Wednesday, February 4, 2009

Contract Brewing, Part III – Capital Brewery, Middleton, WI

When I left you on Monday, I left you with the following hypothetical:

An established but small-ish brewery is particularly well-known and has a strong local identity; it heavily markets and makes a strong connection to the specific location of its brewery. However, this brewery requires more capacity to brew a beer that has become unexpectedly popular. It is unsure if this beer's popularity will be sustained long enough to justify expansion of its own brewery, and in any case needs short term expansion to meet and capitalize on the increased demand. If you are responsible for making this business decision, do you choose a Contract situation or an AP situation? And why?

In light of yesterday's podcast, this hypothetical fits two breweries that we talked about. But, first, let's review for a second. There are two general ways to brew beer – you can either own in your own stainless, or you can use someone else's equipment. If you choose to use someone else's equipment, there are two ways you can do that – Contract Brewing or Alternating Proprietorship. The primary difference between these two is a legal distinction as to who holds title to in-process beer. If the Host brewery owns the beer, the liquid itself, then it is a Contract; if the Tenant, Client, owns the liquid it is alternating proprietorship. In either case, either the Host or the Client can be primarily responsible for the brewing steps; the only real difference is who owns the liquid.

The reason why owning liquid is important is because whoever owns it is responsible for the administrative duties imposed by the Federal and State governments. In the Contract brewery, the Host is responsible for paying taxes and getting label approvals and all of the other administrative duties. In an Alternating Proprietorship ("AP"), the Tenant is responsible. Moreover, as far as labels are concerned, the TTB requires that the name of the title brewery appear on the label. In the case of the Contract, the title brewery is the Host; in the case of AP, the title brewery is the Tenant – even though they are both brewed at a Host.

With that said, let's return to our hypothetical. It perfectly fits the Pennsylvania Brewing Company situation that we talked about in the podcast yesterday. The Penn Pilsner had become too popular and there was not sufficient capacity at the Pittsburgh brewery to meet demand. If this sounds familiar, it's because the situation might remind you of Island Wheat and Capital Brewery. Capital, too, had a beer become unexpectedly popular. And, really, before that was Spotted Cow for New Glarus. New Glarus struggled to meet demand and over-expanded and ultimately reduced distribution and then expanded in order to maintain quality. But, by the time they undertook production expansion the Spotted Cow had been fairly solidified as a cash … umm … cow. On the other hand, Capital ate up most of, if not all of, their capacity in meeting demand for Island Wheat.

Expansion is expensive. You'd rather not spend millions of dollars to expand production if the beer is only a fad. If you do, and it is, you are left with an underutilized multi-million-dollar bank loan (or equity burden; I won't really go into the finance here, but I think it suffices to say you'd rather not spend the money if you don't have to). So, it makes sense to find somewhere to brew in the short term while you evaluate whether expansion is a good idea and bank your money (especially if you are a cash-strapped company like Capital that saw their cash reserves diminish significantly in 2007). During this time you can evaluate and support your brand. You can produce complimentary brands to try to shore up the concept (Rustic Ale, I'm looking at you). You can spend some time to look for good equipment at a good value and figure out how to properly expand – especially if you are in a location where expanding the physical size of the building may not be feasible (like a busy, and crowded commercial district in a rapidly growing suburb).

Alright. That's all to say, no one would blame Capital for needing to brew at least some of its beer somewhere else. But Capital's problem is much like Pennsylvania Brewing Company's problem – so much of their goodwill is tied up in the fact that they brew in Middleton, that they can't just start putting "Stevens Point, WI" on the labels, or they risk backlash from the local community who buys their "local" beer – in some cases, only for the reason that it is local!

Moreover, as we discussed in the podcast, there's a pretty heavy stigma attached to contract brewing. We've tried to counter some of those myths: that the product itself is always worse, less tasty, than beer brewed on your equipment; that the process itself is somehow inferior; that contract beer is a purely marketing beer and that it has no soul, no creative force in it, that it is not, and cannot be, "craft beer." As a brewery that came up during the time when most of these stereotypes were created, it is not surprising that Capital would not want to be associated with it. As the cliché goes, stereotypes wouldn't be stereotypes if there weren't at least some truth to them.

So Capital, as a business, is caught between a rock and a hard place. They can't meet demand themselves and there is a heavy stigma attached to putting someone else's brewery on your label. So, what to do? Well, there happens to a form of contract brewing that allows you to put your own company name on the label! Alternating Proprietorship. The only question is: where?

It is common knowledge that Capital bottles at Stevens Point, and before that Monroe. If you were to go on their brewery tours they happily tell you that the beer is put into re-tooled Wisconsin milk tankers and trucked up to Stevens Point, WI. Then the bottles are brought back to Middleton. That trip, from Middleton to Stevens Point, is 115 miles. Our document that we published on our site shows that Capital had 840.19 barrels of beer in Stevens Point in the month of September, 2008. That's 26,045.89 gallons of beer (31 gallons per barrel). A typical, large, milk tanker is around 6,000 gallons. Which means, if we were to believe that Capital is only bottling at Stevens Point, that they are making 5 trips per month with beer for the sole purpose of bottling. How many of those trips do you think they made at $4/gallon for diesel before they looked into brewing at Stevens Point so that they only had to go one way with the beer?

Not surprisingly, if we look at the tax document, we see that Capital pays taxes on all of the beer that goes into bottles for sale in-state at Stevens Point, WI. Tax on bottles intended for out-of-state sales is paid in Middleton. Tax on kegs, both in and out-of-state, is paid in Middleton. While there is some possibility that Capital is sending five trips per month to Stevens Point in a tax-deferred tank, at $3.50 per gallon diesel, think about the risk in doing that! What if that tanker gets in an accident? What would that do to Capital's inventory? It would be a strong, good, business decision to simply brew at Stevens Point.

So. The evidence is very, very, very strong for the suggestion that Capital is brewing, under an AP contract, at Stevens Point, WI – the home of Stevens Point Brewery and Point Beer (a fine beer, I might add). The question now is: so what? What's the point of this very long post about Capital contract brewing, if the whole point is that contract brewing isn't bad? Well, because it's not entirely true. The point of this very long post about Capital contract brewing is not that Capital is making inferior beer (I'll leave that call to the public), but rather that Capital is intentionally obfuscating this fact to the detriment of the consumer.

There are people who purchase Capital beer because it is brewed locally. Would they continue to buy it, if they knew that it was brewed in Stevens Point? Would they continue to buy it, even if it was brewed in Stevens Point, if Capital provided a good, rational decision for brewing there? Would they continue to buy it, knowing that it is brewed in Stevens Point, if Capital hides that fact; continues to tell people on their brewery tours that all of the beer is brewed in Middleton and dismisses anyone and everyone that would say otherwise; that when asked point-blank about whether the beer purchased in a bottle that is presumed to be brewed in Middleton, because of the very marketing and its implications that Capital themselves undertake, is actually brewed in Stevens Point, WI, Capital's response is to evade the question by saying "We do not discuss our business decisions."

I called Carl Nolen, President of Capital Brewery, Inc. (and ex-distributor and ex-Coors employee), to discuss this issue with him. I asked him "Do you brew at Stevens Point Brewery?" His response: "We do not discuss our business decisions." I asked him: "Do you brew 100% of your beer in Middleton, WI?" His response: "We do not discuss our business decisions." I asked him: "There is significant evidence in the public domain to suggest that Capital is brewing, not just bottling, at Stevens Point Brewery; are you comfortable with the public drawing its own conclusions?" His response: "We do not discuss our business decisions." So, you have to at least give him credit for consistency. When I told him that we were going forward with our story and that we would be drawing our conclusions and that Capital would be on record as providing "no comment," he was very adamant in suggestion that he had, in fact, provided a comment: that Capital does not discuss its business decisions. While I fail to see a significant distinction, I at least stayed true to his comment.

Given all of the information in front of you, the reader, you can draw your own conclusions. We have given Capital plenty of opportunity to address and correct the public record. They have refused to do so. Thus, I am left with the conclusion that Capital is, in fact, brewing at Stevens Point.

But again: so what? So what? Good question. So, the fact is that there is public perception that Capital's quality has decreased significantly. So, the fact is that there is public perception that Capital is abandoning its principles. So, the fact is that there is public perception that Capital is deceiving the public about a number of its other business practices (e.g., the amount of Washington Island wheat used in the Island Wheat, and that recipes have been altered***). So, the fact is that Capital has released the keg-only (remember kegs are brewed in Middleton) Imperial Doppelbock (after poor reviews for the bottled Baltic Porter - by the way, I notice there is no mention of the critically panned Prairie Gold on Capital's website) and that there continues to be public perception that Capital's kegs taste different from Capital's bottles.

So, the fact is that there is a significant amount of public discussion, distrust and unrest concerning Capital Brewery and they have refused to address the vast majority of it. And as a result, the craft beer public (and, quite frankly, significant portions of the non-craft beer public) is abandoning Capital Brewery. I see this as a bad thing. Capital represents a great opportunity in the craft-beer segment – high quality, original, creative beers produced here in Wisconsin and it would be tragic to see its buying public abandon it because its caretakers can't hold a non-confrontational discussion and provide a modicum of honesty.

If they are, in fact, brewing at Stevens Point, they are lying to the public by not admitting as such. And, you know what, so was Pennsylvania Brewing Company (at least until they copped to it when confronted). Labeling laws should require that breweries be very specific about where beer is brewed; that way when I, a member of the public, walk into Capital's Middleton brewery and see the very shiny copper kettles and my fellow local citizens hard at work, I know that the beer in my bottle is not produced by them. And when I walk into Stevens Point Brewery, I can thank their workers for attending to the production of Capital's beer. Because we have no idea if Kirby Nelson has anything to do with the brewing process at Stevens Point. Is this similar to Esser's Best, where Kirby sends up a recipe and simply says "send me the bottles"? Or is it more like Furthermore, where Kirby is intimately involved with the brewing process and drives up to Stevens Point on brew days, taking measurements and shadowing, and even participating in the brewing?

A logical example is Nike. What if, when confronted with evidence that its payroll information showed some discrepencies Nike just commented with "We do not discuss our business decisions." That's fine, but it still doesn't change the fact that it had taken advantage of child labor. Instead, Nike used the opportunity to inform its buying public of its foreign business practices and work with consumer opinion to become a recognized leader in community workforce development in the places where it has manufacturing facilities.

So, maybe the problem with contract brewing is that it raises issues of ethics that we simply do not have in non-contract situations. And the problem isn't that the process or the product is inherently inferior, but the problem is that we can't inherently trust the process. In such cases, it makes far more business sense to err on the side of providing too much information, letting the public know exactly what is going on; otherwise, you only leave the public with the option to draw their own conclusions.


***Kirby has categorically denied altering the recipe for the Autumnal Fire. I am not inclined to dis-believe him; I have no reason to think that he's lying about that, and I admitted as such that perhaps it was rumors and perception more than truth that we think that the Autumnal Fire has been made "lighter" over the years. Moreover, Kirby has insisted that Island Wheat is made with 100% Washington Island wheat.

14 comments:

  1. Very interesting post! I've been a bit disheartened by the products Capital has introduced over the last couple of years, but don't have any issue with where it's brewed. Leinenkugels claims their beer comes from Chippewa Falls, but has a Leinies brewery #2 in Milwaukee - there's no way they could brew everything they sell on the little system in Chippewa, and Guinness owns many breweries around the world (even Canada) so even though the location changes the brand is still identified with a single location. Good? Bad? Eh?

    Your last statement about the Island Wheat...it's very possible that all of the Wheat in Island Wheat is from Washington Is. Just like the Leineis Honey Weiss has honey in it...Not much, but it does have honey. I took the Leinie tour and asked how much honey goes into a brew batch - the answer: one 5gallon bucket. for a 100+ barrel batch! and they put the word honey on the label! So, it's possible that the small amount of wheat in the Island wheat all comes from Washington Island.
    cheers!

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  2. Leinies is open about the fact that their Big Eddie series and ales come from their second brewery in Milwaukee, and most beer drinkers know that unless they are in Ireland (or close to it), the Guinness that they drink is brewed outside of Ireland. While I understand your point about not caring, these examples are not quite the same as Capital's situation.

    It is possible that the wheat is all from Washington Island. I believe W.I. sends over 150,000lbs of wheat to Briess. But because of how Briess sorts and malts their grains, it seems like Capital would have to have a special contract to have ONLY the wheat from Washington Island processed for them.

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  3. That's a very good point about Leinie's. I'm not sure if they own that brewery in Milwaukee or if it's a Miller brewery that Leinie's uses (would that count as owning your own brewery since Miller owns Leinie's???). There are some stories about people going on the tour in Chippewa Falls and asking about the Big Eddy beers (Big Eddy is a river in Chippewa Falls, I think??) and the brewers there had no idea what the guy was even talking about.

    So, yeah, the post was specifically about Capital but it more generally applies to any brewery that isn't entirely honest about where the beer is being brewed and under whose supervision.

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  4. I think that to use "lying" and "ethics" is pretty strong language. They are not divulging information that they are not required to divulge.

    That said, I still think it is a mistake to not tell. Transparency is usually a good policy. A lot of good will can be built or at least a lot of bad will can be displaced or even innoculated against with a good shot of truth. Savvy transparency is better than poor worded "no comments."

    My point is that I don't think they are lying (I give up on the tour guides knowing anything there after one couldn't ID an auger she had her hand on), and I don't think they are obligated to relieve anyone of any rose-colored glasses. However, I think it would be better if they did it in a market-friendly way.

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  6. I agree Erin that lying is probably too strong a word. I would say "misleading" or being dishonest, but they never did say anything right out that was not true. In this case the no comment speaks volumes.
    And you're right about the tours. Either train your tour guides well (ala Lakefront) or go automated (like New Glarus), don't just have any old kid who doesn't know a thing about beer give a tour.

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  7. The uproar over this is amazing...four people commented! On a serious note, I am continually amazed that this topic continues to be such a big issue for this blog. I recognize that it is here to educate readers on all aspects pertaining to beer, but I say move on. This website is at it's best when it is doing beer reviews, highlighting WI beer personalities/breweries, and educating us about the beer industry. The last comment might suggest you should continue on this focus, but once is fine. The presentation of such a big news breaking secret and focusing on Capital is not a big deal. It may be your write as the blog owner to editorialize, but then change the name of the blog so it isn't Madison Beer Review. - Ben

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  8. Anonymous/Ben,

    This wasn't done with the intent to drive an uproar. This whole thing came about because we found out that Capital was contract brewing and we thought that was interesting news. There is a considerable amount of debate and ignorance about contract brewing and we wanted to address the issue head on.

    For example, the Madison Homebrewers and Tasters Guild doesn't allow contract brewers at the Great Taste of the Midwest. Will the Tasters Guild now require that Capital sit at Stevens Point's table since, at least by September's data, over 50% of its beer (and 100% of their in-state bottles) is contract brewed? If not, why not allow contract brewers (except, inexplicably, Fauerbach, which gets an "historical" exemption)? Why does there continue to be derision by people within the industry based solely on the equipment that someone uses?

    We used Capital as the centerpiece because it is a perfect example of a brewery that many in the industry, including many who look down their turned up noses at contract brewing, admire.

    We made a "big deal" out of this because we put a lot of work into it and contract brewing is a significant issue in the beer industry. We felt that people would find it interesting; and, in fact, almost everyone I've spoken to has found this to be extremely interesting news. I'm sorry if you don't find it as interesting as we do.

    We'll get back to regular content soon.

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  9. Erin,

    Yes, "lying" is probably a bit strong. Obfuscating. Ignoring. Misdirecting. All probably better words.

    As for the "ethical" issues - regardless of whether the "law" requires them to disclose the information, it should be disclosed and as consumers we should demand that it be disclosed.

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  10. I'm strongly in the "so what?" camp. I have no need to trust a brewery. I have nothing invested in the relationship beyond the cost of my next beer.

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  11. So, where's the line between Furthermore and Sam Adams, and on which side is Capital Brewery?

    And why is Capital sometimes $1 more / 6-pack than NG?

    These are the answers I want to know...

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  12. I'm late to this discussion, but having lived in Madison from 2000-06 and enjoyed many Capital beers (esp. Autumnal Fire, Blonde Dopplebock and Winter Skal), it has been disheartening to taste these beers since I moved to Chicago (where we get some bottles that are supposedly brewed in Middleton according to this). There are obviously quality changes for the worse that began around the time that the labels began to change. Kirby denies any changes to Autumnal Fire recipe in the Beer Dorks discussion, but I'm not buying that nonsense. It's just sad to see what was once the best brewery around Madison give up the title to save money or attract fans of lighter beers or whatever they've been doing over the last 3 years or so.

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  13. This whole this is disturbing to me as a stock owner of Capital Brewery. A lot of us put up a lot of money years ago and have nothing to show for it. At this point in time I am not happy with that investment I made years ago.

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