Barrel-aged gin. Flavored moonshine. Small-batch rye. Cinnamon whiskey. Hand-crafted tequila. Single-barrel bourbon.

At the local liquor store, the average consumer is treated to spirits of all varieties, ages, levels of quality and artisanship, and packaging shapes and sizes, but generally has little or no appreciation for what it costs the distiller to make those spirits and get those bottles onto that retail shelf.

Distillers must know not only how to make a great spirit, but also have a keen understanding of cost of goods sold (COGS) and key cost drivers to appropriately price a spirit. Building a self-sustaining and successful brand requires not only sufficient margins for producers, but also support and promotion to drive consumer engagement and sell-through and maintain its place on the retail shelf.

A spirit’s composition and overall cost of goods will vary depending on both the type of product and end market. Therefore, before digging into the components of cost, distillers should first consider a few critical questions:

What are your aspirations?

Producing a few thousand cases a year?

Making the next great American Whiskey?

What are you passionate about making?

Where and how are you planning on selling your products?

The answers to these questions can help establish a general framework for overall cost structure and, importantly, what the cost structure of your products needs to be to build a sustainable and profitable business.

The Components of Cost of Goods

To really get a handle on overall product costs, the distiller must understand both the main elements of cost and key cost drivers as well as the individual component costs. Costs generally break down into five items: grain / liquid, packaging, labor and utilities, freight in and out, Federal Excise Tax (FET).

The chart below shows the Illustrative COGS Structure for two types of products: a premium white spirit (ie: vodka) with a suggested retail price of $29.99 per bottle and a super-premium aged whiskey priced at $50.

Illustrative Unit COGS Structure

Premium

Wine Spirit

Super Premium
Aged Whiskey

Component Description

86pf / 750ml

86pf / 750ml

Grain / Liquid — Unaged Spirit

$1.50

$0.00

Grain / Liquid — Aged Spirit

(incl cooperage)

0.00

7.50

Flavoring

0.10

0.00

Bottle (not decorated)

1.50

0.00

Bottle (fully decorated)

0.00

2.50

Labels

0.40

0.00

Label application

0.30

0.00

Closure top

0.33

0.38

Closure label

0.00

0.05

Heat seal — clear — perforated

0.04

0.04

Shipping carton (6 pk) & partitions

0.25

0.50

Bottling labor

0.35

0.35

Utilities

0.15

0.15

Raw goods freight in

0.15

0.15

Finished goods freight out

0.50

0.50

Total COGS

$5.57

$12.12

Federal Excise Tax

$2.30

$2.30

Total COGS including FET

$7.87

$14.42

Individual cost components will vary appreciably, depending upon type of spirit and overall product position the distiller is targeting. Here are a few key observations worth noting:

1. Regardless of the type of product being made, the top three components of cost—grain/liquid, raw glass bottle, and FET—generally account for approximately 65 to 85% of overall product cost; of the three, the distiller has no control over FET, which puts greater emphasis on selection of grain/liquid and choice of bottle to align with overall product positioning and to optimize these two key drivers of overall unit cost.

2. Packaging, which is critical both to product positioning and creating consumer interest, As a whole generally accounts for approximately 25 to 35% of overall cost. Packaging is comprised of multiple components and decisions for the distiller to make, each of which has a function and can provide a benefit to the overall packaging, but also carry a cost.  As a general rule, spending on certain packaging components may be more effective than others, so it’s best to set a guideline for how much of overall product costs should be devoted to packaging (say 30%) and focus on where the greatest bang for the buck can be had.

A few other things to note on packaging:

More so than in any other area of product cost, packaging generally represents the greatest number of options and vendors to choose from, and vendors are more likely to provide price breaks (depending on order quantities).

While looking for price breaks to bring unit costs down, be sensitive to purchasing what is needed to fill near-term production needs with some cushion. Do not fall into the trap of chasing and stretching for price breaks.

Packaging is the part of a product that a distiller can and likely will tweak over time, so be conservative in how much is purchased at one time.

3. Making small-batch craft spirits is generally labor intensive. While it’s not possible to eliminate labor from production, the distiller should periodically review areas of the production process that are labor intensive and assess if there is a better process, layout or incremental piece of equipment that could streamline operations and reduce the labor component in product cost of goods.

4. Between receiving raw goods in and shipping out finished goods, freight can really add up. While a distiller may not generally be able to negotiate significant savings on freight, given the shipment volume and frequencies involved, a distiller can manage freight costs by actively looking for local vendors and, when possible, achieving or taking advantage of full truckload shipments that typically come with lower rates.

Grain / Liquid Costs

Liquid cost will vary greatly by product depending on whether the spirit is:

Unaged or aged? Unaged spirits includes clear spirits such as vodka, gin and moonshine that generally have little or no aging and finishing. Whether distillers make their own product and age it or source aged liquid from someone else, there is both a cost associated with laying down and storing barrels, and an increase in value in the liquid, which over time matures, taking on some of the character and color of the wood.

New make or sourced liquid? If distillers make (and age) their own spirits, they must invest in all of the plant and production equipment required to distill spirits as well as incur all of the fixed and variable costs associated with making (and storing) them. In sourcing liquid from a third party, the distiller, in essence, is paying someone else for incurring these costs.   

On a more granular level, in deciding whether to go with new make or sourced liquid, here are a few of the considerations that a distiller needs to weigh:

New Make

Sourced Liquid

Type of new make spirit

Quality

Cost—new make is generally much less expensive

Age

Fermenting and distilling capacity and experience

Purchase cost

Aging requirements

Disclosure / lable requirements

Cooperage—cost and availability

Marketing / credential implications

Storage / rickhouse—space and cost

Warehousing

Freight

Strictly looking at things from a cost perspective, the chart on the right provides illustrative detail of the cost of sourced liquid and some context for the distiller when weighing out the options and unit cost.

50 Shades of Grain

“Garbage in, garbage out” is a concept common to computer science and mathematics: The quality of output is determined by the quality of the input. This same principle applies to making great spirits. If you want to make the next great American whiskey, it all starts with using quality grains.   

Illustrative Sourced Liquid Cost Detail

Tote / Barrel Size (liters)

250

250

250

250

Cost per tote

$1,000

$1,500

$2,000

$3,000

Net liters

200

200

200

200

9 liter case equiv

22.2

22.2

22.2

22.2

Bottles per case

12

12

12

12

Bottles per barrel / tote

266.7

266.7

266.7

266.7

Cost of liquid per bottle

$3.75

$5.63

$750

$11.25

Like an artist relying on a palette of colors to create a masterwork, a master distiller relies on and pulls from a broad selection and blend of grains to create special mash bills used in the distillation process.

Top varieties include barley, rye, wheat, oats, corn and malt.

Within each variety, differences in where and how the grain is grown, when it is harvested, how it is finished and stored, can create sometimes-subtle, sometimes-significant, differences in quality, consistency and flavor notes of a particular grain. Master distillers look for these nuances in the selection of grains, either working independently or with the grain supplier to create specialty blends suited for the type of spirit they wish to distill.

Grain suppliers range from small, local specialty suppliers to large multinational agribusinesses.  Suppliers can provide both standard grains and custom blends. Although price is invariably a factor in determining which supplier(s) to order from,  other factors are equally or more important, including quality, availability, shelf life of grains (finished to the specifications the distiller is looking for and in the quantities desired), willingness to work with the distiller on development of specialty and custom blends, and customer service.

The cost of grains can vary greatly, depending on such factors as the variety of grain, whether it is more of a standard /commodity or a specialty or custom blend, availability (especially relative to demand) and order quantity. As a rule of thumb, the cost of standard grains can average $0.50 –$1.00 per pound, wheras specialty grains and custom blends can typically cost $2.00 or more per pound.

How much to buy? Given perishability, spoilage and storage considerations, as well as the significant capital outlay required in purchasing grain, it is recommended to buy what is needed for a maximum 60–90 day production schedule. That typically means buying by the sack (or potentially tote) rather than by the truckload. A final word on grain purchases: to preserve the quality of the grain, maximize shelf life and minimize spoilage, it is best to store grain in a cool, dry, humidity-controlled environment.

The Cost of Cooperage

If a distiller wants to use aged liquid in making spirits, there is either an explicit or implicit cost associated with laying down and storing barrels for the desired period of time for the liquid to mature that must be captured in product cost.

Discussions about cooperage with a master distillers generally focus on barrel size (typically 5- to 53-gallon), type (new vs. used; American vs. French Oak, or other type of wood; air vs. kiln dried; and use—aging vs. finishing), and toast and char levels (light to heavy). However other factors come into play and should be considered in to the purchase decision, including:

• Cost and availability—How much does a barrel cost? Are they available in sufficient quantities needed to match the distiller’s production and finished-product schedule? How much capital will be required to purchase barrels needed to support a production schedule?

• Aging time / carrying cost—How much time will it take until finished product is ready?  The longer the maturation time, the larger the carrying cost, as the distiller must cover the costs associated with operating the business until the spirit is mature and ready for sale.

• Warehousing / rickhouse—How much space is available for storage? How much weight can the structure bear? (A full 53-gallon barrel weighs approximately 500 pounds.) Will the space comply with fire safety codes for storage? Insurance costs?

• Compliance requirements—TTB requirements specify which products must be aged in new versus used cooperage.

The table above provides an illustrative snapshot of the cost and economics of using various sized barrels in the aging process. While it’s important to focus on the All-in Cost of a barrel and the Per-Bottle Cost (which would suggest there is a distinct cost benefit of using larger size barrels), Minimum Days Aging Time is another key consideration because smaller size barrels enable the distiller to come to market with a finished product in a matter of months rather than years, which has the distinct cash-flow benefit of enabling the distiller to turn over and monetize sooner the value tied up in aged liquid inventory. While the finished product from 90 days in a 5-gallon barrel will invariably have a different character and finish from one that has been able to rest in a 53-gallon barrel for multiple years, the master distiller will typically use a variety of barrels of different sizes, toast and char levels, both for individual products as well as for blending purposes.

A Word about Inventory and Supply Chain

Your passion may be making great whiskey, but understanding inventory and your supply chain is critical to sustaining and growing a business. The distiller must understand what his or her true product and inventory costs are to more accurately cover and recapture them and to determine if the business is profitable and self-sustaining or not. Purchasing and production considerations must be critical to strategy. There is a long lead time from purchase of raw materials to converting working capital to cash. This must be factored into the budgeting and long-range planning process to ensure the business has sufficient cash to operate and sustain itself. Not doing so runs the risk that you will either run out of cash or need to pull back on investing in the business. To grow you must continue to feed the beast. A word of advice—keep it simple!