2023 was the first full year of business as usual after the pandemic. Whew. We can almost hear the collective sigh of relief.
But with the unique challenges of the pandemic behind us, we’ve been reminded that the industry’s day-to-day concerns never really went away. Craft distilling is a tough business. The days when new distillers could count on built-in local support and products that “sell themselves” are long gone (if they ever really existed). Instead, craft distillers today are grappling with increased competition, fewer opportunities for distribution, ascendant neo-Prohibitionism, and shifting consumer behavior — all set against the backdrop of high prices and inflation.
Still, it’s not all doom and gloom. Steadily improving legislative conditions and an impending generational transfer are bringing fresh energy into the industry, and consumer enthusiasm for distilled spirits hasn’t been higher in decades. The challenges craft distilling faces are the challenges faced by every maturing industry — which is, itself, a testament to the industry’s overall success.
Increased Competition — and Costs
While successful, profitable regional craft distilleries absolutely exist, many operators have bigger plans. But the number of slots for widely distributed brands is not unlimited. That means increased competition and increased costs, especially for brands with national aspirations. As a result, we’re seeing the number of distilleries in the U.S. nearly flatline. There are now 2,694 distilleries in the United States, marking steady DSP growth since 2003, the first year ADI began tracking permits. Not all of them can be on the shelves of every BevMo and Total Wine. While new permits continue to be filed seemingly every week, simple mathematics dictates that, eventually, the number of new entrants will plateau.
The barriers to entry are marginally lower than they once were. Every state, for instance, now has craft distilling laws on its books — definitely not the case in the industry’s early days, as the interview with Frey Ranch Distillery founder Colby Frey in this issue attests. Yet starting a distillery remains extremely challenging, especially when it comes to the costly proposition of building a fully functional and permitted distilled spirits plant in a high interest–rate environment. That financial reality means producers are increasingly open to sourcing spirit rather than (or in addition to) distilling it themselves.
Anyone who’s tried to buy a barrel of eight-year-old bourbon recently knows supply is a problem. That’s why ADI is heartened to see contract production capacity continuing to grow. Bardstown Bourbon, for instance, recently announced a $350M copacking facility — good news for the supply of bulk bourbon. While aged stock is likely to remain scarce in the near term, brands have more choices than ever before when it comes to sourcing spirit from different distilleries. We anticipate seeing more producers — established and new entrants alike — making the choice to source some or all of their spirit rather than invest in the creation of new distilleries, especially while interest rates are high. Conversely, we also expect to see more producers hanging up their B2B shingle and offering contract production to other brands.
The craft distilling industry is also still coming to terms with inflation. Even with welcome slowing, costs aren’t going down on anything except for a few isolated items, like (thank goodness) international shipping. Consumers appear to still be spending vigorously despite increased costs, but it’s not at all clear how long that will last. Interest rates likewise seem to be flattening, another beneficial change for the industry, but the super-low rates of the late 2010s may not return for many years. The specter of tariffs, too, injects uncertainty into the long-term picture for U.S. spirits exports.
Against this challenging macroeconomic backdrop, ADI is happy to see that the industry continues to rack up legislative wins — described in detail by Sean O’Leary in his legislative recap in this issue — in statehouses across the country. While it’s impossible to tell the future, it seems that cracks are starting to appear in the national DTC blockade, and we anticipate continuing to support aggressive efforts to open DTC shipping for producers around the nation.
Navigating Generational Transitions
Understanding today’s consumers can also pose bewildering challenges. Americans, especially young ones, are drinking less, yet spirits continue to outsell beer and wine despite anti-alcohol public health messaging. Inflation is straining household budgets, yet consumers continue to spend on travel, dining, and other luxury experiences. Cracking the code on how to tap into that continued spending and build relationships with new craft consumers while retaining legacy customers will be key for craft distillers looking to thrive in the years to come.
Branding, packaging, and effective storytelling will remain crucial to winning new customers. Mermaid Gin on the Isle of Wight exemplifies the power of a well-thought-out brand. This tiny distillery’s delicious gin struggled to get traction until they commissioned an eye-catching scaled custom bottle also aligned with the distillery’s core value of environmental sustainability. Today, they’re on track to sell a million bottles in 2024, a stunning achievement for a small, independently owned distillery on an island in the English Channel.
We also expect to see more generational transfers taking place within the industry. The craft distilling industry is now more than 20 years old in the United States, and that means many of its first entrants are beginning to look toward retirement. More distilleries are for sale on ADI forums than ever before, and some producers are implementing transition plans to shift ownership from the founders to their employees — like Montanya Distillers in Colorado, which announced in December that its founder, Karen Hoskins, was selling the company to two longtime employees and a strategic partner.
Dynamics like these are a natural part of a maturing industry. They’re also an exciting opportunity to take advantage of fresh energy and new ideas. In response, we’re ramping up our year-round educational offerings like webinars and workshops to help people in all facets of the industry thrive in a tough environment. Our annual conference will be more robust than ever, with a full suite of workshops, summits, and master classes throughout the week designed to bring people together, expand knowledge, and share ideas.
No matter what kind of role you have in the industry, we hope you’ll join us in Baltimore this August to connect with the craft distilling community, learn from experts, and invest in the skills you and your staff need for whatever 2024 brings.
Sincerely,
Erik Owens, President
American Distilling Institute
