Everything was working for Chicago’s Koval Distillery in early 2018. Like many craft producers, the distillery was flourishing thanks to demand for local artisanal spirits and bartenders favoring its organic labels in upscale cocktails. An opportunity to expand the brand overseas was also on the table, as American whiskey was becoming a more global category. Koval co-owner and president Sonat Birnecker Hart says the export side had swelled to 25% of their total business, and had been growing at a 25% clip annually. Then, in mid-2018, the 25% reciprocal tariff on American whiskey was implemented by the E.U. and UK in retaliation for U.S. tariffs on E.U. steel and aluminum—an amount that might double this June. Then the pandemic reared its head last March, bringing the on-premise to a standstill and forcing Koval to temporarily close its tasting room, halt its tours, and downsize its staff. “We see a lot of opportunity if the tariffs are lifted, and even more as soon as the pandemic is behind us,” Birnecker Hart says. “If the tariffs increase in June, however, it will be much less feasible for us to grow our markets in Europe or even maintain them at all.”
Koval is emblematic of what has happened over the past year to craft distillers. Through circumstances beyond their control, a number of craft producers have become casualties of the pandemic economy. While some craft distillers speak of exponential sales growth, others are struggling to stay afloat, given depleted tasting room sales, nearly non-existent on-premise activity, and difficulty in getting SKUs stacked out on the ever-competitive shelf space at package stores. According to David Ozgo, senior vice president and chief economist at the Distilled Spirits Council of the United Stated (DISCUS), something as simple as having your spirit available in a 1.75-liter bottle—a package that has become hugely popular with increased at-home consumption—has given mass-market labels like Jack Daniel’s a leg up on many small craft brands.
Up until 2020, craft distilling was chugging along comfortably in the U.S. market. Embraced by mixologists and consumers who were trading up and interested in local spirits, the industry charted a robust $3.2 billion in retail sales in 2019, according to an American Distilling Institute (ADI)/DISCUS survey. The number of distilleries grew dramatically in a 10-year span, from less than 200 to more than 2,000 distilleries nationally, according to ADI, concentrated in three states: New York, California, and Washington. Then came the double whammy of the Trump-era tariffs and Covid-19. Unlike a great deal of the large beverage suppliers, which have seen sales spike, the craft business is projected to fall by 41%, or annualized sales of $700 million, according to the ADI/DISCUS study, which found that 36% of craft distilleries reported a total revenue decline of 25% or more in 2020. Further, the industry had to furlough 31% of its employees last year—4,600 of the total 15,000 workers.
A Time For Reinvention
Craft distillers have been adapting to the new situation in a number of ways. While American whiskey is still the primary driver of craft sales, premixed and to-go cocktails have emerged as alternatives to the on-premise mixology experience, as tasting rooms were forced to shut their doors during lockdowns. To date, 18 states have filed legislation to make cocktails to-go permanent, and many more bills are expected. Presently, cocktails to-go are allowed in 33 states, with permanent laws passed in Ohio and Iowa. “RTDs were the big thing that caused growth last year,” says ADI president Eric Owens. “Canned cocktails and DTC are the future.” He adds that 63% of craft distillers deplete less than 2,500 cases annually, making the margins exceedingly thin, even before the pandemic.
Craft distillers had already started experimenting with the concept prior to the pandemic through the release of upscale RTDs, a trend that only quickened in pace last year. In 2019, spirits-based premixed cocktails—not including wine, cider, or other bases—grew 7.5% to $351 million in the U.S., according to DISCUS. In 2020, premixed cocktails sales, driven by spirits RTD products, were up 39.1% to $489 million, so it’s no wonder that craft producers are interested in the lucrative space. Now, craft distillers like Tattersall Distilling in Minneapolis; New Holland in Holland, Michigan, and Dry Fly Distilling in Spokane, Washington are releasing single-serve and premixed cocktails, responding to the success of mass-produced hard seltzers like White Claw and Truly.
In addition to the cocktails to-go phenomenon, craft spirits have also benefited from a number of new legislative actions, including the passage of the Craft Beverage Modernization and Tax Reform Act last December, which made federal excise tax cuts permanent for distillers. Under the Act, distillers pay a reduced excise tax rate of $2.70 per proof gallon for the first 100,000 proof gallons of distilled spirits (most craft distillers fall into this category); a rate of $13.34 per proof gallon for the next 22,130,000 proof gallons of distilled spirits; and a rate of $13.50 per proof gallon for production in excess of 22,230,000 proof gallons. Other strides include curbside pick-up/delivery options from on- and off-premise retailers in multiple states, and DTC shipments of spirits from in-state distillers in nine states, including a new law permitting DTC shipping of spirits in Kentucky.
While these new efforts were developed in response to the challenges facing craft distillers, nothing helps more than the backing of a mass-market producer. Over the last five years, after witnessing the momentum of American craft labels, major suppliers like Constellation Brands, Pernod Ricard, Moët Hennessy, and others have thrown their fiscal weight behind a number of distilleries, with a concentration in the whiskey category. Through these partnerships or equity stakes in craft labels, producers like Woodinville and Wyoming Whiskey have been somewhat shielded from the economic hardships that have befallen standalone distillers in the past year. These multinational-backed players have been able to take advantage of established distribution channels, specifically in the off-premise, while expanding production and their presence on the international stage.
“While it’s certainly a challenging environment for craft distillers, Wyoming Whiskey has been able to achieve year-over-year growth despite the pandemic,” says Michael Zitelli, president of Wyoming Whiskey at Edrington Americas. “This is mostly attributed to a shift in off-premise focus and leveraging e-commerce opportunities in the changing landscape.” In 2018, Edrington announced that it would handle sales, marketing, and distribution for Wyoming Whiskey. The strategic partnership has allowed the brand to be integrated into Edrington’s national distribution network, making the label available in all 50 states, as well as giving it an expanded international presence, with availability in Mexico and Canada and at travel retail.
“As far as Covid-19, we had a record year last year,” says Orlin Sorenson, co-founder of Woodinville Whiskey. “When it hit, when all of America shut down, we lost all the on-premise business as well. But that shifted toward more of the off-premise; it was the at-home happy hour. As things moved back up, we grew well over 100% last year.” The Washington State distiller was acquired by luxury spirits conglomerate Moët Hennessy in 2017, paving the way for an increased national presence, as well as providing capital for a larger distilling operation. Thanks to Moët Hennessy’s distribution network, Woodinville was able to strike out from its Washington base, moving into California and Oregon in 2018, and entering a flurry of new states in 2019 and 2020. Woodinville is presently in 20 states and Washington, D.C. The expanded distilling operations, which were completed last fall, increase capacity sixfold to around 1 million proof gallons, with the addition of two new stills.
Jeff Kozak, CEO of Shoreham, Vermont-based WhistlePig Whiskey, notes that the company had to learn a whole new segment of the drinks business, the off-premise, as its brand was so firmly grounded in restaurants and bars prior to the pandemic. “The bartenders were no longer the gatekeepers— all of a sudden, it became the retailers,” he notes. “So, for us at least, it was a skill set that we really didn’t have. When Covid-19 hit, it was like learning a whole new trick. It was tough. We learned as we went: what it means to merchandise in a retail setting, going from competing against five rye whiskies at the bar to competing with 30-40 on the shelf.” In December 2020, roughly three years after purchasing Woodinville, Moët Hennessy took a minority stake in WhistlePig. The deal will increase WhistlePig’s international standing significantly as Moët Hennessy assumes distribution outside of the U.S., with a goal of expanding the brand’s presence abroad. Kozak notes that it will initially move into select global markets—the UK, Japan, Germany, France, and Switzerland—and likely into travel retail in 2022.
Pernod Ricard is another major drinks supplier increasingly investing in American craft distilleries. Growing its American Whiskey Collection, the company has added four craft brands to its portfolio in the last five years, including Louisville, Kentucky’s Rabbit Hole Distillery and fellow Bluegrass State brand Jefferson’s Bourbon, and Fort Worth, Texas’s Firestone & Robertson Distilling Co. in 2019; and West Virginia’s Smooth Ambler Spirits in 2016. These brands fill the missing piece of Pernod’s whisk(e)y stable, American whiskey, with the acquisitions playing a critical role in the company’s growth ambitions stateside. “When we assessed the market, we observed super-premium-plus American whiskies were growing at up to four times the overall spirits market, and that guided our investment strategy,” says Pernod Ricard USA’s director of marketing for new brands and transversal capabilities, Daniel Clarke. “Beyond that, each brand partnership and acquisition considered consumer brand appeal, future potential, and cultural fit with the Pernod Ricard Group.” Clarke adds that each of the labels within its American Whiskey Collection—Rabbit Hole, Smooth Ambler, Jefferson’s, and Firestone & Robertson’s TX Whiskey—are seeing high double-digit growth.
Constellation Brands has also been incredibly active in acquiring craft labels in the last few years. In 2016, the company purchased Utah-based High West Distillery for around $160 million, while also taking minority stakes in Kentucky’s Bardstown Bourbon Co., Virginia’s Catoctin Creek Distillery, and Tennessee-based Nelson’s Green Brier Distillery (upped to a majority stake in 2019). Then, in 2020, Constellation acquired full control of Louisville-based craft distiller Copper & Kings for an undisclosed sum, after taking a minority stake in the company three years prior. “The craft spirits category is experiencing substantial growth that shows no signs of slowing down,” says senior director of marketing of craft spirits for Constellation Brands Daniel Schear. “We see an immense growth opportunity for our portfolio in premium segments as consumers continue to trade up across the category.” As an example, he notes that High West is outpacing the market at 23% growth in IRI channels.
Other top drinks suppliers that have been investing in American craft labels include Rémy Cointreau, who bought Washington-based Westland Distillery in 2016; and William Grant & Sons, who purchased Tuthilltown Spirits Co. in its entirety in 2017, having already acquired Tuthilltown’s largest brand, Hudson Whiskey, back in 2010. Diageo, too, has its eye on the burgeoning segment, investing in Portland’s Westward Whiskey through its Distill Ventures unit in 2018. The deal included investment in both the facility and inventory of House Spirits Distillery (now Westward Whiskey Distillery), as well as the Westward American single malt brand. Majority ownership and independent control remain with Westward’s founders, current investors, and existing staff, including head distiller Christian Krogstad.
New Face Of Craft
Despite these difficult market conditions, craft distillers are bullish on recovery from the hardships inflicted by the pandemic, but acknowledge that some of the changes to their business models are here to stay. “Interest in craft spirits will continue to grow in the U.S., but there are difficult times ahead,” says Birnecker Hart of Koval. “It’s likely that a number of distilleries will sell to larger players, while others will need to prepare now in order to come out of the pandemic able to compete in what will be a very different business environment.”
Some of these shifts include increased online DTC sales, an expanded off-premise, and an increased demand for RTD and single-serve cocktails. Schear at Constellation notes how critical online sales will continue to be going forward. “The explosion of three-tier e-commerce growth across platforms like Drizly and Instacart indicates that consumers are changing how and where they expect to be able to purchase their favorite spirits brands,” he says. “This trend was growing rapidly before the pandemic, and 2020 accelerated and punctuated consumer preferences in this space.” Craft distillers that are able to adapt to these changes, with enough capital, will come out successfully on the other side.