Contract Brewing - A Strategy for "Right Sizing" Brewery Production

Posted by Brian McCormac on Wednesday, September 19, 2018

One of the toughest decisions a brewery owner must make is deciding how much production capacity is the right amount.  Starting (or expanding) a brewery is a huge decision.  Brewing equipment is expensive and filling excess production capacity can be a tediously slow process.  After an expansion, a brewery owner may spend many sleepless nights thinking about how to fully utilize its newly increased capacity. 

Brewers spend countless hours—and even more dollars—on determining how much capacity they need.  Indeed, a brewer can feel like Goldilocks when trying to strike the right balance between too big, too small, and just right when sizing production equipment.  Contract brewing can help fill the gap between a brewer’s own production needs and excess capacity and provide an additional revenue stream.   

On the flip-side, brewers may “outgrow” their current production capabilities.  Production equipment is costly and takes time to bring online.  In some cases, a larger physical facility must be found to accommodate growth.  Rather than investing huge sums of time and money, contract brewing may present a low-overhead option to help satisfy current demands and buy time to plan—and finance—future expansion. 

Contract Brewing in a Nutshell

In a contract brewing arrangement, one person pays a brewing company (the contract brewer) to produce beer for him or her.  Contract brewing is allowed by federal law, and the responsibilities of the contract brewer typically include brewing the beer, keeping appropriate brewery records, having title to ingredients, labeling, obtaining COLAs, and paying tax.  The contract brewer keeps title to the beer until tax is paid and beer is removed from premises. 

A home brewer may make great milk stout in his garage.  However, raising the capital needed to step up to commercial production can prove difficult, time-consuming, and risky.  Using a contract brewing agreement to work with an established brewery could be a viable way to “test the market” on a limited basis.  In some cases, the contract brewer may also develop recipes and handle marketing, sales, and distribution.  All of these functions can prove vexing to new brewers, and an experienced partner may help provide a solid foundation to start—and grow—a brewery business.

Contract brewing does present some potential drawbacks.  Margins for both the contract brewer and the buyer are typically smaller than in traditional production.  Finding a reliable and trustworthy partner can be a challenge for both sides of a contract brewing arrangement.   Coming to grips with losing control over production can be hard to accept for an independent brewer.  Perhaps the most significant drawback to contract brewing is caused by federal labelling law, which requires product labels to identify the city where beer is packaged.  Consumers that emphasize “buying local” may shun beers made by a third party.

Contract brewing can be a viable strategy for brewers with underutilized capacity, those that have outgrown their current facilities, and small brewers looking to reduce risks of growth and new start-ups.   However, both sides must carefully weigh the costs and benefits of contract brewing to decide whether it is a win-win for their businesses.

If you have any questions on contract brewing, please contact Brian McCormac  / mccormac@brownwinick.com or one of our BrownWinick attorneys that specializes in Craft Brewing and Hospitality Law.