If there was a thematic element to this edition of the Ontario Craft Beer Guide, it is probably to do with the life cycle of the startup brewery. Mark Murphy from Left Field asked me back in the summer if we were going to go back and revisit the breweries that started up in 2014 and 2015. He correctly pointed out that the first two years are when you get the most significant learning curve at a brewery. A brewery doesn’t spring up fully formed, and the best brewers will gamely admit that it might take six months or a year to get the nuances of a new set of equipment dialed in. If you’re going to do this book, you sort of owe it to everyone to do it right. The subtitle might as well be “A catalogue of improvements.”
The people that make our job easy are the brewers who will say to us “we know about the problems and here’s the plan to fix them.” I’ll give you the example of Halo brewing over near Lansdowne, who during their first month or so were having problems with in their kettle soured beers with an off flavour called THP or Tetrahydropyridine. This in no way rendered their beer undrinkable, but there was a slight popcorn or cheerio character to it. It is not so common a problem that it is included in off flavour tasting kits. The fact that they were so up front about the process was impressive and the fact that they were a little sheepish about it was endearing. Importantly, copping to the problem informs people that you are not only good enough to realize that there’s a problem, but also that you are confident in your ability to fix the problem, which they did. It’s all part of the learning curve on new equipment and the life cycle of a startup brewery.
That learning curve has been happening nearly everywhere and I’m relatively happy to say that we think quality is improving on an aggregate level. It is a joyous thing to be able to sit down with a brewer and see their thought process develop year over year. It’s a young industry with a lot of brewers in their 20’s and 30’s and it’s inspiring to see the pride people are taking in their work. That improvement is necessarily iterative and it’s a long process. Sometimes there will be a sudden burst of understanding or insight (or, y’know, funding) that crops up and everything a brewery makes gets better in a single year. Sometimes they have to graft like maniacs for slight improvement given their equipment or logistical issues. The size of the victory is less important than the continued effort, and we have seen prodigious effort.
What I want to talk to you about is one sector that we think lags behind a little. You may be unsurprised to hear that it’s the contract brewing sector.
I’ve talked before about how contract brewing as a basic model is probably unsustainable. Usually, if you’re a brewer, the retail channel takes a certain amount of markup and the government takes a certain amount of tax and you’re left with a certain amount of profit after you subtract your expenses. In contract brewing, the retail channel and government still get their money and the brewery still gets their expenses paid in addition to a small amount of the profit, and you, as a renter of equipment, are left with whatever remains from the profit. That is an ideal circumstance: Less than normal is the ideal version of that model.
As you scale up that amount remains the same per unit. If you move less product than you have contracted for, you are simply stuck with unmoved product at a loss. That product you’re stuck with is aging rapidly and you’ve got to find a place to stash it. If you luck out and your brand takes off, you are going to need more sales staff and the costs are going to go up and you’d better hope that with the increased overhead you never get to a point where sales drop off and you’re suddenly stuck with unmoved product, because at a higher volume the consequences become much more significant. You might lose your house, for instance.
A brewery that starts from scratch probably starts out in debt, but with every sale they’re building equity in equipment and potentially making gains on the real estate they occupy. Theoretically, creating a contract brand is about developing equity in branding. I do not believe that there has yet been an instance in Ontario’s modern era in which a contract brewed brand has been purchased. While equipment probably has the equivalent of a blue book value, branding does not.
Theoretically, there is a single good reason to become a contract brewer in the short term and I refer here back to Mark Murphy from Left Field. He is an early example of someone who was able to use a contract brewed presence in order to leverage the ability to start a physical location. We have seen a number of brewers make this transition since 2010. 14 by my count. Of the contract brewers extant I am aware of at least 20 who have plans to make that transition. By 2018 more breweries will have gotten out of contracting than existed in Ontario in 2008, just a decade earlier.
It’s possible to make that transition, but not all of the brewers I’m talking about planned for this. Some of them saw the writing on the wall and decided only subsequently a physical space was the way to go. Some people got into it without a plan. I’m not saying you shouldn’t contract brew on your way into the market. I’m saying you shouldn’t contract brew on your way into the market without a plan and I’m going to outline some realities that I see frequently.
The first and most important thing to know is that you are not the only person doing this. Demand for contracting space is at an all time high and we have reached the point where three breweries exist almost solely for that purpose. While Common Good and Cool release their own brands, Brunswick Bierworks exists solely to contract brew. Other breweries like Big Rig and Wellington have massively increased in size solely for the purpose of contracting. Initially my worry was that they would probably undercut each other on price in order to attract clients creating a race to the bottom type of situation, but that’s not happening for two reasons. Firstly, there are way too many people interested in contract brewing for that practice to be necessary and secondly, because such a situation would rely upon a perfectly informed customer, which most startups aren’t. While I can’t personally imagine not doing due diligence on your options, that seems to be the case in most instances. Know your options.
The second thing you need to know is that without special expertise or effort on your part, your beer is only going to be as good as the beer made by the brewery you are contracting with. The argument I frequently hear is that contract brewing is good for getting the word out about your product before you open your physical location. If the word that’s getting out about your product is that it is borderline undrinkable because of diacetyl or chlorophenols or just plain ol’ floaty nasties in there, that is doing you more harm than good. If you think this is going to be your livelihood for the next decade, at least go and taste the beer that the brewery you are contracting out of is making. If you’re not there to oversee production, that’s the level of quality you’re going to get. If it is a relatively small brewery that has space for contracting, ask yourself “how come they’re not selling their own beer out their front door during a massive boom period?” Heck, ask them. Otherwise, you’re setting yourself up for either failure or an uphill reputational battle in a province where the overall quality is going up and no one is required to care about your struggle because there are 300 other options.
The market is getting more competitive and on an ongoing basis there is going to be correction. That’s probably a good thing for the overall health of the market. We’ve reached the point where a consumer entering the market at age 19 could conceivably drink a new beer made in Ontario every day until they were 23 without repetition, not including the things that become available during those four years. At the current rate, they might make it to 26. If someone’s initial impression of your contract brewed beer is that it is bad, fighting to get that consumer to come and visit you when you open or purchase it again in the LCBO when it’s not contract brewed is much harder than just making a good first impression.
The final thing is this: Brewing and contract brewing are very different footprints. If you have a physical location, you are likely to be selling out your front door. In fact, you should base your model around that since it’s the highest possible margin available. Contract brewing necessitates casting a wide net across the province through various retail channels. There is, I think, an element of pride at having your beer available in Ottawa or Windsor say, that can be dissuasive emotionally when it comes to transitioning out of contracting. It might feel like a step back to have to concentrate your business model more locally. If given the choice between money and fame, choose money. The titanic is famous and you can always hire a publicist.
The good news is that a lot of the breweries that have made the transition are doing a lot better than they were solely as contract breweries. No longer abstractions, they get to show off significantly more range than they did. Bell City, for instance, has a really impressive taproom and quite a good range of beers. Arch Brewing in Newmarket probably doesn’t get talked about a lot yet, but their Dinner Jacket O’Red IPA is an entirely different beer now and better for the lemony hop twang. Descendants in Kitchener has a lovely little beer hall and is a busy little community hub. These are all good things. They are all, after incubatory phases as contract brewers, going through that learning curve that I described earlier.