Expand your brewery or buy contract capacity

The decision in one sentence

Expanding turns a variable cost into a fixed one. Contract capacity does the opposite. If your volume is certain and growing, fixed cost per litre falls as you add output. If it is uncertain, a fixed cost can sink you. That single fact explains most of the arguments below.

Before you compare, check whether you really have a capacity problem. A brewery that fills its fermenters 50 per cent of the time has a scheduling problem. Our guide on brewhouse efficiency is worth reading first.

What expansion costs

Expansion means more fermenters, perhaps a larger brewhouse, more cold capacity, more packaging and often more space and staff. Each adds capital, depreciation, loan interest and running cost. The new capacity only earns money if you sell the beer it makes. Add the working capital to run it, because bigger batches tie up more cash. See working capital for the method.

An honest model includes the months in which the new tanks are installed and not yet full.

What contract capacity costs

Contract brewing means a host brewery makes your beer to your recipe and specification, or to a shared one, for a fee per litre or per batch. You pay only for what you brew. The terms vary: who buys ingredients, who owns the yeast, who carries losses, who handles packaging and labelling and who is responsible for quality. Get all of that in writing.

The per-litre fee is not the whole cost. Add transport, testing, sample checks and the time you or your brewer spend on site. Also check the regulatory side. In India alcohol is a state subject. Contract production often needs specific licence arrangements for both parties. The rules differ by state and change, so take advice before you sign anything.

A worked illustration

Use hypothetical numbers in currency units. You need an extra 10,000 litres a month. Contract brewing costs 55 per litre all in, which is 550,000 a month and no capital. Expansion needs capital of 6,000,000 financed over five years, with a monthly instalment and running cost of 330,000 plus 30 per litre for ingredients and packaging, which is 300,000. That is 630,000 a month for the same volume.

At 10,000 litres expansion costs more than contract. At 15,000 litres, the instalment and fixed running cost stay at 330,000 and the variable cost rises to 450,000, so the total is 780,000, or 52 per litre. Contract at 55 per litre is 825,000. The lines cross at about 13,200 litres in this example (330,000 divided by the 25 per litre gap). Below that, contract wins. Above it, expansion wins, provided the volume is real.

The risks the arithmetic hides

Contract brewing gives less control. Your beer is made on another team's schedule on another team's kit. It may taste slightly different. Insist on a shared specification, retained samples and the right to audit. Expansion carries the risk that demand falls and the loan stays. Contract brewing carries the risk that the host's quality or priorities change.

There is also a brand risk if a contract arrangement is not what customers believe they are buying. State the truth on the label where the rules require it. Never hide where the beer is made. Customers who feel misled rarely come back.

Mixed paths work

Many breweries do both for a while. They keep the flagship at home where quality is tight and contract a seasonal or a high-volume lager. Others use contract capacity to prove a market before they buy tanks. Treat the contract as a test, with a minimum volume you can sell and a way out if it fails. Agree in advance what result would make you expand and what result would make you stop. A decision rule written before the test beats an argument held after it.

The brewing side deserves a check as well. Ask the host how they will match your fermentation temperature profile, which yeast they will use and how they will measure original and final gravity. Taste the first batch against your own and keep a retained sample of every batch for later comparison.

How to decide

List the volume you are confident of in each of the next 24 months. Mark what is already ordered. Model both options on that line, then on a line 25 per cent lower. The better option is the one that survives the lower case. If you want help running that comparison with your own numbers, talk to us.

Common questions

Is contract brewing cheaper than building capacity?

At lower volumes it usually is, because you avoid capital. At high and steady volumes expansion tends to win. Model your own numbers to find the crossover.

Who owns the recipe in a contract arrangement?

That is set by your agreement. Put recipe ownership, yeast and any improvements in writing, with legal advice.

Do I need a licence to contract brew?

Often both the brand owner and the host need appropriate approvals. Rules differ by state and change, so ask a licensing adviser.

Can I use contract capacity to test a new beer?

Yes. A small contract run lets you test demand before you commit to equipment.