Stepping Up to the Pint: Contract Brewers Turn to Ownership For Growth, Increased Control

Feature by | Oct 2014 | Issue #93

Jeremy Cowan of sh could be the poster child for contract beer, an outspoken advocate of the practice by which Shmaltz produced most of its beer for 17 years. After he graduated from Stanford with a humanities degree and no background in brewing, Cowan contracted 100 cases of HE’BREW beer from Anderson Valley and sold it out of the back of his grandmother’s Volvo, expanding Shmaltz’s operations until the company was able to open a 50-barrel brewhouse housed in a 20,000-square foot facility in Clifton Park, N.Y. Since the facility opened in May 2013, Shmaltz has posted an impressive regional growth in sales of nearly 700 percent.

For Cowan, starting out as a contractor was a responsible business decision, mainly because he realized his talents were not in brewing but in marketing and selling. “For me, it was great because I never wanted to brew,” says Cowan. “I just wanted to make fantastic beer, use my punchlines and get out and hustle to grow the brand. That’s where my passion was.”

And even though his sales numbers would seem to indicate unambiguous success, Cowan remains somewhat ambivalent about becoming a full-time production brewer. “Do I like being on the hook for four million dollars in debt?” he jokes. “That’s a lot of responsibility and a lot of risk.”

In the beer industry, few practices are as potentially polarizing as contract brewing. It’s hard to let go of the image of an opportunistic contractor, daydreaming over logos and visions of unearned glory—especially if you, the brave entrepreneur, have thrown yourself headlong into the complex, multifaceted and downright scary business of accumulating permits, sourcing hops years ahead of time, and plunking down large sums of money to ship bright tanks and conical fermenters from the other side of the country.

Still, contracting is a relatively tiny part of the craft beer market—less than 1.5 percent of the beer sold in the United States, according to data from the Brewers Association. And few contract brewers start out with the nefarious intention of selling the hapless beer drinker subpar suds disguised behind a fancy label. In fact, most contractors have the same dream as every other brewer: to build their brand, win over consumers, and open facilities of their own. In the rapidly changing economic world of independently brewed beer, multiple strategies exist for getting a product to market and growing a business. But, as most past and present contract brewers will tell you, it’s not necessarily an easier or faster process.

For Gabriel Magliaro of Half Acre Beer Company in Chicago, contracting was a way to keep working toward his dream of building a production brewery in a stagnant economic climate. “Financially, we couldn’t swing it,” says Magliaro. “At that point in time, there was a lot of conceptual doom and gloom around starting a production brewery in Chicago. The ones who had done it in the years prior [to us] had failed.”

In 2007, Magliaro sidestepped the need for a hefty loan and started contracting his signature Half Acre Lager at Sand Creek Brewing Company in Wisconsin while he built out Half Acre’s current location on Lincoln Avenue. The contract arrangement lasted for two years, but they began brewing on Lincoln Avenue in 2008.

“It was a tool to establish ourselves as a business with earnings, so we could approach a bank and say ‘Hey, we’re something! It says so right here, on this piece of paper,’” Magliaro says. “From looking at who we were and what the equation was at that time, I didn’t see any other route.” Today, Half Acre produces around 15,000 barrels a year on a 15-bbl system, with a steady lineup of draft selections in its tasting room and a constantly refreshing series of one-offs, seasonals and collaborations.

“It’s pretty straightforward,” agrees Greg Kitchen, whose Triple Voodoo Brewery in San Francisco began contract brewing in February 2011 before moving all production to its 10-barrel system in January of 2014. “If you think about starting a brewery, a lot of capital is required. We wanted to build the market so that by the time you open your physical space, you already have people who know your brand, versus opening your own space and then getting your brand out there.”

David Lederfine of Portland, Ore.-based Awesome Ales also points out that there’s a lower environmental impact when brewers can rotate batches on the same equipment. Lederfine had been fiddling with the idea of tenant brewing—or contracting with breweries to use the excess capacity on their systems—since the 1990s, when he realized that friends who had started breweries in the Portland area could make several house beers that he could then sell at his small pub, The Snake and Weasel. The concept coalesced when he worked for a political campaign that promised to reduce healthcare costs by convincing hospitals to share capital-intensive equipment like MRIs.

“I wondered if we could do things cheaper and greener if we bought [equipment] regionally and collaborated on the use of equipment,” Lederfine says. “I started thinking about breweries that had already purchased equipment and were struggling to get out of debt, that needed help getting that equipment paid for.”

Now in its first year of production and brewing at Seven Brides in Silverton, Ore., Awesome Ales intends to produce 500 barrels of its small lineup by the end of 2014. Lederfine has outlined a plan for a future small, niche production facility, but he’s not anxious to abandon the tenant model. “It’s green,” he says. “My capitalization is roughly the same as I would’ve needed for a one- or two-barrel brewery. If I were to build that brewery to do that on my own, I would’ve had to get a building, use materials, create a deeper carbon footprint. We save money on energy consumption by doubling up on grain and hop deliveries. So, I guess what I’m saying is I’m not just grabbing another building and getting it set up with another HVAC system, plumbing, electrical and such to build out a new facility. I’m using one that’s already there.”

And of course, there are also some for whom contracting is the only feasible choice to keep their business running at all. At times it can be more of a temporary fix than a long-term plan. “It was an emergency measure,” says Rick Sobotka of Long Island’s Great South Bay Brewery. “We were at a small facility looking to expand. We were brewing on the one-barrel system and it looked like it was going to be another five or six months before we could start brewing on a much larger system that we were in the process of purchasing. [Contracting] kept the business running rather than cut everything dry and start over.”

Nearly every contract brewer will say that their eventual goal is to own their own production facility. “It costs less to get started as a contract brewer, but you make a lot less and your margins are at least half of what you’d make yourself,” says Cowan. “Once you’re at three, four or five thousand barrels, that’s when you could probably buy a brewery and run it and break even on your margins, build your own equity and build your own operation.”

One of the complaints many people have with contracting is that it allows brewers to skip crucial steps that those who own their own facility cannot. While true, nearly every contractor found themselves revisiting those same steps when it came time to pursue ownership. Most encountered the same aggravating hurdles vis-à-vis navigating city permits and licenses, finding the right location and investing in equipment. Even given the occasionally awkward transition from one business model to another, a majority of contractors concluded that all things considered, production at your own facility is ultimately a better option when within reach.

For Sobotka, leaving his contract relationship at Greenpoint Beer Works in Brooklyn turned out to be more difficult than anticipated. Dealing with insufficient production levels of his contract brews like Blonde Ambition and Massive IPA while trying to start brewing at his facility in Bay Shore left a three to four week gap in May of 2013 when Great South Bay simply had no beer to sell. When their brewhouse came on line later that year, it was a relief to the company to be able to control their own production schedule, consistently source ingredients, and maintain the cleanliness of the brewing equipment to their own high standards.

“Everything changed for us when we stopped contract brewing,” says Sobotka, who works full time as an anesthesiologist. “The quality of the beer improved, popularity improved, our accounts seemed to believe in us more. In this craft beer culture that we live in, developing a good beer is about doing it yourself. It’s very grassroots and local, and you want to believe in a company that’s producing a product from start to finish… At least with my personality and the way I like to do things, it’s been a world of difference.”

“You can specify your system size and your own schedule,” Kitchen concurs. “Our focus changed from large batches and retail to bars and restaurants, to making smaller artisan batches and creating a destination in the tasting room.” Now, instead of making sales calls, Kitchen is able to focus on tastings and tours, as well as organize events with local cheese and chocolate makers near Triple Voodoo’s space in the Dogpatch, San Francisco.

Ultimately, the end goals of the contractor turn out to be more or less the same as any other brewer—to own their own facilities and adhere to the highest standards in producing the best beer they can. So what advice do former contract brewers have to offer those considering the same route? The same as for any beginning brewer: Plan ahead, save some money, and put in the legwork. “Do an enormous amount of extra research and don’t do anything for six months,” says Cowan. “After that, if you still think it’s worth it, go out and sell beer every single day.”