Several innovative business models allow new companies to avoid the cost of equipping their own operations.
From incubators and partnerships to co-ops and alternating proprietorships, neophyte craft beverage makers are tapping into innovative business models designed to help them break into the burgeoning industry. Whether brewing beer, distilling spirits, or delving into small-scale wine production, the growth in the craft beverage market is spurring entrepreneurs to pursue innovative ways to develop products and introduce their brands to a thirsty public.
Brew Crew's nanobrewery offers 16 taps with varieties from the current brewers, plus a guest tap.
According to the Brewers Association, of the total U.S. beer sales last year, which topped $101.5 billion, the craft beer market brought in $19.6 million. The potential for profits is real, but start-up costs in the hundreds of thousand dollar range can pose an obstacle. To offset startup costs, avoid substantial regulations, and give new brewers an opportunity to introduce and test their brews in the marketplace, nano breweries or “incubators” have cropped up in cities around the country.
A relatively new concept in the craft beer sphere, the nano brewery model, also known as a pico or bucket brewery, constitutes a legally licensed, equipped space where small-scale brewers can create and test their recipes commercially without having to deal with the initial cost and time investments of starting their own breweries. Some nano breweries lease their equipment, others provide on-site taprooms for the public to try. Although the breweries can vary in size and scope, they generally only distribute to a narrow demographic and limit the number of barrels that a brewer can batch. This allows nano brewers to experiment and take creative risks in a collaborative environment.
Strength in Numbers
Blazing the incubator/nano brewing trail is Brew Crew, a manufacturing and retail facility currently housing three breweries that share equipment, storage space, and taps: Delicious Science, Polymath, and the Seven Brethren (which is in the process of changing to its yet-to-be-determined new name).
The 1,800-ft2 facility located in Riverside, California, houses two brewing systems, a walk-in cooler, and a 16-tap bar.
The Brew Crew's taproom accommodates seating for 50, including 25 in the storefront and 25 in the warehouse when there's a break in brewing. A variety of drink sizes sell for $1.50 to $7.
Starting out as a home brewer himself, Brew Crew owner and CEO Brad McCauley started the business in the spring of 2014 because he wanted to launch his own brews under his Delicious Science label. After doing all the licensing footwork, he decided to open up his facility to other home brewers.
“I wanted it to be a versatile and unique vessel that could be extended to others,” he said.
In the arrangement, the three nano brewers work as Brew Crew contract laborers, their businesses legally owned by Brew Crew. Alternately using equipment and space on a schedule that prevents them from overlapping their brew days, each pays for its own ingredients and a portion of sales goes back into the facility.
Brew Crew's owner, Brad McCauley.
From the exposure they gain via the Brew Crew taproom, the brewers could earn enough to eventually go out on their own. The benefit to brewers if they do decide to leave is that they retain the rights and the names of their signature beer products.
In an interview with CrushBrew, a digital publication for fans of artisan food and drink, Seven Bretheren head brewer Philip Vieira discussed some of the benefits of sharing space with other nano brewers.
“Home brewing is great: low investment, plenty of room for experimentation, and the only person you have to please is yourself,” Vieira told CrushBrew. “However, you cannot legally sell your backyard concoctions to the general public. On top of that, few home brewers invest in commercial grade products for their brews, creating room for variables that can affect the overall quality of their beer. As a part of the Brew Crew Inc. incubator, I can easily play with variables like temperature controls (with several temperature-controlled rooms), water profiles (adjusting a direct reverse osmosis source), yeast production (with access to our own microbiology lab), grain crush, etc.”
A second benefit of the Brew Crew model, according to Vieira, is the ability to brew relatively small batches, which allows brewers to experiment without worrying about having to dump hundreds of gallons of beer if a test doesn’t work out. “I have room to play with lots of different ingredients,” he said. “As a nano brewer, this was a huge opportunity for me, since it would’ve been too expensive and time-consuming for me to establish a legal brewery on my own.”
Brewing Co-ops and Partnerships
Fledgling brewers might also consider joining a coop, which functions similarly to the incubator model. One example is Chicago’s CO-HOP, a cooperative brewery that partners with start-up brewers. According to its web site: “Providing fully equipped breweries in prominent urban locations, the goal is to remove the high barriers to entry and increase the profitability of our tenant brewers through a state-of-the-art shared brewing facility, high-margin taproom, and retail storefront.”
Operating on a slightly larger scale is Florida-based Brew Hub, which calls itself an “incubation center for partner brewers.”
The distinction between partner brewing and contract brewing is that partnerships allow craft brewers to brew their own recipes at the host facility using their own brewmasters, whereas a contract brewer hires a brewery to produce its beer, which can also include options for recipe development, marketing, sales, and distribution. Brew Hub, which is operated by a group of beer industry experts, provides the necessary equipment, as well as offers mentoring options and additional services on the business side, including packaging, distribution, sales, marketing, logistics, and help with legal and government affairs.
In Craft Brew Business, Brew Hub founder and CEO Tim Schoen said, “Building a brewery is not realistic for many brewers, and contract brewing opportunities that exist today are less than ideal. We believe our partner brewing model will allow craft brewers a great opportunity to expand their business and reach new consumers.”
Partner brewing might be a good option for brewpubs or microbreweries looking to start or expand distribution without a huge monetary investment; larger brewers that want to reduce their shipping footprint or produce beer closer to the region where their beer is being sold; or for breweries with special equipment or packaging needs. Additional advantages of partnering include the ability to quickly launch or expand brewing operations or production; gain access to larger breweries with high-quality equipment, labs, multiple packaging options, and economies of scale that would not normally be affordable for a small brewer; and the potential to grow or contract rapidly and relatively cheaply in response to changing business plans and markets. “The demand for high-quality craft beer has never been higher,” Schoen says. “We are building a network of new, state-of-the-art craft breweries across the country that will allow our craft brewing partners to expand their capacity and their distribution while ensuring their beer is brewed to the highest quality standards possible.”
Like the craft brew industry, craft distilling comes with steep start-up costs — yet it, too, is a growing market. According to Forbes, the American Distilling Institute (ADI) reported that the number of U.S. micro and craft distillers has increased nearly 30% a year for the last decade. Opportunities are opening up for small-scale distillers to break into the market, allowing them to test the market via smaller batches and by renting out production facilities or working cooperatively with another craft distiller.
Stephen Thompson, an executive with 25 years of experience in the spirits industry, said, in the Forbes article, “When I tell people it will likely take at least two years to even begin processing a first full batch and make something that is commercially viable, and anywhere from $350,000 to a million dollars to get off the ground, you see some disbelief. I don’t want to discourage people from their dream, but they need to be prepared.”
Thompson and several partners started Kentucky Artisan Distillery to provide opportunities for individuals to distill their spirits without the huge expense and time of building their own distilleries. The organization aims to help micro-distillers “develop new distilling methods and spirit products and to create their own Kentucky-based brands,” according to its web site.
In addition to the distillery, the facility has a complete bottling line, barrel warehousing, and a laboratory for distillers to experiment with a spirit on a small scale before actually producing it.
Wine’s Alternating Proprietorships
Because building a wine production facility is also an expensive endeavor — a single piece of equipment can cost as much as $250,000 — many new winemakers are choosing alternative approaches to productions. The most common is having their wine made at another winery or through a custom-crush operation, such as Medford, Oregon–based Barrel 42 and Pallet Wine, where growers provide the grapes and the business produces and bottles the wine.
Pallet Wine Company based in Southern Oregon focuses on custom winemaking for growers who want to sell their own brand. They currently support 25 wine brands. Photo courtesy of David Gibb Photography.
A few wineries are now experimenting with a business model called “alternating proprietorship,” or a winery within a winery. This co-op style of production allows wineries to provide production space for other grape growers to process their own wines from grape to bottle. In the shared facility, growers each have their own space but share equipment. Some facilities are co-owned, others have a separate owner who leases the space. Many owners also have their own wineries. Some are owned by more than one wine company, but also rent space to other producers.
Keep Up With the Ever-changing Market
Whether you are interested in brewing beer, distilling spirits, or delving into small-scale wine production, the growth in the ever-changing beverage market will likely spur entrepreneurs to come up with more innovative ways of introducing a variety of new faces and new brews to a thirsty public.