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For Craft Spirit Distillers, a Dark Mood Is Simmering

Craft distilleries have grown and flourished for the better part of two decades, anchoring neighborhoods and drawing supporters in all 50 states. Their spirits have enriched and diversified cocktail bars and liquor stores, and the industry as a whole has reset consumer expectations for flavor and authenticity.

But craft distilleries are in trouble. Founders are throwing in the towel; inventory and equipment are being sold off; and bottles that were once on shelves are disappearing. The industry faces something of an existential crisis. Attendees of the February convention for the American Craft Spirits Association (ACSA) say that a dark mood is simmering.

“It’s a pretty tough landscape out there right now,” says Gina Holman, founding partner of J. Carver Distillery and the outgoing president of the ACSA’s board. She points to the challenges coming out of the pandemic as contributing to the gloomy moment, which Colin Spoelman, co-founder and distiller at Kings County Distillery, echoes.

Craft spirits demand “reached a fever pitch during the pandemic,” Spoelman says. “That lasted until November 2022.” At that point, he explains, the rate of alcohol sales across the board slowed dramatically. “That created a very tense atmosphere because now you have a lot of big brands that were expecting 20 percent growth fighting to get 2 percent growth”— alongside thousands of other craft distillers.

Layers of Challenges

Spirits sales growth looks likely to remain sluggish this year, and that’s going to continue hurting craft distillers disproportionately to their corporate counterparts. “Nobody got into this to get rich and for the money,” Holman says. Ultimately, however, cashflow is the biggest determining factor in a craft distiller’s success or failure, and for many, it’s being crunched in the current environment.

To begin with, borrowing has gotten much more expensive. “With credit and interest rates being tighter and a lot of people cutting back on their spending a little bit, while the debt that a lot of craft distilleries have is also becoming more expensive, everyone is starting to get a little more strapped for cash than they were before,” says Adam Polonski, co-founder of craft whiskey independent bottler Lost Lantern. “Going up 3 percent [in interest rates] when you have a million dollars in debt is a lot of extra money to pay every year.”

The cost of goods, just like in every other industry, has also risen. “The economics of all of our supply chain and our channels going up 25, 30, 35 percent has a real impact on the bottom line for distilleries,” Holman says.

Many distilleries felt comfortable coasting on debt in the past, when sales showed healthy growth year-on-year. From 2017 to 2022, craft spirits sales went from $3.7 billion to $7.9 billion, according to the ACSA’s Craft Spirits Data Project. But the future now looks much less certain.

“It was possible to tolerate losses in previous years because overall the business was growing,” Spoelman explains. “When the rate of growth slows down, you have to be asking yourself — I can’t take a loss this year because I don’t even know if next year is going to be a growth year or not. “

Crucially, this is all occurring just as many distilleries finally have a substantial volume of mature whiskey ready for sale, but fewer outlets for it. Distribution has become more consolidated while craft offerings have multiplied, leading to more stringent performance metrics as distillers compete for wholesale contracts and, ultimately, shelf placements. “I’ve heard from some distilleries about being dropped by distributors in some of their less important markets,” Polonski says.

“We ultimately bear a lot of the blame by not investing as much in sales and marketing. It doesn’t necessarily matter, unfortunately, what’s in the bottle. And that is, of course, what we stressed.”

Kings County, which is in its 15th year and well established on its home turf, is struggling to build distribution in key markets like Florida and California as more of its mature bourbon becomes ready for bottling. “State governments have fostered small distilleries, creating a much more diverse landscape of producers,” Spoelman says. “But they often haven’t done anything about the middle tier or the retail tier. … To some extent, direct-to-consumer would help mitigate some of those challenges.”

Direct-to-consumer (DTC) spirits shipping is the ACSA’s big focus of the moment, along with pushing local lawmakers to pass legislation making it easier for craft distillers to get their products into the marketplace. The question they’re tackling, Holman says, is, “How can we work to modernize local liquor laws so that these small craft distilleries can thrive and survive?”

The End of the Road

But changing the law takes time, and for struggling distilleries, there’s not a moment to lose. It’s already too late for some, which are now finding that the best move is to pull out of the game entirely. Michael Kinstlick, CEO of New York’s Coppersea Distillery, says he no longer has the energy to keep running the business, and is looking for a buyer. “I felt tapped out personally in terms of what I could do to grow the business and I felt like there were others who potentially could do that more effectively,” he explains.

Coppersea won accolades for its focus on heritage methods of whiskey making, such as floor malting its own barley and distilling over open flame. The distillery’s portfolio was picked up early on by luxury wine distributor Wilson Daniels, which Kinstlick says ended up being the wrong move. “It was too early for us — it kept us from getting the direct feedback from the customers in the market that we needed at that stage to hone our value proposition,” he explains. “Not getting that dialogue cost us a lot.”

“In 2019 craft distilling was hot and it was about how many new markets you could open. It’s not that at all now. We switched in 2022 to entrench. Go as deep as possible; make your dollars work.”

Washington, D.C.’s One Eight Distilling, which made bourbon, rye, gin, and vodka, shut its doors at the end of March. Co-founder and head distiller Alex Laufer says a number of factors led to the closure, from decreased foot traffic following the pandemic to early decisions to lay down more supply rather than contract-distill, which would have provided immediate revenue. But there’s one area that cost them the most. “We ultimately bear a lot of the blame by not investing as much in sales and marketing,” he says. “It doesn’t necessarily matter, unfortunately, what’s in the bottle. And that is, of course, what we stressed.” Although One Eight attempted a rebrand and marketing push in 2023, it was too little, too late.

One Eight isn’t alone; one look at the forums of the American Distilling Institute highlights how many distillers are looking to sell off equipment, aged stock, or even entire businesses. Fewer people are choosing to enter the industry, too; the Craft Spirits Data Project shows that the rate of growth in distilled spirits permits in the first eight months of 2023, the latest figures available, was 1.6 percent, a significant slowdown from previous years’ growth rates.

Lost Lantern is fielding more cold calls with offers of mature whiskey than ever before. “A lot of distilleries have invested very heavily in production over the last few years and dramatically increased the amount of whiskey they’re laying down, whether that’s going from 50 barrels to 200, or 500 to 2,500, or even more than that,” Polonski says. “That takes a lot of money to do, but suddenly, once that whiskey becomes mature, you have to start investing in the sales infrastructure that you need to actually sell through it all. I think that a lot of places are discovering that, while it doesn’t take as long aging whiskey, sales has a little bit of a lead time, too.” Lost Lantern has bought inventory from closed distilleries in the past, and Polonski says he expects more opportunities to do so in the future.

Bright Spots

It’s not dire straits across the board, though. Some distillers are still doing well — mostly mature ones with solid financing, established distribution partnerships, and well-crafted sales and marketing strategies. Melissa Katrincic, a marketing veteran who founded Durham Distillery with her husband, Lee, in 2014, has set a goal of 65 percent growth for the company’s gin lineup this year. It’s ambitious but, she believes, achievable thanks to investments from Constellation Brands and a pivot in the company’s post-pandemic strategy.

“In 2019, craft distilling was hot and it was about how many new markets you could open,” Katrincic says. “It’s not that at all now. We switched in 2022 to entrench. Go as deep as possible; make your dollars work.” For the last year and a half, Durham Distillery has built up its sales team, fully staffing its leading markets, and targeted on-premise growth. “It’s tough, but once you find your key accounts and you get on menus and you’re getting the traction, that’s when the distributors start really believing in you,” Katrincic adds. “That’s how it all works together.”

“The early stages of a market renaissance like this feature a lot of churn and experimentation. So it’s not surprising that we’re going to see exits and entrants, coming and going over time.”

But with so much uncertainty in the industry, even distilleries on a strong footing are looking to make themselves more secure. Kings County always eschewed contract distilling — until now. “Contract distilling is a lifeline in a moment like this,” Spoelman says. “On our website, for years it said, ‘We never distill for any other brand.’ And we are pretty open to that idea right now. It’s a way to diversify our business.”

What’s to Come

As craft distilling faces the first major crisis of its short life (other than Covid, which impacted all businesses), many are drawing comparisons to craft brewing’s ebb and flow of growth and shakeouts over the last 30 years. “A lot of us [distillers] thought that we could get a similar-sized piece of the pie as craft brewing, but I don’t think that’s going to happen,” Laufer says. “I don’t think we’re anywhere near that yet and I don’t think we’ll get there. It’s different in every spirit of course, but ultimately a lot of the focus is on whiskey and bourbon, and I think that there’s just no way to compete with the growth that we’ve seen in the big brands.”

Kinstlick, however, has a more moderated view. “Let’s say the craft spirits market is 20 years old, roughly speaking,” he says. “The early stages of a market renaissance like this feature a lot of churn and experimentation. So it’s not surprising that we’re going to see exits and entrants, coming and going over time.”

No one questions that more distillery closures will occur; it’s just a matter of how cataclysmic the trend will be, and what the aftermath will look like. “The question that I continually ask is, are we craft beer in 1995 to 2001, when there was a correction that happened?” Spoelman says, referring to a period when a slew of highly successful craft brewers suddenly closed. “Then there was this whole second era of craft beer that grew and grew until the moment we’re in right now, when we’ve probably maxed out on beer in general because spirits and RTDs have taken a lot of those casual drinkers away. Are we beer now or beer 10 years ago?”

Though the comparisons are tempting to make, craft spirits might not follow beer’s trajectory at all. The segment makes up just under 5 percent of all spirits sales in the U.S., according to the Craft Spirits Data Project, while craft beer takes over 13 percent of its category sales. That’s a substantial difference in market share. But this crisis moment demands attention, regardless. Holman urges consumers not to wait until it’s too late to support distilleries. “For people that love craft spirits, it’s the here and now,” she says. “If you care about craft distilleries and you haven’t visited one, go visit one.”

The article For Craft Spirit Distillers, a Dark Mood Is Simmering appeared first on VinePair.

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