Brew Hub Bets On Capacity Demand: Will Anyone Take It?

On paper, the Brew Hub concept has many industry experts intrigued. For fast-growing craft breweries wrestling with capacity and capital constraints, the idea of expanding production without the added investment risk in a second brewery is enticing. And for contract beer brands in search of a larger facility to grow production volumes and expand distribution, Brew Hub — which plans to invest $100 million into 5 facilities scattered across the country — could be a viable option.

But news of the company’s emergence — it plans to break ground near Tampa very soon — has some in the industry not only questioning Brew Hub’s ambitious scale, but also the actual need for production capacity. Schoen told Brewbound that the need for strategically located capacity is at an all-time high, but is it?

In 2012, a number of well-known craft companies like Sierra Nevada, New Belgium and Lagunitas announced secondary brewery projects in an effort to catch up to growing demand. At the same time, hundreds of smaller microbreweries grew capacity in their existing footprints by adding new fermentation tanks and brewhouses.

At the June 2012 Brewbound Session, Brooklyn Brewery president and co-founder Steve Hindy, estimated that U.S craft brewer are already building 10 million barrels of new capacity.That figure runs parallel to the Brewers Association’s (BA) stated goal of achieving a 10 percent volume share of the overall beer market by 2017, or about 20 million barrels. In 2012, U.S. consumers drank just over 200 million barrels of beer, 13.2 million barrels of which was craft beer. That means craft brewers would need to grow annual production by 8 million more barrels over the next five years if they want to meet the BA’s goal.

“There is more demand than supply,” said Julia Herz, craft beer program director for Brewers Association. “To get to that 10 percent, somehow craft brewers are going to have to expand capacity and it’s the existing regional craft brewers who are the ones that produce more beer. That is where most of those barrels are going to have to come from.”

So when it comes to meeting demand, does the Brew Hub concept serve a vital need for craft beer capacity or are craft brewers already building enough infrastructure and investing enough capital on their own? That’s the $100 million question, and asked a number of industry members to weigh in on it.

Herz said she was also intrigued by Brew Hub. She added that she to pay close attention to the integrity and authenticity of product being made at Brew Hub’s locations.

“As craft evolves, you are going to start seeing all types of alternative business models, and this is one of the most ambitious I have seen,” she said. “The biggest thing to watch is that any craft brand (being manufactured at Brew Hub) still has to have an identity attached to it. The further that brand is removed from the original producer, there is a chance that that identity gets lost.”

Andy Thomas, the president of commercial operations for Craft Brew Alliance (CBA), is no stranger to the challenges of maintaining authenticity while brewing numerous brands across multiple facilities. He’s struggled with it through CBA’s attempt to market the Kona, Redhook and Widmer brands, which are produced at facilities on opposite coasts.He called the Brew Hub approach “clever,” and said the need for additional capacity is definitely there.

“Its not a question of how much capacity is coming online, but what kind of capacity is coming online,” he said. “The brewhouse size, batch sizes and geographic regions all matter. Overall, the incremental capacity coming online is sort of shocking to me, but this is a pretty thoughtful approach to it.”

Mercury Brewing founder Rob Martin, who also contract brews for a number of craft beer brands at his brewery in Ipswich, Mass. said he was speechless when he heard the news.

“There is room for more contract brewing,” he said. “But I am curious as to how the whole format is going to work. It would seems as though the capacity needs are being filled very, very quickly.”

Martin, who is growing his current capacity from 23,000 barrels to 46,000 barrels, explained the biggest challenge of operating a contract brewing facility.

“To be a contract brewer doesn’t always equate to the best use of capacity,” he said. “With more products and more variables, its harder to get beer out of the tanks.”

Alan Newman, the founder of Magic Hat, echoed Martin’s words.

“The volume of capacity that they are building seems pretty excessive to me unless you have some significant players in there,” he said. “There is this issue of running a manufacturing facility at threshold. To get margin, you want to run as close to 85 percent of capacity as you can and have as few SKU’s as you can.”

For Newman, like Thomas and others, it’s not about how much capacity is being built but how it’s used.

“Yes there is a need for some capacity,” he said. “How much, where does it need to be and who is going to be using it are the issues that I don’t know how to answer. I think we will see continued growth of the industry and I think beer with flavor will get to a 10 or 15 share of the beer category, but I think the landscape will look different than it does today.”

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