November 23, 2015

Brewers, bottlers rake revenues from competitors

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Wachusett Brewing Co. is using its 400-cans-a-minute canning line to package its own Larry Double IPA and other in-house brands, but the company is building a business model on performing a similar task for competing microbrews, under a system known as contract brewing.

When consumers look at beer and soda bottles on store shelves, they see several brands competing for the same dollars, but to Central Massachusetts firms like Polar Beverages and Wachusett Brewing Co., all those bottles and cans mean money.

"Virtually all the private labels in the northeast and the southeast come out of our factories," said Polar CEO Ralph Crowley Jr. "It's an important part of our business."

In this concept known as co-packing in the carbonated beverage industry and known as contract brewing in the beer industry, large bottlers and brewers use their excess capacity not taken up by-house brands to package, label and sometimes distribute their competitors' products. This adds a different source of revenue for firms like Worcester-based Polar and Westminster-based Wachusett and enables their competitors to sell in the region without the pricey infrastructure. In the brewing industry, it specifically has led to the rise of the number of microbrews in the market.

"Even though there's friendly competition amongst our brands. We still feel we are working against the big powerhouses of the world," said Ned LaFortune, founder and president of Wachusett.

In July, Polar entered into a hybridized venture with Connecticut-based Nestle Waters to bottle and distribute certain products, such as Nestle Tea, in cans while Nestle continues to make the bottled version. The deal could be worth upwards of $50 million in the next five years, Crowley said.

Crowley wouldn't disclose an exact figure, but he said co-packing constitutes roughly 50 percent of Polar's revenues from its facilities in Worcester, New York and Georgia, having quietly built up an array of brands since the 1990s, like Dr. Pepper and Snapple.

"You get dramatic efficiencies if you are running the plants at full speed. There is nothing worse than a machine that is sleeping," Crowley said. "The more you run the machines, the more your cost structure comes down for everything you do."

A relative newcomer to the practice, but a company that has built it in to its fundamental growth plan, is Wachusett Brewing. When the company was looking to expand, it decided to put money into a canning line with more capacity than it needed. It brought its 400-cans-a-minute line into operation in 2012, planning on canning for other brands.

Wachusett brews and packages the product. From there, the contracting company handles all the marketing and distribution. Wachusett contract brews for breweries such as New Hampshire's Smuttynose Brewing Company and Long Island's Montauk Brewing Company. This additional work is a key part of Wachusett's expansion.

"We sell 98 percent of our beer in New England and 80 percent in Massachusetts," LaFortune said. "We have chosen a limited market. We are not rolling the Wachusett brand out and fighting in the craft brew brands of Oregon and California."

For the current fiscal year, contract brewing is trending to exceed 20 percent of Wachusett's production, with the possibility of more growth in the future, LaFortune said. House Bill 187 that would open up Massachusetts to tenant brewing, bringing in federal tax breaks and allowing outside beer to be canned on the line, would only accelerate the growth of this practice in the state, he said. The bill is currently being reviewed by the state committee on Consumer Protection and Professional Licensure.

Benefits all around

These contracts are a win for the companies whose products are being made, said Jeff Weston, vice president and general manager for Nestle Waters' new Polar Strategic Ventures. With the new arrangement, Nestle is able to make use of Polar's canning and distribution expertise.

"Their supply chain is so much more nimble and capable in cans, and we just don't have that expertise," Weston said. "Manufacturing of it is extremely important, but the distribution is essential."

Canning is a niche both Wachusett and Polar have embraced. There are a multitude of benefits to canning, LaFortune said, and the microbrew community has recently embraced cans as a delivery vessel for high-end brews.

"We never wanted to get into it in bottling. We only wanted to do contract work in cans," LaFortune said. "It was definitely a bit of a gamble because if cans had come and gone, I wouldn't have had a market to sell to."

By focusing on cans, Wachusett was able to secure Smuttynose, which has an extensive bottling line of its own but contracts with Wachusett to avoid committing to their own canning line.

Finding a balance

There is a balance that must be struck, Crowley said, insisting that Polar remains the company's priority even as 50 percent of its production goes towards other brands.

Polar maintains distance between the brands where it counts – in the sales staff who are differentiated between Polar and other drinks produced by the company.

From Weston's perspective, as long as the products are differentiated enough in type and market level, they can be used to pull customers away from other drink types, such as traditional sodas, rather than cannibalize sales.

"It's another weapon in (Polar's) arsenal… it gives them more clout and space on the shelf," Weston said. "It's making the pie bigger, and it really works as long as we are attracting new users."

Frenemies

This opportunity to make use of additional capacity is present for many industries, said Crowley. With many larger companies focusing on their branding and marketing of a product, rather than actual production, there is opportunity to gain business that is being moved out of house. That is how Polar has been able to acquire franchises for major soft drinks over the years.

However, the first place to look is the competition, he said. It might not seem to make sense, but Crowley said even the most hardened competition can become frenemies if they have run out of capacity and he has an excess.

"If you're sitting there and own a manufacturing facility and have excess capacity, you might want to consider people you think of as your enemy as a business opportunity rather than your enemy," Crowley said. "If you're looking to grow your business, one great source of growth would be your competitors."

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