March 1, 2011

Dear Friends:

 For those of you that have been following our progress, you are probably aware that 2010 was the company’s best year in both sales and production. Sales increased by 16% while production was up 14%. Bayhawk still focuses much of its efforts in providing handcrafted beer for the private labeling of California based restaurant chains. Also, we have developed a reputation for working with start-up marketing companies that wish to produce proprietary recipes, i.e., contract sales. Although these products are sold at slightly lower prices, the burden of marketing falls to whom they are sold. This helps to increase Bayhawk’s profits.

We experienced a decline in bottle sales directly related to our lack of adequate equipment. Although we can afford to upgrade, the space we rent in our present location makes the addition of new equipment impractical. Lacking the proper facility to produce cost competitive package products has always had an adverse affect on the company’s profits and market branding. We are regularly forced to turn away business because of this situation. Although our sales percentages have out-paced industry figures, the inadequacy of our location conservatively costs Bayhawk in excess of $100,000 per year in bottom-line profits. Our studies have demonstrated the average microbrewery in our area takes in approximately $250,000 annually in their tasting room. Our affiliation with our restaurant landlord prohibits us from retail sales of which are nearly all net profit. It is apparent that Bayhawk will never be a truly successful company until we can remove ourselves from our present location. Our moving to an efficient profitable location presents us with the greatest challenge in the near term. The largest portion of our resources must be focused on this goal. 

A major expense in our Cost of Goods Sold is the cost of keg rental, in excess of $120,000. This figure climbed 36% in 2010 and will continue rise as long as the company is forced to focus on draft sales. Nearly 10% of the gross profit from each keg sold goes directly to the rental company which has a near monopoly on the market. In recent months, some alternatives have been presented, but one of the best investments the company can make is buying its own cooperage. The estimated cost would be in excess of $650,000. Based on our present cost of keg rental, the company would be able to recover this capitalization is less than 6 years. The company’s management must seriously consider this figure in its costs of relocation and replacement of other much needed brewery equipment.
The economic down turn has had its affects on nearly all of our restaurant accounts. The largest casual dining chain that Bayhawk has been supplying since my tenure is selling far less now than when we supplied them with only one style of beer five years ago. Much to our dismay, many of our friends may not survive the current business climate. Many times in the past, Bayhawk has worked with its clients to assist them through rough times, and we will continue to do so. Our philosophy has always been to offer the highest quality product at the most cost effective price, to build a company that will last 100 years at the service of its customers. We believe we are fulfilling that promise, and our growth reflects it. 

Cheers,

Karl Zappa
President
Bayhawk Ales, Inc.