Tale of two beers and question of outsourcing!

There’s lot of debate over whether you should rely on co-packers or simply put outsource your production to a third party

This question is especially important for companies who’s core is the real world product, like tires are for Michelin or cars for Volkswagen. For these companies they are known for their craftsmanship and people pay a premium to buy their products – so it seems ludicrous that any of these company will not actually make the product themselves which they’re selling and charging us a premium for.

So it was no surprise when on popular TV show Shark Tank, where aspiring business owners and entrepreneurs come to pitch their businesses to Angel investors.

In episode 727 Henry Schwartz, co-owner of Mobcraft Beer, seeked an investment for his crowdfunding/beer platform and micro brewery. Mobcraft Beer takes a unique approach to micro-brewing by adding a crowdfunding component to its mission. Each month, people submit new beer recipes. The recipe with the most votes (pre-orders) gets produced. Customers either pick their beer up at the brewery or get it shipped through an online retailer.

Mobcraft is the moplst successfully crowdfunded beer in history, but it didn’t get its money from Kickstarter, it came from Craftfund, a Wisconsin-based crowdfunding platform. Wisconsin was an early adopter of an investment crowdfunding law that allows backers to become equity participants in businesses they fund. 52 “co-owners” of Mobcraft Beer invested $75,000 to get the company started.

The voting period for a group of recipes is the first three weeks of the month. Most beers are ready for delivery within four weeks, but some take a little longer. The winning brew comes in four-packs that run around $25. You can also buy Mobcraft Beer all over the state of Wisconsin and in two Illinois locations.

But here’s where it gets relevant and interesting to us – even though Mobcraft was dealing in small volumes it wants to run its own brewery. Schwartz’s refusal to budge on MobCraft’s decision to build its own brewery, one of the company’s core principles that a particularly acerbic would-be investor described as a fatal flaw in an otherwise promising business plan. In describing why a brewery was needed, Schwartz hit on some maxims craft beer lovers are most passionate about.

So whilenSchwartz is on one side of the debate where he certainly focusses on making their own product, on other side is

Founder of The Boston Beer Company, brewer of Samuel Adams Boston Lager, and a key catalyst of the American craft beer revolution, Jim Koch. He’s the man who’s given most credit for reviving craft brew movement in America.

In his book Jim describe how he piggybacked on excess capacity of other brewers to kick-start his own brewery which eventually became precursor of craft brew revolution. Infact in his chapter of biggest mistake yet in his book Quench your own thirst Jik describes how he was happily running the company with no external investors but then he decided to open his own brewery for no good reason other than apparently to have one. He was given initial estimates of 8 million and he raised funds accordingly but when he actually got quotes to begin work he was given quotes of 15 million dollars ! Which could easily wipe out his years of profit and not to mention control of the company. So he ended up discarding the already bought equipment, cut his losses and pull the plug off his plan.

In an industry born out of passion, with tons of ardent followers and customers – if a company is able to take top spot and maintain it via outsourcing then it’s telling that in most industries the practice can work. But don’t get me wrong – you’ve to have couple of key components which differentiate you:

  1. Your own secret sauce or recipe in case of Sam Adams case
  2. Superb quality control

2nd one is the key – as is famously quoted – you can delegate work but not responsibility. In case of Jim he tasted every single batch made himself and once did a total recall of all the production when bottle was found to have particles of glass due to faulty packaging – wiping off entire profit of the year – whopping 25 million dollars

By making the right moves Jim had certainly created long term value as is evident from its stock value