17 Sep 2010 @ 8:42 AM 

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.)

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.

Posted By: erik
Last Edit: 17 Sep 2010 @ 01:18 PM

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 03 Jun 2010 @ 10:30 AM 

If you’ve never started up a brewery before, as I haven’t, you may be interested to learn of what I think is the most interesting challenge up front. I’ve been thinking of it as the “Order of Operations” problem. Allow me to explain:

In order to sell make/beer, you need to be licensed by your state to do so. This process can take months, depending on your state.

In order to be licensed by your state to make/sell beer, you need to be licensed by the TTB to do so. This process can take months (they quote 95 days).

In order to be licensed by the TTB to make/sell beer, you need to have a place of business outside of your home.

In order to have a place of business outside of your home you need money to pay a lease.

Okay, now go!

This, all of the “construction” or “buy equipment” or “make good beer” crap aside, might be the single most prohibitive process I can think of in new brewery startup. Why? Because it means that you can’t make your product, aka make money, aka pay your expenses from cash flow, until months after you’ve begun paying rent and, quite possibly, paying people.

Can you begin building out your brewery while waiting for licensing to come through? Certainly, as long as you have a floor plan design in place that you can submit to the TTB, but new startup brewers beware: You need capital up front to be able to pay for MONTHS of operations before you have the slightest possibility of being able to make any money back to put into your bank account and start to pay off your debts.

The thing that I hear most in brewery startup is that the #1 reason for failure is under capitalization. Now, I can be snarky and say that that should apply for any business, but it seems to me that in many other businesses you probably don’t have to pay for months worth of space and utilities while simply waiting for a piece of paper to come in that says you’re allowed to actually make/sell your product. Maybe I’m wrong. I feel like yarn stores don’t have this kind of long startup period.

To be fair, I don’t know how this works if you’re starting a nanobrewery, say, out of your garage. When I talked to my state board, they were very explicit about having a place of business outside of your home, but maybe it’s because I’m applying for a wholesaler’s license right off the bat and they don’t want you to distribute out of your living room.

So, potential startups, there’s your first warning from startup land: Be ready to pay out up front and be ready to wait.

Posted By: erik
Last Edit: 03 Jun 2010 @ 10:30 AM

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Categories: brewery, startup
 06 Jan 2010 @ 8:01 AM 

I keep running across references to nanobreweries, but up  until now I never gave them much thought. My mind kept going back to this old article on MSN last year, “Something’s Brewing Close to Home” in which they note (or quote actually):

The nanobrewer isn’t going to quit his day job. They are brewing because they love the process and want to share the results with the people in their neighborhoods…

That sounds crazy to me, so I wrote it off. But I keep seeing the concept pop up, so I started doing a little research, and I think I just didn’t get the correct characterization off of said MSN article (an MSN article being unclear? Shocking!). It just kinda ends after introducing the concept. From what it looks like, you homebrew, and then you drop the thousands upon thousands of dollars you need for the necessary permits and licenses to sell your product, and then for some bizarre reason you keep your day job.

See? It is crazy. Totally batshit insane.

But! There are other operating nanobreweries around. The Hess Brewing Odyssey, a nanobrewery in San Diego, recently compiled a list of operating nanobreweries in the U.S., some of which are making the step up to being small craft breweries, though in reality a small craft brewery is all a nanobrewery really is. Sorta.

Curve Street Brewing

There’s no good definition, but what seems to be settled upon is that you’re making an amount of beer, per batch, that is considerably less than one would expect from a production brewery: half-barrel or one-barrel systems are common and sometimes even less. If you think about it, in that respect, Dogfish Head can be said to have started as a nanobrewery.

There are only a handful in the country, but it’s been enough for the TTB to put together some guidelines. They are basically a reminder of what constitutes the amount of beer that you can legally make in your home every year and that if you sell it, you need a license.

Michael, the person behind the Hess Brewing Odyssey, has compiled an absolute wealth of good documentation about how to open a brewery, nano or not. He covers all of the forms and hoops you have to jump through quite well (in fact, I’ve already bookmarked it to use as a reference), but the associated cost is still there.

So, I ask: If you don’t have a sizable bankroll at your disposal (Hi, I’m looking for investors, interested? Let’s talk!), is starting a nanobrewery financially feasible as a startup option? In other words, if this isn’t going to be a hobby – you’re not going to keep your day job – is that type of investment worth making 1 – 2 kegs at a time? A 7bbl brewday isn’t going to be much different in time vs. a 1bbl brewday, but at the end of it all you have 14 kegs to sell instead of 2 in return for your 8 hours of janitorial work. Will a 7bbl brewery cost more? Certainly. At least the brew system. Any sort of packaging and packaging system will cost exactly the same, and you’re going to use it a lot more frequently. If you’re making a go at starting a business,and you start that small, I feel like you’re going to be spending all of your time making your product, rather than selling it, and the latter is really important if you want to make a profit.

On the other hand, I’m a proponent of slow growth in the craft beer industry. Every single book I read about startup businesses in craft beer, every single time I hear an industry veteran talk about their startup experience, the number one thing I hear (though mostly in subtext) is, “We grew too fast, and had a hard time keeping up with production demands, so we went into a ton of debt.” I mean, I hear about companies that are now successful quote things like 7 – 10 years to cash-flow positive. I’m not convinced it has to be like that. Maybe starting super small and selling deep into a market is a way to avoid that. The path to cash-flow-positive growth is to not grow until/unless you can afford it and bust your ass in the meantime. It’s a theory.

I just can’t get by the fact that you have to brew 5 days a week to sell a half-barrel keg to 10 accounts. That’s a lot of time – and it’s a lot of fermentation space! I have a hard time imagining it.

Maybe the purveyor of a fine nanobrewery will stop by here and set me straight. They’ll let me know that, actually, they put together their operation with $5,000 and a box of coat hangers and they only brew on weekends, but I’m going to guess that’s not the case. I’m going to guess that they all meet at least one of the following conditions:

– they are rich
– they are in an enormous amount of debt
– they are making a go and hoping against odds that this venture doesn’t make them bankrupt
– they are still employed at a full-time job elsewhere
– they have an anonymous benefactor
– they are homeless and sleep under their lauter tun
– they have a really-well-employed spouse or partner
– they employ magical elves to make beer while we sleep
– they are, in fact, wizards

What do you think? Starting that small is an undeniably cool (and even romantic) concept, but I wonder at how sustainable the businesses are. It’s great to see that some of the ones listed in the link above are making a step up in growth, but how many will successfully make that step, and how many will make that step at all? Are these merely extended hobbyists or is this a viable entrance strategy to the craft beer industry?

I’d love to hear from others.

Posted By: erik
Last Edit: 06 Jan 2010 @ 09:02 AM

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 24 Aug 2009 @ 9:50 AM 

One of the most bizarre parts of starting a brewery is planning that’s far away from buildings, business plans, or venture capital, and it’s probably one of the most important decisions that you can possibly make: What kind of beer do you make first?

It’s vital. It’s the beer that first defines your brand to customers; it’s the beer that will most likely, but not necessarily, be with you for the entirety of your existence.
The ubiquitous sampler.

So, how do you decide? Do you want a session beer that people can drink a lot of? Something big and memorable that people won’t drink a lot of? Do you want to make an incredibly popular style and subject yourself to a ton of competition? Or make a hard-to-get style and hope that people will go out of their way to try it? What’s more – is there a way to balance all of these considerations?

A few years ago, when I took Siebel Insitute’s inaugural Start Your Own Brewery course, one of the largest things I took away from it was Jason Ebel of Two Brothers Brewing Company and Windy City Distribution saying something like, “If you’re trying to sell a porter, for the love of god, don’t even bother calling me. Everybody’s got a friggin’ porter.”

When I was shopping at Whole Foods this weekend, I took a stroll through the beer section and noticed that 75% or more of the beers that they had in there were IPAs or APAs.

In one panel at the Craft Brewers Conference this year, I remember a slide (wish I had a reference for you, but I don’t) noting specifically that most customers expected and wanted to see a stout on tap at their brewpub, but that it was continually the lowest-selling beer on tap.

A study by the BA in 2002 (which I can no longer find, so you’ll have to trust my AWESOME memory) suggested that craft beer drinkers who said they had a favorite beer drank that beer, on average, once per month. So on some level, all of this is subject to whim, no matter what.

It all seems like crazy conflicting information? So how do you deal with it?

For me, it’s been a weird process of elimination. I started by looking at the beers that I like. It is my personal feeling that a flagship should be with a brewery as long as possible, as a strong part of their brand definition. With that in mind, it had better damn well be a beer that I enjoy since I’m going to be the one around it most.

I cut it down to beers for which I had already made recipes that I enjoyed, so that I could then work on perfecting those recipes over the next few years as I work on the nuts and bolts of the rest of the startup … you better believe I have a beer in my hand every time I work on my business plan.

That left me with a half dozen beers to choose from. I eliminated the really high gravity stuff with the thought that I would prefer if people bought a lot of my first product, and the best way to get people to buy a consumable product is to make sure they consume it.

That left me with three. One of which I eliminated because it involved an herb that I thought would be a tough sell out of the gate.

That leaves me with an IPA and a Porter.

Tough sell.

Of course, I’m still early on in the process – it all may change in time, especially as I develop new recipes that I – and others – like.

But what about others?

Beer drinkers: What are you most likely to try from a new brewery?

Breweries: How did you arrive at your final decision for your flagship?

Other startups: How are you approaching this process?

Posted By: erik
Last Edit: 24 Aug 2009 @ 09:58 AM

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