September 11-15, 2017

The Spirit of Invention

You all know the familiar refrain. For decades beer has been surrendering considerable market share to spirits (as well as wine). It’s seemed that the one upbeat narrative the beer industry could hang its hat on has been the explosive resurgence of craft brewing during the past decade. But it seems these days the spirits category has been attempting to steal a little of that thunder as well with the emergence of its own artisanal arm.

“Macro consumer trends are pointing to the search for new experiences with the products that are consumed,” says Brian Sudano, managing partner of Beverage Marketing Corporation and BMC Strategic Associates. “That’s what’s supporting craft beer. And at the same point you’re starting to see the movement toward craft distilled spirits.” 

In many ways, the similarities between what’s going on now with artisanal distilling and craft brewing’s origin story are striking. Think back to the late ’80s and early ’90s when craft beer had its initial boom. “[Craft beer] was really little and then it started to gain momentum,” recalls Sudano. “It took a while before it hit about two and a half share, flattened out for 10 years and then grew again. We’re starting to see similarities with craft spirits that we saw with craft beer in the ’80s and ’90s.”


The Latest Tally 

The exact number of craft distilleries in the country varies, depending on whom you’re asking. According to Bill Owens, president of the American Distilling Institute (ADI), which represents craft distillers, there are 400 craft distilleries in the U.S. (and a good 20 or so more in Canada) with another 50 or so under construction. (That’s still relatively small in comparison to the number of craft breweries in the U.S.—about 2,100 at last count, with another 1,200-plus in planning.)

However, Dave Pickerell, the former master distiller at Maker’s Mark, who now runs Oak View Consulting and has had a hand in the launch of some 23 operating craft distilleries with another six or seven in the works, says that 400 figure represents the number of permits that have been issued. The number of distilleries producing at this point in time is probably 100 fewer than that. “Some of those [400] have permits but no operations right now,” Pickerell explains “Some of them are what we call merchant bottlers—they go and get the spirits and they bottle it, but someone else is distilling it.”

The merchant bottler concept is not unlike contract brewing in the beer realm. “There are a lot of people whose model is to start out by bottling up what I refer to as ‘found whiskey’ and create a brand,” Pickerell says. “And the goal is to use the profits that that generates to start funding the building of the distillery. So, discount 25, 30 who have permits but aren’t really doing anything yet, discount another 50 or 60 for people that are bottling but not distilling and the real number is closer to 300 where there’s really distilling going on.” 

That being said, craft distilling, Pickerell observes, is “absolutely on fire,” with a new craft distillery opening up about once every other week.


A Question of Identity

As it has been with its brewing counterpart, craft distilling has wrestled somewhat with identity issues. The breweries worthy of the craft designation, according to the Brewers Association (BA), are independent (less than 25 percent owned or controlled by an alcohol beverage company that’s not itself a craft brewer), use traditional methods—with an all-malt flagship brand or at least half of its volume from brews that are all-malt or use adjuncts “to enhance rather than lighten flavor”—and are small. The definition of “small” has been tweaked recently. There used to be a 2 million barrel ceiling, but the BA raised it to 6 million, largely because Boston Beer Co. had outgrown that 2 million barrel threshold. 

On the distilling side of the artisanal world, the criteria are a little more open to debate. ADI’s definition caps production at 65,000 proof gallons or about 34,000 cases a year. But even Owens concedes that that threshold could change. “Now we’ve got two or three people bumping up against that, so I’m sure we’re going to raise it to 100,000 cases,” Owens reveals. “You’ve got to remember 100,000 cases is an experimental batch done by one of the bigger distilleries. They’ll roll out 100,000 cases of vodka just to test the market. For a [small] distiller to do 100,000 cases, you’d be quite wealthy.”

To complicate things further, each state has its own idea of what constitutes a craft or micro distiller. “Some [states] say it’s 50,000, some say it’s 65,000, some say it’s 100,000 and some of them have ginormous limits,” says Pickerell. “When you actually go state by state, it’s about what the state is willing to give a license for. At the federal, it doesn’t matter, there’s no such thing as a craft license at the federal level.”

There are parameters other than volume, of course, but those are much harder to gauge in concrete terms. “Certainly it’s [about] mindset and outlook,” offers Pickerell. “But I don’t know how you quantify entrepreneurial spirit to separate a big boy from a little guy.” 


Political Economy

There are a couple of factors—in both the public and private sectors—that have been helping craft distillers grow and likely continue to do so for the foreseeable future. On the public front, it’s the states themselves, as elected officials begin to recognize the economic advantages craft spirits producers create in their states. 

“The more progressive states are beginning to realize there’s tax revenue, there’s tourism revenue, there’s jobs,” notes Pickerell. 

He points to Oregon as a prime example of a state whose laws are friendly to artisanal distilling (not to mention craft beer, as SymphonyIRI has reported that craft represents close to 40 percent of overall beer revenue in the state). 

“If you draw a circle 30 minutes from the center of town in Portland, there are 24 distilleries,” he points out. 

Craft activity also is ramping up in the Northeast/Mid-Atlantic region. “It’s just getting started, but New York is exploding because New York has figured it out,” Pickerell observes. “There are distilleries all up and down the Hudson Valley now and as states figure it out, the industries begin to explode.” 

There’s been a significant change in climate on the private front, as well, as spirits distributors increasingly embrace the artisanal upstarts—a shift similar to what happened with craft beer. The contrast between the distributor-distiller dynamic of today versus in 2005 when Philadelphia Distilling was just getting started couldn’t be any starker, says the distillery’s co-founder Andrew Auwerda. “When we first started pitching distributors, they didn’t really know what craft distilling was; they didn’t think of it as a separate thing,” recalls Auwedra. “People would roll their eyes when I said micro-distilling or craft distilling. I’d make an analogy to craft brewing and they’d say, ‘Oh, I get it, you’re small.’” Fast-forward seven years and most of Philadelphia’s distributor partners have separate divisions or at least separate selling teams devoted to craft. That’s another aspect in which recent changes in the spirits distribution landscape mirror the evolution on the beer-wholesaling side of the beverage alcohol business.  

“[Distributors] are realizing that [craft spirits] may not be paying the bills today, but some of these brands are going to be the big brands of the future,” Auwerda asserts. “I think they kind of wised up to how craft brewing’s been over the past five years. They’ve given [craft spirits] more attention than they were and a more professional look at it.” 

The folks at Maine Distilleries, makers of Cold River vodka, have experienced a similar transformation with their distributor partners. That company formed in 2003, experimented for a couple of years and produced its first batch of what would become Cold River in 2005. Since then, there’s been a marked shift in the amount of attention its wholesalers have been paying to Maine’s brands. The distributors really started to change their tune when they began to realize that the small distillery wasn’t going to be a flash in the pan. 

“We’d gone with a couple of large distributors that treated us fine, but really didn’t pay attention to us until we were around for a while—until they knew we were serious and had some staying power,” remembers Chris Dowe, CEO of Maine Distilleries. “We always had a good product, but it took a full five years for these distributors to really pay attention and really start talking to their sales force, even though we were visiting them every month and going to their meetings.” 

On the opposite coast, Click Wholesale Distributing, headquartered in Kent, Wash., has made a name for itself over the past decade distributing craft beer and fine wine throughout Washington State. On March 1, 2012 it added spirits to its product mix. That was the first day it was legal for a private company to distribute distilled spirits in Washington after voters last November approved privatization in the erstwhile control state. In fact, at 9 a.m. that day, Click became the first company since the repeal of Prohibition to be able to legally do so. And since the state is a hotbed of activity for craft distilling activity—as well as craft beer and fine wine—Click has taken on a fair number of artisanal spirits brands. 

“[Craft distilling] is growing very rapidly,” observes Click president and co-owner Rick Steckler. “We see a lot of similarities to craft beer from quite a while ago, maybe 15 or so years ago, where there are fledgling craft distillers who are very passionate, very creative, finding their way in the world of beverage sales.”

At last count there were a total of about 60 distilleries either currently operating or about to open in his state. 

Steckler says he’s witnessed a wide range of quality and marketing knowhow among startup spirits producers. “[There are] some that really don’t appear to have a good grasp on it and others that, right out of the gate, are very good at it,” he offers. 

However, one clear distinction Steckler sees between micro-brewed beer and micro-distilled spirits is that the latter require a stronger consumer and retailer education effort. “I think it’s going to be a bit of a bigger learning curve to get consumers to switch over from what’s so ingrained and what they’re used to on the spirits side—their call brand or favorite brand, or they’re not even thinking of spirits as being branded as much, whereas there’s a high degree of interest in craft beer, who or what’s behind the brand. When a patron walks into a bar, they look at the tap handle selection, they look at the list and they really want to try the new, cool stuff with brands that have really been making some waves. With spirits, we’ve got a longer road to get to that point, but it’s happening.” 


Riding the Tailwind

With all of the momentum behind craft spirits in 2012, what’s the market going to look like in, say, 2017 or 2022? If the market continues on its current trajectory, is it possible that craft distilling could be as much of a force within the spirits world that craft brewing is today—approximately 6 percent of volume and climbing—in the context of the broader beer market. “Not necessarily,” says BMC’s Sudano. “The biggest difference,” Sudano points out, “is that spirits core brands, the big ones, are still growing.”

Jack Daniel’s, for instance, still posts year-on-year volume gains, as does Smirnoff, albeit largely from flavor extensions. The same can’t be said for beer, where macro premium domestics like Budweiser and Miller Lite continue on downward trajectories. 

“The large branded products in spirits are still growing,” Sudano notes. “You don’t see that in beer. That’s why you see the acceleration in the fragmentation of beer because they’re taking it out of the major brands. You don’t see that yet in spirits. But on a macro basis, the characteristics are very similar. So I would expect [craft spirits] to continue to grow.”

There certainly will be considerably more players over the next several years. It’s no great stretch of the imagination to anticipate a distillery census that numbers in the quadruple digits before the current decade is over. “There are 5,000 cities in America,” says ADI’s Owens. “If one in five cities could have a small distillery in it, we could get to 1,000.”

And despite all of the very obvious comparisons that have been made with craft brewing, Owens is confident that there’s one aspect that will be different for craft distilleries. He points to his own experience as a former brewery owner—Buffalo Bill’s Brewery.

“When I had my brewery back in the ’80s, a lot of people started up and a lot of people failed,” he remembers. “I’ve been doing ADI for 10 years and I think I’ve only seen four people go out of business. It’s not people saying let’s start a distillery and see what happens. It’s people who have a strong commitment to the idea and to the money. They put their money where their mouth is and they’re in it for the long haul. [These] people have it in their DNA.”   

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