What is contract manufacturing?

Contract manufacturing is when an existing production facility, such as a brewery or distillery, enters a partnership with another business to manufacture a product on their behalf. The beverage product is sold under the other business’s brand name. These beverages are often called “shadow brands” since the business does not have its own brick-and-mortar space.

Steps to create a shadow brand

In British Columbia, Russell Brewing Company has been contract brewing off and on for six years. They usually take contracts from existing Vancouver breweries who seek to fulfil production gaps. Steve Schafer, general manager at Russell Brewing Company, outlined the steps involved in creating a shadow brand for an alcoholic beverage.

Step 1: Apply for licensing with the government

A shadow brand must register with the appropriate government bodies. In B.C., these are the B.C. Liquor Distribution Branch and the B.C. Liquor and Cannabis Regulation Branch.

Schafer says that the shadow brands Russell Brewing works with are required to apply for their own manufacturing licenses. This may seem counter-intuitive since the shadow brand is not actually manufacturing anything. However, the manufacturing license allows the products to be registered under the brand owner’s license rather than the production facility’s license, and the shadow brands retain proprietary ownership of their products.

Schafer estimates that applying for a manufacturing license can take 18 to 24 months, and says that the process is more difficult for brands that don’t have a manufacturing facility. He notes that establishing a shadow brand for alcoholic products is quite an investment, since the production and distribution of alcohol is heavily regulated by the Canadian government.

Step 2: Fully develop the drink recipe and brand concept

What type of drink will be made? Will the drink be packaged in cans or bottles? What makes the drink unique? These are just some of the many questions shadow brands need to answer when developing a product. A shadow brand should have a clear vision of their product before approaching contract manufacturing facilities since it is difficult to make changes to a product once manufacturing begins.

Step 3: Find the right contract manufacturer for the product

No two contract manufacturing facilities are the same. Some facilities have bottling equipment, while others only have canning equipment. Shadow brands need to find a manufacturing facility that can produce the product they envision.

Along with ensuring that the facility can produce their product, the shadow brand will need to determine if the manufacturing facility can produce their beverage at a cost that enables them to make a profit. The cost of manufacturing is highly dependent on production requirements. For instance, ready-to-drink products, such as canned cocktails, usually only require mixing and can be packaged within a few hours.

Beer, on the other hand, requires brewing, mashing and fermenting, spanning several weeks to produce. Fermenting beer also requires tank storage. All these factors add to manufacturing costs. The size and production parameters of the manufacturing facility will also dictate the minimum order quantity.

Step 4: Negotiate the terms of the contract and sign it

A shadow brand must determine the details of their contract with the manufacturer. For example, some shadow brands purchase their own labels, while others will ask their contract manufacturer to purchase labels on their behalf. Manufacturers may be able to get a better deal since they order in bulk and often have larger discounts with suppliers.

Another important detail to consider in the contract is where the product will be stored. Contract manufacturers may be able to store the finished product for the shadow brand if they have the space, or the shadow brand may need to arrange for another storage space. Keep in mind that alcoholic products must be stored in a bonded warehouse. Shadow brands can apply for a bonded warehouse or hire another company to store and distribute their product.

Step 5: Get the drink into liquor stores

Once the beverage is manufactured, it’s time to get it into liquor stores. Shadow brands can hire liquor brand representatives to approach liquor stores to carry their product. When first approaching liquor store managers, bring product sell sheets or product samples to help managers decide whether they want to carry the product. Keep in mind that liquor store owners often ask for free bottles or additional perks for purchasing the product.

Establishing a good rapport with liquor store employees and managers may help sell more products, since employees can recommend the product to customers. This in turn can lead better shelf placement for the product. Generally, products placed at eye level tend to sell better than products placed very high or very low.

Step 6: Sell to customers

The work has only just begun once a shadow brand gets its product onto liquor store shelves. They will need to develop a marketing plan to spread the word about their amazing new product. This can entail creating a website and social media accounts for the brand. They can run online ads and promotions for their beverage, set up a booth at farmers’ markets and offer free tastings at liquor stores. It is all about getting the product in front of people and converting them into paying customers.

Step 7: Rinse, repeat and grow!

Once a shadow brand starts making sales and they are confident the product will continue to sell, they can go back to their contract manufacturer to make more product. As the drink brand continues to grow, they may even think of establishing their own brick-and-mortar manufacturing facility.

Weighing the pros and cons of starting a shadow brand

Establishing a shadow brand is a safer and less expensive way to start a drinks business. The main benefits for contract manufacturing a product are the cost savings and required expertise to operate a manufacturing facility.

“[Shadow brands] are not putting up the money to build and facilitate production, but at the same time they have to pay for that,” said Schafer. “Either they are paying perhaps more than they hoped, and their margin is shrinking and they’re getting [more] quality, or they can pay less and not get the quality that they were expecting…. It is a balance of cost versus quality.”

Shadow brands are also reliant on contract manufacturers to have the capacity to produce their products. During the busy summer season, manufacturing facilities may be operating near or at maximum capacity. So, either they might not be able to get their product made, or the price goes up compared to slower months when the facility has spare capacity.

Successful shadow brands usually transition from using a contract manufacturer to owning their own manufacturing facility over time, since owning a manufacturing facility allows the brand greater quality control, more reliable production schedules and higher profit margins.

Overall, contract manufacturing is an excellent way to test a drink concept, and to determine whether it is worth investing more time and effort. 

Kristine Hui is a professional distiller who has made whisky, gin and liqueurs in distilleries in the U.K., India and Canada. She helped to develop a rum recipe, which won a Silver medal at the 2021 International Wine and Spirits Competition. Most recently, she appeared as a contestant on Moonshiners: Master Distiller on the Discovery Channel. She is best known as Miss Brewbird on YouTube, where she documents her work in fermentation.

When and how did Goldenfield get started?

Ethan Chiti: The idea came into my mind right before COVID-19 at the end of summer 2019. I was thinking about it and I hadn’t even talked to anybody about it, but then COVID-19 came, so I had time to do more research. Every day, I became more interested in the craft brewery industry and started looking for the equipment. Then, I went to other breweries to see what they had online and in-person. It was my first time opening a brewery and a manufacturing business.

How did you manage to get the partners together?

EC: After I came up with the idea, I talked to my best friend and his brother. We always wanted to create a business together. They agreed to come on board and work together. Later on, we got introduced to [Canally] – actually, we kind of found each other – and we’ve been working together ever since.

Culum Canally: [Chiti’s] family in Iran owns a leather tannery and his best friend’s family owns a couple of flour mills. They had a manufacturing background, so that helps explain why he and his friends were so eager to get started in manufacturing.

“There are two different mindsets. There’s opening the brewery and the excitement of getting a project done. Then there’s running a brewery, which is the day-to-day slog of managing and growing a business.”

Culum Canally, Goldenfield Brewery

How did you choose your location?

EC: Right after we ordered our equipment, we had to start looking for a location because in order to get all the licenses we needed a location. We finally found [one] after about six months of looking.

CC: There was a concentration of breweries on the west side, and it was a lot more expensive [there], so there were fewer risks on the east side. The east side had good links to downtown and the rest of Toronto, so that was good for scaling for distribution and access to the tasting room.

What did you like about the building?

EC: One of the hardest things to find was a building with high ceilings because of the size of the tanks that we ordered. We needed at least 14 feet for the ceilings, which was not easy. The other thing about the building that I liked was I always wanted to have a standalone building. I didn’t want to get a space in something like a plaza, which is attached to [many] other units. There were offices inside the building when we started, so we had to take them out to make space for our equipment.

CC: We’re on the first floor, but it goes down into a sort of basement in the back because we’re on a bit of a hill. We’re essentially on a floating slab, where we were able to drill some holes for drainage. It can also take the load of the equipment. We have a nice loading dock out front that allows us to get easy access in and out for supplies and shipping.

What was the permitting and licensing process like?

EC: The very first permit that we had to apply for was from the AGCO (Alcohol and Gaming Commission of Ontario), which allows us to manufacture beer. We needed to get three licenses: A manufacturing license, a boiler gas license and a retail store license. It requires many documents, but we didn’t have a hard time. The most time-consuming license was the city license, so we could open our doors to the public.

CC: To add some context, in order to get our manufacturing license, we had to get our excise license from the CRA (Canadian Revenue Agency). It’s one of those weird scenarios where you have to apply for your manufacturing license, and then they give you a provisional license to brew the beer. You then brew a beer and submit it to the Liquor Control Board of Ontario (LBCO) for testing. They test it, and if they say it’s okay, you can then submit that to get your manufacturing license.

At that point, you can now apply for your excise license, which means that the CRA comes in – or in this case they do it virtually – where they measure your tanks and look at your equipment so they can have a baseline for what they’re going to tax you. This provides them with accurate information on the size and scope of your brewery. The CRA can then give you the excise license, which you can put in for the manufacturing license, and then you get your full manufacturing license.

So, it’s a bit of a back and forth. I think some of it doesn’t make much sense because you’re technically not allowed to open until you have your manufacturing license, but you need to submit a beer to LCBO for them to test it.

Did you have to open in phases because of this process?

CC: We started to phase in July 2023 when we got the taproom license, but we didn’t launch yet. We sold cans of beer, but we weren’t quite ready at that time to have a grand opening. It took a few months to plan and get our beer stock up. We also had to co-ordinate all the parts of having the grand opening, which didn’t take place until November. We had a packed house when we opened.

What sets your business apart?

EC: The first is the ownership and the second is that we are trying to introduce the craft beer industry to people that have not yet been introduced to the industry. Most of our customers who come into the brewery say it was the first time that they visited a brewery.

“When we sat down and did the marketing plan, the owners said they had a lot of friends who didn’t know about craft beer, but when they were introduced to craft beer they really liked it. They were not your traditional craft beer consumers so we came to the conclusion that this might be a growing market or an untapped market that Goldenfield is uniquely situated to target.”

Culum Canally, Goldenfield Brewery

CC: When we sat down and did the marketing plan, the owners said they had a lot of friends who didn’t know about craft beer, but when they were introduced to craft beer they really liked it. They were not your traditional craft beer consumers so we came to the conclusion that this might be a growing market or an untapped market that Goldenfield is uniquely situated to target because of the ownership coming from a non-traditional craft beer community like Iran. There are also a lot of networks within other new immigrant or first- and second-generation immigrant communities that aren’t traditional craft beer drinkers.

So, the idea was to focus on that target market first and foremost. We also wanted to develop a community that is based around our area. A lot of your market comes from within a small radius around the brewery. It just so happens that our area is fairly multicultural, so the ones who are walking by here come from all sorts of backgrounds.

What is the current beer line-up?

CC: Our beer lineup includes what we’re calling a Persian Pilsner, which is pretty much a Mexican Cerveza. But it’s with a twist of different flavours based on hops and just using hops as the flavouring. It has more grape and lime to it. We also have a solid amber ale and a solid IPA.

Strangely enough, we have a double IPA, which was an accident from our first brewing. We never really intended to brew a beer that strong, but people took to it. It was daunting to try and reproduce the same beer in the same method. We’ve gotten pretty close with our second batch and it’s selling well.

What advice do you have for someone thinking about setting up a craft brewery?

EC: The first advice from me would be that it takes longer than you think. It’s much longer and it’s a hard process. At the same time, it can be enjoyable because you will see that it’s growing.

CC: I would say there are different skills to open a brewery and to run one. I remember opening my first brewery and I realized the day after the grand opening that now we have to do this day in and day out. So, there are two different mindsets. There’s opening the brewery and the excitement of getting a project done. Then there’s running a brewery, which is the day-to-day slog of managing and growing a business.

I would also suggest creating as comprehensive a business plan as possible. That is the one thing that I think could be a game changer and forces you to think through a lot of your problems beforehand.