Why contract brew or enter alternating proprietorships (Alt Props) at all?
Determining how to size your brew house and fermenters to match demand poses a critical question. Matching your capacity to demand is especially challenging because demand is not only uncertain, it also changes over time. It is often wise to size your brew house to match where you expect demand to be a few years down the road. However when you do this, you’re paying for capacity today even though you won’t make money from it until years later.
Further breweries face another list of challenges and questions before they build out capacity. Issues like securing financing, taking on the risk of debt, waiting for your capacity to come online and uncertainty in the marketplace are just the beginning.
The ability to ‘rent’ capacity from another brewer with excess capacity is often the best way to get to the market more quickly at low risk. Sharing capacity is nothing new, not even for the brewing industry. It’s a low risk tool that can be a game changer for many breweries.
There are two main flavors of this: Contract Brewing and Alternating Proprietorships.
What is Contract Brewing?
Contract brewing occurs when a brewery in need of capacity (let’s call them the buyer) pays another brewery (let’s call them the contract brewer) to use the buyer’s recipes, logos and processes to brew the buyer’s beer in the contract brewer’s facilities.
Let’s say we have a brewery called Hey Hey Hey IPA’s, or HHH. Business is booming. They have outgrown their 15 barrel brew house and want to keep up with the demand. Instead of investing the hundreds of thousands of dollars on a new system, they decide to contract brew.
At the same time, Hip Hops, is only using 70% of their capacity. A couple years prior, they built a brand new system & while demand is growing, they are not using all of their capacity … yet. They figure that since they are paying the interest payments on the whole system, they might as well make money from it. They put up a listing on Capacity Tap (my apologies for the shameless plug) offering to brew 100 BBLs.
HHH sees this and makes an agreement with Hip Hops. HHH provides their recipe, logo, supplier information, packaging requirements and Hip Hops brews the beer for them. HHH includes stipulations about the quality of the beer including specific gravity, ph balance and that the taste must be dialed in. Hip Hops brews the beer, the distributor picks it up, HHH pays Hip Hops and the distributor pays HHH. Customers enjoy HHH beer and HHH does not have to go further into debt nor wait months for a new brewery.
What are Alternating Proprietorships?
Alternating Proprietorships, also known as alt props, tenant brewing or partner brewing, occur when multiple brewers agree to share the same brewing facilities. They will ‘alternate’ their usage of the facilities as per an agreed upon cadence. For example, let’s say we have two breweries, Awesomo-5000 Ales & Griffin Growlers. Awesomo-5000 Ales is only using half of their 30-barrel system whereas Griffin Growlers have already outgrown their 10-barrel system. They decide to split the use of Awesomo-5000’s facilities. Some weeks, Awesomo-5000 will use the facilities & others, Griffin Growlers uses it. Instead of one Awesomo-5000 paying for the entire overhead on their own, they get help some Griffin Growlers. Furthermore, Griffin Growlers don’t need to take on hundreds of thousands of dollars in debt (and risk) to expand their capacity.
Major Legal Differences
These arrangements improve the bottom line for everyone. When deciding whether to pursue contract brewing or an alt prop, it is helpful to consider some basic legal considerations. Our good friends at the TTB have outlined some of the major differences:
- In contract brewing, the contract brewer has title to the beer from raw ingredients throughout all stages of production. The title passes to the person who has contracted the brewery only after the beer has been produced, taxes have been paid and the beer is removed from the brewery.
- In an alternating proprietorship, each brewer, host and tenant, hold title separately for the ingredients and beer that they individually produce.
Records & Reports
- In contract brewing, the contract brewer is responsible for all records and reports to be sent to the TTB. The purchaser does not need to hold records or reports in relation to brewing. However, they may need to maintain records as a retail or wholesale dealer if applicable.
- In alternating proprietorships, the host and tenant brewer each keep separate records of their respective beer production & removals.
- In contract brewing, the contract brewer is responsible for paying taxes, whereas the brewery for whom the beer is brewed, is not responsible to pay taxes on the beer. However, they will obviously compensate the contract brewer for taxes and other expenses.
- In alternating proprietorships, the host and tenant brewer individually pay taxes based upon what each of them brews and sells.
Qualification and permits
- In contact brewing, only the contract brewer needs the proper brewing permits & qualifications under part 25. The entity contracting the beer (buyer), does not need a brewing permit. However they will need the applicable reselling permits.
- In alternating proprietorships, both the host and tenant brewer need to be qualified as brewers under part 25.
In conclusion, brewers have many options to manage their capacity. Even within contract brewing and alt props, there are different flavors just as there are many types of ales and lagers.
The consistent theme is that it allows a growing brewery to avoid the cost of building a new brew house and allows another brewery to monetize unused capacity.