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Contract Brewing & Shadow Brands
BUSINESS & POLITICS
A VIEW FROM THE CELLAR | editorial
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A TALE OF CONTRACT BREWING AND SHADOW BRANDS
>> ADAM CHATBURN
This year, I was surprised to learn that Ontario has a massive contract brewing scene, to the extent that dozens of “breweries” have no brick-and-mortar space and are just brands made in a giant factory-style brewery. This is one reason why, in my opinion, they don’t have the vibrant, community-focussed brewery taproom scene that we have created in BC.
To some extent, contract brewing has been around for years here. Some of the larger local breweries with a bit of spare capacity either helped other existing breweries “on contract” with their excess demand, or helped start-up, nomadic brewers or, in a few cases, enabled “shadow brands” (those pretending to be something they are not).
Even though contract brewing does not break any rules, the related “rules” have typically been vague and inconsistently enforced. The topic has been of concern to the BC Craft Brewers Guild [Ed. Note: see following story], as it was to CAMRA BC during my time as President of the Vancouver branch. At the time however, it wasn’t considered an urgent priority due to the small amount of market it occupied.
Then came further explosion of the craft revolution. Craft beer was on everyone’s lips and new breweries with tasting rooms were popping up all over, growing quickly and making money. So a few folks thought they would try to bring the Ontario model to BC and make a quick buck exploiting gaping holes in the provincial guidelines. Suddenly, we had beers that pretended to be from a real craft nanobrewery when they were in fact made in an Ontario-style contract production brewery. Is that a problem? Does it really matter as long as the beer is good?
In early July, a number of BC “brewing companies” received cease-and-desist letters from Raymond Tetzel, Deputy GM of the BC Liquor Control and Licensing Branch (LCLB). The gist was that by using the term “brewing company” in their business name and marketing materials (particularly their web presence) without a valid manufacturing licence, businesses would be violating the Liquor Control and Licensing Act (the LCLB police the Internet now, apparently). The letter warned of potential penalties ranging up to six-figure fines and/or a year in prison.
For this story, I contacted some actual contract brewers to find out if they had received similar notices, but most stayed tight-lipped, presumably on legal advice. One brand owner said: “We haven’t been served any such documents, nor do we operate in any way so as to be in contravention of established BC or Canadian liquor laws.”
In late April the LCLB (now renamed the BC Liquor & Cannabis Regulation Branch, or LCRB) released the memorably-named “Business Technical Advisory Panel (Liquor Policy) Report and Recommendations”, compiled by lawyer Mark Hicken (known for his liquor law blog www.winelaw.ca) working with an industry panel. Recommendation number 18 reads as follows:
The sticking point is that small breweries are assessed a smaller markup (tax to you and me) that reflects their relatively lower efficiency. This hard-won scale is intended to help them grow organically by reinvesting in themselves. Hicken notes above that it is “defeating the purpose” when businesses outsource most or all of their brewing to a large operator then still pay this lower markup rate.
What if that is taken to the extreme (and it is happening), where a brewery opens its doors with a small homebrew 40L system, then outsources thousands of hectolitres of beer annually, allowing people to assume it was brewed at their facility under their manufacturing licence? Is that fair? Hicken continues:
A further review might stop tasting rooms from selling or serving that brewery’s products if they were brewed offsite. This is the same rule that currently prevents tasting rooms from selling packaged product or growler fills if that exact beer wasn’t brewed on site—even collabs. That may seem like a draconian rule, but we must remember that the ability to do off-sales from a tasting room, indeed having a tasting room or lounge at all, is an endorsement on a manufacturing licence.
What doesn’t seem to be addressed in this is the “shadow branding” we mentioned earlier. A quick search on the Internet will reveal that such brands often don’t list a brewery address. Is this something that as consumers we should be worked up about? Some individuals launching these brands seem very happy to talk about how clever they are to avoid the work, money and commitment needed to build their own brewery. Personally, I find that a bit insulting to the hard-working crews who laid it all on the line to open real craft breweries around the world.
The sudden rise of BC contract brewing has made it a bigger concern. One Guild board member posted his concerns about it on Facebook, saying “Our goal is to preserve the integrity of the craft beer industry as a whole. We want a healthy and vibrant craft beer scene in BC. We do not want to become Ontario, with 60-90 contract breweries that do not employ any staff other than a couple of sales reps. It muddies the waters, and dilutes the authenticity.”
If shadow brands were to be stopped here in BC, could some of your favourite brews be affected? We’ve recently seen Doan's Craft Brewing announce plans to abandon their microbrewery. Unintended collateral damage could force other nanobreweries and contract brewing companies to close or fail to open. Is that an acceptable situation to protect the greater BC craft beer community? There are more questions than answers because it’s a divisive topic that isn’t going away soon.
Adam Chatburn is a former president of CAMRA Vancouver. He has now closed Real Cask Brewing, and is enjoying his dotage. Follow him at @real_cask on Instagram and @realcask on Twitter.
Note: views and opinions expressed within are those of our individual authors, and do not necessarily reflect the position of What’s Brewing
BUSINESS & POLITICS
ON THE RECORD WITH KEN BEATTIE
ADDRESSING A BREWING CONTROVERSY
By Dave Smith
Ken Beattie, Executive Director, BC Craft Brewers Guild
Back in March 2016, the BC Liquor Control and Licensing
Branch (LCLB) asked the BC Craft Brewers Guild why ‘contract brewing’—the act of outsourcing production of a beer recipe or brand to a third-party (usually larger) brewery—hadn’t taken root in British Columbia to the extent that it had in Ontario [Ed. Note: refer to previous story by Adam Chatburn].
Like most provincial government departments, the LCLB (now renamed the Liquor & Cannabis Regulation Branch, or LCRB) has an interest in the creation and maintenance of BC jobs, including those in brick-and-mortar microbreweries. So their question came partly from a place of curiosity about how contract brewing might affect those jobs.
The Guild, which is made up of approximately 130 members of BC’s craft brewery community and steered by a seven-person representative board, responded that the first step was to define what a brewery is. Their definition started with the need for a manufacturing license, as well as a commercial brewhouse with fermenting tanks.
Ken Beattie is the Guild’s Executive Director. During our conversation on August 7th, he recalled that the policies the Branch wanted input on also included a “production minimum”, similar in nature to ones that had been set for BC’s wine and cider sectors. The board began to work on the input the LCLB requested. “Then the policy person went away, and we didn’t hear from them for a year”, Beattie noted.
In the meantime, the Guild kept lobbying for further reduction to the “wholesale markup schedule”—a set of tax brackets—on products created by small brewers. In May 2016 the government duly adjusted markup from 97 cents down to 40 [cents/litre] for breweries under 15,000 hl/yr. Job done, for the moment at least.
But as to the LCLB’s earlier question, Beattie admitted, “We didn’t know why” contract brewing hadn’t really caught on in BC yet.
Then things changed. Back in 2016, Factory Brewing had not yet opened, although it was in the planning stages. The brainchild of former Russell Brewing part-owner Andrew Harris, Factory burst onto the scene in spring 2017 as Vancouver’s first dedicated contract brewing facility and was—no doubt to the surprise of its owner—immediately greeted with an enthusiastic reception by local breweries, desperate for space to create their ever-more-popular liquid products.
“Then we started to see some virtual breweries show up”, Beattie recalls. “And they were getting the same markup [relief] without a manufacturing license. And we’re like, wait a second.”
Beattie and the Board members wondered: how is this fair, if you don’t have a brewery? “The intent and purpose of markup re-
lief is to take that money, invest it into your business and allow you to grow further”, Beattie points out. “What’s to stop [external breweries] from coming into BC and saying ‘We’re not going to invest in your [province], we’re not going to do bricks & mortar. We just want to do 20K hl/yr and we want it at 40 cents.”
“You can’t just have a guy with a recipe who starts a marketing company getting the same relief because he’s got a head start to the guy who’s done bricks & mortar" Beattie explains. "And what will he do with the head start? It’ll be marketing funds and sales people. So, you can’t compete against that if you’re small because, when you’ve invested all your capital expenditure into the business, you don’t have much left for salespeople and marketing programs. Now you’re the sales person.”
In spring 2018, Factory diversified and rebranded as Craft Collective Beerworks, launching a house beer lineup and consolidating their brewery agency and marketing services.
To be clear, Beattie says the Guild is not against contract manufacturing per se. “We’ve never said ‘no’ to contract manufacturing”, he asserts. “It’s the only way that [some of] our small members will grow. Or if, God forbid, there’s an accident and tanks go down. It’s a safety net. But what you can’t have is a shortcut that everyone else didn’t have. When we have members that can’t get into festivals because shadow breweries are taking up space, that’s a concern.”
Beattie feels that virtual operators who present themselves as BC craft brewers can create a lack of transparency that potentially confuses the consumer and “dilutes the integrity of the craft beer community.”
It should be noted that certain packaging and messaging requirements are in place that mandate, for instance, Factory/CCB’s clients to display the beer manufacturer’s identity on beer cans and at festival booths. But long before Factory opened, “shadow brewing” (not always necessarily the same thing as contract brewing) had a negative connotation.
It’s always been about transparency. Sometimes, educated consumers (read: beer geeks) have welcomed contract brewing, when the rationale is understood. A good example is the story of Fuggles & Warlock Craftworks, a well-respected former “nomadic brewer” which created its products under contract at more established breweries before finally building a Richmond brewhouse.
Asked whether a contract brand can become a Guild member, Beattie confirms the obvious: “One of our requirements since our incorporation is you must hold your own manufacturers license.” He feels that if the Guild can’t send a consumer to a member’s location to experience their brews firsthand, then a key differentiator that attracts and creates loyal craft beer consumers is lost.
“We always worked with LCLB on three things" he goes on. "Firstly, the definition of a brewery. Secondly, markup relief to help small brewers grow. The third was the 80/20 rule.”
80/20 rule? Beattie elaborates. “There’s an existing rule that 80% of your [storefront tasting room alcohol retail] volume has be produced on site, and 20% can be produced offsite.” Ken explains that the push for allowing 80/20 came from wineries that wanted to offer visitors variety, but it works just as well in brewery tasting lounges for those that don’t want beer.
“Because you already have the 80/20 rule, you can’t allow somebody to open a small brewery, produce 5000 hl/yr offsite, then bring it back and sell it [in their lounge].” He feels that the LCLB wasn’t enforcing this, and feels that it doesn’t matter that the offsite product happens to be the brewer’s recipe, if the amount is way over 20%. “It may as well be rum!”
But Ken insists he understands that there are legitimate reasons for some operators to brew a substantial amount offsite. He says that certain smaller members need the extra capacity at points of the year (typically summer) to keep up with demand. “We have members who opened with a very small volume facility and have had success that has outgrown their current space”, Beattie notes. “The extra volume will allow them revenue to reinvest in their own expansion.”
Ken notes that the LCLB (now LCRB) has been completely overwhelmed dealing with cannabis lately. In April of this year, after years of working with the LCLB on three issues, the Guild was told that markup policy is the responsibility of the Liquor Distribution Branch. The same people responsible for collecting markup now also set the rates. “We are now dealing with two regulatory bodies who have different mandates. The LDB has a revenue mandate and the LCRB has a regulatory and compliance mandate.”
“At this point we had already proposed that anyone who contract brews their product offsite or does not have a manufacturing license pays the premium rate of $1.08/L.” Ken notes. “The theory was, if in three years from now we have 50 contract brewers [as in Ontario] who get 40 cents markup, and they have [an extra] $500,000 in their pocket, we don’t care what size your brewery is, you won’t compete.”
Beattie shared that some owners (presumably of smaller breweries that need to contract brew) view the rate recommendation as the Guild’s bigger breweries trying to squeeze smaller competition. “It’s not that at all” he clarifies. “Our opinion is we’re actually protecting [smaller members] against something that will happen in the future [if the markup rules remain unchanged]. We had to make a recommendation that [for ease of government implementation] was black or white. In that decision unfortunately, there was going to be some friendly fire and some [collateral damage]”, Ken rationalizes.
There's the matter of whether the associated proposal letter presented to government, specifying full support of the Guild membership, actually enjoyed such. Ken admits that it could have been worded differently. Since then, he says, “We went back and got reaction from people who are contract brewing. We listened—better. Now we’ve said ‘OK, where’s the middle ground to that."
Ken notes that "Now we have two negotiations, not one, and it becomes problematic. Because one side, the LDB is working on a fiscal calendar that we really have to hit. On the other side, the LCRB is mired under cannabis, and don’t have the bandwidth to address our agenda on liquor at this time”. He offers as evidence his observation that the “Hicken Report” [a set of recommendations requested by the Province from liquor industry consultant Mark Hicken; see previous story in this issue] came out three months ago and has had zero attention.
“That’s why, when [members] say, ‘why didn’t you consult us?’, I think ‘I don’t know how I’d explain this to you’.” Beattie admits, “We’re not ready, and we have more negotiation to come.”
Upcoming on the Guild’s agenda is the topic of external brewery ownership, as determined by “worldwide production volume.” Breweries with external ownership/affiliation [including a very small number of BC craft operators] are obliged to pay a higher markup rate reflecting their group’s total licensed volume. This would in theory also affect contract vendors like Factory/CCB. Applying this approach, if a contract facility brews for twenty clients, plus makes their own products, their markup rate will jump significantly.
Beattie admits that certain limitations in the contract model tend to keep it from running rampant. “When I was in Halifax (for the Canadian Brewing Awards and Conference) I listened to a panel on contract brewing”, he relates. “A number of guys like Brunswick [Bierworks, a Toronto contract vendor], that’s all they do. It seemed to be the consensus of the panel that when you get to about 4000 hl/yr, it doesn’t make any sense to contract brew.”
Not to mention that BC doesn’t have anywhere the contract brewing supply necessary to worry about an “Ontario model” at this point. So, is it worth the Guild’s time to lobby for differences in policy between “real” and “virtual” brewers? Beattie’s mind is clear on this: “The legislation that will occur today will impact what will happen five years from now. If you talk to someone from Ontario, they’re wondering how they can close the door they opened.”
Next issue: stay tuned for “A Guilded Existence”, the What’s Brewing Biography of Ken Beattie, in which we learn about the man himself and how he found his way into one of the most unique positions in BC craft beer.
Dave Smith is Editor of What's Brewing, BC columnist for the Northwest Brewing News, and an accredited member of the BC Association of Travel Writers, He has has been collecting beer and beer experiences for two decades.
