What is Contract Brewing? (+Pros and Cons for Craft Brewers)
February 05, 2020
If you’re just starting out in the craft brewing industry, it may be surprising to learn that many successful breweries don’t brew or package some (or sometimes none) of their beer in their own facilities.
These companies are taking advantage of a type of commercial agreement called ‘Contract Brewing’.
What is Contract Brewing?
In this type of arrangement, a brewery, the Contracting Brewery, gives production control of their product to another brewery, the Host Brewery. In these situations, the Host Brewery is often responsible for the production itself in addition to record keeping, labeling, getting appropriate certificates, and even paying taxes as the beer leaves their premises.
These responsibilities may vary a little, but will always be spelled out in the legal agreement. The level of involvement of either party can vary. Sometimes the contracting brewery essentially only acts as the face of their company, focusing mostly on marketing and PR.
Another option breweries have is a commercial agreement called an Alternating Proprietorship. In these agreements, the Host Brewery can assume ownership of the beer during the production process, using their own ingredients and facilities, and then pass the title back to the Contracting Brewer when they receive their beer.
In other cases, a Contracting or Tenant Brewery will rent the time at their host brewery’s premises so they can use their own ingredients and brew their own products in the host space. In this case, the Contract Brewer or Tenant Brewer owns their product from start to finish and is also responsible for the record keeping, labeling, certificates, and taxes.
These types of commercial agreements are defined on a federal level with brewery licenses by the Alcohol and Tobacco Tax and Trade Bureau (TTB), but can also be regulated on a state basis. When putting together plans for your business always be sure to check state laws!
Many breweries use Contract Brewing as a way to supplement what they produce in their own facilities, while others use it as a jumping-off point when starting a new brewery and to get their foot in the market. Either way, these commercial brewing agreements can help ease the pressure for craft brewing companies to make such a large investment of capital or space.
Could Contract Brewing Work For My Business?
Thanks to the overwhelming growth in popularity of craft beer over the past few decades, the beer industry is one of the few in the United States right now that aren’t dominated by a couple of large corporations.
Contract Brewing, combined with a sense of camaraderie, has been a key vehicle in making this happen by giving small craft brewery businesses more chances to start and flourish. These arrangements aren’t right for everyone, but they can be worth some serious consideration.
Pros of Contract Brewing
1. Reduce Costs
Brewery startup costs can often be cost-prohibitive. Contract Brewing gives more great brewers a chance at success, rather than only allowing those with enough existing funds or connections to get a leg up. Think about it – between renting or purchasing brewery space, getting all the necessary brewery equipment, brewery insurance, and hiring enough staff to do the brewing you’re already looking at a sizeable investment. Entering into a Contract Brewing or Alternating Proprietorship agreement can eliminate a large portion of these costs and free up funds that can be allocated toward other worthy budget lines.
2. Fewer Equipment Headaches
Without brewing equipment or facilities to purchase, maintain, or replace, you can avoid many many headaches like beer line cleaning and other routine cleaning procedures. You’ll have fewer maintenance and repair vendors to deal with, fewer mechanics-related emergencies to overcome, and again, fewer related costs.
3. Make Your Arrangement Work For You
There is a lot of variety in the arrangements available to craft brewers looking to contract. If you know what resources and needs your company is working with, and you are willing to do some serious research, there is a high likelihood that you can find a solution that works for you.
4. Make Use of Excess Capacity
Let’s not forget that Host Brewers also benefit from these arrangements! Host breweries may not always be operating at full capacity, so incorporating additional beers into their production schedule or offering time in their facilities at a cost can be a sustainable way to increase overall profits.
Cons of Contract Brewing
1. Less Community Presence
Contract Brewing can be tough to justify to die-hard craft brew enthusiasts. The idea that you are not producing beer in your own facilities might not be popular with certain customers or the specific community you are working within. Those who place a high value on a specific idea of integrity or authenticity when it comes to breweries can get fussy about this, but if you take the time to explain the benefits for your company specifically, you may be able to change some hearts.
2. Potentially Smaller Margins
Paying another company to take on a significant portion of your company’s work may not be cheap. Do the math before entering your agreement to be sure your profit margins will be high enough to warrant moving forward.
3. Ceding Control
If you created your craft brewery business from the ground up, chances are you think of it as your most prized possession. Handing over any level of control when it comes to your hopes and dreams can be very difficult. Making that call, however, can be more appealing when you consider the cost benefits and potential opportunities it may offer in the long run. If this is an especially big pain point for your business, considering an Alternating Proprietorship might bring you closer to seeing the benefits of this type of arrangement while maintaining ownership and control over the production of your beer.
4. Relationship Pressures
Entrusting your recipe, your production, and a hand in your business’ overall success to another company means that you’ll need to put the work in to build a successful relationship with them. There is always risk involved when relying on another entity to be timely and trustworthy, so choose your host wisely.
Additional Resources for Contract Brewing
This will all require an effort on both ends, so you will need to thoroughly research your options. To get started by joining a brewery association to seek advice or, depending on your community, you can look up an open Host Brewery in a directory, like Capacity Tap if you’re in Chicago.
If your dream is to open a successful craft brewery, doing whatever it takes to make it happen is probably a given. Despite some risks and potential pitfalls, entering into a Contract Brewing agreement or an Alternating Proprietorship may be the key to making your dream come true.
As with any business decision it is extremely important to do the research, seek advice, make a budget, and be realistic about the risks you take and benefits you’ll see. But if you can shake off a little stigma and keep your mind open, you will be much more likely to find a commercial agreement (or not) that aligns perfectly with the craft brewery business you have always envisioned.
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