Why Aren’t There More Contract Brewers?
According to the Brewer’s Association, 117 breweries contract brewed some or all of their production1 in 2009. That’s out of 1,558 total craft breweries in the United States. Contract brewery sales accounted for 365,132 barrels out of a total of 9,115,635 barrels for the entire craft beer segment. That’s only 4% of craft beer production.
I was very surprised to find those numbers to be so low. Given the enormous capital investment needed to start a brewery, I expected there to be a higher percentage of brewers taking advantage of the contract brewing model.
After all, if you want to start even a small production facility with a 5 to 10 barrel brewhouse, you’re looking at needing somewhere in the neighborhood of $200,000 to $400,000. I don’t know about you, but I don’t have that kind of money laying around right now. Give me 10 years, but not right now…
If I wanted to sell my beer commercially, but don’t want to assume the risk of investing several hundred thousand dollars, contract brewing seems like a viable alternative. So why don’t more people choose to go that route?
Before we dive into the pros and cons of contract brewing, let’s define contract brewing and the different arrangements that can be made between a contract brewery and the production brewery.
What is Contract Brewing?
At its simplest level, contract brewing is a term used when one company (the contract brewer) signs a contract with a production brewing facility to brew beer that becomes the property of the contract brewer.
There can be many different arrangements for this relationship, so I’ve broken it down into four basic types for the purposes of discussion, with each type increasing in the contract brewer’s involvement in the process:
Type 1 – The Marketer
This is the least involved that the contract brewer can be. Even using the term “brewer” is a loose connection. Under this arrangement, the contract brewer asks the producer to use one of the producer’s recipes or to formulate a new recipe for them that the contract brewer can then put a private label on and sell as their own. This is what someone might do if they know very little about beer, but they feel confident they can build a brand and sell product.
Type 2 – The Collaborator
This is a combination of types 1 and 3. The contract brewer knows what they want in style and character, but may not know the ideal recipe to achieve this on a commercial level. The contract brewer may bring an initial recipe to the producer, who will then work with them to tweak the recipe where they ultimately want it. The producers then makes the beer for the contractor according to the collaborated recipe.
Type 3 – The Architect
The contract brewer has formulated the exact recipe they want, hands it to the producer to brew, and the producer takes it from there.
Type 4 – The Renter
At this level, the contract brewer is a capable commercial brewer and physically participates in making the beer themselves using the producer’s equipment. Depending on the contract brewer’s level of expertise at the commercial level, they may assist the producing brewer or they might be able to handle the entire process by themselves with little or no involvement from the producing brewer.
Why Contract Brew? The Advantages.
“It dawned on me one day, ‘What if everyone hates my beer?’ I’m stuck with all this equipment. Worst case by contracting production, I’m stuck with a warehouse full of beer that I like. It takes out the ‘what if’.” That was why Terry Bumbaugh, founder of Kind Beers (Charlotte, North Carolina), ultimately decided to have Thomas Creek Brewery in Greenville, South Carolina, contract brew his beer when he went commercial.
Terry got his start as a homebrewer. Unlike someone like myself, who never brews the same beer twice, Terry took the approach of working on one recipe at a time until he got it exactly where he wanted it. After working on a few recipes for a year or two, he knew he was on to something when his friends would choose his homebrew over the commercial stuff he had in his fridge.
Once he made the decision to take his beer to the world, Terry decided the best approach for him was to form his company as a wholesaler, not as a brewery. He felt this gave him an advantage since he has the option of selling his beer directly to retailers and to other wholesalers.
When he first started, Terry would deliver his beer directly to his retail accounts. Now, after nearly two years in business, he only services two or three accounts directly. It makes more sense for him to work through other distributors, and Kind Beers has expanded distribution into five states: North Carolina, South Carolina, Florida, Georgia and Alabama (coming later in 2010).
Fred Block, the founder of BottleTree Beer Company out of Tryon, North Carolina, recently saw his dream come to fruition as his first pilot batch of BottleTree Belgian Blonde rolled off the bottling line at Thomas Creek. A homebrewer for eight years, Fred worked on recipes, entered homebrew competitions and spent countless hours researching the craft beer market and commercial brewing.
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| Fred Block, left, founder of BottleTree, helping bottle his pilot batch brewed at Thomas Creek |
Through his experiences and research, Fred concluded the best way to ensure his success was to partner with an experienced brewery, “I work with a great brewery. I instantly gained 12 years of industrial brewing experience with this partnership. Every situation is unique, but for me, the folks that are showing interest in BottleTree are interested because of the 12 plus years that Thomas Creek bring to the table and the consistent quality they produce. It is a big positive.”
Terrapin Beer Company, budding craft beer stars out of Athens, Georgia, built their own brewing facility in 2007, but they got their start as a contract brewer in 2002. From the beginning, founders John Cochran and Spike Buckowski wanted their own brewery, but as John put it, “We didn’t have any weathly relatives, and back in 1999 the first craft beer explosion was dying down, so banks weren’t too eager to give hundreds of thousands of dollars to a couple guys who claimed they could make good beer.”
In order to get their start and brew commercially, they struck up a deal with their friends at the now defunct Zuma Brewery in Atlanta. Spike was allowed to use their equipment to brew Terrapin beer himself.
Terrapin took the same approach to building their brand as a contract brewer the same way they would have if they had their own place. They used a grassroots marketing effort, working at beer festivals, personally getting to know businesses and customers throughout Athens, and doing whatever it took to get their product in the hands of consumers.
Within five years, it obviously worked well enough for them to achieve their goal of building their own brewery, and they haven’t looked back.
If It Were That Easy, Everyone Would Do It. The Disadvantages.
To this point, I’ve painted a pretty rosy picture. So what’s the downside to contract brewing? In my view, there are two primary disadvantages: perception and independence.
As a homebrewer, I love the craft of making beer. From conceptualizing a recipe to the smell of the grains in the mash tun to the relief I feel as I crack open the first bottle from a batch and know that it conditioned, I receive a great deal of satisfaction that I made a beer with my own hands.
In the minds of many craft beer aficionados, they feel that this sense of the craft should also translate to commercial brewing. As my friend Evan put it, he wants to know that the beer he drinks “has a soul.”
We have so much good craft beer available to us now, people now want to know the story behind the beer. The best way to build a loyal following is to create an emotional bond with your customers. People are more emotionally tied to other people, not to things.
That’s why Terrapin wanted their own brewery. As John Cochran put it, “The marketing aspect of having a brewery is huge. There is something about going to a brewery and seeing how it’s made and the people behind it. Being in a college town, Terrapin is the first craft beer that many of the students are exposed to. We’re their first love and they never forget that.”
However, both John and Terry Bumbaugh said their experiences as contract brewers has been positive. The average consumer really doesn’t care where the beer is physically made and if they own the equipment. As long as the beer is good, they are happy to lay their money down to buy it.
While they wouldn’t get specific, they both said the only backlash they received was from people within the craft beer industry. Terry has dealt with discrimination as a contract brewery. John said that once Terrapin started going beyond Athens, some other breweries tried to use their contract status against them.
Fred Block offered an interesting perspective on being a contract brewer, “There is no difference between how Thomas Creek operates and how I would operate if I had my own brewery. Every brewery has folks that make beer, folks that do the finances, folks that market and promote the beer. Every person has a role. In most cases in a small brewery, everyone does a little or lot of all of those things. I would have to wear all of those hats for a long time, but to deliver quality, we have to have our areas of focus.”
The other big disadvantage to being a contract brewery is the lack of independence and control. I believe this is why most brewers want their own brewery. They want to be able to brew what they want, when they want and not be constrained by the production brewery’s schedule.
Most people get into commercial brewing because they are passionate about beer. Most got their start as homebrewers, tinkering with recipes and building their own systems one piece at a time. Their passion is in making beer, not selling it.
Except for the biggest of the big, few breweries will survive if they’re only in it for the money. As a contract craft brewery, if that’s your motivation, odds are your beer will be seen as a gimmick and consumers will quickly see through it once they taste an inferior product.
Terrapin, Kind and BottleTree are perfect examples to show that many contract brewers are passionate about their beer. However, a brewery is a business, no matter how us beer geeks like to romanticize it. In business, reality sets in quickly, and owning a brewery may not make sense for everyone.
Everyone should have the opportunity to bring us good beer, no matter where it’s made.
1 The New Brewer, The Journal of the Brewers Association (Vol. 27 No. 3 May/June 2010)
47 Comments to “Why Aren’t There More Contract Brewers?”
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Thanks for the informative article. Contract brewing may have a bad rap historically but well made craft beer can surmount the backlash from beer snobs. If canned beer can become cool then so can contract brewing.
Good point, Sean, that’s a good analogy to canned beer. Once people realize that most of the people behind the contract labels also put the same amount of thought and care behind their recipes and building a loyal customer base, it won’t matter any more.
To answer the initial question of the article, it’s because they are the little guys. Of those 9 million barrels, Sam Adams produces over 2 million on their own. Sierra Nevada and New Belgium also take a big chunk out of that remaining 7 million. Look at the BA’s top 50 from 2009 and, while numbers aren’t officially released, I can tell you roughly 80,000 barrels will get you in the top 25 range and you’d be surprised how precipitously production continues to drop by the time you reach #50.
365,000 barrels is quite a lot of beer and generally represents the smaller guys. Once you brew enough to build your own brewery, your numbers are removed from that list. It’s a list that will never grow too large.
Gah! I just realized that an older draft got published, which did not include a key piece of data in the first paragraph. I’ve updated the first paragraph to reflect this, which I think sheds a more useful light on the situation.
I found that there were 117 breweries that contracted part or all of their production in 2009. Out of 1,558 total craft breweries, that’s only 7.5% of breweries that utilize contract brewing.
It seems like the barriers to entry are much lower for a contract brewed beer, so I expected that number to be higher. That was the basis for my question. You’re right, the sales number are skewed based on the top 5-10 producers carrying so much weight.
By the way, Peter and I did our bi-weekly Hopinions piece today with the topic being contract brewing. As I sent my last email out, yours was published.
http://www.betterbeerblog.com/index.php/2010/05/27/hopinions-making-vs-marketing/
One of my favorite brews (contract or not) is Tupper’s Hop Pocket! The Tuppers are a Maryland couple who has St George brewing in VA beach do the work for them.
I can’t help wonder if there other effects going on to keep the level of contract brewing down in addition to the reasons you cite. Could it be that with the growth of craft brewing, most breweries are at or near full capacity and simply aren’t in a position to offer contract services? I realize craft brewers are a pretty chummy group, but do you think there are competitive concerns that cause established breweries to decline providing services to a start-up brewer who could turn into a serious competitor?
Those are excellent questions. You bring up the other side of the coin, the producer, which I really didn’t touch on in my article. I felt I was going on long enough, so I didn’t attempt to tackle that end, because as you point out, there are many questions and issues that arise. Perhaps I’ll do a followup article in the next week or two that touches on those issues. Thanks for the idea!
I really doubt that any brewery with excess capacity would be foolish enough to turn down the opportunity as long as they feel the contract brewer is competent enough to maintain a professional relationship with the producer and not become a nuissance. If one producer turns down the opportunity to brew the beer, someone else will and that excess capacity is wasted.
On another note, my company has used contract brewing to make signature beer for events that no one else has. Being an IT company we are always looking for new ways to engage our customers. So a smaller scale of contract brewing is also being done but most likely not being tracked.
Does anyone know of a contract brewer that cans beer?
Thanks for the great article Brian. Looking forward to reading more of your work in the future.
I work in the wine industry and this model has been in place for quite a while. There are thousands of virtual wineries in the US that use the same model that is discussed here. I suspect the reason for that could partially be the enoumous cost to open a winery versus a brewery, especially if an accompanying vineyard is also purchased. This model is a net positive for consumers and the industry as a whole. It allows more great beers to come to the market as opposed to being stuck in some homebrewer’s 5 gallon home brewery because they don’t have $500,000 laying around the house. It also makes the entrepreneurial process easier so all of us homebrewers can have realistic aspirations to launch our own brands commercially someday.
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