What is contract brewing?

If you are new to the craft beer industry, you may be surprised to find that many successful craft breweries do not brew or package craft beer in their facilities. This is because these companies are using a commercial agreement called “contract brewing” to get other breweries to provide it with beer.

Contract brewing definition

In this type of arrangement, company A pays company B to use his brewery for production. Company B that provides company A with beer production equipment is called a contract brewer. The contracting brewer can help the client’s company improve the recipe, produce beer, package, and transport beer.

Understand the different types of contract brewing arrangements

There are several different types of contract brewing agreements, and the type of contract you choose will significantly affect your contract brewing efficiency. Let’s take a look at these two different types.

Contract brewing agreement

The first is a simple contract brewing contract, where you transfer the brewing responsibility to the contract brewer. The contracting brewer will improve your brewing recipe, produce beer, and provide packaging and shipping services. This is conducive to contract brewers to reduce costs.

Tenant Brewing Agreement

The second type is a tenant brewing contract. In this arrangement, you rent the brewery equipment and facilities of the contract brewer. So, you have the ownership of the raw materials and use your own labor to produce beer, package, and transport it yourself.

Understand contract brewing license requirements

This part of the contract brewing license requirements can be a bit tricky. But, if you have read and understood the content of the two types of contract brewing agreements mentioned above, then you can easily understand this part of the content. Contract brewing itself does not have a license. The license and licensing requirements you need 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

Just like what we mentioned above, in this arrangement, you give the cost to the contract brewing company, and they use their labor, equipment, space, etc. to produce beer for you. They can even help you pack and ship the final product.
Obviously, in this type of contract, you are not a real winemaker, you just buy the finished product at the contract brewing company, which makes you a wholesaler. In this special case, you must have the correct state license and contract brewing TTB wholesaler license. These certificates indicate that you agree to have an appropriate winemaking license with the contract winemaker you are cooperating with.
Also, taxes, please make sure that the necessary taxes have been paid when the product is put on the shelves. If you want to work with contract brewers, you can make different terms and conditions.

Permission to sign a tenant brewing agreement

The beauty of this type of agreement is that you have more control. You have your labor force, brewing technology, brewing recipe, etc. You are also responsible for the packaging, branding, and transportation of the beer. Simply put, you are the brewer and owner of this brewery.
As a brewer, you are responsible for all tax matters related to your products, and you must also record how much beer you are brewing. Also, to understand federal laws, you must also understand state laws governing contract brewing agreements and licensing requirements.

Find the right brewing contractor

Now that you have completed the preparations for contract brewing, you need to find a suitable contract brewer to meet your brewing requirements. Here are some tips to help you find a suitable contract brewer:

The best way to find the right contract brewer to work with is to build a social network. Contact your social network and ask around, this is usually the source of the best partners.
Keep in mind that established breweries may not be interested in contract brewing because they may not have additional production or interest.
The most suitable cooperation is a start-up brewery, and it is best to be in the initial stage of expansion. They just set up some new equipment, which may have more capacity to help you brew.
Check out the Oktoberfests that may be taking place in your area. If you don’t have a suitable social network, then there will be a good way for you to start a social network.
Finally, you can go to a beer conference. CBC is the mecca of the craft beer world, but there are also other beer forums. Similarly, this is also a good place to build a beer social network.

Draft a viable contract brewing contract

Once you start thinking about contract brewing and find someone willing to sign a contract, you need to draft an agreement that is beneficial to both parties. When drafting an agreement, you should consider the following points:

Make sure the quantity of beer is worth your time, but also carefully consider how much you can sell.
Include shipping costs in the transaction. Unless you have extra capabilities here for some reason, you won’t want to find more work for yourself here.
If you are not signing a tenant brewing contract, you need to understand your contract brewer’s commitment to producing high-quality beer and carefully study their brewing process. If you think they are just renting out space and equipment, please consider choosing a tenant agreement so that you can better control the beer quality.

Advantages of contract brewing

Contract brewing is an arrangement between the contract brewer and the guest brewer. It can help contract brewers reduce costs, and help guest brewers optimize production capacity, and increase revenue. This is a win-win cooperation model.

1. Reduce costs

Start-up costs for breweries are usually very high. Contract brewing provides opportunities for more outstanding brewers to succeed, not just those who have sufficient funds and connections to succeed. Think about it, between renting or buying brewery space, acquiring all the necessary brewery equipment, brewery insurance, and hiring enough employees for brewing, you are already considering a substantial investment. Signing contract brewing or tenant brewing agreements can eliminate a large part of these costs and allocate funds to other valuable projects.

2. Fewer equipment failures

You do not need to buy, maintain and replace brewing equipment or facilities, you can avoid many headaches. For example, the cleaning of the brewery production line or other routine cleaning procedures. You will have to deal with fewer repair issues and repair suppliers, fewer emergency situations to overcome mechanical equipment, and fewer associated costs.

3. Make your arrangements work for you

For craft breweries seeking to sign contracts, there will be a variety of arrangements to choose from. If you know what resources and needs your company is using, and you are willing to do some serious research, then you are likely to find a brewing solution that suits you.

4. Take advantage of excess capacity

Let us not forget the craft brewery will also benefit from these arrangements. Contract brewers may not always operate at full capacity, so they sell additional beer production capacity to guest brewers to obtain certain additional revenue. This is also a way to sustainably increase profits.

Disadvantages of contract brewing

However, contract brewing is not always perfect, and it has some drawbacks. There is a symbiotic relationship when the contract is brewed. The beer produced by the cooperative brewer may not satisfy the guest brewer, which may give the cooperative brewer a feeling of being at the mercy of the guest brewer. Next, we will tell you the shortcomings of contract brewing.

1. Reduce community presence

For stubborn craft beer lovers, contract brewing is difficult to justify. If you do not produce beer in your facility, you may not be welcomed by certain customers or the specific community you are in. Those who value integrity and authenticity when it comes to breweries may be picky about this. But if you take the time to explain the benefits of your company, you may change some of your thinking.

2. Possibly smaller profit margins

It may not be cheap to pay another brewery to do most of your company’s work. Perform scientific profit calculations before signing the agreement to ensure that your profit margin is high enough and that you can continue to move forward.

3. Give up control

If you create a craft beer business from scratch, you will most likely think it is your most precious possession. When it comes to your hopes and dreams, it can be very difficult for you to surrender control of any level of the brewery. However, when you consider the long-term cost benefits and potential opportunities it may provide, this decision may be based on attractiveness. If this is a particularly big pain point for your business, then you can consider tenant brewing agreements. It can bring you closer to seeing the benefits of this type of arrangement, and it can also maintain ownership and control of beer production.

4. Relationship pressure

When doing contract brewing, you need to entrust the brewing recipe, production, and overall success of the business to another company. This means that you need to put in your work and establish a successful and reliable relationship with them. Relying on another brick-and-mortar brewery is always risky, because cooperative brewers may have problems of one kind or another, so please choose your cooperative brewer wisely.

If your dream is to open a successful craft brewery, then it may be natural to make every effort to achieve it. Although there are some risks and potential pitfalls, signing a contract brewing agreement or tenant brewing agreement may be the key to realizing the dream. As with any business decision, it is very important to conduct research, seek advice, develop a budget, take risks and estimate benefits. You need to maintain patience and a developmental mindset to be more likely to find a completely consistent commercial agreement with the craft beer business you have always envisioned.

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