Co-Manufacturing in the Beverage Business

The wide variety of beverage products now marketed by the industry’s giants has encouraged the use of specialized co-manufacturing businesses and led to their growth. To discuss these businesses and their challenges and opportunities, GLG’s Sabah Kazi hosted a teleconference with Jim Meier, the former Vice President of Commercial Finance at Molson Coors Beverage Company and a longtime beverage industry executive. Below is a version of their conversation, edited for brevity and clarity.

What does the current landscape of the brewing industry look like, and what is driving co-manufacturing?

Over the last 10 to 15 years in the U.S. alcohol industry, beer consistently has been losing market share to spirits and wine. This trend has had a significant cumulative effect, leading the industry’s two top players, AB InBev and Molson Coors, to look at adjacencies to the beer category. In some cases, they may not have started with the manufacturing capability to produce those items, which created an opportunity for co-manufacturers such as City Brewing to enter the picture.

The other trend is that the beer industry has been more broadly defining “beer” over the past 5 to 10 years to include beer-like products such as Mike’s Hard Lemonade from Mark Anthony Brands and hard seltzers such as Truly from Boston Beer and White Claw, also from Mark Anthony Brands. Neither Mark Anthony Brands nor Boston Beer has the capacity to produce those brands themselves. The demand coming from the marketers of products without sufficient manufacturing capacity and the growth of microbrewers, who usually but not always have the capacity, has led to the growth of the co-manufacturing segment of the market.

Don’t the big players have sufficient manufacturing capacity?

For the most part, they do. In fact, they may have a bit too much capacity overall. But there are some smaller aspects of their production where they may not have gotten to the point where they want to invest in certain production capacities or packaging capabilities for specific products and a co-manufacturer can fill the void for however long they may need.

How will the industry fare if there is a recession?

During my career I’ve seen economic booms and busts, and each has had minimal impact on the industry. In more serious recessions, some consumers trade down a bit, but others trade up to enjoy a bit of an affordable luxury. It’s difficult to predict what will happen to sparkling water, energy drinks, and other categories. Demand can change very quickly.

Any other challenges you see as significant for co-manufacturers?

Supply chain disruptions and the higher cost of supplies remain a threat. Co-manufacturing contracts can be structured in ways to hedge some costs, such as aluminum, transportation, and energy. Those variables depend on the financial sophistication of the company as well as how willing they are to absorb some costs and have it affect the bottom line.

Is there a particular area where you see co-manufacturers having an edge?

Packaging. Co-manufacturers are in a very good position to invest in niche packaging ideas that others may not be. A co-manufacturer can apply a small idea across a wider customer base than even a company with a larger customer base might be able to do. It’s a dynamic that co-manufacturers like City have exploited in the past and have the potential to exploit in the future because consumer tastes evolve and can change quickly.

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About Jim Meier

Now an independent consultant, Jim Meier retired from Molson Coors in November 2018 after a 26-year career as a financial executive in the beverage industry. Most recently, he was Vice President of Commercial Finance and oversaw budgeting, financial reporting, forecasting, and marketing spending allocations for Molson Coors.

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This article is adapted from the GLG Teleconference “City Brewing: Business Update.” If you would like access to a transcript of this event or would like to speak with experts like Jim Meier, or any of our approximately one million industry experts, please contact us

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Questions Asked During the Teleconference:

• Describe the current landscape of the U.S. brewing industry. What’s driving co-manufacturing?
• What are the production capabilities of the big players in this marketplace?
• How was this industry impacted by the 2008 recession? Talk about its resiliency.
• How will beverage demand, especially in the areas of sparkling water and energy drinks, grow in the next few years?
• How has production capacity evolved and changed in the last few years?
• Describe the typical contracts with co-manufacturers.
• Are any post-pandemic trends likely to continue in the long run?
• How is City Brewing positioned in this market, and what are some of its growth drivers?
• How is its business model evolving?
• What are some trends around key categories?
• Any observations about customer concentration?
• Discuss supply chain disruptions and how rising input costs are impacting the business.
• How are City Brewing and the broad industry positioned from a labor standpoint?
• What are some industry innovations and technological advancements? Is there R&D?
• What are the trends regarding M&A and consolidation?
• What about co-packers?
• What are the growth opportunities for City Brewing?
• How do you see City Brewing positioned over the next three to five years?