Steve Hershberger hopes to solve the terrifying problem of running out of beer. A global problem, SteadyServ measures and monitors kegs of beer for restaurants and bars. Sounds trivial, but when you think what that means to an average restaurant, running out is not an option. And with most bars and restaurants, space is at a premium so storing more kegs isn't a great option either.
According to Bloomberg Businessweek, most restaurants try to make alcohol sales account for around 30 percent of their revenue. Restaurant, bar and grocery store owners often use that estimated percentage of revenue as one factor in pricing their drinks. The more a business hopes to make from alcohol sales, the more expensive its alcohol. HOUSTON CHRONICLE
Join us for a Big Awards SYNC with CEO Steve Hershberger as he explains the challenges growing a small business and how his technology can help your local bars and restaurants.
Live interview here Friday, June 28th at 9 a.m. eastern.
Russ: Good morning everyone. This is Russ Fordyce with the Business Intelligence Group. Today we’re here with Steve Hershberger from SteadyServ out of Indianapolis. SteadyServ is a beverage management company. I don’t know any other better way to say it, but Steve’s going to give us an insight into his company and how he got started. Steve, thanks for joining us and welcome to the Big Awards Sync.
Steve: Thank you, Russ. I appreciate the opportunity to be with you today.
Russ: Yes, so tell us just briefly, kind of in that elevator pitch, what SteadyServ is and what market you're going after?
Steve: Yes, absolutely Russ. SteadyServ technology was formed to solve a very specific problem in the industry. What we do is we do inventory and supply chain management for the beer industry. Now the beer industry is broken into really two sections, two groups that were mandated by law by the Federal government. You have on-premise, and if you think of on-premises, “I'm going to drink my beer here.” When you go off-premise, which is, “I'm going to take my beer after I buy it and drink it somewhere else.”
What we do is we help on-premise retailers and then the distributors that support and supply them, and ensure that their supply chain of beer is flowing smoothly.
Russ: I think you guys developed a proprietary technology, I think a patent tending technology to do this. I guess in the old world, the manager would go round and lift kegs. I remember that from my fraternity days. It wasn’t very effective. Now your technology is basically monitoring the kegs; is that right?
Steve: Well yes, Russ. In a general sense that’s exactly what happens. What you did at your fraternity back in the days still occurs. The beer industry, if you think of draught beer, it really hasn’t evolved since essentially 1933 or 1934. The only difference is today are that we use either diesel or propane powered trucks to deliver it and the kegs are no longer wood. They're aluminum. Outside of that it's pretty much the same.
If you think of an industry, for instance the automotive industry, and it operates on the just-in-time basis, right. Ford, as an example, when they need bumpers they don’t send an email and say, “Hey, send us over 2,000 or so bumpers and we need them in a couple of hours.” It doesn’t operate like that. But that’s exactly how the beer industry operates. In essence, for the on-premise, the places, the bars and restaurants and taverns that we support, they buy almost $22 billion worth of beer a year. All of that beer is just-in-time delivery.
The problem is that when they order their beer they do exactly what you did when you were in college, and they take a legal pad and then they walk into a cooler and then they shake those kegs and go, “Well, gee, this one feels a third full or this one feels mostly empty,” and, “Gosh I get my delivery day after tomorrow,” and, “Boy I think we bought this last week and maybe this the week before so that sounds good to me and I'm only going to check 10% of the kegs because those are the ones I can reach.” Then I put an email or a voice mail or a text message into my brewer and I hope for the best.
That’s the solution that’s just untenable to us. You can't really operate with any degree of efficiency in an environment like that. Because of the explosion in craft beer today and the level of competition, and frankly the money that’s at stake, brewers, distributors and retailers are saying, “We really wish that there was a better way to do this,” but up until now there really wasn’t.
We went in and developed a hardware and software solution that essentially makes all of those problems evaporate.
Russ: Tell us a little bit about the technology. What goes into iKeg?
Steve: Well it's actually a fairly sophisticated hardware and software synthesis. But be that as it may, from the user standpoint, it's got to be incredibly simple and easy to operate; they really don’t care what happens. But for the purpose of today’s interview, essentially we have a hardware device that sits underneath their keg. And think of it like a very sophisticated scale. It measures pressure and it takes that pressure and translates that into weight and the velocity of change of that rate over a specified period of time. That uses RFID technology to determine what’s actually in that keg because every time a keg empties it goes away to be refilled and it gets filled with something else, whether it's the same brand, Miller, Coors, or it may go to one of any hundred different craft breweries to be filled with a different brand and a different style every time.
The RFID technology understands and says, okay I now know what's in the keg and it pairs that information with the information that the sensor is telling us, “Hey, here's how much is in this keg.” Then it uses a very specific wireless frequency that’s different than the standard Wi-Fi that everybody is familiar with. It uses that singular set of band width to send information from the sensor in the cooler to an uplink that is near that cooler that we created. And then it uses one of two cellular channels to deliver that information to the Cloud. Once it's in the Cloud it goes through our enterprise software and then it's delivered back to either a portal similar to the … it's access to their computer like you are and I are talking on, or maybe delivered to a tablet or an iPhone or an android phone or a kindle fire that a manager is using as they walk around their facility, or that a distributor sales person is using as they're making their way to and from the hundred different accounts they have to serve every single week.
Russ: I read on line, I think Bloomberg had that it was 30% of a restaurant’s revenue comes from the bar. Is that what you guys are seeing?
Steve: Oh, absolutely Russ. The draught beer category is the single largest revenue driver as well as margin driver that any restaurant is going to enjoy. Let me give you a little bit of an anecdotal story to sort of drive that home. We are working with one very successful retailer that everybody probably in the country has been in it at least once. The gentleman who leased that used to run operations for a large publicly traded franchise of companies that most of us have either seen on television or have been in. He says to us they’re very good operators, “We know exactly what our costs are for labor, for food, for spirits, alcohol, for disposables, the napkins, plates and what not.” He said, “But beer is a black hole. We’re just constantly guessing. It drives us more revenue and more profit than anything else by a long shot, but we have no idea what's happening in it. And so we just sort of fumble around.” For the first time now iKeg gives them the ability to understand their largest profit contributor on their P&L and make better decisions about what they need to carry, when they need to carry it and how much they should be spending on that line item.
Russ: Alright. Now you're obviously very passionate about beer, but I get the sense that you’ve got more than a beer background in your history there. How did you get here? Steve: Well that’s a long strange tale, Russ. Yes, I came to beer actually by accident. I'm a software and services guy by trade. I've spent 20 years developing either software or services that support software throughout my career. About four years ago I entered an opportunity to have lunch with a friend of mine. At the time he worked for a large consumer electronics firm and he wanted to retire … he was a tremendous operator, but he wanted to retire from that to become an entrepreneur. I took him out to explain the entrepreneurial lie to him which is it's going to get better in six months, and I'll be home in 20 minutes.
Steve: He said, “Man you’ve really bummed me out. The best you can do is buy me a beer.” We went to a craft brewery that’s here in Midwest and we got a tour by one of the owners. We walked around and I looked at my friend and I said, “You know what, I think this is a good business model and I think this is something that we could do.” Three years ago we started planning to open a brewery and we did and we scaled it to where it was one of the fastest growing craft breweries in the Midwest.
During that period of time one of the things, Russ, that I was most concerned with was what are the drivers that cause retailers and distributors to either want to keep a brewery on tap because that’s life-blood revenue for a brewery, or what are the drivers that cause them to make the decision to remove them from being on tap. For me, understanding of that allowed me to … us to do some, what I thought would be good for predictive analysis on making sure that we always took two steps forward rather than one step forward and one back.
During that process, Russ, I learned that this problem of just-in-time inventory with no system tools or processes existed and that the market was very chaotic and a mess. We said, “Well, wow, why can't we solve that problem? If it's not going to be us it's going to be somebody else. It may as well be us.” And therefore it was.
Russ: Well that’s great. The concept is really great. It does seem like a black hole. Just, again from my days, you’d grab it, you pull it and you didn’t know. Then you’d just grab one from the back.
Steve: Let me drive a soft home for your audience. Imagine that you sell widget to a very large customer segment, and every year 20 to 25% of those widget orders are raw, and that every year you have to bring back a million dollars or more of those widgets and you’ve got to buy them back from your customer and then you’ve got to throw them in the trash. That’s what goes on in the beer industry. As we all know, we see on TV, there's a freshness state for beer. Well in reality, is that marketing? No that’s not marketing because beer will actually [inaudible 0:12:07]. It will turn skunky or it’ll go bad if it sits around long enough. It's not like wine, it doesn’t age. There are some instances if you do it … from a brewing standpoint, but that’s not the case. But if it's in a keg and it's in a retailer’s cooler it needs to be sold. If a beer is at or near it's freshness state that distributor’s got to bring that product back. They've got to buy it back and they’ve got to poor it out. Those distributors ever year sometimes on the low end they poor down the drain 200 or a quarter million dollars worth of beer. On the high end sometimes its two to three million dollars a year that they just pour down the drain.
iKeg allows them to track the age of every beer before it goes to market, when it's in market so that they can move to an industry standard. Let me ask you, have you ever heard of the term LIFO or FIFO, last-in-first-out, first-in-first-out?
Russ: Yes. Steve: It's pretty standard, not only accounting practice, but as inventory management practice, right. Well in the beer industry they don’t use either. They use nifo, nearest-in-first-out because they don’t know what they’ve got available to them.
Russ: Are you out there selling to individual retailers or are you out solving this problem for the distributors and it's trickling down to the retailers as a benefit?
Steve: Well that’s a great question, Russ. By law, the Federal government years go established what is called a new … it's a three tier system. At the top of the system are the LEMs, the suppliers, the brewers. The middle are the distributors and the wholesalers and the bottom are the on-premise and off-premise retailers. What we do is we literally, quite literally, support all three tiers of the process. Our customer is the distributor and our user is the retailer. The indirect user is also the brewer. The brewer benefits from the information that we make available to them by knowing how to better allocate their brewing schedule. “What do I brew, when do I brew it? Then I also have as a brewer an infield sales team that I spent a lot of money to support. Where do I deploy those people so that they're actually effectively helping the distributor sales team?”
iKeg, a lot like Mattel, selling to the mob but the kid plays with the car, so the kid’s the user, the mum is the one with the checkbook. We operate much the same way.
Russ: Okay. Now what are your challenges right now in scaling the business? I imagine you’ve got to go out and talk to every beer distributor in the world which is a hefty task? What's the challenge to scale and grow the business?
Steve: Good question and the challenge of scale is operational excellence. Our technology we've been working on, Russ, for quite some time. This is not a small endeavor and we have been … we have a team of dedicated engineers on both the hardware and software side that are built here in Indiana, that are in Dallas, Texas, that are in India, that are in Italy as well as a facility in Singin China that is where we manufacture and do a lot of our [inaudible 0:15:31]. We've got all of those people tightly coordinated on building a solution that integrates the hardware and the software seamlessly. Right now we’re in a closed beta which we will come out of due this summer. Then our job in terms of scale is to share iKeg with other distributors. Really it's to tell the return on effort, return on time, return on the investment story that they're able to deliver; more market share, more revenue, lower costs at lower effort.
Russ: I would imagine that there are others in the market trying to do similar things. Is there anybody breathing down your neck in this space?
Steve: Well you know right now we, like everybody, have worthy competition. Our competition has really been focused on using flow meters. Flow meters do an admirable job in tracking how much beer flows through a tap. But that’s what it tells you on an aggregate, how much beer flows through that tap? It's really focused on the people that manage their systems or still the systems, focus on shrinkage. How much beer am I wasting or how much beer is being stolen from me by a fruit pint to somebody? While that’s important we think that that’s the tail lagging the dog. We've taken a very different path.
The other competitive choices that are available or taking an actual scale into the cooler, taking that keg, dragging it across, putting it on the scale and reading the number to somebody else that writes it on a legal pad. That’s the second competitive choice that you’ve got. And the third competitive choice is do nothing.
Really what we’re focused on, Russ, is creating for the first time a repeatable defined standard within the industry for order and inventory management to take this spikiness and the black box out of it and make it predictable and essentially to create a new normal that makes it easier for everybody in that channel to operate and do their job effectively. If we do a good job at that,
Russ, nobody’s going to want to go back and do it the way that they wanted to before or did do before.
Russ No, I can't imagine they would. It seems like a black pit, a big hole in a lot of bars and restaurants and when that’s your life blood, that just simply can't be the case. I applaud your efforts. Now when you're not … when you do have that 20 minutes off and you are … you're not tweaking code or finding another distributor or looking for your next partner, what do you do in the off time?
Steve: Well I do a couple of things. The first thing is that I spend a lot of time on my road bike. I've been a cyclist of years. I try to get out either with my friends or by myself and either just take in the rural countryside that I'll disappear into. Or I'll be thinking about solving problems. I'm here doing that or I'm playing golf with my 13 year old, and believe it or not already getting lashed by him because 13 you can drive it almost 300 yards and I just look at him and I go, “Really?” It's not fair. Then I've got a seven year old daughter and they both swim as well so I am … I try to be half as good a parent as my wife is. She does an amazing job with our kids so we just try to be … I try to live up to her standard and enjoy them. Between my kids and my wife and spending time on the bike, that’s where I spend my off time, Russ.
Russ: Now is the brewery still around?
Steve: It sure is. As one of the founders I'm very proud of the success that they’ve had. I sold my interest in the brewery a while back because it was necessary for me to focus intently on scaling SteadyServ. But the brewery, I love to promote it. It's called Flat 12 Bierwerks and its named after a car engine and a really interesting story that included some industrial espionage at the turn of the century. But you can find them at flat12.me. They make some of the best beers on the planet.
Russ: Oh, that's great. Well, Steve, I really appreciate you joining us today on Big Awards Sync and we wish you the best of luck in your coming out into general availability on the iKeg product. Steve: Well Russ, I really appreciate the opportunity to share what we’re doing and it's been a pleasure to spend the morning here with you.
Russ: This has been Russ Fordyce with Steve Hershberger from SteadyServ and we’ll see you next time. Thanks everyone.