Craft spirits may still account for a relatively small percentage of U.S. spirits sales, but the segment is playing an outsized role in shaping the category’s future. And with the number of U.S. craft distilleries now totaling more than 1,300, according to the American Craft Spirits Association (ACSA), the category’s influence is only slated to grow.
The definition of what exactly constitutes a craft distiller varies. The Distilled Spirits Council defines small distillers as those producing less than 100,000 nine-liter cases annually, while the ACSA requires that voting members produce fewer than 750,000 proof gallons removed from bond (roughly 315,000 cases). The American Distilling Institute, meanwhile, states that a certified craft distillery is one whose sales total less than 100,000 proof gallons. All three organizations agree that the category is on fire. The ACSA estimates that craft spirits averaged annual growth of 27.7 percent by volume and 27.9 percent by value between 2010 and 2015, reaching nearly 5 million cases and $2.4 billion last year, respectively.
Deal-making Heats Up
With craft’s growth far outpacing that of the overall spirits category, it comes as no surprise that the market’s biggest players have taken notice. Over the past several years, the craft spirits world has seen an uptick in M&A activity, starting in 2010 with William Grant & Sons’ takeover of Tuthilltown Spirits’ Hudson whiskey brand and Proximo’s purchases of St. George Spirits’ Hangar 1 vodka and Stranahan’s Colorado whiskey. The trend has since accelerated, with late 2016 seeing record levels of deal-making.
“You have entrepreneurs who, yes, want to have some financial return, but mostly want to see the great work they’ve put into their brands turn into something enduring and successful,” says Thomas Mooney, co-owner and CEO of House Spirits, which sold off its Aviation gin brand to New York–based Davos Brands last November. “The path from 10,000 to 100,000 cases is very different from the path from zero to 10,000 cases.”
For House Spirits, the sale of Aviation has allowed the company to ramp up focus on its Westward Oregon straight malt whiskey. While Westward ($50 a 375-ml.) is currently a single-SKU brand, House Spirits plans to develop it into a three-expression range, as well as expand into 750-ml. formats. According to Mooney, Westward is on track to sell 25,000 cases by 2019. “We’ve realized that when you have limited resources and competitors with very deep pockets, focus is an incredible virtue,” he adds.
Among the craft segment’s recent high-profile deals are Constellation’s acquisition of Park City, Utah-based High West Distillery and its purchase of a minority stake in Purcellville, Virginia-based Catoctin Creek last year, as well as Remy Cointreau’s December 2016 takeover of Seattle’s Westland Distillery. Pernod Ricard also entered the fray last December, acquiring a majority stake in West Virginia’s Smooth Ambler Spirits, and this past April, William Grant opted to acquire the remainder of Tuthilltown Spirits’ operations. Also is in the mix is Samson & Surrey, the investment firm led by former Bacardi executives Robert Furniss-Roe and Juan Rovira. Thus far, the firm has formed equity partnerships with such key craft players as Illinois-based FEW Spirits, Brooklyn, New York’s Widow Jane whiskey and Philadelphia Distilling. In addition, Spirits Capital Partners—led by former Allied Domecq executive Todd Martin—is now teamed up with The Real McCoy rum and Los Angeles’ Lost Spirits.
“We’re all growing at such a rate that it eventually becomes more than most small entrepreneurs can handle,” notes John Little, head distiller, founder and CEO at Smooth Ambler, which produces the Old Scout ($35 to $65 a 750-ml.) and Contradiction ($50) Bourbon labels, among other spirits. “Plus there’s always the attraction of the resources that large companies can provide, which doesn’t necessarily just mean money. It means access to legal teams, accounting, compliance and distribution platforms.” With Pernod’s investment, Smooth Ambler is expanding to 24/7 production at its 3,000-barrel facility.
Westland, meanwhile, is currently in the process of merging with Rémy Cointreau’s existing whisk(e)y portfolio, which also includes the Bruichladdich single malt Scotch and Domaine des Hautes Glaces French single malt brands. Westland specializes in high-end American single malt whiskies retailing at around $70 to $125 a 750-ml.
“All businesses go through stages of development where they need a new partner to push to the next stage,” explains Simon Coughlin, CEO of Rémy Cointreau’s whisk(e)y business unit. “This is a crucial time for Westland, and we’re focused on building brand awareness. We’re getting our own teams and distributors fully trained on the philosophy of Westland and the category and forming a solid base.”
According to former High West chief executive John Esposito, however, the recent wave of craft whiskey buyouts has also led to a rise in competitors looking to make a quick sale. “The whiskey category continues to be hot, and there are a lot of people who believe they can make some whiskey, get it to a minimum level of 10,000 cases in sales, and then cash in,” says Esposito, who recently departed High West to join craft rum producer Real McCoy Spirits as chairman. “But the most important thing is to establish a brand. The reason High West was so successful is that we worked to become a nationally recognized brand, and we had some very unique assets,” he adds, citing the company’s High West Saloon tourist center in Park City, which draws more than 200,000 visitors a year.
With craft spirits poised to remain a hot commodity, many industry players predict the buying frenzy will persist. “I think the acquisition trends will continue for as long as there are holes in the major distillers’ portfolios,” says Joe Heron, cofounder of Kentucky-based craft brandy distillery Copper & Kings. “Overall, it’s a healthy thing in terms of building an American distilling industry and heritage that will last the next hundred years or longer.”
Likewise, House Spirits’ Mooney agrees that the rampant M&A activity will persist, as well as play a key role in helping certain craft brands get to the next level. “Not only is this the tip of the iceberg, it’s the tip of the tip of the iceberg. The spirits business has always been scale-sensitive, where it’s very challenging to be small. And the consolidation in the wholesale tier over the last few years has only made it more challenging,” Mooney adds.
However, others predict that the competitive environment will make future investors more discerning, particularly if the current crop of craft buys fails to meet expectations. “While deals will continue to move forward, I think big companies will become a lot more selective,” Esposito says. “They’re making some bets right now, and if some of them aren’t paying off, they’re definitely going to become a little tighter about how much they spend and what they spend it on.”
Though the craft spirits craze shows no signs of slowing, the threat of overcrowding is a major concern. The proliferation of small distillers and their ever-expanding portfolios has led to some concern, especially as craft beer—a segment that has long served as a bellwether for the craft spirits category—starts to contract in the United States.
“We are at a point where the market may be on the path to being too saturated with new craft items, but it will be up to the consumers’ buying patterns to decide when there are too many choices to be made,” says Brian Bowden, senior vice president and general merchandise manager of spirits, beer and more for chain retailer BevMo.
With around 158 locations across California, Arizona and Washington, BevMo currently dedicates 5 percent of its overall spirits selection to craft, though that ratio is slated to grow this year. According to Bowden, BevMo’s top-performing craft spirits offerings continue to be whiskies, though the chain has also seen growing demand for barrel-aged gins. BevMo has also found success by customizing each store’s local craft selection, with Washington’s 2bar Spirits and Arizona’s Thumb Butte Distillery among some of the retail giant’s more popular regional offerings.
For California retailer K&L Wine Merchants—which operates three stores across Redwood City, San Francisco and Hollywood—the crowding of the craft category has also put some pressure on pricing, with consumers increasingly on the hunt for better quality and value.
“The misty-eyed romanticism that used to allow craft producers a pass on quality is gone. I think many customers have come to the conclusion that small isn’t necessarily better—it really comes down to quality and price,” says K&L spirits buyer David Driscoll. “No modern shopper is going to pay more for less at this point, so the craft guys need to get their pricing in line with their big brand competition.” K&L’s top-selling craft spirits categories include whiskey and gin, with the retailer also seeing an uptick in more esoteric entries, such as Italian- style amaro.
Wheat Ridge, Colorado–based retailer Applejack Wine has similarly witnessed the steep rise in craft spirits offerings, and Applejack CEO Jim Shpall believes the trend has contributed to a notable decrease in brand loyalty. “Because the number of spirits available to them is growing, people want to experiment,” Shpall notes. “There is loyalty to being a whiskey drinker or a Bourbon drinker, but loyalty to a specific brand is disappearing.”
Consequently, for small distillers, the increasingly crowded market has resulted in a renewed need for solid brand building. In anticipation of a coming glut, San Francisco–based craft distiller and importer Anchor Distilling—which produces Old Potrero whiskey, Junípero gin and Hophead vodka, among other brands—has sought to differentiate its portfolio by way of history and authenticity.
“The craft spirits market is not yet too crowded, but you can see where it’s heading,” explains Dennis Carr, president and CEO of Anchor Distilling. “Wholesalers are sitting on a lot of inventory, which is the key indicator that the selection process needs to be tighter and that the industry is likely heading toward a shakeout. Being new isn’t good enough anymore.”
Other players dispute the notion that the category is overcrowded, however, due in part to distribution challenges for most small spirits brands. “The route to market is very challenging,” says House Spirits’ Mooney. “If anything, the consumer probably has the perception that there are fewer craft spirits choices than there really are. If you look at a winery with a half-million dollars in annual revenue, most likely they’re doing much of that out of a tasting room and wine club. They’re not going through a major wholesaler and distributing in 26 states. So I think we’ll see greater interest in the ways in which spirits producers—especially the smaller ones—can similarly participate in a direct-to- consumer business.”
As craft spirits brands reach a critical mass and some opt to go corporate, the line that separates craft from the rest of the spirits industry has begun to blur. Moreover, large spirits producers have increasingly adopted craft-like branding, making it more challenging for consumers to assess a product’s craft credentials.
“At worst, there’s a lack of transparency in which large spirits conglomerates masquerade as craft producers,” says Lance Winters, master distiller for Alameda, California–based St. George Spirits. “Ultimately, this obfuscation hurts the category, as well as the consumer, by taking the category of craft and making it even more confusing.” St. George currently produces the Terroir gin, Green Chile vodka and Bruto Americano aperitif brands, among others.
In an effort to better preserve the category’s cachet, craft distillers are making transparency a priority. This trend has been particularly evident within the craft whiskey category, which has received criticism for sometimes obscuring the common practice of sourcing, in which whiskey companies purchase liquid from contract distillers like Indiana’s MGP Ingredients. But as consumers grow increasingly interested in the finer points of provenance and production, craft whiskey players have become more forthright about sourcing, and are also expanding their in-house distilling and aging capabilities.
Among the many craft whiskey brands that practice sourcing is Vermont-based WhistlePig, whose core range includes its 10-year-old straight rye whiskey, 12-year-old Old World Cask Finish and 15-year-old straight rye whiskey. In March, WhistlePig unveiled Farmstock ($90 a 750-ml.), the brand’s first label featuring whiskey distilled, aged and bottled at its Vermont farm. The expression is comprised of 20-percent whiskey distilled from rye grown on the WhistlePig farm. Of the remainder, 49 percent is 5-year-old whiskey from Alberta Distillers, finished in WhistlePig Vermont oak barrels, while 31 percent is 12-year-old whiskey from MGP.
“This is ‘Crop 1’ of Farmstock, as we’re calling it, and each year, we’ll release another iteration as we come out into being 100-percent sourced from the farm,” says WhistlePig founder Raj Bhakta. “So far, the market response has been overwhelming, and we’ve had three times as many orders as we have cases to ship.”
Likewise, trade organizations such as the ACSA assert that maintaining transparency and authenticity will be key to driving craft spirits’ long-term growth in the United States. And as the categorization of craft evolves into something more complicated, many industry players agree that small distillers will need to rely on honesty, quality and consistency to remain competitive.
“The big question of what is craft is always a little nebulous because craft is really in the eye of the consumer,” says Paul Hletko, founder of FEW Spirits in Evanston, Illinois, and former president of the ACSA. “Our job as distillers is not necessarily to tell people what is craft, but to tell people what we are and let them decide if it’s craft or not. The idea is that you peel away the smoke and mirrors and let people know what you are doing. The consumer will, and should, always win.”