Breaking Bad or Breaking Even

It’s been lovely hearing from those of you who have signed up to follow Cidernomics.  A number of you have asked “So what scale IS sustainable?”  There is no easy answer. That’s the whole project I’m on.  This post gets at just some of the basics needed to start figuring it out.  Meanwhile, keep the questions and comments coming!

Just up the road into Canada there is a medium sized producer of ice cider, run by an interesting woman who had succeeded in getting a contract to export to the Nicolas chain in France.  All of a sudden she was building out more space and putting in some much larger tanks.  We benefited from this because she was happy to part with 4 600L tanks and a 4-head gravity bottle-filler for less than $2,000.  We didn’t own a truck, so my man was going to take the Toyota Highlander SUV and bring the stuff back in 2 or 3 trips.

Our biggest concern was coming back across the border.  It’s not like you can hide a stainless steel tank under a coat in the back seat. We had no idea what kind of rigmarole we would need to go through – paperwork, exorbitant duty charges, official signatures, pledging of first-borns, etc. He eased up to the border guard in Lane 1 at the Port of Derby Line and rolled down the window.  Yup, he was told to pull into the parking area and go inside the border station to see the customs officer on duty.  Man, if this didn’t work our back up plan was pretty much unaffordable.

After waiting in line a mere 10 minutes or so, he got to the front and explained that he had two stainless steel wine tanks purchased second hand.  The border guard asked what price we had paid, and proceeded to hand him a form.  “Write a one sentence description here, put the value here, and sign it here.” he said, “That will be $10.75.”  Done! Piece of cake! We really were going to try this ice cider thing after all.  Three trips and three hours later, it was all in our basement.  If we’d had a big enough vehicle, it would have only cost us $10.75 for the one trip.  We were delighted to spend just $32.25.

Along with the tanks and the filler, we had purchased a small press and some plastic containers to freeze the juice outside for the ice cider process. We also needed a pump, small filter, hoses, some fittings, and some kind of corker, capsuler and labeler.  These all fall under the category of “plant & equipment” in the broader category of “fixed assets”.    Going back to the question at the end of the value chain post “Apples to Cider to You” – can I make money at $12.60 per bottle of ice cider FOB price? – knowing my fixed versus my variable costs is the key to the answer.

Variable production costs:  apples and/or apple juice, production supplies (yeast, filter pads, etc.), bottles, corks, labels, capsules, cartons, and any hourly labor cost for pressing, bottling, labeling etc.  Calculate these per bottle, and make sure to allow for some waste.

So, if my FOB price is $12.60 and my variable costs add up to $6.50, then the incremental money I’m going to bring in from each bottle I sell = $6.10. Also known as marginal contribution.


Fixed production costs:  equipment, rent, utilities (mostly at our scale).

OK, so you don’t count the full cost of equipment in one year – that’s what depreciation is for.  Most equipment is assumed to have a useful life of 7 years, so take 1/7 of the equipment cost as your annual fixed equipment charge. (We’ll talk about the difference between cash flow and profitability later.)

Overhead: Then you have all sorts of things that are typically considered “overhead” – sales, marketing, general, administrative expenses.  For simplicity’s sake we’ll  just call this all fixed cost.  However, in future posts, I’m going to do a pretty deep dive on sales economics where we’ll parse that more finely.

The basic concept of break-even is the math that tells you how many bottles you have to sell at your marginal contribution rate to cover your fixed costs, after which the marginal contribution of each bottle goes toward your bottom line profit.  In this example, if my total equipment purchases are $18,000, and  I estimate that office, utilities, marketing and sales will cost me $5,000 per year, then I will need to sell  (($18,000/7) + $5,000)/$6.10 = 1,241 bottles of ice cider, or just about 100 12-bottle cases, to break even.


You have to play around with this quite a bit, because 1) your variable costs per unit are different depending on the quantity you purchase, as we saw in the label example in “Economies of Scale, Cider Style“.  And 2) fixed costs are really only fixed for a certain range.  For example, you can make anywhere from 100 – 600 liters of cider in a 600 liter tank, after which you have to purchase a new tank.

The trick is to know where the ‘steps’ are in your fixed costs, and see if the volume at the steps will be sufficient to break even or better.  In the diagram below, you want to be in situation B as you grow.  Situation A is truly Breaking Bad.  This picture is one of the key issues I worry about with small food/drink businesses!


My capacity at that point was 1600 liters (3 full tanks plus one to pump into, less some loss during fermentation). That’s 2,068 375ml bottles, and the variable costs of $6.50 per bottle are what I expected to pay to produce and bottle at that quantity.  So theoretically, I could generate $6.10 of incremental profit on every bottle over 1,241:  (2,068 – 1,241) x $6.10 = $5,044 of profit on a little over $26,000 in revenue.  I would be paying myself a little over $1,000 in hourly wages as part of my variable production cost, and I could pay 5% interest on the $18,000 I invested in equipment, and take home another $4,000 or so for the year that it would take to produce and sell the ice cider.  Sounds good, and might work as a secondary ‘hobby’ income, but it’s not going to support me at that level.  So I’ll need to grow beyond that. (SO easy to say…)

If you are being smart, you spend a lot of time calling vendors and asking for quotes at different quantities and building a sophisticated spreadsheet that lets you model the picture of growth with some precision. (If you don’t know how to use Excel, find someone who does!)  On the other hand if you are being romantic, what the hell.  This is why they say that to make a small fortune in the wine – or cider –  business it helps to start with a large one.






Economies of scale, cider style

Living a mile up a dead-end dirt road in an area that has more cows than people presents a few challenges when you start a garage, or in this case basement, business. Things like how does an 18-wheeler truck delivering a pallet of bottles actually get to your place? The answer: very carefully, with a lift gate, and not during Mud Season. Or being stuck with satellite internet that goes out every time it rains hard (although interestingly not when there’s a blizzard of snow), and did I mention no cell service?  There’s one spot on the property where we can get cell service, which is out on the road about 200 ft. from the barn.  Every time you drive up the road from the rural highway and hit that spot, you get a text message that says ‘Welcome Abroad’.  Did I mention we are 8 miles from Canada?  So it’s a good thing this isn’t a tech start up.

Back to said pallet of bottles.  Everything in manufacturing is delivered on pallets, those ubiquitous slatted wooden 40 x 48 inch, 6 inch high frames that are like little mobile pieces of floor.  You can pack anything on to them, and people do: bottles, cartons, corks, cleaning supplies, tanks,  machinery…finished cases of ice cider.  A pallet is like a unit of measure.  Don’t ever buy a pallet and a 1/4 of something.  You’ll pay almost as much in trucking cost for the 1/4 as you will for the full one.  The cost per pallet of anything will be lower per unit than the cost per unit of some lesser amount.  If you are buying more than one pallet, as long as you keep buying by the pallet, you don’t usually see the cost per unit get lower until you buy a full trailer load.  Then if you are buying by the trailer load on a regular basis, you can usually get stuff even cheaper.  This is just one factor among all the various economies of scale that affect every aspect of business.


I think many people would like to pretend that economies of scale don’t exist, or that somehow it’s an economic theory that is just a theory with which you can choose to disagree.  Unfortunately that’s not the case.  Economies of scale are in everything, because some costs or resources just don’t increase 1 to 1 with an increase in quantity.  Labels are a great example.  For a label printer, there’s a significant amount of cost involved in setting up a print job, and it doesn’t make much difference whether the print job is for 500 labels or for 5,000 labels.  Once the job is set up, the incremental cost of printing 501 labels vs. 500 labels is pretty much just the cost of the ink and the paper for the one extra label – probably less than 5 cents, but let’s assume it’s 5 cents.  If it costs $200 to set up the job, it’s going to cost $200 + 500 x $0.05 to print the labels, or $225.  Add some % to cover the printer’s overhead and profit, say 50%, and the price you will pay for 500 labels is $337.50 ($225 x 1.5).  That works out to 67 1/2 cents ($0.675) per label.  On the other hand if you print 5,000 labels, the printer’s cost is $200 + 5,000 x $0.05, or $450, the price you will pay is $675.00 ($450 x 1.5), and that works out to $0.135 per label.  That is an 80% decrease in the cost per label!


The larger the ratio of fixed (set up cost in this example) to variable cost (ink and paper) in a process, the more significant the economies of scale.  And they are everywhere. A 620 Liter stainless steel wine tank costs $2,295, a 1,100L one costs $3,095 – a 35% increase in price for a tank that will hold 77% more volume.  A 500g package of commercial yeast will cost you more per g than if you buy a 2kg package.  A pallet of bottles will cost you more per bottle than if you buy them by the trailer load.  Brochures, corks, capsules, even office paper for god’s sake.  It’s relentless.  And these amounts that I’m giving as examples are still tiny in the overall context of the cider market.  Imagine how much lower the cost to produce a bottle of cider – any cider, or beer or wine for that matter – is for a 600,000 gallon operation vs a 6,000 gallon operation, just by virtue of being 100 times larger in quantity.  How can a small producer hope to compete?

That’s what we are going to explore more…