Ħanini Brewing: Spare Capacity, a German Contract and an €18,000 Decision
Ħanini Brewing is a microbrewery producing 2,000 litres a month against a tested capacity of 3,200 litres. It sells 1,900 litres locally at an average of €3.40 a litre. Fixed costs are €2,600 a month and variable costs €0.55 a litre, giving a unit cost of €1.85 at present output.
A German distributor has offered a twelve-month contract for 1,000 litres a month at €2.45 a litre. The order needs 500 ml bottles and pasteurisation that the brewery does not have; the equipment would cost €18,000 and take ten weeks to install. Payment terms would be 60 days. The distributor has asked for exclusive rights to the German market and has hinted it may want 1,500 litres a month in year two.
Domestic demand is growing about 4% a year. The owner is also weighing a €45,000 canning line for the local market, which would allow sales into supermarkets but at a lower price per litre.
1. Calculate the contribution per litre on domestic and export sales, the monthly profit now and with the export order, the unit cost at the higher output, and the payback period on the €18,000 equipment.
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Contribution per litre
- Domestic: €3.40 − €0.55 = €2.85
- Export: €2.45 − €0.55 = €1.90
Monthly profit now
1,900 × €2.85 = €5,415 contribution − €2,600 fixed = €2,815 profit
With the export order
- Extra contribution: 1,000 × €1.90 = €1,900 a month, €22,800 a year
- Total contribution: €5,415 + €1,900 = €7,315 − €2,600 = €4,715 profit a month
- The export adds 67% to profit while using output that would otherwise be unused.
Unit cost at 2,900 litres
Fixed cost per litre falls from 2,600 ÷ 2,000 = €1.30 to 2,600 ÷ 2,900 = €0.90. Unit cost = 0.90 + 0.55 = €1.45, against €1.85 now. This is the economies-of-scale argument: the fixed cost is spread over 45% more litres.
Payback
€18,000 ÷ €1,900 a month = about 9.5 months of extra contribution (ignoring interest and the ten weeks of installation downtime, which the candidate should flag).
Working capital check
60-day terms on €2,450 of monthly export sales ties up roughly €4,900, plus bottles and labels bought before payment - so the €18,000 is not the whole cash requirement. On payback alone the order looks attractive; on cash and capacity it is tighter.
2. Evaluate the export order against the €45,000 canning line, using capacity utilisation, contribution, risk and cash flow. Recommend one course of action.
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Capacity
Utilisation now is 2,000 ÷ 3,200 = 62.5%; with the export order it becomes 2,900 ÷ 3,200 = 90.6%. That is efficient but leaves almost no slack for a failed batch, a tank clean-down, a breakdown or a domestic summer peak. In year two, 1,500 export litres would take output to 3,400 litres - above capacity, forcing further capital spending before the contract can be honoured.
Contribution and payback
Export adds €1,900 a month at €1.90 a litre, paying back the €18,000 in under ten months. The canning line is €45,000, needs supermarket volume at a lower price per litre, and - critically - the case gives no price, no volume commitment and no listing agreement. Its payback cannot be calculated, which is itself an argument against it.
Risk
- Concentration. 1,000 litres on 2,900 is 34% of output, rising toward 44% in year two, in the hands of one customer who wants exclusivity. If the distributor walks, the equipment is stranded and 34% of production has no buyer.
- Exclusivity locks the brewery out of every other German buyer for the contract term, including better-paying ones.
- Price is 28% below the domestic price. If domestic demand grows (4% ≈ 76 litres a year) or a higher-priced local channel opens, the export volumes may be crowding out better business in year two.
- The canning line carries the opposite risk: supermarket buyers demand promotional support, can delist without notice, and the lower price per litre means a much greater volume is needed to recover €45,000.
Cash flow
Export terms of 60 days absorb about €4,900 of working capital plus packaging; the €45,000 canning line would absorb more than twice the export equipment cost up front.
Recommendation: accept the export order with the €18,000 equipment, but sign nothing as offered. Conditions: exclusivity limited to the twelve months and to the specific product; a break clause and a minimum monthly volume; 30-day payment terms or 30% on order; and a commitment to review capacity (a third tank) before any year-two increase above 1,200 litres a month. Defer the canning line until a written supermarket listing with an agreed price exists.
3. Assume the export order is accepted. Explain three operational decisions the brewery must take to protect quality and delivery reliability, and one way it should protect itself commercially.
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1. Batch scheduling and changeover discipline
At 90.6% utilisation, production planning becomes the constraint. The brewery should fix a rolling schedule with dedicated export batches rather than switching between products mid-batch, because every changeover loses beer, uses cleaning chemicals and risks contamination. Pasteurised export batches should be brewed in blocks, with the unpasteurised domestic beer brewed in separate runs to avoid any risk of cross-contamination and to keep traceability records clean.
2. Pasteurisation validation and shelf life
Pasteurisation is a food-safety control, not just a process step. Before the first shipment the brewery must validate the process (time and temperature records), test shelf life - ideally with forced-ageing samples - and check that the 500 ml bottle and closure are fit for a product travelling to Germany. Bottle supply lead times must be checked; running out of bottles at 90% utilisation stops domestic production too.
3. Buffer stock and despatch planning
With 60-day payment terms and a monthly shipment, a missed shipment costs cash as well as reputation. The brewery should hold roughly two weeks of export stock as a buffer and despatch on a fixed date each month, so a failed batch can be absorbed rather than passed on to the customer. Quality records must accompany each batch for EU traceability.
Commercial protection
Do not accept exclusive rights without a minimum volume commitment and a price review clause, and cap the volume the distributor can demand within existing capacity (say 1,200 litres a month) so that any further increase triggers a renegotiated price that funds the extra tank. A deposit or partial advance payment on the first shipment converts some of the 60-day credit risk into the customer's risk, which matters when one customer will represent over a third of output.