What Investors Look for in Alcohol Startups
In this video, Jeff Menashe, an industry leader with extensive experience in the alcohol business, shares insights on building successful alcohol brands within this sector. As the CEO of Demeter Advisory Group, an investment bank specializing in the alcohol category, Menashe offers a perspectives on how to start a beverage company and navigate the intricacies of mergers and acquisitions (M&A).
His emphasis on community-building, consumer-centricity, and adaptability in a dynamic market landscape provides a strategic roadmap for success in this highly competitive sector of the alcohol business.
Below are some of the key highlights from his presentation at Bar Convent Brooklyn.
Strategic Framework for Success in the Alcohol Business
Menashe shares that the primary objective of acquirers is to enhance the growth and profitability of their portfolio within the alcohol segment. To achieve this, he emphasizes two key concepts that often lead to success within the alcohol business: singularity and sustainability.
The term singularity, refers to a brand’s focus on a specific product category rather than attempting to diversify too broadly. Specialization and a laser focus are seen as essential ingredients for success in the competitive alcohol business landscape.
Sustainability, in this context, is the ability for an alcohol brand to maintain its growth trajectory without relying solely on existing assets. Brands must have a strategic roadmap that includes long-term sustainability, which is critical for continued success in the ever-evolving alcohol business.
Building Distribution and Brand Relevancy in the Alcohol Business
A central theme that emerges in Menashe’s presentation is the idea of building distribution and brand relevancy concurrently. He emphasizes that alcohol brands should not only target their desired consumers but also cultivate a strong sense of community around their products.
Understanding the target consumer deeply is crucial within the alcohol business, delving beyond mere demographics to grasp their habits, preferences, and values. This comprehensive understanding allows alcohol brands to tailor their offerings and marketing strategies effectively.
He also discusses partnerships with national accounts, highlighting the importance of collaborations that focus on premium, education-based selling environments.
The Key to Positive Cash Flow
Within the realm of alcohol brand development, Menashe introduces two distinct models: Model 1.0 and Model 2.0. These models offer strategic approaches for building and growing alcohol brands within the competitive landscape of the alcohol business.
Model 1.0 centers on building brand awareness and distribution as the initial steps before actively engaging with the target consumer. This traditional approach involves establishing a presence and recognition in the market before deeper consumer engagement begins
In contrast, Model 2.0 prioritizes identifying and engaging the target consumer right from the outset, with the aim of creating a community around the alcohol brand. Jeff underscores that Model 2.0 is the future of brand development within the alcohol business, as it yields a shorter path to positive cash flow and necessitates a more substantial initial capital investment.
Key Metrics for Success in Alcohol Brand Development
Menashe provides insights into crucial metrics for success within the alcohol business, particularly in Model 2.0:
- Achieving Positive Cash Flow: Success in Model 2.0 involves achieving positive cash flow in less than three years, signaling the brand’s ability to sustain itself financially and remain competitive in the alcohol business.
- Capital Requirements: An average capital infusion of $15 million is often necessary within the alcohol business to support the brand’s growth and development efforts.
- Gross Margins: Maintaining gross margins exceeding 60% is a key indicator of financial health and profitability within the alcohol business.
- Net Revenue Targets: Within the alcohol business, brands should aim to reach a minimum of $50 million in net revenue within a four- to five-year timeframe to establish themselves as significant players in the market.
The Influence of E-Commerce in the Alcohol Business
Menashe also delves into the influence of e-commerce in the alcohol business. He posits that e-commerce can potentially account for up to 30% of a brand’s volume within the first few years within the alcohol business. To capitalize on this channel effectively, substantial digital marketing expenditure is necessary within the alcohol business, with figures potentially exceeding $3 million dollars. The involvement of creators and influencers can play a pivotal role in building and accessing the desired community within the alcohol business.
4 Tips for Pitching Investors
Kristen Bareuther, Managing Director at First Bev, followed Jeff to discuss how private equity investors evaluate potential beverage-alcohol deals. She’ll walk you through the key tenets that brands must refine in order to position themselves as an attractive candidate for investment. While it’s crucial to maintain strong market differentiation, authentic identity, and variable scalability, Bareuther wants owners to understand that it’s the people behind the brand that’ll ultimately get a deal across the line.
Bareuther explained, “If you’re a minority investor, you’re really evaluating whether or not it’s a founder group that is truly engaged and that you can align around that founder group, wrap your arms around them, and help them build their business.”