State laws that govern whether or not distilleries can sell bottles directly to consumers have a dramatic affect on a distillery’s ability to stay in business. Nowhere is this more evident than in the state where the craft revolution began—California; where the craft movement has slowed to a crawl in large part because of arcane tied-house laws that predate the return of micro-distilleries. And yet, the states that are rushing to pass California in number of distilleries—Washington, Colorado, New York and Oregon—are all states that, to varying degrees, allow distilleries to sell directly to consumers.
There are almost as many models of distribution systems as there are states. Varying laws have distillers from California to Georgia crying fowl, while distillers from New York to Colorado are seizing opportunity. With legislation currently under consideration in most states, Distiller examines how direct consumer sales, satellite tasting rooms and self-distribution works in three states with vastly different systems: California, Colorado and Ohio.
Though results vary greatly depending on restrictions and the distillery’s location, most bottle shops gross approximately $100,000 a year in direct consumer sales for off-premise consumption.
California distillers are generally not allowed to sell direct to consumers, with an exception for brandy because of strong influence of the wine industry over the state’s history. Arthur Hartunian of Napa Valley Distilling, said, “It’s mind boggling to me how I can sell a bottle of brandy, but my friend on the other side of the hill can’t sell a bottle of gin or whiskey.”
Some distillers have gotten around the restriction by creating gin and vodka from a grape base. Others have sublet space in their distillery’s building to a third party to operate a bottle shop. The bottles, however, cannot simply be walked from one room to the next. They must be delivered to a licensed distributors’ bonded warehouse, unloaded, and then shipped back to the distillery. Both the distributor and the subletting retailer take markup, and the portion the distillery keeps (after production costs, packaging and taxes) is the smallest of the three.
In Ohio, DSPs have a similar problem. Those producing less than 10,000 proof gallons a year may obtain an A3A craft distillers license, and be able to sell two bottles per day per person. However, distillers still have to pay Ohio the same amount as if the bottle had gone through the state-run distribution system. It’s a complex algorithm to figure out how much tax Ohio distilleries must pay, depending on the size of the bottle, type of spirit and target retail price. According to Ohio Distiller’s Guild President Ryan Lang of Middlewest Spirits, they send roughly 46% on each bottle to the state. When Ohio distillers factor in Federal Excise Tax, shipping and other expenses, approximately 55–60% of the retail price goes to some place other than the distillery. The retail price and wholesale price stay the same, regardless of whether the bottle is sold at the distillery or a state store and the distiller must swallow the cost of shipping as well.
Distillers are a little irked that the state’s portion is the same when it is sold by the distilleries. “As an economist, it doesn’t make any sense,” commented Gene Sigel of the Red Eagle Distillery. “They don’t do anything. They don’t ship. They don’t warehouse it. They don’t stock the shelves. They don’t write up the sales or pay the overhead.”
Red Eagle does not distribute spirits through the state stores and depends on mostly tourism for his livelihood. “The sales that I make are mostly to tourists travelling through,” said Sigel. “The locals only occasionally stop and get a bottle because it’s not available through the state stores.”
Greg Lehman, of Ohio’s Watershed Distillery, sympathizes with his California brethren. The date of March 22, 2012 is permanently etched in his mind because that is the date when Ohio law changed to allow for paid tastings and direct consumer sales. Lehman said, “They would take the tour and say, I want a bottle of this and a bottle of that. When you told them they had to drive down the road, then turn here… you could see it in their eyes: ‘I want some, but I am not driving that far for it.’”
Sean Venus, of Venus Spirits in Santa Cruz, CA, sums it up: “Having the ability to offset some overhead by something we can sell direct to consumers…, give someone the complete experience when they walk through our door of seeing the distillery, tasting our products and being able to walk home with a bottle, is the complete story. And right now we have to just say ‘Hey, there’s a few spots down the street,’ and hope they get to that spot and find the product on the shelf, and also hope that the retailer is not out of stock.”
Referring to a birthday party of 20 people who had recently been to his distillery, Venus said, “Every one of those guys wanted to walk away with a bottle of our spirits. That would have changed the event from a $200 event to a $1,000 event. That’s a big difference.”
According to James Carling, of the Ventura Limoncello Company, “When you have a tasting room, you have a tasting room staff. When you look at the benefit in terms of employment, the benefit of sales tax, the benefit of excise tax, the benefit of all of those things, where is the downside to this? Increased tourism, increased awareness. Everyone wins. I just cannot understand the downside. Where is it?”
Timo and Ashby Marshall, owners of Spirit Works Distillery in Sebastopol, CA, have taken a creative approach to stocking their tasting room with ancillary products. They have partnered with a local soap manufacturer to create a gin botanicals soap and a local bakery that is producing gin-botanicals shortbread cookies. But lack of direct consumer sales of bottles is also stifling creativity in product development.
Marshall, who is also President of the California Artisan Distillers Guild, said, “If I want to do a very small run of something, like a tester run of a new product while I’m in product development… in my current situation, the only vehicle I have to market the test—whether people actually like that or not—is to sell it through my distributor. If I have a very small run—just a couple hundred bottles—sometimes it’s difficult to convince a distributor to carry such a small number of bottles.”
In Colorado, distillers are allowed not only to sell from the distillery but to also open a satellite tasting room. Kristian Naslund, of Dancing Pines Distillery, doesn’t see much traffic at his Loveland, CO distillery. The tasting room is open Wednesday through Saturday and rings up an average of 20 sales per day on weekdays and 70 on Saturdays. However, he has opened a satellite tasting room in Estes, CO, near the entry to Rocky Mountain National Park. The Estes location is open seven days a week and rings an average of 70 sales per day. This has allowed Dancing Pines to create nine new jobs, with six or seven full-time equivalents. The benefit to the distillery is not just in the sales and the jobs created, but the ripple effect increases sales through distribution. According to Naslund, “We look at the tasting room as something that creates brand loyalty, and it really does.”
Tastings and Cocktails
State laws on spirits tastings vary. In some, consumers are allowed to try and buy. In others states, the consumer is left to take a chance on buying a spirit they have never tasted. Some states forbid distillers from charging for tastes; others mandate tastings must be paid. In California, recent changes in the law allow for paid tastings. Consumers can at least know what the spirits taste like before buying a bottle, but still must go elsewhere to buy. Revenue generated by tasting rooms may cover the cost of staf,f but is far from a solution.
The 2012 Ohio law not only allowed for tastings, but also created a new license called an A1A, which allows craft distillers to sell cocktails for on-premise consumption. Sigel’s Red Eagle Distillery benefits from having the A1A license. His farm/winery/distillery sees between $100,000 and $125,000 in annual revenue from bottle sales, but overall revenue through alcohol activity from his winery distillery are close to $800,000. “Clearly, the cocktails are what we make the money on because we don’t have to pay the state markup,” commented Sigel.
Results vary around Colorado because business models are not all the same. Breckenridge Distillery has a very limited cocktail program, but plans on expanding. Tasting room manager Patrick Brown said, “About 80% of sales is made up from bottles; the other 20% is from swag and cocktails.” The distillery is planning an 8,000 sq ft full-service restaurant, which should be open next year. Another Colorado distiller reports that sales of cocktails annually generate approximately $300,000 on top of approximately $100,000 in bottles sales.
One of the key battles in distillery regulation centers on the issue of self-distribution. Until recently, large distribution companies opposed anything that appears to dismantle the three-tier system. In Colorado, where self-distribution is legal, most distilleries have used it to service their local markets, at least upon start-up. Yet, with all the headaches associated with running another complex operation, almost all eventually enter the three-tiered system for distribution. The complications of liability, account management, bad debts and operating a fleet of trucks are an unwelcome burden to a producer who would like to concentrate on their core business and passion of making distilled spirits. These are issues best left in the hands of distributors who have decades of experience. Only a handful of the state’s 75 distilleries are currently self-distributing.
Wayne Anderson said that his Spirit Hound Distillers, in Lyons, CO, self-distributed in their county for the first six months. “Oh gosh, it’s just the scope of it, the breadth of it. You are talking about hundreds of accounts over thousands of miles. Logistically, we weren’t set up to buy vehicles and hire the people. We probably have a couple thousand outside accounts. I could never reach that. It’s much cleaner to use those people we already have the relationships with.”
Though most California DSPs are not allowed, brandy distillers and rectifiers may self-distribute. “I self distributed to for two years because I could,” he said. “If I had to use a distributor on day one, we would have closed our doors day two. There isn’t a distributor who would have picked up a brand-new, unknown limoncello made in the USA in 2007, which is when we launched. In two years, I got my brand in 200 locations in Southern California myself—between Santa Barbara and Orange County—and that is when a distributor noticed us. And thankfully we did, because not only could I not grow the brand, there was no way I could physically get it to San Francisco and San Diego. It couldn’t happen.”
Carling said the accounts he gained through self-distribution were a steppingstone that made Ventura Limoncello look good enough to get picked up by Young’s Market Company. He considers it a boon to the brand because the retailers they deal with all do business with Young’s retailers, and bars are more likely to give him placement—and he gets paid regularly. “I get my checks paid,” Carling said. “I don’t have to go chasing after money or find out about credit. I don’t have to deliver it. I just sell it.”
Referring to new legislation before the California Assembly, Jim Harrelson, of Do Good Distillery in California, says distillers are not trying to dismantle the three-tier system. “All we want is equal playing grounds. We want the same rules as everyone else.”
Because Ohio is a control state, the state is the only distributor. Bottles sold at state liquor stores must go to a state-run warehouse before going to stores, and the distiller must pay the shipping.
According to Joe Duer, of Indian Creek Distillery, “Getting our whiskey to what Ohio calls its agency stores is very cumbersome. Some of the state stores are 5 miles, 10 miles, 25 miles away, but they all have to go through the nearest state warehouse, which is 60 miles away.” Duer saves money on shipping by delivering the bottles himself to the distribution centers, which are in major cities, and doubles up his business time by visiting accounts.
New legislation passed in North Carolina and Florida this year has alleviated some distillers’ woes. The North Carolina Distillers Association sums up the anticipated affects that SB 24, which went into effect in June 2015. The guild says that the new law, which allows the distilleries to sell one bottle to one customer per year, is expected to raise purchase by distilleries of North Carolina agricultural products by 101%, increase distillery tourism fourfold and increase staffing by 235%.
Ohio distillers have coalesced around new legislation, which will raise the allowable production level to obtain an A3A craft license while also folding the A1A in allowing all craft distillers to have a tasting room, full bar and cocktail sales. Proposed legislation would also streamline other administrative processes for the distillers.
In California, Chris Steller of Dry Diggings Distillery and Executive Director of the California Artisan Distillers Guild, reports that AB 1233, which the distillers have been lobbying for, has been replaced by an even better bill—AB 1295. “The new bill is more than just consumer sales,” Steller said. “It has restaurant opportunities: it has event opportunities.” But with Washington State exceeding California in total number of distilleries, and Colorado, New York, Oregon and Texas trying to eclipse the Golden State, the future may stagnate or even decline until the laws change.
“There are a number of distillers who have said that if the bill doesn’t pass, they won’t be around to see another chance for the bill to go through. This bill is that critical.” Steller stutters for a second and regroups his thoughts. “Even me… I know I would not be able to stay around that long.”
And in Colorado, business is booming.
The tables and graph that follow compiles information from a survey of tasting room laws that was collected from distillers and state alcohol control boards. It reflects the most current information available at the time of writing. Due to the hard work of motivated distillers, distillers guilds and state representatives these laws are continuing to be debated and modified to meet the needs of all interested parties in their locality. As laws change, the most up-to-date information known to ADI will be made available online at http://distilling.com/resources/distillery-tasting-room-laws. Finally, this information does not constitute legal advice. If you need legal advice, please contact an attorney.