Definition of Contract Brewing
In this arrangement, Company A pays Company B to use its brewery for production. Company B, which provides beer production equipment to Company A, is known as a contract brewer. The contract brewer helps the client improve the recipe, produce beer, package it, and handle transportation.
Understanding Different Types of Contract Brewing Arrangements
There are several types of contract brewing agreements, and the type you choose will significantly impact your brewing efficiency. Let’s explore two different types.
Contract Brewing Agreement
The first type is a simple contract brewing agreement, where you transfer the brewing responsibility to the contract brewer. The contract brewer improves your brewing recipe, produces beer, and provides packaging and shipping services. This helps contract brewers reduce costs.
Tenant Brewing Agreement
The second type is a tenant brewing agreement. In this arrangement, you rent the brewery equipment and facilities from the contract brewer. You maintain ownership of the raw materials and use your own labor to produce, package, and transport the beer.
Understanding Contract Brewing License Requirements
This aspect of contract brewing license requirements can be a bit tricky. However, if you have understood the content of the two types of contract brewing agreements mentioned above, understanding this part will be easy. Contract brewing itself does not require a license. The license and requirements depend on the type of agreement you have. Let’s take a look at these two types of requirements.
Permission to Sign a Contract Brewing Agreement
In this arrangement, you provide the cost to the contract brewing company, and they use their labor, equipment, and space to produce beer for you. They may also assist with packaging and shipping the final product.
Keep in mind that in this type of contract, you are not a real brewer but rather a wholesaler who purchases the finished product from the contract brewing company. To operate under this special circumstance, you need the correct state license and contract brewing TTB wholesaler license. These certificates indicate that you have an appropriate winemaking license in agreement with the contract brewer you are working with.
Also, ensure that the necessary taxes have been paid when the product is ready for sale. If you choose to work with contract brewers, you can establish different terms and conditions.
Permission to Sign a Tenant Brewing Agreement
The advantage of this type of agreement is that you have more control. You have your own workforce, brewing technology, brewing recipe, etc. You are responsible for packaging, branding, and transportation of the beer. In simple terms, you are both the brewer and owner of the brewery.
As a brewer, you are responsible for all tax matters related to your products and must keep records of the amount of beer you produce. Additionally, you need to understand federal laws as well as state laws governing contract brewing agreements and licensing requirements.
Finding the Right Brewing Contractor
Once you have completed the preparations for contract brewing, you need to find a suitable contract brewer to meet your brewing needs. Here are some tips to help you find one:
The best way to find the right contract brewer is through networking. Reach out to your social network and ask for recommendations; they are usually the best source for finding reliable partners.
Keep in mind that established breweries may not be interested in contract brewing due to production limitations or lack of interest.
An ideal partner is often a startup brewery that is in its initial stage of expansion. They may have newly set up equipment with more capacity to assist you with brewing.
Check for Oktoberfests or beer conferences happening in your area. Attending these events can help you build a social network in the beer industry.
Drafting a Viable Contract Brewing Agreement
Once you start considering contract brewing and find a willing partner, you need to draft an agreement that benefits both parties. When drafting the agreement, consider the following points:
Ensure that the quantity of beer is worth your time and carefully consider your estimated sales volume.
Include shipping costs in the transaction. Unless you have extra capabilities, it’s best not to burden yourself with additional work.
If you are not entering into a tenant brewing agreement, understand the contract brewer’s commitment to producing high-quality beer and familiarize yourself with their brewing process. If you believe they are simply renting space and equipment, consider opting for a tenant agreement to have better control over beer quality.
Advantages of Contract Brewing
Contract brewing benefits both contract brewers and guest brewers. It helps contract brewers reduce costs and enables guest brewers to optimize production capacity and increase revenue. It is a win-win cooperation model.
Cost Reduction
Starting a brewery can be expensive. Contract brewing provides opportunities for talented brewers to succeed, not just those who have substantial funds and connections. When you consider the costs of renting or purchasing brewery space, acquiring necessary equipment, obtaining brewery insurance, and hiring enough employees, the investment can be significant. Signing contract brewing or tenant brewing agreements can eliminate a substantial portion of these costs, allowing funds to be allocated to other valuable projects.
Reduced Equipment Failures
By not having to purchase, maintain, and replace brewing equipment or facilities, you can avoid many headaches. For example, routine cleaning procedures like cleaning the brewery production line. You will have fewer repair issues, fewer emergency situations due to mechanical equipment failures, and reduced associated costs.
Making Arrangements Work for You
For craft breweries looking to sign contracts, there are various arrangements to choose from. If you understand your company’s resources and needs and conduct thorough research, you are likely to find a brewing solution that suits you.
Utilizing Excess Capacity
Craft breweries can also benefit from contract brewing arrangements. Contract brewers may not always operate at full capacity, so they sell unused production capacity to guest brewers, generating additional revenue. This is a sustainable way to increase profits.
Disadvantages of Contract Brewing
However, contract brewing is not without drawbacks. When entering into a contract, there is a symbiotic relationship between the contract brewer and the guest brewer. The beer produced by contract brewers may not meet the expectations of guest brewers, potentially leading to dissatisfaction.
Diminished Community Presence
Contract brewing can be difficult to justify for die-hard craft beer enthusiasts. If you do not produce beer in your own facility, you may face resistance from certain customers or communities who prioritize integrity and authenticity in breweries. However, by taking the time to explain the benefits of your company, you may change their perspective.
Possibly Smaller Profit Margins
Paying another brewery to handle most of the work may not be cheap. Before signing an agreement, calculate your profit margin carefully to ensure it is sufficient for you to sustain and grow your business.
Relinquishing Control
When you have built a craft beer business from scratch, it is likely your most prized possession. Surrendering control over any aspect of the brewery can be challenging when it comes to your hopes and dreams. However, considering the long-term cost benefits and potential opportunities, this decision can be appealing. If maintaining ownership and control over beer production is a major concern for your business, you may consider tenant brewing agreements as they allow you to retain ownership and control.
Pressure on Relationships
When engaging in contract brewing, you need to entrust the brewing recipe, production, and overall success of the business to another company. This means establishing a successful and reliable relationship with them. Relying on another brick-and-mortar brewery always carries some risk, as cooperative brewers may face their own challenges. Therefore, choose your cooperative brewer wisely.
