Definitions: What We Talk About When We Talk About Craft
According to BA guidelines, an American craft brewery must adhere to three specific guidelines: it must be small, independent, and traditional. Here’s what they mean by that:
Small: Production of less than 6 million barrels per year, excluding flavored malt beverages.
Independent: A brewery that is has less than 25 percent ownership or controlling economic interest by a member of the alcoholic beverage industry that is not a craft brewer.
Traditional: A brewery that produces only malted barley-based beer or has at least 50 percent of its production volume in either all-malt barley beers or in beers which use adjuncts (such as rice and corn) to enhance rather than lighten flavor.
The Brewers Association defines segments of the craft beer industry in terms of production volume as well as how breweries distribute their products. The BA designates craft breweries as follows: microbrewery, brewpub, contract brewing company, and regional craft brewery.
Microbrewery: A microbrewery produces less than 15,000 barrels (1 barrel = 31 gallons) of beer per year. Microbreweries must sell 75 percent or more of their beer off-site and have relative flexibility in the way they can distribute, pursuant to individual state regulations in which the brewery operates. In most states, a microbrewery can sell its products via the traditional three-tier system (brewer to wholesaler to retailer to consumer), and/or the two-tier system (brewer acting as wholesaler to retailer to consumer), and/or direct to consumers through on-premise sales.
Microbreweries have become the fastest growing segment in the craft beer industry; of the 250 new brewery openings in 2011, 174 were microbreweries. A significant percentage of microbreweries start out as a “nanobrewery,” a very small brewery operation often launched by home brewers attempting to turn their craft into a career. Like any other brewery, and despite its tiny size, a nanobrewery must be licensed by the U.S. Alcohol and Tobacco Tax and Trade Bureau (TTB).
Brewpub: A brewpub is a restaurant-brewery that sells 25 percent or more of its beer on-site. The beer is brewed primarily for on-premise sales and often dispensed directly from a brewpub’s tanks. Brewpubs can sell beer “to go” and distribute to off-site accounts, however, the BA re-categorizes a brewpub as a microbrewery if its off-site beer sales exceed 75 percent of beer production.
Brewpubs currently represent the largest segment of craft beer. Of the 1,940 craft breweries in operation last year, 1,063 were brewpubs.
Contract Brewing Company: A contract brewery is one that hires another brewery to produce its beer – known as the producer-brewery – and/or a brewery with limited capacity that hires another brewery to produce additional quantities of its beer. A contract brewery handles the marketing, sales, and distribution of its beer, while the brewing and packaging of its beer is left to its producer-brewery.
Contract brewing is often the quickest and least expensive route to starting a new beer company. Most contract breweries pay flat fees to its producer-brewery based on a number of barrels produced. The benefits are clear: a contract brewery can build its brand without the difficult and time-consuming process of acquiring state and federal brewing licenses and none of upfront capital costs associated with the construction of a brewing facility.
A similar business model is that of an “alternating proprietorship,” or “altprop” for short. While the BA does not designate an alternating proprietorship as a specific craft beer segment, the term is used by the TTB to describe an arrangement in which two or more people share the physical premises of a brewery. In most cases, an alternating proprietorship represents a contract in which an existing brewery with excess brewing capacity rents space and equipment to a tenant brewer, often a new entrant into the beer business.
Regional Craft Brewery: A regional craft brewery produces between 15,000 and 6,000,000 barrels of beer annually. With a growing number of microbreweries increasing production and expanding into new distribution territories, the number of regional craft breweries is on the rise, yet the segment is still the smallest within the craft beer industry. Nevertheless, these larger operations represent the largest sales growth for craft beer, so much so that the Brewers Association created what has come to be known as “The Sam Adams Provision.”
Up until 2011, the Brewers Association based the production ceiling for a craft brewery on a 1976 tax code which defined “a small brewery” as one that produced less than 2 million barrels of beer per year. By 2010, however, the Boston Beer Company (BBC), the largest craft brewery in the country and manufacturer of Samuel Adams beer, was approaching 2 million barrels of production, with expectations that it would exceed that amount within a short number of years.
While the BA refuted claims that it was changing its definition of craft beer in response to the growth of BBC, on December 20, 2010, the BA’s board of directors of voted to alter the BA’s designation of “small” craft brewer to refer to “any independent brewery that produces up to 6 million barrels of traditional beer.” Notably, BBC is currently — and has always been – the only craft brewery that produces over 1 million barrels of beer.
Editor’s Note: This story appeared in the April/May issue of BevNET Magazine