As alcohol beverage producers—whether brewers, wineries, or distillers—look for cost-effective and efficient ways to scale their operations, co-packing, custom crush, and contract production arrangements provide valuable solutions. These outsourcing options allow producers to leverage third-party expertise and facilities while retaining control over their brand and product.
This blog post provides a comprehensive overview of how these production models work, typical legal considerations, who owns the brand, and who is responsible for selling the finished product. Additionally, we’ll explore what should be included in contracts and the pros and cons of each model.
What Are Co-Packing, Custom Crush, and Contract Production?
These terms define different—but fundamentally similar—ways alcohol producers can outsource various aspects of the production process:
- Co-Packing: Co-packing generally involves a brand owner outsourcing the manufacturing, bottling, and packaging of their alcohol to a third-party company. The co-packer follows the specifications provided by the brand owner, who supplies the raw materials (grapes for wine, hops for beer, or spirits ingredients). Co-packers handle everything from production to packaging, but the brand owner retains control over the brand and marketing.
- Custom Crush: Custom crush is specific to the wine industry. In this arrangement, a winery contracts a larger facility to crush, ferment, age, and bottle the wine made from their grapes. This is an excellent option for smaller wineries or new entrants to the wine market who want to utilize a well-established facility without the overhead costs of maintaining their own production equipment. The custom crush facility handles production but the brand owner maintains control of the final product.
- Contract Production: Contract production is a broader arrangement where a producer or brand owner outsources all or part of the production process. In this model, a brewery, distillery, winery, or brand owner contracts a third-party facility to produce alcohol according to their specific recipe, ingredients, and production methods. The brand owner is responsible for sales and marketing, while the contract producer only manufactures the product.
How Do Co-Packing, Custom Crush, and Contract Production Work in Practice?
These models allow businesses to save on overhead costs, scale operations, and access specialized production facilities. Here’s how each works:
- Co-Packing or Contract Production: In most instances, the brand owner provides the recipe, raw materials, and specifications for the product (although some of these items may be provided by the co-packer depending on the arrangement). The co-packer then manufactures or processes the alcohol, bottles it, and adds labels according to the brand’s instructions. While the brand owner retains control over the final product’s design and marketing, they do not handle the day-to-day manufacturing.
- Custom Crush: A winery supplies the grapes, and the custom crush facility processes them into wine. The facility manages fermentation, aging, and bottling, while the winery retains ownership of the final product and its branding.
Who Owns the Brand for the Alcohol Produced?
One of the key elements to clarify in any co-packing, custom crush, or contract production arrangement is who owns the brand of the finished product. Generally speaking, the brand owner usually retains full control over the intellectual property (“IP”), including the product name, logo, trademarks, and marketing materials. Here’s what to know about brand ownership:
- Brand Ownership: Typically, the brand owner retains exclusive rights to the product’s brand and IP. For example, if a brewery hires a contract producer to brew beer, the brewery typically will retain ownership of the brand, including the beer’s name and logo.
- Licensing of IP: In some cases, the co-packer, custom crush facility, or contract producer may use the brand’s intellectual property for production purposes. In such cases, a licensing agreement is usually drafted to outline how IP will be used and who holds the rights.
- Labeling: The contract should specify the ownership of the labels. While the third-party producer may handle the physical act of labeling, the brand owner usually retains control over the design, trademark, and any other brand elements on the label.
Who is Responsible for Selling the Finished Product?
While co-packing, custom crush, and contract production agreements focus on manufacturing, the responsibility for selling the finished product typically lies with the brand owner. Here’s how it works:
- Brand Owner’s Role: The brand owner is responsible for marketing, sales, and distribution. They handle relationships with distributors, retail outlets, and consumers. The brand owner must also ensure compliance with local, state, and federal laws for alcohol sales, including obtaining the necessary licenses and paying excise taxes.
- Co-Packer’s Role: The co-packer, custom crush facility, or contract producer generally will not handle sales. The co-packer is responsible for manufacturing and ensuring that the product meets the specifications agreed upon. In some cases, the third-party producer may provide advice on quality control or packaging, but they are not involved in the selling process.
What Laws and Licenses Apply?
The production and sale of alcohol are highly regulated and businesses must comply with both federal and state regulations. Key licenses and laws include:
- TTB Permitting: All alcohol producers and bottlers must obtain the appropriate federal permits from the Alcohol and Tobacco Tax and Trade Bureau (“TTB“). These include the Brewer’s Notice for beer producers, the Distilled Spirits Plant (“DSP”) permit for distilleries, and the Bonded Winery license for wine producers. The brand owner in a contract production relationship also typically needs a TTB federal basic permit.
- State Regulations: In addition to federal licensing, alcohol production and distribution are regulated at the state level. State agencies like the California Department of Alcoholic Beverage Control (“ABC“) or New York State Liquor Authority (“SLA“) enforce rules about alcohol production, sales, and distribution. These agencies may require both the brand owner and the third-party producer to hold specific licenses. The requirements fluctuate by state so it is important to check with the corresponding state to ensure compliance.
- Excise Taxes: Excise taxes are levied on alcohol products at the federal and state levels. It is important to review the proposed route to market to determine which party is responsible for paying federal and/or state excise taxes.
What Contracts Are Needed?
Clear and comprehensive contracts are essential to ensuring that all parties understand their roles and obligations. Below are some general ideas of what should be included in an agreement (not an exhaustive list).
- Co-Packing Agreement: Specifications for the production process, including raw materials, quantities, and packaging; terms regarding the use and protection of the brand’s trademarks and logos; detailed procedures for quality assurance and compliance with the brand owner’s standards; payment terms, such as costs per unit, payment schedules, and any minimum order requirements; and liability and Insurance (terms specifying which party is responsible for any production defects, accidents, or damage to goods).
- Custom Crush Agreement: Terms related to the delivery of grapes, including any storage or handling instructions; detailed production steps from crushing to bottling (including storage, aging, and blending); payment terms (such as pricing for each phase of production (crushing, fermentation, and bottling)), as well as payment schedules.
Pros and Cons of Co-Packing, Custom Crush, and Contract Production
Pros:
- Cost Savings: Reduce the capital investment required to set up a full production facility.
- Scalability: These models make it easier to scale production to meet demand.
- Access to Expertise: Take advantage of the specialized knowledge, equipment, and facilities that contract producers or co-packers provide.
- Focus on Branding and Marketing: Since the co-packer handles production, the brand owner can focus more on marketing, sales, and brand development rather than day-to-day operations. This can be especially advantageous for growing businesses or those looking to enter new market.
Cons:
- Loss of Control Over Quality and Production Processes: When working with a co-packer, custom crush facility, or contract producer, brands can experience reduced control over production methods, quality standards, and consistency. This can make it challenging to maintain the brand’s identity and product integrity, particularly if the third-party producer does not share the brand’s vision and standards.
- Potential for Production Delays and Supply Chain Disruptions: Outsourcing production to a third-party can result in delays due to capacity constraints, scheduling conflicts, or production bottlenecks at the third-party facility. These delays can affect inventory levels, sales, and overall business planning.
- Higher Costs Compared to In-House Production: While co-packing, custom crush, and contract production arrangements offer cost savings on upfront investments, ongoing production costs can be higher per unit compared to in-house production. This can impact overall profitability as the brand grows.
Alternatives to Co-Packing, Custom Crush, and Contract Production
In addition to co-packing, custom crush, and contract production, alcohol producers may explore the following options:
- Alternating Proprietorship: This model allows multiple producers to share a production facility while maintaining separate operations. It can be an excellent option for smaller producers seeking flexibility in facility usage without a significant capital investment. For more information about the Alternating Proprietorship see our blog post Understanding Alternating Proprietorships in the Alcohol Beverage Industry: What You Need to Know.
- In-House Production: If a producer has the resources, they can invest in their own production equipment and facilities, giving them full control over production. This option requires more upfront capital but offers greater control over the process.
Deciding between Alternating Proprietorship vs and-Packing, Custom Crush, and Contract Production
An Alternating Proprietorship is generally more advantageous over Co-Packing, Custom Crush, or Contract Production when you want to maintain greater hands-on control over production, scale gradually, and/or better protect intellectual property. It works well for those looking for flexibility and the ability to independently manage their operations while benefiting from shared facilities.
However, if you’re looking for a more hands-off approach or need to leverage the expertise and resources of a co-packer without direct oversight of production, co-packing might be the better choice.
Ultimately, the decision should be based on your specific business goals, resource availability, costs associated with each business model, and long-term growth strategy. Consulting with an alcohol beverage attorney can help you navigate these options, draft the necessary contracts, and ensure compliance with both federal and state regulations.
How can Lindsey Zahn P.C. Assist with an Co-Packing or Custom Crush Relationship?
Co-packing, custom crush, and contract production arrangements offer valuable opportunities for alcohol beverage producers, especially those looking to scale operations efficiently and manage production costs. These models allow brewers, winemakers, and distillers to leverage external expertise and resources without the substantial investment in equipment or facilities. However, navigating the complexities of brand ownership, production timelines, and regulatory compliance requires careful attention.
To ensure these arrangements are structured properly, alcohol beverage businesses must secure the appropriate licenses and create comprehensive contracts that clearly define roles, responsibilities, and liabilities. Whether you are a small brewery looking to co-pack your beer or a winery considering custom crush options, it’s crucial to partner with an experienced alcohol beverage attorney.
A skilled attorney can help you secure the necessary permits, draft clear contracts, and ensure full compliance with federal and state regulations, so your business can thrive in a competitive and highly regulated industry. Contact an alcohol beverage attorney today to guide you through the complexities of co-packing, custom crush, and contract production arrangements and help you protect your brand and business interests. Reach out to Lindsey Zahn P.C. for an introductory meeting to discuss your project at 929-ZAHNLAW or info@zahnlawpc.com.