17 Sep 2010 @ 8:42 AM 
 

Startup: Starting Up Somewhere Else, Methods of Contracting

 

If I’m going to correctly cover all my startup bases, there’s one more startup option that I need to get into: contract brewing.

I’ve been a little dicey on contract brewing for a long time. There’s a stigma against it that I’ll discuss in a little while, but first, let’s start here:

There are two versions of contract brewing.

Version 1: Contract brewing. You come up with a recipe, a brand, and a wholesaler’s license, then you contract with somebody else to make the beer for you. They package it and sell it to you. You sell it.

Version 2: Alternating proprietorship. You rent a brewing facility and do your own brewing and packaging.

I’m going to talk about them separately, because they’re really completely different animals.

Some of the most recognizable names in craft beer have started (and continued for years and years) as contract breweries: Sam Adams, Brooklyn Brewery, and Terrapin come to mind. If you play your cards right, it can be a very profitable venture where you essentially act as a middleman as experts that you hire do their work on either side of you. You pay for the beer to be made, you manage the freight for the beer to be delivered to your distributor, then the distributor does all the sales and delivery for you. Aaaand scene.

Of course, that’s where the stigma comes into contract brewing. If you’re using that model – where does the brand really exist? You, as the middleman, carry the name of the brand on your organization, but your involvements exists on a purely organizational and managerial level. You didn’t make the product, you didn’t sell it, you’re just a money-collector in the middle with a good idea. It’s why people started getting bent out of shape when Sam Adams started winning medals at the GABF way back in the day. Sure – it’s great beer – but who deserves the credit for it? The guy who made it or the guy who marketed it? Tough call.

On the other hand, for a startup brewery, this is a really smart way to go. You get to pay someone who already has equipment and licensing in place to get your product off the ground. It’s a shortcut to revenue generation and you don’t have to be the mindless drone middleman. There’s no reason you can’t be actively involved in the brewing process – go hang out while your beer is being made, make sure that recipe is being followed to a T. What’s more – you need to be set up as a wholesaler to be a contract brewer, so get out there and sell your beer and make the deliveries. You don’t have to be out of touch with the product, but you can be if that’s your cup of tea.

Alternating proprietorship is a horse of a different color. Here’s the idea behind alternating proprietorship: You are set up as a brewer in another brewery’s space. Every once in a while, on an agreement with the brewery, you take legal possession of their brewery for a certain amount of time. It’s essentially a really short term lease – like 24 – 48 hours. In that time, the brewery is legally yours. You (and your employees, if any) are the people who are in there managing the product, the equipment, and everything in between. Sounds awesome, right?

Sure, but you have to get someone to let you into their brewery.

Alternating proprietorship comes from the wine world. Wine, as I’m sure you know, has a much longer production period than beer. In a winery, you’re only ever spending a few weeks per year using the equipment to actually make wine. The rest of the time, the vintner’s job exists in the cellar managing the inventory and aging. That means that the equipment itself is free, and if someone else comes in and uses it for a few weeks it won’t interrupt the flow of business in the winery.

That doesn’t really work out the same way in the beer world. Since our long turnaround times are measured in weeks instead of years and our short turnaround times are measured in days instead of months it means that the amount of time when equipment is not actually in use in a brewery is much smaller, thus, the amount of time available for somebody to come in and rent that equipment is low.

However, if it can be done, it’s another great way to get going as a startup, and that’s exactly what it’s designed for. In addition, since you’re in ownership of the entire process (just not the equipment), you avoid the traditional stigma of the contract brewer.

For my own operations at Mystery Brewing, I had been hoping to participate in an Alternating Proprietorship but have had to change my plans and am now looking at a short-term contract and getting quotes for brewhouses. Why? It’s simple: finding a contractor is hard. The craft beer industry is doing well, and very few people have the space available to allow a contract. That means that even fewer people have space available AND feel comfortable renting their facility out on a regular basis. From my assessment, and others I’ve talked to in the industry, the feeling is that if a brewery has the ability to offer alternating proprietorship, then their business is probably failing and they’re using this to generate extra revenue. Not a bad way to go about staying afloat, but a little sad, and risky from the standpoint of the startup business. Of course, the alternative is that they’re just a really low volume brewery and doing fine, but it seems hard to believe that a brewery would exist right now with that much empty space around on a regular basis.

Still, I’d like to offer you this Pro/Con chart between the two methods of contracting. (I’ll probably update this over time as more items are either brought up to me or occur to me.)

Contracting
Pros Cons
  • Low startup cost
  • No need for brewing equipment.
  • You don’t actually need to know how to make beer.
  • No need to buy supplies, etc.
  • No brewer’s bond needed, just basic wholesaler’s permit.
  • Contract brewery handles the bulk of the paperwork, COLAs, etc.
  • Traditional stigma against contracting – hard to market to beer geeks (everyone else doesn’t care).
  • Space is a premium; it’s difficult to find a contractor, especially on a small scale.
  • It’s even more difficult to find a good contractor; you’re often required to use their base supplies instead of being able to specify your own.
  • Extra freight cost after manufacturing.
Alternating Proprietorship
Pros Cons
  • All the benefits of owning your own brewery, without the initial startup cost.
  • No need for brewing equipment.
  • You actually get to make the beer yourself, manage supplies, and manage your own brand.
  • No contracting stigma, if you can explain just what it is you’re doing.
  • Space is a premium; it’s extremely difficult to find someone who will let you use their space.
  • All paperwork falls into your hands, plus extra paperwork for the host brewery.
  • You lose control of your product while you’re not in possession of the brewery.
  • If something goes wrong while you’re brewing, the potential for incurring additional cost is high (it’s not just your equipment/beer/space, but somebody else’s.)

Read more from the TTB Industry Circular describing contract and alternating proprietorship breweries.

Tags Tags: , ,
Categories: brewery, industry, startup
Posted By: erik
Last Edit: 17 Sep 2010 @ 01 18 PM

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Responses to this post » (9 Total)

 
  1. Mike says:

    Erik,

    this is a great write up. I have often wondered about the stigma myself, what causes, how to get around it, is it warranted in some cases?

    I’m glad to see someone grappling with the issues. Granted your involvement is at a higher level than most consumers!

    Great chart accompanying pros & cons on top of the post. I have begun to see Southampton’s Abbt 12 and their Saison on shelves down here in Northern Virginia. I found out not that long ago that this is in fact a contract brew coming from no other than Latrobe, PA. I think another fascinating side of contract brewing is the intersection of contract brewing and economics. Does it put people to work? Does it let them have a job?

    Great stuff, keep up the good work!

  2. Greg says:

    Nice analysis, Erik. Really thoughtful.

    Do you think being in NC hurts you at all with contractors? Up in PA, I know of a bunch of large breweries within three hours of here that do contract brewing, allowing for brands/beer companies to come (and go) with relative fluidity. That’s largely because the Northeast has always had large regional and local breweries that are bigger than your usual craft brewery and have excess capacity since they can’t take on the big boys.

  3. S says:

    Nice writeup. Keep the posts coming bro.

  4. erik says:

    Well.. yes and no. I know of quite a few contract breweries in the South, but everybody that I’ve talked to is running at capacity and doesn’t have room for any more contracts. So maybe being in NC hurts me because the industry is doing so well here.

    I think what hurts more is being small and looking for small batches. The bulk of contract breweries that *do* have space (one in PA comes to mind) are BIG breweries. They’re doing contracting for Sam Adams, or picking up overflow from North American Breweries or something like that. I’ve been quoted minimum batches of 300bbls or more. I just can’t move that kind of volume of beer as a new brewery.

    On top of that, most of the big guys won’t do something, like, use my house yeast, or order a specialty grain that I like more than what they have on hand.

    I don’t think it’s location as much as it is size.

    • Greg says:

      That makes complete sense; the contract brewers I know of in PA do have significant minimum runs.

    • Andrea says:

      Girl you just made my day. I love reading this and am so glad you found my blog! First of all, you can TOTALLY do this. And a 5K is just the beiinngng. SEriously. I will help in any way I can. I will tell you that the beiinngng won’t be easy. My first mile was 15 minutes and I ran the whole thing. I was slow and dying. But I got back up and did the same thing. And then 2 miles. And then 3. I am happy to push you and make sure you stay on track. I can listen to your complaints and your worries and your frustrations and your doubts. But I will celebrate every victory with you too. YOU GOT THIS. Such a pleasure to meet you

  5. anda says:

    That’s a good comparison of the two contracting options from a business perspective. One of the additional issues with an alternating proprietorship is that you must have a business plan drawn up to submit to the TTB outlining how you will get your own facilities in the future. It’s something they allow, but something they want to know that will not last too long.

    We opted to start out small with a 1 bbl system, and quickly outgrew that, and have a 15bbl coming soon. A lot of breweries have started out this way, and have been able to organically grow instead of being heavily leveraged from the beginning.

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