The publication of our annual directory always prompts reflection. But this edition, which coincides with ADI’s 20th anniversary celebration, has been particularly thought-provoking.
In many respects, 2022 was another good year for craft distillers. Distilled spirits are increasingly seizing market share from other categories. Unleashed from pandemic-era restrictions, distillery travel and tourism boomed. Some states retained the modernized alcohol laws that were relaxed during Covid-19 lockdowns, providing a tantalizing glimpse of what a true DTC future might hold.
Yet the year was not without its headwinds. Supply chains are still snarled. Inflation is changing the math for producers large and small. In such a competitive environment, it’s no surprise that business closures have increased. And frustrated lobbying efforts mean many states have stalled out when it comes to legislation that will help distillers thrive.
Still, we’re feeling optimistic as we move into 2023. At the first ADI conference 20 years ago, just a few dozen distillers gathered to build connections and share information at the grandfather of craft spirits, St. George Spirits in Alameda, California. Today, there are 2,460 craft producers in the U.S. alone. That is a 1,000% increase over the last 20 years. It’s not just in the United States. Craft spirits growth is truly a worldwide phenomenon, with small distilleries making gin, whiskey, and rum in communities around the globe.
All year, we’ll be celebrating how that initial group of spirit geeks, entrepreneurs, tinkerers, cocktail nerds, and iconoclasts ignited what would become a truly global movement. It’s a perfect time to review how 2022 played out for American craft distillers — and look forward to what 2023 might hold.
The Good News
American craft spirits have never been more delicious. Quality standards in the industry are high, and getting higher every month. Enthusiasts can now enjoy exceptional gins, whiskeys, rums, vodkas, and liqueurs from every state and virtually every city. Packaging, marketing, and tasting room experiences are also becoming increasingly sophisticated, delivering incredible value to consumers.
With post-Covid-19 travel surging, tourism is emerging as a critical aspect of the industry, a pathway to sustainability for smaller brands, and an economic benefit to communities around the country. Visiting local distilleries has become an important part of many travelers’ itineraries. Distilleries that have taken cues from the wine industry — banding together to create distillery trails, visitor centers, passport programs, and other tourism infrastructure that make planning a distillery tour easy — are thriving.
Copacking and contract manufacturing also continue to be a lucrative area for craft distillers around the nation. New business formation in the industry continues, and many newer entrants are opting to contract produce or source their spirits rather than build their own manufacturing plants.
Craft spirits and spirit-based RTDs also continue to gain market share relative to beer and wine, as well as increase their share of the beverage alcohol dollar. Despite inflation, premiumization shows no signs of slowing down. Consumers are increasingly willing to spend more for quality and authenticity. Younger consumers are drinking less than previous generations, but that hasn’t appeared to create much drag on premium craft spirits, which are a natural fit with the “drink less, drink better” trend.
Finally, the TTB introduced its preliminary new standard of identity for a new category in 2022: American single malt whiskey. It caps years of organizing by American whiskey producers to create this new category. Formalizing this growing new style is an exciting step forward for American whiskey makers.
The Bad News
While supply chain disruptions eased somewhat, resources remain strained. Barrels are scarce, with lead times that can stretch nine months or longer. Costs for ingredients, supplies, and labor have all increased dramatically over the past 12 months, squeezing cash flow and forcing many to increase prices to match. The effects of Prohibition also continue to linger. Each state is different, but many still have outdated regulations like onerous caps on distillery bottle sales, limited on-site tastings, and constrained hours of operation, stifling growth.
The growing cost of doing business may be one reason we’re seeing more distilleries downsize or close up shop altogether. Between 2010 and 2020, growth was widespread and fast-paced, with 300 to 400 new producers opening each year. Seeing distilleries go out of business was very rare. That is no longer the case. In 2022, the industry grew by about 200 distilleries, an increase of 9%. Producers of all sizes are feeling the pressure, from tiny nano distilleries to major brands. Anecdotally, we’ve seen an increase in postings on the ADI forums for used equipment and distilleries for sale.
The spirits industry is famously cyclical, with centuries of precedent of boom-bust-boom cycles. The kind of growth we saw in the 2010s couldn’t continue indefinitely. Looking to the craft brewing industry for comparisons, we saw an initial explosion of growth, followed by a downturn, followed by a return to growth. It’s impossible to say exactly where we are in that cycle, but it’s a safe bet that what goes up must come down — and vice versa.
What’s Next
The pandemic opened the door for direct-to-consumer shipping. Many states instituted newly permissive laws for DTC, although not all have retained those laws as the pandemic recedes. Before Covid-19, just three states permitted DTC in some form. Eleven states now have DTC laws on the books. A permanent, coherent, and coordinated approach to DTC, however, remains the ultimate goal.
DTC legislation will have to be passed at the state level, which means that each state will have a unique set of circumstances and conditions to strategize around. Distillers are not unopposed. Distributors, retailers, beer and wine producers, and neo-Prohibitionists are all mobilizing against DTC legislation. Proof gallon caps can create conflict between larger and smaller producers. This means that those in the distilling industry will need to work to find common ground with one another, and with those in adjacent industries, to succeed. ADI is working with multiple industry partners on DTC as a key legislative goal for 2023 and beyond. This will not be an easy fight, and we hope you can join us as we work toward this critical goal.
Despite the challenges, it’s still a great time to be an American craft distiller. When we gather in Las Vegas later this year for our 20th anniversary conference, we’re looking forward to celebrating the incredible achievements of this remarkable industry over the past two decades — and looking forward to many more great things to come.
Cheers,
Erik Owens, President
