Put Excess Capacity to Work | Brewing Industry Guide

Taproom & Brewery

Put Excess Capacity to Work

Breweries expanding operations to meet future demand can take advantage of an uptick of interest in contract brewing and packaging to help allay upfront costs.


Growing a brewery is a straightforward equation with no easy answers. When business is going well, consumers can’t get enough of your beer, which creates demand, which means that you need to make more beer. Ideally you can match your increased output with forecasted demand so that one shipment runs out just as you’re ready to release the next with no bottlenecks anywhere in the system. And maybe rauchbiers will surpass IPAs as the nation’s next big brewing craze!

True and lasting growth requires capital investment, whether to add more fermentation space or packaging equipment or to build out an entirely new facility. For mid-sized breweries and beyond, those numbers become very large, very quickly. It’s also highly likely that they won’t even begin to use the full capacity or see a return on their investment for quite some time.

As the market and the options for contract brewing—and less so, alternating proprietorship arrangements—increase, more expanding breweries are finding ways to put that added capacity to work before they need it themselves. Often all it takes is putting the word out to a few friends or a post on ProBrewer.com to start a conversation. If the terms are right, it can be a mutually beneficial arrangement that helps both breweries grow.

Circumstances Vary

The circumstances in which a brewery might seek a contractual arrangement to partner with another brewery to brew, package, or ship their beer are multifaceted and vary from one case to another.

Some start-ups are finding a more viable route to opening by first contract brewing their beers and working to establish a foothold for the brand before investing in infrastructure. Jim Koch famously took this approach when he launched The Boston Beer Co. and contract brewed its flagship beer, Samuel Adams Boston Lager, at the Pittsburgh Brewing Company. Many others have since followed suit and, as a result, contract brewing has lost a lot of the negative connotations of past decades and is much more widely accepted and openly talked about. Some brands—such as Evil Twin Brewing and Mikkeler—have crafted their identities around their gypsy-brewer status before settling in to open their own facilities.

Some enterprising brewers are even partnering with their current employers to develop and launch their own brands from within an established brewery in a kind of brewery-incubator relationship. Such was the case with Taylor Ziebarth, former head brewer at Adelbert’s Brewery in Austin, when he contracted with owner Scott Hovey to launch his barrel-aging project, Oddwood Ales, from the brewery.

Under the agreement, Hovey retained the rights and responsibility for the beer and the brand while Ziebarth operated from Adelbert’s. Ziebarth then purchased back the rights when he opened up his own location earlier this year, having enjoyed several years to develop his barrel-aged beers and blends without the cost of operating and maintaining his own facility.

Similarly, for years before establishing his own brewhouse, Chad Yakobson chose to contract brew wort for his Crooked Stave Artisan Beer Project, first at Funkwerks in Fort Collins, Colorado, then at Prost Brewing Company in Denver, and finally at EPIC Brewing in Denver. The arrangement allowed him to direct the bulk of his attention to his barrel-aged pure-culture fermentation projects and grow his brand without investing funds, time, and space into operating and maintaining his own brewhouse.

Of course, a physical presence in their home market and full control over their brew systems and schedules are paramount for many craft brewers, and tasting rooms are also a critical component of success. Not only are they a place where patrons can enjoy the beers in the place where they were made, tasting rooms also provide a captive audience for developing and gaining feedback on new recipes (and provide a tidy profit margin). Breweries that are seeking to preserve their tasting room environment and the flexibility of operating on a smaller brew system but are also looking to grow outside distribution, might contract with a larger brewery to quickly expand capacity and distribution while maintaining their smaller footprint.

Such is the case with Überbrew, a brewpub in Billings, Montana, that was named Small Brewery & Brewer of the Year at the 2016 Great American Beer Festival. Überbrew brews a variety of beers on its in-house system and contracts with Fort Collins Brewery (which has since sold to Red Truck) to contract brew three of its core brands—White Noise, an American-pale wheat; Stand Down Brown; and ICONIC pale ale. Überbrew also contracts with a half-dozen wholesalers to distribute throughout northern Wyoming and into Montana, extending its reach to around Glacier National Park while firmly maintaining its local presence.

When San Francisco’s 21st Amendment Brewery and Restaurant sought to expand its distribution beyond its brick-and-mortar pub, the brewery chose to enter into an alternating proprietor relationship to produce its packaged beers. Unlike a contract brewing agreement, in which a brewer pays another brewer to produce its beer (although usually based on recipes and brands developed by the brewery seeking a brewing partner), an alternating brewery proprietorship temporarily cedes control of a host brewer’s facility and equipment to a tenant brewer, who is responsible for all record-keeping and taxes, and, critically, must hold a brewer’s license. While there is much more paperwork and there are more legal considerations to navigate, an alternating proprietorship agreement can offer more control over the process for the tenant brewer and reduced liability for the host.

A Package Deal

As cans continue to gain traction as the material of choice among both brewers and consumers, contract-packaging agreements have also become more common. Mobile canning operations and smaller, more affordable canning lines have made it easier for many smaller breweries to package in cans—as have opportunities with larger breweries that have unrealized canning capacity.

Denver-based Great Divide Brewing Co. recently completed phase one of a two-part, multi-million dollar expansion. The first phase included building and opening a new packaging facility to provide more warehouse space as well as a kegging line and a state-of-the art canning line capable of processing as many as 350 cans a minute. Phase two of the project is set for completion at least two years after the first phase and includes a new full-scale brewing operation, fermentation space, and a large tap room and beer garden. The ambitious project is designed to support the needs and operations of the 23-year-old brewery for at least the next few decades as it continues to grow, but it will take Great Divide some time to fully utilize its capacity and potential. In the meantime, the brewery invested in a tanker vehicle to move fermented beer 1.5 miles from its brewhouse to the new packaging facility.

“Obviously we’ve invested heavily in our new facility, but that’s projecting into the future and the ability to grow into that facility—specifically into our canning line,” says Bryan Slekes, senior director of finance with Great Divide. “We most certainly have a canning line of the future, but based on our barrelage and packaging, we don’t come close to hitting capacity on that line and won’t for some time.”

Recently, the brewery put out the word and reached out to several breweries directly about packaging their beers at Great Divide. It’s a decision that isn’t driven as much by necessity, Slekes says, as it is by the opportunity to more fully utilize the potential of Great Divide’s new packaging facility in the near future and to help offset some of the cost.

“We have the capacity to both transfer and handle the liquid and to can and keg it,” he says. “Regardless of what our revenue numbers looked like when we built this new facility, it’s good business practice, if we can handle it, to create another revenue stream so that we can accelerate phase two or hire a new out-of-state person to be more relevant in certain markets.”

The brewery has also noticed an uptick across the board in demand for its canned beers, even in markets that had traditionally been bottle heavy. “It’s happening, and it’s happening pretty fast,” Slekes says of the movement toward cans.

Slekes analyzed the associated costs and what Great Divide’s projected margin should be on a packaging agreement and helped to put together a price sheet for interested parties. While Great Divide isn’t looking to pivot its business or even for contract packaging to become a revenue stream that the brewery relies on, it made good sense to put the new canning line to work closer to its potential.

“Our team is mainly tasked with making great beer for us—we’re not in the business of packaging beer for others—but everyone is on board and understands how it could benefit Great Divide as a whole,” Slekes says. “And, at the end of the day, it will also help improve our efficiencies and lower our costs.”

Weighing the Options

While there are numerous advantages of a partner brewing or packaging relationship, there are also potential pitfalls that both parties should consider before entering into an agreement.

First, there’s the question of personnel and who will actually do the brewing—will it be the host facility’s staff or will the contracting brewer be allowed to bring in staff? If so, are there any changes to processes or equipment? What does the production schedule look like and where do the extra brews fit in?

And then there are questions of culture and each party’s goals and expectations from the relationship, including how long it might last.

“You definitely have to work around [the host brewery’s] schedule, and everyone needs to be respectful of the business ethos and how everyone works,” Yakobson, of Crooked Stave, says of making wort in a facility that’s not his own.

Discussions around technical specifications might include specifying minimum and maximum batch sizes as well as who provides the raw ingredients and whether the contract brewer can bring in his/her own special ingredients, such as a specific yeast strain. Will the brewer also have access to a laboratory and other specialized equipment? How will the beer be finished and packaged? Is there warehouse space available for the packaged beer and for how long?

Talking through the details of how the relationship will work and drafting a comprehensive contract only helps everyone involved. And while contract brewing or packaging might not have been in the original business plan of the host brewer, it can be a means to an end to achieve his/her ultimate growth goals and help offset the necessary capital investments made along the way.

Tom Wilmes November 21, 2017

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