(Bloomberg) -- Waterloo Brewing Ltd. has spent eight years and C$85million ($64 million) expanding its facilities, all so it can make booze for someone else.
The Ontario-based company, which got its start making craft lagers 40 years ago, wants to be the go-to producer for global brands selling everything from hard seltzers to canned cocktails in Canada. In the next two years it plans to more than double the volume of beverages it’s producing for other brands -- known in the industry as co-packing -- to 650,000 hectoliters from around 300,000 hectoliters this year.
Its craft brew business is still growing -- Waterloo’s namesake brands posted volume growth of 25% in its most recent quarter -- but even those gains can’t keep pace with the demand the company is seeing from global conglomerates, like Pernod Ricard SA and Carlsberg AS. Seeking to expand the reach of the beverage brands they’ve snapped up in recent years, these ever-growing giants are also looking for ways to trim costs.
At the other end of the scale, Waterloo is getting an additional boost from new hard seltzer companies and other beverage startups, keen to focus on marketing and leave production to someone else.
“Our owned brand volumes continue to grow, but the exponential growth is in our co-pack business,” Chief Executive Officer George Croft said in an interview.
It’s a major transformation for a company that barely had a toehold in the co-packing business when Croft came aboard 12 years ago. (His previous employer, Canada’s storied Labatt Brewing, is now owned by much larger Belgian beverage giant Anheuser-Busch InBev SA.)
Founded in 1984, Waterloo Brewing claims to be the first craft brewery in Ontario. Originally called Brick Brewing, after founder Jim Brickman, it was renamed last year in homage to the Ontario region where it’s based.
Waterloo produces a stable of traditional craft-beer styles, including a golden lager, an India pale ale, as well as dark and amber lagers that for close to forty years have been the choice of customers who wanted bolder flavors than those provided by mass-produced brews.
Since Croft came aboard, it has expanded beyond beer with the purchase of the Canadian rights to Seagram coolers, as well as the LandShark and Margaritaville brands. It also has co-packing deals to manufacture Absolut Vodka’s canned cocktails, Somersby ciders and Mott’s Clamato beverages, along with nine other undisclosed brands, in Canada.
While it’s difficult to find hard figures, co-packing has become increasingly common for large beverage companies that want to quickly capitalize on hot new drinks trends and keep their costs low, said Kenneth Shea, an analyst at Bloomberg Intelligence.
“Co-packing is a vibrant activity involving most of the large beverage companies -- as packer or customer-- exacerbated by the rush into the fast-growing hard seltzer business,” Shea said.
Waterloo’s further expansion plans for the next two years will almost double Waterloo’s annual production to 1.2 million hectoliters in fiscal 2023. By then, co-packing will represent about 54% of the company’s volume, from 46% currently.
Current contracts are locked in so barring a sharp decline in alcohol consumption in Canada, or specifically beer, which still accounts for about 55% of total volume, Croft sees few risks ahead. The brewer-for-hire model mitigates the risk of consumer tastes changing and allows it to benefit from new trends while leaving the marketing to their clients.
“People that are getting into the seltzer business are saying, ‘Geez, I know how to build brands, I understand the route to market, but why would I build a facility, why would I take on that complexity?’” Croft said.
There’s also scope to diversify through acquisitions, once the expansion is complete and capital spending drops back to C$4 million to C$5 million a year, Croft said. He expects to be on the hunt in the next 12 to 24 months; the ideal candidate would be a branded business with excess manufacturing capacity and the ability to expand production from around 250,000 hectoliters to as much as 500,000 hectoliters, Croft said.
He’d also like to add geographic diversity by targeting companies in the western provinces of Alberta and British Columbia.
“We don’t want to have all our eggs in one basket,” Croft said. “So if we do get a red light in one piece of our business, it’s not a paralyzing issue.”
©2020 Bloomberg L.P.