets in case an opportunity arises.

  Now that we’ve covered the basics, let’s dive into the top five things you need to know in a merger and acquisition when it comes to your IP.

What IP Do I (and They) Have?

  Start by taking an inventory of everything you have that is protectable – beer names, wine names, logos, artwork, packaging, unique brewing processes or recipes, social media accounts, and domain names – to name a few. This should include anything you registered, anything you are trying to register (like pending applications), and anything unregistered but material to your business. Disclosure schedules are used to list all of the IP and what is to be transferred in the transaction (if not everything). Be clear to fully disclose what you have without overstating.

  The same should be true of the other side. You should ask them to disclose all of their IP assets that will be a part of the deal, all the way down to their social media accounts and domain names.

  As you and the other side are pulling this together, you also want to collect all of your documentation to evidence the IP. This could include trademark applications and registrations, copyright registrations, patent applications, patents, email accounts, and social media accounts. You will also want to pull any licenses you have to use IP, independent contractor agreements regarding creation of IP, liens on IP (if applicable), and any documentation relating to disputes or claims of infringement involving your IP (if applicable). Make sure you have clear documentation of the chain of title (meaning who owned it at each point) from origination to present day.

Do Both Sides Actually Own Their IP?

  The next question you need to ask yourself in any deal is: Do we actually own that IP? The answer may not be as simple as you think. You need to be sure that all assets are owned by the company and not an employee, owner, or even a third party. A lot of companies don’t realize that if they hire an independent contractor to make something, whether a website, logo, or marketing materials, unless they have the contractor expressly assign the finished product to their organization, the contractor owns it. Employee-created works should automatically transfer to the employer, but it is still good practice to include an assignment in your employment agreements. 

  Ownership issues can derail or even terminate what would otherwise be a great deal. Make sure that the ownership of IP on both sides is clearly documented and validated as you move forward.

What Are We Agreeing to In the Deal Terms?

  Within the deal documentation, there will be a number of representations and warranties and indemnity provisions that relate solely to IP and the disclosures and transfers being made in the deal. This is why it’s so important to make sure you have your ducks in a row with your IP as you move forward.

  These reps and warranties will range from confirming ownership of the IP to promising your IP does not infringe the rights of others. You can also see reps and warranties that ask you to declare that your employees have not created any IP that is not owned by the company. Your legal counsel can help to finesse the reps and warranties to match your circumstances and protect you as best they can, but it’s important you ensure everything stated is accurate. A broken rep and warranty in a transaction can be expensive and arise after the deal is done.

  You may also be asked to indemnify the other side for any claims of infringement of the IP, even if you are selling your business to them and walking away. Typically, indemnity provisions should only last for a particular time period following the sale and have a few caveats of what does and does not trigger indemnity. It’s important to make sure you understand them and how they may impact you in the future.

  It’s also important that you understand what will happen to your IP or the other side’s IP after the deal is done. Who will end up as the owner? Who has control? Will any IP be left behind with either party? Are there any pitfalls with the IP that need to be addressed (like prior enforcement matters that resulted in Coexistence Agreements or liens)? Given the importance of IP to any business, it’s doubly important to understand what happens to the IP in the deal as you look to the future.

Were Things Done Right with the IP by Both Sides?

  While you want to believe all assurances a party makes in fostering the deal, both sides must do their due diligence. Did an employee copy and paste images from Google that are infringing someone’s copyright? Did you use unauthorized background music in a promotional video or advertisement? Did you see a great idea at a trade show and implement something similar, not realizing it was patented or trademarked? As the brewery, distillery, or winery grows and expands, so do the footprint and the risk for claims against you.

  Similarly, data privacy can be another pitfall. If any customer information is kept, such as names, birthdays, addresses, or credit card information, (or more abstract information such as IP address or use of cookies, beacons, and pixels), you have to be sure that this information is kept safe and confidential. Ensure there are no data breaches and never have been any breaches.

Likewise, if you are keeping any data, a clear privacy policy must be in place. Do not be tempted to copy and paste a privacy policy found online. The Federal Trade Commission (FTC) often comes down hard on businesses for having a policy that does not match what they are actually doing. Copying and pasting can lead to a policy that misleads consumers as to how you handle their data – and that’s a big problem.

A privacy policy can be fairly simple and straight forward: Explain what information you collect, where you keep it, how long you keep it, and how it is stored, and provide an option for customers to opt out (such as an email address to contact). The more information (and the clearer the information) the better – and when in doubt, ask for affirmative consent.

  With these five things in mind, you can approach a deal with confidence and find the perfect fit to expand and secure your brewery, distillery, or winery. When in doubt, consult your attorney – we’re here to help!

  Ashley Earle is an attorney at Dinsmore & Shohl who focuses on branding protection through trademark and copyright law. Dinsmore represents breweries, distilleries, wineries, cider companies and other alcoholic beverage producers in business, regulatory, intellectual property and litigation matters. Dinsmore attorney represent these entities in every stage of their business, from formation to operation to final sale or closure.  Ashley can be contacted at…513-977-8522 or ashley.earle@dinsmore.com

Brewery Financial Resolutions for the New Year

As we turn the calendar to 2021, it’s time to make financial New Year’s resolutions for your brewery. Financial resolutions may include sales growth, margin improvement, or expense reductions, to name a few.

  However, during the Covid-19 pandemic your most important resolution may be to improve cash flow. During a crisis, the most essential asset is cash, and access to capital. Simply put, when you have access to capital you can stay in business and ride out the financial turmoil.

  Therefore, in the new year, resolve to build a financing plan for your brewery so that you always have access to capital when you need it.

  In this article, we’ll review tactics and strategies to build your brewery financing plan. We’ll cover loan terms, common brewery loan structures, and the details of what a bank will need from you in order to get funding. A complete and well-thought-out financing plan lets you develop alternate sources of cash and capital when emergencies happen. Like right now.

Brewery Loan Terms and Types

  One of the keys to success in business is to have a financing plan in place before you need the money. The financing plan may include a working capital line of credit, equipment line of credit, and commercial term loans. Each loan serves a specific purpose in funding your brewery business.

Here’s a summary of each loan type:

  Working capital line of credit. This is used for short term funding needs, seasonal, or temporary cash shortfalls. It may be open ended, or there may be requirements for re-payment at certain time intervals. For example, the line may need to be paid down to zero on an annual basis. This type of loan is generally secured by assets, such as accounts receivable and inventory, and may require a personal guaranty.

  Equipment line of credit. This line of credit is for specific asset purchases like a canning line, tanks, or warehouse equipment. The line provides for a pre-approved buying ability so that you can act fast if there is an auction on used equipment, for example. The line is open ended, available when you need it, and converts to a term loan which is paid down in monthly installments. This is a useful part of a financing plan as it provides flexibility, ability to act quickly, pre-planning for brewery equipment.

   Term Loan: This loan is secured by the equipment purchased and is paid down in monthly installments of principal and interest. Unlike the equipment line of credit, this type of loan needs to be reviewed and approved prior to funding, so it takes longer to get access to the funds.

A Typical Brewery Loan Structure Might Look Like This…

  In this example, the business has a working capital line of credit of $250,000 and has used (borrowed) $50,000 of this amount. Therefore, $200,000 remains available if future cash needs arise.

The equipment line of credit in the amount of $100,000 has been pre-approved and is available should the business need to purchase brewery equipment quickly. 

  Equipment Term Loans of $100,000 have been borrowed and are related to past purchases. This loan is being paid down, or amortized, on a monthly basis with principal and interest payments.

The working capital and equipment lines of credit can provide access to capital when you need it most. However, your financing requirements may vary, so be thoughtful about what you need now, and may need in the future.

What the Bank will Need from You

  At the heart of any good financing plan is a good financial pro forma. This document will demonstrate your funding needs and ability to re-pay the loans. Moreover, the pro forma shows your lender that you understand what they require to approve the loan. This provides credibility for you and makes the lender’s job easier.

  A typical financial pro forma will present three to five years of projected results. The information is presented in summary form, and shows sales, margins, operating expenses, net income, and EBITDA (Earnings Before Interest, Taxes, Depreciation and Amortization). The expected financial results are then compared to the projected payments on the requested loans. This comparison establishes the ability to make the required payments.

  Here’s an example of a summary financial pro forma:

  In this example, the financial pro forma shows a summary of annual sales, margins, operating expenses, net income and EBITDA. The EBITDA is then compared to the expected loan payment to show the ability to re-pay the loan.

Loan Covenants are Promises

You Make to the Bank

  The financial pro forma presents expected financial results and demonstrates your ability to re-pay the debt. In addition, the bank will require regular financial updates to ensure the expected results are being achieved. This is typically done by sending monthly or quarterly financial reporting.

  Further, the bank will require that loan covenants be met. Loan covenants are additional financial promises that you make to the bank. Examples include the debt service coverage ratio and the debt to net worth ratio.  

  The debt service coverage ratio measures how well cash flow covers debt payments. Here’s an example:

• Debt Service (payments on the loan) = $100,000

• Coverage (cash flow or EBITDA) = $150,000

• Debt service coverage ratio = 1.5x

  n this example, the EBITDA of $150,000 is divided by the debt service of $100,000 and yields a ratio of 1.5 times. In other words, EBITDA (cash in) is greater than debt service (cash out) by 1.5x.

  A second loan covenant that is often required is the debt to net worth ratio. As the name implies, this ratio compares the total debt of the brewery to the net worth. Here’s an example:

• Debt = $150,000

• Net Worth = $300,000

• Ratio = 0.5x

  In this example, total brewery debt is $150,000 and net worth is $300,000. For the calculation, debt is divided by net worth, and the result is a debt to net worth ratio of 0.5x.

  The covenant requirements for each ratio will be set by your lender and spelled out in your loan documents. It’s important to understand how the calculations work and measure actual results against the financial promises (covenants) that have been made.

Wrap Up & Action Items

  In the middle of the Covid-19 pandemic your most important asset is cash and access to capital. The working capital and equipment line of credit provide access to cash when you need it most. The financial pro forma demonstrates your cash needs and ability to make loan re-payments.

  A financing plan provides access to capital so that you can stay in business and ride out the financial turmoil. As you set your New Year’s resolutions, consider resolving to create a solid financing plan for your brewery.

For more information, visit: http://www.craftbreweryfinancialtraining.com/

Beer Wholesaler Checklist: How to Increase Business Value

By: Kary Shumway, Beer Business Finance

The Holiday Season is a perfect time to measure and improve business value. Value equates to strength and strength provides you with more business options.

These options may include selling your business at a higher price or being in a stronger position to buy another wholesaler business.

When you focus on creating value, there is an immediate improvement in business results: Profits, cash flows and business systems benefit from the attention to value creation.

Today’s gift is the Beer Wholesaler Value Creation Checklist. Use this one pager to bring focus to growing the value of your beer business today. https://beerbusinessfinance.com/wp-content/uploads/2020/12/BBF-Checklist-How-to-increase-business-Value.pdf

Cash flow and profit are for today, but business value is forever. Take five minutes and learn how to protect forever.

Yours in Business Value,

Kary

https://beerbusinessfinance.com/wp-content/uploads/2020/12/BBF-Checklist-How-to-increase-business-Value.pdf

Brewery Open Book Management

By: Kary Shumway

In normal times, it’s a challenge to manage brewery operations, and stay on top of the finances. There’s a lot to juggle, and never enough time to get it all done. In these abnormal times, these tasks become even more difficult.

  However, one way to manage your brewery business differently, and more effectively, is with open book management. Open book management (OBM) is a system in which employees are provided with financial information so that they can make better business decisions.

  The idea is that employees are more motivated, engaged, and productive when they are treated as business partners (who commonly have access to financial data) instead of employees. In these uncertain times, more information can provide employees with more certainty to make better decisions.

  Open Book Management has four basic elements:

•    Train employees in financial literacy so they can read and understand financial statements.

•    Empower employees to use financial information when making business decisions.

•    Trust employees as business partners with proprietary company information

•    Reward employees fairly for the brewery’s success

Train employees in Financial Literacy

  Financial literacy is the ability to read and understand the numbers of your brewery business so that you can improve financial results. Improving financial results may include growing sales, strengthening gross margins, or increasing cash flow. In today’s uncertain times, financial literacy is more important than ever.

  The numbers of your brewery business are reported on the financial statements – the income statement, balance sheet and statement of cash flows. Each of these reports provides vital financial information to understand what’s going on in your business

  The financial statements are the scoreboard for your brewery and the numbers show whether you are winning or losing. The financials show you where you are in relation to your goals and how much harder you must push to hit the targets.

Open book management requires that you train employees in financial literacy so that they can know the score, and help the brewery win the financial game.

Empower Employees to Make Decisions

  In most organizations there is a decision-making hierarchy. Owners or managers make the decisions, and employees carry out the directives. With open book management, everyone is responsible for making decisions and has the authority to do so.

  If a problem needs to be fixed, employees are empowered to fix it. If an opportunity needs to be seized upon, employees are obliged to act. There is no waiting around for a manager to make these decisions. The move lies squarely on the shoulders of employees.

  With open book management, employees use their understanding of the numbers – financial literacy – to inform their decisions. For example, suppose a brewery uses a mobile canning company to package beer. The packaging manager understands the costs associated with this service and can make an informed decision about whether the purchase of canning line would benefit the company financially. The packaging manager understands how to build a return on investment calculation and is empowered to make a purchase recommendation based on the numbers.

Trust Employees with Proprietary Financial Information

  Open book management centers around trust. Do you trust your employees with sensitive financial information? What if confidential information is shared with competitors? What if it’s leaked out on social media? Sharing information requires trust.

  OBM requires that we trust employees to handle sensitive information with professionalism and confidentiality. The best way to earn the trust of employees is to be trustworthy yourself. Be transparent, share the information that will help them do their job better, or have a better understanding of the business. When you call upon the highest level of thinking from your employees, you get the highest level of results.

Reward Employees for Brewery Success

  In an open book management system, employees are asked to learn new things in addition to their core job. Brewers are asked to understand the costs that go into making the beer. Brewery salespeople are asked to understand product margins for each brand in the portfolio. Taproom staff are asked to learn the average order per customer, for example. Everyone in the organization needs to learn something new to make the open book management system work properly.

  The goal of open book management is to create a culture of business owners. OBM teaches employees to think of themselves as businesspeople instead of workers. To make this real, businesspeople need a stake in the outcome – a reward for brewery success. As such, part of what they earn should be tied to company financial performance.

  A stake in the outcome gives employees a vested interest in improving financial results. The brewer learns about the costs that go into making the beer so that she can find ways to be more efficient. The salesperson learns about product margins so that he understands the importance of proper pricing. The taproom server learns about the average order per customer to find ways to increase customer sales.

  Learning about the financial aspects of the business that are within the employee’s area of control moves the brewery towards the goal of improving overall financial results. And towards the reward of having employee businesspeople share in the success.

Wrap Up and Action Items

  Open book management is a system where financial information is shared with employees so that they can make better decisions. Better decisions lead to better financial outcomes, and better financial outcomes lead to a stronger brewery business for everyone.

  OBM requires that you train, empower, trust and reward employees. Train employees in financial literacy so they understand the finances of the business. Empower employees to make decisions and encourage them to do so. Trust employees with sensitive information and reward them when brewery financial success is achieved.

  In these uncertain times, open book management provides a way to manage your business more effectively and to reward your employees for a job well done.

  I’d like to offer your readers a $50 discount off of the Craft Brewery Financial Training annual subscription. Visit http://www.craftbreweryfinance.com Use the discount code beveragemaster at checkout to claim savings.

Raising Capital for Craft Spirits Through Crowdfunding

By: Becky Garrison

Since its founding in 2013, Seattle-based Copperworks Distilling Company developed an award-winning portfolio of spirits with accolades such as the 2018 Best Distillery of the Year award from the American Distillery Institute. Yet, according to Jason Parker, Co-Founder and Presi-dent, they found themselves at a crossroads in growing their distillery last year. Even though they had more than 260 barrels of whiskey aging in inventory, the current demand for their American Single Malt whiskey exceeded their supply of mature whiskey.

  “The only way to win sales in the whiskey market is to have whiskey to sell,” Parker told Beverage Master Magazine. “If we are only growing through cash flow generated by vodka, gin and a little bit of whiskey sales, we won’t have the whiskey to compete in the market against those businesses who received capital investments to produce whiskey. In essence, we must produce whiskey faster than our current cash flow will allow.” 

  Rather than resort to traditional ways of generating capital, they wanted to explore a way to ex-pand their business that would get their friends, family, customers and other supporters involved as brand ambassadors. “We wanted to give them an opportunity to own a little piece of the work and be with us as we grow,” said Parker. 

Choosing Equity Crowdfunding

  Copperworks decided to raise money via equity crowdfunding through the WeFunder website. In Copperworks’ estimation, this approach enables individuals to become part-owners of a privately held company by trading capital for equity shares. This method of generating capital became available in 2016 with the passage of a new law called “Regulation Crowdfunding.” This shift made it legal for anyone to invest small amounts of money in startups.

  Copperworks chose equity crowdfunding over more established crowdfunding platforms like Kickstarter, Indigogo or GoFundMe because, with equity crowdfunding, a company issues equi-ty, such as shares of company stock, to participating investors. A company like Copperworks may also choose to offer perks, but the major incentive is the opportunity to become shareholders in the company.

  In comparison, traditional crowdfunding is more rewardsbased, whereby those who contribute to the campaign receive a perk, such as a discount or an advance copy of the product, but they have no equity in the company. Furthermore, a traditional crowdfunding campaign often offers their products at a discount to generate interest. Should the campaign take off, companies can find themselves unable to meet market demand at this low price point.

  According to Parker, a key advantage of equity crowdfunding is the company’s opportunity to utilize its investors as brand ambassadors. While this component of Copperworks’ strategy has been put on hold due to COVID-19, they are currently in the process of building a brand ambas-sador kit for their investors. In this kit, investors will be given the details of how to approach a restaurant, bar, grocery store or liquor store on behalf of Copperworks.

Challenges of Using Equity Crowdfunding

  Parker acknowledges the need for a distillery to ascertain if equity crowdfunding is the right ap-proach. For example, this approach to raising funds may not work for a business that has only been around for a year or less and has yet to build up a loyal following. “Equity fundraising is a good thing when you’re mature enough for the company to attract the appropriate investors for the valuation,” he said.

  From a company’s point of view, equity crowdfunding requires more upfront costs and financial discipline. The company’s records need to be reviewed professionally, an expensive process that took Copperworks three months to complete. In addition, WeFunder takes 7% of the funds raised, unlike a bank loan where one receives the entire amount upfront and then pays interest over time. Depending on the terms of a loan, a company may pay more in interest through a traditional loan. However, for those companies needing the full amount upfront, a bank loan may be their best option.

  Also, with equity crowdfunding, Copperworks had to be totally transparent with their financials, a process that included having this information readily available for public viewing. For Parker, this transparency fits in with their business model. “We believe transparency is one of the things missing in businesses today, so we want to model that behavior.” In the issue of transparency, they chose to share with their investors why they needed to raise money and how they intended to use these funds.

Promoting and Implementing the Equity Fundraising Campaign

  Copperworks promoted their campaign through their mailing list of 12,000 individuals. In addi-tion, they reached out to the 3,600 folks who liked their Facebook page because they had a high rate of customer engagement on this platform. They were also featured for five weeks in the American Distilling Institute newsletter. Their campaign, which ran from the end of February to April 2020, netted a total of 409 investors and $776,480 in funds.

  Parker admits to the challenges of raising funds right as COVID-19 began impacting the econo-my starting in mid-February. “It’s not very easy to ask people to spend money on a company when they may not have a job, their life savings may be losing 30% of its value, and they don’t know who around them is even going to be alive in a few months.”

  However, he said that since Copperworks had been around for a long time, many people emerged who really liked the company and their products and were looking to support something they cared about. 

  Regardless of the amount of their investment, each investor receives an annual report along with an invitation to every quarterly meeting. For those who invested $1,000, they get 10% off all Copperworks goods for life. Other perks were offered to those investing at higher increments, such as an offer to pick a single cask whiskey, a free event rental or an invitation to be on the board of directors.

  As per the SEC regulations, Copperworks disclosed to their investors the risks associated with capital works. While some of the risks noted are associated with investing in any company, others are specific to the distilled spirits market or Copperworks in particular. For example, the cur-rent distilled spirits market growth could slow or stop in the future. Along those lines, due to the threetier distribution system in the alcohol industry mandated by U.S. law, Copperworks is reli-ant on distribution companies. The distribution system has experienced consolidation in recent years, and should this consolidation continue, distilleries may face difficulty in expanding the distribution of their products.

Outcome of Equity Fundraising Campaign

  Copperworks successfully raised enough money to continue production during the COVID-19 shutdown and produce whiskey at their all-time maximum rate. All employees kept full-time hours, even though the tasting room was (and remains) closed. Therefore, the distillery could de-vote some of its resources to producing hand sanitizer, a product badly needed at the start of the pandemic. 

  Even better than simply raising money, which a bank loan could have accomplished, Copper-works was able to fully engage the support of their loyal fans. Customer engagement through social media, email and quarterly calls increased the opportunity for Copperworks to share their story and their customers to become brand ambassadors. New customer acquisition, which is much more difficult while the Copperworks tasting room is closed, increased through word-of-mouth, and online sales increased due to these outreach efforts.

  As Copperworks looks to expand their production area and event space, they have solicited their new investors’ network to help them find even more opportunities to grow their business. Copperworks is truly building an army of brand ambassadors and getting new talent and ideas through the use of regulation crowdfunding.

Intellectual Property for Beverage Manufacturers

By: Brian D. Kaider, Esq.

While many people are familiar with the four main types of intellectual property: patents, copyrights, trademarks, and trade secrets, often they don’t know the distinctions between them or what they are meant to protect.  This article is meant to cut through the confusion and explain these distinctions and how each property right applies to the beverage industry.

Patents Protect Ideas – sort of

  Most people have a general understanding that a patent protects an “invention” or an idea.  In a very general sense, that’s true.  But, even though the Congressional authority to grant patent rights comes directly from the U.S. Constitution (Article 1, Section 8, Clause 8), exactly what is patentable is the subject of tremendous confusion among the U.S. population, examiners at the U.S. Patent and Trademark Office, lawyers, and even judges; sometimes requiring clarification from the U.S. Supreme Court.  The purpose behind the grant of a patent is to encourage innovation by granting exclusive rights to one’s discoveries for a limited time.  In other words, it gives the patent holder a short-term (20 years from the date of filing) monopoly on his invention.  Generally, new machines, chemicals, electronics, methods of production, and in some cases, methods of doing business, are eligible for patent protection.

  But, not all ideas are patentable.  In fact, ideas alone cannot be patented.  They must first be “reduced to practice,” meaning that either you must have actually created your invention or have described it in sufficient detail that someone skilled in that area could follow your disclosure and create it themselves.  So, you can’t get a patent on a time machine, because (at least for now) no one has figured out how to defy the time-space continuum.  In addition, to be patentable, ideas must be novel, meaning that no one else has ever disclosed that idea before, and non-obvious, meaning that your idea cannot be an obvious variant on someone else’s invention.

  Given that humans have been making beer for thousands of years, one might think that coming up with something novel in the brewing process would be impossible.  Not so.  In preparation for this article, I ran a quick search of patents containing the word “beer” in the title and got 491 hits.  Some recent examples include U.S. Patent No. 10,570,357 – “In-line detection of chemical compounds in beer,” U.S. Patent No. 10,550,358 – Method of producing beer having a tailored flavor profile,”  and U.S. Patent No. 10,400,200 – Filter arrangement with false bottom for beer-brewing system.” 

  Improvements in any area of the alcoholic beverage industry may be patentable including, new types of bottles, cans, growlers, and kegs; new types of closures and caps; improved methods of separating hops from bines and leaves; new processing equipment, improved testing procedures and equipment, improved packaging, etc.  Essentially, anything that lowers costs between the farm and the consumer, improves the quality of the beverage, or enhances the consumer experience is worth considering for patent protection.

  One word of caution, however; time is of the essence.  The America Invents Act, effective March 16, 2013, brought the U.S. in line with most other countries in being a “first to file” system, meaning if two people develop the same invention, the first to file for patent protection wins, regardless of who first came up with the idea.  Also, any public disclosure of your idea (such as at a trade show) starts a 1-year clock to file or you may lose your eligibility for patent protection.

Copyrights Protect Creative Works

  The authority for copyright protection stems from the same section of the U.S. Constitution as patent protection, discussed above.  Our founding fathers recognized the valuable contribution made to society by authors and artists and, therefore, sought to encourage creative expression by providing protection for artistic works.  Examples of copyrightable materials include, books, paintings, sculptures, musical compositions, and photographs.

  Unlike inventive ideas, which are only protected when the government issues a patent to the inventor, copyrights attach at the moment the artistic work is “fixed” in a tangible medium.  So, for example, if a composer develops a new musical score in her head it isn’t protected, but the moment she translates that tune to notes on a page or computer screen, it becomes protected by copyright.  In order to enforce that copyright in court, however, it must be registered with the U.S. Copyright Office.  While it is possible to wait until an infringer comes along before filing for registration, doing so can severely limit the damages that may be available to the author of the creative work.  So, early registration is the better course. 

  In the beverage industry, copyright issues often crop up with regard to labels and advertising materials.  But often disputes arise relating to who owns the artwork contained within a label, for example.  Generally, the author of a work owns the copyright.  But, if an employee of a brewery, acting within the scope of their employment, creates an image that the brewery owner incorporates into its labels, that picture is considered a “work made for hire” and is owned by the brewery.  Where disputes often arise, however, is if the brewery hires an outside artist or a branding agency to develop the artwork.  In that case, the brewery should include language in its contract requiring assignment of all copyrights to the brewery for the created artistic works.  The same would apply for any artwork commissioned for use inside the brewery tasting room or for marketing materials.

Trademarks Protect “Source Identifiers”

  People generally associate trademarks with the protection of a brand.  In fact, I have often described trademarks as an “insurance policy for your brand.”  But, in more technical terms, what a trademark protects is a “source identifier.”  The purpose of trademark law is to protect consumers from being misled or mistaken as to the source of a product.  So, for example, if a consumer sees a pair of shoes with a certain famous “swoosh” image on the side, they should be reasonably able to assume that pair of shoes was manufactured by Nike, Inc. and was made with the same degree of workmanship and quality that they have come to expect from that company.  That “swoosh” symbol, therefore, acts as a source identifier to tell the public that the product was made by Nike, Inc. 

  What may function as a trademark can be quite broad, including: the name of the business (e.g., Triple Nickle Distillery®), a logo (e.g., the “swoosh”), a color (e.g., the Home Depot orange or the UPS brown), even a scent (e.g., Verizon owns a trademark on a “flowery musk scent” it pumps into its stores to help distinguish them from competitors’ environments).  Not everything can be trademarked, however.  Slogans, words, and images that appear merely as decoration as opposed to a means of identifying the supplier will not qualify for protection unless the applicant can demonstrate that the item has achieved “secondary meaning,” i.e., that the public has come to associate that item with the manufacturer.  As an example, in the 1970’s McDonalds used the slogan, “You deserve a break today” in its commercials and other advertising.  People came to associate this phrase with McDonalds and in 1973 they were granted a trademark registration.  Incidentally, McDonalds briefly let this trademark go abandoned in 2014, but quickly re-filed and the mark is still active today, more than 45 years after it first registered.

  In general, marks also cannot be descriptive of the product or geographically descriptive of the source in order to be registered as a trademark.  For example, one could not obtain a registration for just the words “India Pale Ale.,” because it simply describes the product and does nothing to differentiate it from every other IPA on the market.  Similarly, an attempt in 2019 to register the name “Philly City Brewery” was refused as “primarily geographically descriptive,” because the applicant could not demonstrate that people had come to associate that name with its business as opposed to the many other breweries in Philadelphia. 

Trade Secrets Protect Valuable Confidential Business Information

  Unlike other forms of intellectual property, there is no registration system for trade secrets, because, by their very nature, they must be protected from all unnecessary disclosure.  Trade secrets can be just about anything that is confidential to your business and gives you a competitive advantage.  Some examples, include recipes, client lists, manufacturing processes, marketing plans, and client lists.  These are things that, if publicly disclosed, would harm the competitive position of the company and, therefore, must be vigorously protected. 

  One of the most famous trade secrets is the formula for Coca-Cola.  This formula has been protected for more than 130 years, sometimes through extraordinary measures.  In 1977, The Coca Cola Company withdrew its product from India, because in order to sell there, they would have had to disclose the formula to the government.  They decided it was more prudent to forego sales to one of the biggest populations on earth rather than risk disclosure of their secret recipe.

  Protecting trade secrets requires constant vigilance in two ways.  First, the information should only be disseminated to people within the company, or outside consultants, who need the information in order to perform their duties for the company.  In other words, the information is on a strictly “need-to-know” basis.  Second, those few people who are given access, should sign non-disclosure agreements with harsh penalties for breach of their duty of confidentiality.  Once the information gets out, it’s nearly impossible to un-ring that bell, so there must be severe financial consequences to someone who leaks the information.

  Brian Kaider is a principal of KaiderLaw, a law firm with extensive experience in the craft beverage industry. He has represented clients from the smallest of start-up breweries to Fortune 500 corporations in the navigation of regulatory requirements, drafting and negotiating contracts, prosecuting trademark and patent applications, and complex commercial litigation.

For more information please contact Brian Kaider at…
240-308-8032; BKAIDER@KAIDERLAW.COM; www.KaiderLaw.com