Back in March 2016, the BC Liquor Control and Licensing Branch 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 [as noted by by WB columnist Adam Chatburn in his Fall 2018 story, A Tale of Contract Brewing and Shadow Brands].
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 bricks-and-mortar microbreweries. So their question came partly from a place of curiosity about how contract brewing might affect those jobs. What they wanted to avoid was a phenomenon known in the wine industry as crush pads: storefronts that manufactured wine in bare-bones “virtual” facilities, with no land or vineyard.
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 per 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 as of that point.
Then we started to see some virtual breweries show up. And we’re like, ‘wait a second.’
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 relief is to take that money, invest it into your business and allow you to grow further”, Beattie pointed 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 if you’re small against that 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.”
We always worked with LCLB on three things. Firstly: the definition of a brewery. Secondly: markup. The third was the 80/20 rule.
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!”
Asked if the Guild felt that Doan’s Craft Brewing, as an example, was obligated to sell onsite-brewed product 80/20 even though most of their inventory had likely been brewed offsite at Craft Collective Beerworks, Ken said, “That’s the negotiation piece. We don’t know where that goes yet.”
Sadly, that point has since become moot because Doan’s announced a change the day after our interview. Their tiny brew space can no longer support them, so they will be packing up and moving their operations to CCB. As we’ve documented elsewhere, this move comes as a relief to Doan’s ownership. It also offers dramatic evidence of what contract brewing can mean to small players.
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.”
Beattie points out that, for breweries doing both on- and off-site brewing, “When they’re producing offsite they’re not making [the same] money. They’re getting their brand out, they’re building distribution, they have liquid. But they’re not making [the same] money on the liquid because it’s very expensive” to contract brew, seeing as the profit needs to be split between the manufacturer and client.
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.
People view it as big breweries trying to stop little breweries. It’s not that at all.
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] 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.