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Sunday, 21 August 2016 14:37

Alternating proprietorships could alleviate capacity constraints for craft brewers

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Greenbush Brewery Co. co-owner Scott Sullivan inked an alternating proprietorship agreement with Brew Detroit to expand his company’s production capacity. The agreement — which is similar to contract brewing — allows brewers to rent another facility’s equipment while maintaining control and ownership of the brewing process and ingredients. For breweries like Greenbush, alternating proprietorships allow companies to enter new markets while saving cash to invest in their own expansion projects. Greenbush Brewery Co. co-owner Scott Sullivan inked an alternating proprietorship agreement with Brew Detroit to expand his company’s production capacity. The agreement — which is similar to contract brewing — allows brewers to rent another facility’s equipment while maintaining control and ownership of the brewing process and ingredients. For breweries like Greenbush, alternating proprietorships allow companies to enter new markets while saving cash to invest in their own expansion projects. Photo by Joe Boomgaard

SAWYER — When Greenbush Brewery Co. needed to expand its production facility, co-owner Scott Sullivan faced a conundrum. 

Originally, the Sawyer-based microbrewery planned to open a production facility in a building it leased behind its beer garden, known as The Annex and based across the street from its original taproom. However, Sullivan realized that as Greenbush grew, it would quickly outgrow that facility. 

Greenbush’s other option was to seek out a larger site to build a production facility, yet Sullivan wasn’t fully sold on taking on a substantial debt load or selling a large portion of shares in his business to raise the capital necessary to expand. 

“I realized we were going to get landlocked really quickly and so putting all the capital investment into that (initial) location didn’t make sense,” Sullivan told MiBiz. “When we stopped and backed up, we said we have to find a new spot and buy acreage and put up a big building. But then you put all that kind of money into something and then you have this huge debt load. I am not comfortable taking that sort of debt risk.” 

Ultimately, Sullivan opted to pursue a little-known type of agreement known as an alternating proprietorship with Brew Detroit LLC.

For Greenbush, which produces just under 10,000 barrels of beer annually, the agreement represents the best of both worlds. The brewery can scale-up its capacity to enter new markets, while banking cash to eventually invest in its own production facility — something Sullivan plans to do in about two and a half years, he said. 

“We have to brew a lot of beer to try to keep up with what our situation was in the first five years,” Sullivan said. “Because of that, we were never able to open the Meijer chain or Spartan Stores because we were just so limited. Now, we’re able to put a bunch more beer on the street and the margin is still good on it. It allows us to bank money and sit back and decide how big a system we might want to eventually put in for ourselves and build capital.”

Essentially, alternating proprietorships allow brewers to rent equipment from a “host” brewery to produce their beer, according to regulations issued by the Alcohol and Tobacco Tax and Trade Bureau (TTB). The relationship is similar to contract brewing, however brewers remain in control of their product throughout the entire production process. The other party simply provides the equipment and time to operate it. 

Brewers operating under an alternating proprietorship can use their own employees, quality control methods and ingredients. The agreement also allow brewers to avoid labeling their beer as being contract brewed, which could turn off some consumers. 

“I was so trepidacious about it because I thought I was going to get burned at the stake by people who think I’m doing a contract brew deal,” Sullivan said. “Once I realized I could send my guys out there and do it our way, this was a no-brainer.” 

While alternating proprietorships have been around for a number of years, they really haven’t caught on until relatively recently, said Joe Infante, a Grand Rapids-based attorney who heads up the alcoholic beverage regulation team at Miller, Canfield, Paddock and Stone PLC.

However, the trend toward alternating proprietorships is likely to continue, especially as breweries reach full capacity and need to expand, Infante said. 

“Really, it’s because we still have such a fast-growing industry that everyone is maxed out of capacity,” Infante said. 

For Brew Detroit, which opened three years ago strictly as a contract brewer, alternating proprietorships represent a more attractive arrangement for both the brewer and the host compared to contract brewing, said CEO Jerry Kocak. 

Under a contract brewing agreement, Brew Detroit would be on the hook for paying a higher federal tax rate if production rose above the 60,000-barrel mark that defines a microbrewery. With an alternating proprietorship, the original brewer — not the host — is responsible for those taxes.

Going forward, Brew Detroit will only offer alternating proprietorships, Kocak said. 

The Detroit-based producer is betting heavily on more brewers moving to its service model. Brew Detroit plans to embark on a $500,000 expansion project that will bring its total capacity to more than 100,000 barrels a year, Kocak said. The company is currently using all of its 70,000 barrels of annual capacity. Brew Detroit aims to increase its total capacity again in late 2017 to 140,000 barrels.

“Where the craft beer business is right now, a lot (of breweries) are in a wait-and-see mode to see where the industry is going because it’s getting pretty jammed up,” Kocak said. “They’re waiting to see if they use Brew Detroit or expand themselves. The easier option is to come to us and then see where the industry goes.” 

Brew Detroit also made headlines recently when the TTB approved a label request by the company for The Stroh Brewery Co.’s Bohemian-Style Pilsner, according to a report in Crain’s Detroit Business. Stroh’s was last brewed in Detroit in 1985 and is currently owned by Los Angeles-based Pabst Brewing Co.

In addition to The Stroh Brewery Co., Brew Detroit is also licensed to do business as Badass Beer Co. and Lake Brothers Beer Co., according to filings with the state.  

Read 8165 times Last modified on Friday, 19 August 2016 11:27
John Wiegand

Staff writer

jwiegand@mibiz.com

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