Can small spirits producers stay on a roll?
The U.S. craft spirits business has increased exponentially during this decade, growing from fewer than 200 distilleries to more than 1,700, according to the industry’s trade association. The increase has been fueled by legal changes in many states that make it possible for craft distillers to sell their product directly to consumers. New York state pioneered these changes with a “farm-to-flask” law that made it relatively easy for farmers to distill and market spirits using their home-grown produce. At least 13 other states have followed suit, swayed by the potential of the craft spirits business to generate jobs and economic opportunities in agriculture, tourism and other fields. A 2017 reduction in the federal excise tax on distilled spirits also has facilitated growth. One potential obstacle startups face is the need to properly age some craft spirits, such as whiskey; this has led some new distillers to buy someone else’s product and sell it as their own, creating the potential for brand confusion.
Here are some key takeaways:
Millennials are a key target market for craft spirit producers because of their preference for unique and varied alcoholic beverages.
As the number of craft distilleries has grown, the industry’s employment footprint has increased as well, more than tripling between 2014 and 2017.
Unlike craft beer producers, craft spirits distillers are less likely to have an adversarial relationship with the bigger, established companies in their industry.
When Kings County Distillery opened its doors and began producing whiskey in 2010 out of a small facility in the East Williamsburg section of Brooklyn, it was the smallest commercial distillery in the United States. It also was the first distillery of any kind in New York City since Prohibition.1
At that time, there were fewer than 200 craft distilleries – defined as those producing 750,000 gallons or less annually – in the United States.2 Now, less than a decade later, the number of small U.S. spirits producers has exploded, to 1,589 in August 2017, up 20.8 percent from the year before, according to a report by the American Craft Spirits Association.3 Today, the number of small producers tops 1,700, says Margie A.S. Lehrman, the association’s executive director.
That growth is no accident, says Nicole Austin, who was a master blender at Kings County Distillery from 2010 to 2016. In the past 10 years, changes in state laws and regulations have facilitated the growth of craft distilleries, says Austin, who is now general manager & distiller at Cascade Hollow Distilling Co., which produces George Dickel Tennessee Whisky. (Dickel is not considered a craft distiller because it is owned by Diageo PLC, a British multinational company.) Increasingly, lawmakers realize that craft distilleries create economic opportunities and jobs in agriculture, tourism, manufacturing, hospitality and even transportation and graphic design, says Austin. As a result, craft distilleries, once treated as a stepchild by state officials, have become a favorite.
One big change involved laws in many states, dating from the end of Prohibition in 1933, that made it difficult for craft distillers to obtain a license to operate a distillery or sell their product directly to customers. For instance, some state laws bar distillers from offering visitors a cocktail or selling a bottle of their spirits on-site, Lehrman says.
“Imagine starting a bakery and having the state tell you that you can’t sell your muffins directly to the consumer,” Austin says.
New York state was a pioneer in making it easier to open a distillery: In 2014, it passed a “farm-to-flask” law that allows farmers to distill and sell spirits using their own produce without expensive licenses or distribution requirements.4 The law also allows distillers to sell their own product at a farm store and to offer tastings, without using a wholesaler, if they use locally grown ingredients.
New York’s craft distillers benefited from being in a state with a strong agriculture department and a prosperous wine industry, Austin says. State legislators saw how agriculture and tourism benefited from New York’s wine industry, which made them receptive to appeals from craft distillers, she says. Parity with the wine industry “is a strong argument,” Austin says.
Across the country, distillers have pointed to the success of New York’s farm-to-flask law and lobbied their legislatures to enact similar laws. At least 13 states have passed similar laws easing restrictions on craft distillers.5
Watch video with John Alvardo of Corona on Millennials and the alcoholic beverage market:
Much of the growth in the market for craft spirits comes from Millennials, those born roughly between 1980 and 2000. Millennials have a rising preference for unconventional drinks, which could further boost the demand for craft spirits, according to a 2017 report by Grand View Research, a San Francisco market research firm.6
“In the United States, Millennials account for approximately 32 percent of the total consumption of craft spirits,” says Jishnu Varma, a senior research analyst at Grand View Research. They are the most lucrative consumer segment, and they generate a sizable demand for innovative and premium beverages.
Instead of drinking craft beer or wine, many Millennials are choosing to drink craft spirits, Austin says. “They are not single-brand drinkers. They want a variety of experiences, and that is driving the market,” she says.
For Millennials, it’s about the pursuit of unique local products, Lehrman says, and craft spirits provide that experience. The most popular craft spirits include vodka, gin, whiskey, rum and brandy, she adds, with vodka being the easiest to make because it does not require time to age as whiskey, rum and brandy do.
Distilled spirits make up about 7 percent of the $117 billion market for sales of alcoholic beverages, according to Park Street, a Miami-based company that provides consulting services to alcoholic beverage companies.7 While the craft share is still small, the American Distilling Institute has forecast that craft producers could account for 8 percent of the distilled spirits market by 2020.8
Employment also has been rising, as have investments in the industry, according to the American Craft Spirits Association.9 The 2017 tax legislation that lowered the federal excise tax on distilled spirits has spurred hiring and investment in the industry, according to Lehrman.10
Despite the big increase in the number of craft distilleries, the market is fairly concentrated, with nearly 2 percent of the larger craft producers (defined as those who produce between 100,000 and 750,000 gallons) accounting for 57 percent of cases sold, the American Craft Spirits Association report said. Just five states – California, Colorado, New York, Texas and Washington – account for 34.2 percent of craft distillers.11
The craft spirits association defines a craft distiller as one who produces no more than 750,000 proof gallons annually and is independently owned and operated.12 The 750,000-gallon limit means that brands many consumers once considered to be craft, such as Tito’s Handmade Vodka, produced by Texas’ first legal distillery, no longer qualify as a craft spirit, says Harry Kohlmann, CEO of Park Street. In 2016, Tito’s recorded volume sales amounted to about 3.8 million 9-liter cases in the United States.13
As more states liberalize laws pertaining to distilleries, Lehrman, the craft association director, says she expects an increase in the number of craft distilleries. “It really will depend on how much state legislatures are educated to help allow for not only the production of craft spirits but also the sale and distribution on premise,” she says. For instance, Lehrman says, not all states allow craft distillers to handle the sale of their own product.
One state that is ripe for an expanding distillery market is Virginia, Lehrman says. Recently, nearly 30 craft distillers in Virginia joined to create the Virginia Distillers Association to lobby the state legislature and promote their products to consumers. The state has begun to eliminate laws, such as the one that required distilleries to have a driveway off the main highway at least 100 yards in length. Such a requirement might make sense for a large producer with a fleet of trucks, Lehrman says, but is unnecessary for a small craft distiller.
The number of full-time employees of U.S. craft distillers has risen from less than 6,000 in 2014 to more than 19,000 in 2017, according to the craft spirits association report.14 Kohlmann says the industry’s total economic impact may be closer to 100,000 jobs when positions created outside the distillery in farming, tourism, hospitality, transportation, manufacturing and graphic design are taken into account.
Craft distillers and local farmers have had a significant impact on each other, in part because of the farm-to-flask laws that give distillers a competitive advantage if they use local produce. In New York state, craft distillers qualify as farm to flask if they use a majority – 70 percent – of agricultural products grown in their state, according to Austin, the former Kings County Distillery blender.
Other states that offer distillers lower licensing fees or allow them to sell their own products if they use local produce include Arizona, Connecticut, Delaware, Georgia, Indiana, Massachusetts, Minnesota, Virginia and West Virginia.15 As a result, many craft distillers contract with local farmers to buy specific heirloom grains and fruits to produce their spirits, Lehrman says.
Craft distilleries also have played a role in bringing economic development to industrial neighborhoods that have been abandoned, Lehrman says. For instance, in northeast Washington, several distilleries located in a neighborhood along New York Avenue, the site of a warehouse for a defunct department store. Since three distilleries opened, restaurants, luxury apartments and retailers have followed.16
However, one of the challenges of starting a distillery is that the product is not immediately available for sale, particularly if it is whiskey, which requires time to age. “The vast majority of craft whiskey being sold is made in Kentucky or Indiana,” says James Rodewald, author of “American Spirit: An Exploration of the Craft Distilling Revolution.” “You buy a tanker truck full of whiskey, stick it in your barrel for a few months, and then bottle it with your own label.”
Some craft distillers will do this while they wait two to three years for their own whiskey to age because they need a product to sell to stay in business, he says. The problem, Rodewald says, is that they are branding and selling something as their own but, ultimately, their product might not taste the same. Will customers notice? It’s a dilemma, he says. In fact, Lawrenceburg, Ind., is known for cranking out distilled spirits and selling them in bulk to nascent distilleries.17
Tax Cut Provides a Boost
The reduction in federal excise taxes, which dropped the tax from $13.50 to $2.70 per gallon for the first 100,000 gallons, has been a major boon to small distillers. Although the tax cut is set to expire in two years, distillers hope the law will become permanent. “Thousands of businesses that weren’t profitable before are now,” Austin says.
Maggie Campbell, master distiller for Privateer Rum in Ipswich, Mass., agrees. “The recent federal excise tax has meant everything to our business,” she says. “The day it passed, we sat down and made a plan for how to use that money wisely.”
Before the new law, Privateer was paying $1,272 in tax for every pallet of True American Amber Rum, before it was even sold to customers, she says. “Now we pay $254, for a savings of $1,018,” she says. “In a month, we sell about eight pallets. This makes a savings of $8,144 a month or $97,700 a year.” That savings has allowed Privateer to hire three new employees and offer its staff improved health care benefits. The new tax law has enabled FEW Spirits, a gin and whiskey distillery in Evanston, Ill., to hire three additional employees and to purchase bottles in the United States instead of overseas, says founder Paul Hletko.
Craft distillers readily acknowledge that the excise tax reduction would not have passed without the help of large distillers. “It’s not a view that is shared by everyone, but many craft distillers see that we have to work together to get things done,” Campbell says. “They aren’t our enemy, but maybe our future investors.” In recent years, a number of large producers have purchased smaller distilleries. Constellation Brands acquired High West Distillery for $160 million, Pernod Ricard made separate deals with Monkey 47 gin and Avión tequila and Bacardi purchased Angel’s Envy bourbon.18
Craft distillers have a certain amount of respect for big distillers, says Kohlmann. “Many craft distillers once worked at a bigger spirit brand and then went into business for themselves, so the relationship is more cordial” than the one between craft brewers and large beer producers, he says.
One of the biggest differences between the craft beer and craft spirits industries is that the craft beer movement was born out of a desire to shatter homogenized beer styles, such as light pilsners and lagers, and introduce U.S. consumers to new, flavorful beer styles such as India Pale Ales and stouts.
Although the craft beer industry grew by double digits annually from 2004 to 2015, its growth slowed to 5 percent in 2017, according to the Brewers Association, an industry group.19 And the growth of the overall beer industry is down 1 percent.20 From the start, there was a natural tension between large beer distributors such as Anheuser-Busch InBev and independent craft brewers. The industry giant fought craft brewers for market share, particularly as the beer market has been shrinking.
Even brewers admit that beer may be losing its market share to craft spirits. Last year, at the National Beer Wholesalers Association convention, Heineken USA CEO Ronald den Elzen and Anheuser-Busch CEO João Castro Neves said that their beer has been losing market share to wine and spirits. Elzen acknowledged that the beer industry, as a whole, has lost 35 million barrels – or 11 billion servings of beer – to wine and spirits over the past 20 years.21
And some breweries are starting to make craft spirits as well. Well-known beer brands such as Dogfish Head, Rogue and Anchor Steam are using their fermentation skills to migrate to the spirit side of the business, introducing beer drinkers to craft spirits.
What Does the Future Hold?
Given the market predictions for premium spirits, it should come as no surprise that breweries are trying to expand into the craft spirits market. The global alcoholic spirits market is predicted to have a compound annual growth rate of 3.36 percent from 2018 to 2026 due to a rising demand for premium spirits, according to Inkwood Research, a Boston-based market research firm.22
Although Kohlmann expects the craft distillery industry to continue growing, he warns that it is not realistic to expect growth to continue at its current 20 percent annual rate. He also said he doubts that the craft spirits market will ever grow as large as craft beer.
“Some of the regulations aren’t as favorable for craft distillers as craft brewers, so it’s a steeper uphill battle,” he says. With only a minority of states relaxing their laws to allow distillers to obtain a license to operate a distillery or allowing them sell their product directly to customers, it is difficult for distillers to compete with craft beer manufacturers who are not as heavily regulated in the other states. “In some markets, craft distillers are way behind beer,” he says.
|1607-1945||From founding father to Prohibition and World War II.|
|1607-1776||American colonists produce alcoholic beverages from fruit and grains such as corn and rye.|
|1797||George Washington operates the nation’s largest distillery at Mount Vernon in Virginia, specializing in rye whiskey.|
|1808||The temperance movement begins in New York as an effort to encourage moderation in the consumption of liquors; later reformers press for complete abstinence.|
|1900||Pennsylvania houses the country’s densest cluster of commercial whiskey producers.|
|1919||The 18th Amendment to the U.S. Constitution, which prohibits the production, transport or sale of alcoholic beverages, is ratified. By 1920, every U.S. distillery is forced to close.|
|1933||Prohibition ends. National Distillers Products Co. produces approximately 50 percent of all of the whiskey in the United States and owns several notable distilleries, including Wathen Distillery (makers of Old Grand-Dad, Old Taylor and Old Crow) and Overholt Distillery (maker of Old Overholt).|
|1941-45||To aid the war effort, most U.S. distilleries are converted to other uses. Many produce industrial-strength alcohol used to make antifreeze, plastics, lacquer, medical supplies and smokeless gunpowder. A few distilleries are used to make penicillin.|
|1995-2005||Early craft distilleries appear.|
|1995||Bert “Tito” Beveridge obtains the first legal permit to distill in Texas; he also creates Tito’s Handmade Vodka, one of the first popular craft products.|
|2003||Ralph Erenzo and Brian Lee found Tuthilltown Spirits in Gardener, N.Y., in the Hudson River Valley, converting one of its mill granaries to a micro-distillery. It initially produces vodka and now also makes gin and whiskey.|
|2005||Philadelphia Distilling becomes the first craft distillery to open in Pennsylvania since Prohibition and begins producing Bluecoat American Dry Gin the following year.|
|2007-Present||“Farm to flask” makes its debut.|
|2007||New York state passes its first Farm Distillery Act, known as a “farm-to-flask” law, which allows farmers to distill and sell spirits using their own produce without expensive licenses or distribution requirements. The law also allows distillers to sell their own product at a farm store and offer tastings of their product, without using a wholesaler, if they use locally grown ingredients. Rules are loosened further in 2014.|
|2011||Pennsylvania enacts a farm-to-flask law, allowing distillers to offer tours, samples and on-site sales.|
|2014||The number of U.S. craft distilleries grows to 906, up from 280 in 2011.|
|2013||Texas enacts laws allowing distillers to sell their product directly to consumers and companies that are licensed to package and sell food.|
|2015||California passes the Craft Distillers Act, similar to New York’s farm-to-flask law.|
|2016||The U.S. industry reaches 1,439 craft distillers.|
|2017||Congress passes the Craft Beverage Modernization and Tax Reform Act of 2017, which reduces the federal excise tax on spirits from $13.50 to $2.70 per gallon for the first 100,000 proof gallons for distillers.|
Resources for Further Study
Fireman, Payton, “Distillery Operations: How to Run a Small Distillery,” Payton Fireman Attorney at Law, 2016. An attorney and founder of the West Virginia Distilling Co. describes all aspects of distilling operations from fermentation to bottling.
Rodewald, James, “American Spirit: An Exploration of the Craft Distilling Revolution,” Sterling Epicure, 2014. A journalist and former drinks editor for Gourmet magazine takes an in-depth look at the U.S. craft distilling industry.
Edwards, Dave, and Helen Edwards, “The economics of selling craft beers and spirits just got a lot better,” Quartz, Jan. 22, 2018, https://tinyurl.com/
Finkle, Victoria, “With a new distillery, two women make their mark on D.C.’s craft liquor scene,” The Washington Post Magazine, June 16, 2016, https://tinyurl.com/
Henderson, Tim, “‘Farm to Flask’ Distillers Lifting Local Spirits,” Pew Stateline, Oct. 10, 2017, https://tinyurl.com/
Kell, John, “Why Craft Liquor Is the Next Big Thing,” Fortune, Oct. 18, 2016, https://tinyurl.com/
Reports and Studies
“Annual Craft Spirits Economic Briefing,” Craft Spirits Data Project, Park Street/American Craft Spirits Association/IWSR, October 2017, https://tinyurl.com/
“Craft Spirits Market Analysis By Distiller Size (Large, Medium, Small), By Product (Whiskey, Vodka, Gin, Rum, Brandy, Liqueur), By Region (North America, Europe, Asia Pacific, South America, MEA), And Segment Forecasts, 2018 – 2025,” Grand View Research, October 2017, https://tinyurl.com/
“Global Alcoholic Spirits Market Forecast 2018-2026,” Inkwood Research, https://tinyurl.com/
The Next Step
Chang, Momo, “How a New California Bill Could Change the Game for Small Distilleries,” East Bay Express, May 7, 2018, https://tinyurl.com/
Moomaw, Graham, “Virginia distillers push ‘booze equality’ legislation to loosen state rules on liquor tasting rooms,” Richmond Times-Dispatch, Jan. 23, 2018, https://tinyurl.com/
Murphy, Erin, “Iowa distilleries are thriving under new state law,” Quad-City Times, Jan. 26, 2018, https://tinyurl.com/
Gutierrez, Andres, “Local craft distilleries concerned over China’s tariff on bourbon,” KSHB Kansas City, July 6, 2018, https://tinyurl.com/
Leary, Patrick, “Central Standard Craft Distillery releasing first re-barreled spirit: bourbon finished in wine barrels,” Milwaukee Business Journal, July 20, 2018, https://tinyurl.com/
Torres, Chris, “Seeds of new rye whiskey market are growing,” American Agriculturalist, Aug. 15, 2018, https://tinyurl.com/
Alcohol and Tobacco Tax and Trade Bureau
1310 G St., N.W., Box 12, Washington, DC 20005
A bureau of the U.S. Department of the Treasury that regulates and collects taxes on trade and imports of alcohol, tobacco, and firearms within the United States.
American Craft Spirits Association
PO Box 701414, Louisville, KY 40270
National trade group representing the U.S. craft spirits industry.
American Distilling Institute
22752 Bayview Ave., Hayward, CA 94541
Founded in 2003, the oldest and largest organization of small-batch, independently owned distillers in the United States.
Grand View Research
201 Spear St. 1100, San Francisco, CA 94105
A market research and consulting company that provides research on a range of industries, including food and beverage, energy, health care and technology.
169 Harrison Ave., Boston, MA 02111
A marketing and research firm that offers trends and analysis on a number of industries.
1000 Brickell Ave., Suite 915, Miami, FL 33131
A market research firm that provides consulting services to alcoholic beverage companies.
Virginia Distillers Association
PO Box 136, Richmond, VA 23218
An industry group focused on improving the regulatory, legislative and promotional environment for Virginia distillers.
1. “About,” Kings County Distillery, accessed Aug. 9, 2018, https://tinyurl.com/
2. “Number of operating craft distilleries in the United States from 2005 to 2016,” Statista, https://tinyurl.com/
3. “Annual Craft Spirits Economic Briefing,” Park Street/Craft Spirits Data Project/IWSR, October 2017, https://tinyurl.com/
 “Governor Cuomo Signs Craft New York Act and Announces $3 Million in Promotional Funds to Further Raise the Profile of New York’s Beverage Producers,” New York State/Governor Andrew M. Cuomo, Nov. 13, 2014, https://tinyurl.com/
4. “Governor Cuomo Signs Craft New York Act and Announces $3 Million in Promotional Funds to Further Raise the Profile of New York’s Beverage Producers,” New York State/Governor Andrew M. Cuomo, Nov. 13, 2014, https://tinyurl.com/
5. Tim Henderson, “ ‘Farm to flask’ Distillers Lifting Local Spirits,” Stateline, Oct. 10, 2017, https://tinyurl.com/
 “Craft Spirits Market Analysis By Distiller Size (Large, Medium, Small), By Product (Whiskey, Vodka, Gin, Rum, Brandy, Liqueur), By Region (North America, Europe, Asia Pacific, South America, MEA), And Segment Forecasts, 2018 – 2025,” Grand View Research, October 2017, https://tinyurl.com/
6. “Craft Spirits Market Analysis By Distiller Size (Large, Medium, Small), By Product (Whiskey, Vodka, Gin, Rum, Brandy, Liqueur), By Region (North America, Europe, Asia Pacific, South America, MEA), And Segment Forecasts, 2018 – 2025,” Grand View Research, October 2017, https://tinyurl.com/
7. “US Alcoholic Beverage Market – Overview,” Park Street, https://tinyurl.com/
8. “Craft Spirits Come Of Age,” Market Watch, Jan. 27, 2016, http://tinyurl.com/
 “Annual Craft Spirits Economic Briefing,” op. cit.
9. “Annual Craft Spirits Economic Briefing,” op. cit.
10. “S.236 - Craft Beverage Modernization and Tax Reform Act of 2017,” Congress.gov, Jan. 30, 2017, https://tinyurl.com/
 Annual Craft Spirits Economic Briefing,” op. cit.
11. Annual Craft Spirits Economic Briefing,” op. cit.
12. “Craft,” American Craft Spirits Association, accessed Aug. 9, 2018, https://tinyurl.com/
13. “Sales volume of Tito’s Handmade Vodka in the United States from 2013 to 2016 (in 1,000 9 liter cases),” Statista, accessed Aug. 17, 2018, https://tinyurl.com/
 Annual Craft Spirits Economic Briefing,” op. cit., p. 27.
14. Annual Craft Spirits Economic Briefing,” op. cit., p. 27.
 Henderson, op. cit.
15. Henderson, op. cit.
16. Victoria Finkle, “With a new distillery, two women make their mark on D.C.’s craft liquor scene,” The Washington Post Magazine, June 16, 2016, https://tinyurl.com/
17. Eric Felten, “Your ‘Craft’ Whiskey Is Probably From a Factory Distillery in Indiana,” Daily Beast, July 28, 2014, https://tinyurl.com/
18. John Kell, “Why Craft Liquor Is the Next Big Thing,” Fortune, Oct. 18, 2016, https://tinyurl.com/
19. Chris Furnari, “Brewers Association: Craft Growth Slows to 5 Percent,” BrewBound, Aug. 1, 2017, https://tinyurl.com/
20. Jess Baker, “Craft Brewing Growth Statistics for 2017 Released by the Brewers Association,” Craft Beer, March 27, 2018, https://tinyurl.com/
21. Justin Kendall, “Beer Executives Address Dwindling Market Share at NBWA Convention,” Brewbound, Oct. 10, 2017, https://tinyurl.com/
22. “Global Alcoholic Spirits Market Forecast 2018-2026,” Inkwood Research, accessed Aug. 17, 2018, https://tinyurl.com/