Craft distillers poised to breakthrough

Source: Technology Digital

Date :31/05/2007 14:25:57

Small-batch distillers are a relatively new phenomenon, but one they hope will parallel the growth experienced by microbreweries.

By James Buchanan

It wasn’t long ago when microbreweries were something of an interesting niche business, taking customers back to a time before prohibition when smaller, local breweries existed in nearly every corner of the country.

Now many of these small brewers have built their businesses into mainstream multi-million-dollar success stories with others setting up shop in nearly every community in every region of the US.

If past trends hold true, the handful of craft distillers throughout the US want to follow their brewing brothers’ success. These are small distilleries – 88 in all – located in 32 states, including Hawaii, that produce a variety of distilled spirits – whiskey, rum, vodka, gin, etc – in small batches with an eye to homemade quality rather than large production.

“What we are doing resembles in many ways the micro-brewery phenomenon,” says Melkon Khosrovian, founder of Modern Spirits based in Monrovia, Calif. “We are small companies coming in and radically reshaping the industry.”

According to Khosrovian, “This also reflects what the customer is interested in, which is quality, craftsmanship, locally produced in smaller batches a lot like the kinds of products you would find at markets like Whole Foods. What we produce tastes and is made, and is in every way different from what the large international producers make.”

Though most craft distillers hope to capture the excitement and growth of craft brewers, they face a few more challenges than the early pub owners did. These range from a rather high cost of entry to educating the public about their products. However, the one area that bedevils them most is laws and regulations that limit their ability to sell and disseminate their products to the public.

Most annoying to them are state laws making it illegal for them to sell their products onsite or even offer tastings.

“The main challenge is antiquated state laws,” says Jack Robertiello, group editor of electronic media for the Adams Beverage Group, “that make it difficult to operate such places where food and beverages are served and spirits are distilled in the same location.”

Khosrovian agrees, saying he is unable to offer tastings or sell his product directly to the customer in much the same way a vintner or brewer can. “I can show them the bottle and the label, but it is very difficult to entice a customer to buy our product that way,” he says.

However, an oasis has recently been created in the middle of the country. In March, Nebraska Gov. Dave Heineman signed Legislative Bill 549 into law creating the first legal framework for craft distillers to open micro-distilleries in the same mold as microbrew pubs. Distillers will be able to sell their products directly to restaurant patrons. They will also be able to sell their products at off-site retail liquor outlets as long as the distiller goes through a wholesaler.

“Nebraska’s law is revolutionary because it’s the first state where you can have a pub,” says Bill Owens, president of the American Distilling Institute. In other states, sales are generally only through retail outlets or distributors so it is something new to be able to produce a glass of rum and be able to have people come in, sit down, and drink it.”

While craft distillers say the Nebraska law is a move in the right direction, they still face a number of challenges. According to Khosrovian, requiring craft distillers to sell to retail outlets through distributors is a tough nut for small-batch producers to crack.

“The wholesale marketers over the past few years have gone through a lot of consolidation so there are very few small to midsize companies left,” Khosrovian says. “The larger companies are hard to convince that it is worth their time selling smaller batch brands.

“The big question is how we get our products into the hands of retailers, and how to get our products to where they are popular enough where the wholesalers will nourish their growth,” Khosrovian continues.

Khosrovian says he managed to break through the logjam by initially acting as his own distributor, walking the product from store to store and restaurant to restaurant. “After a while it got to be too large of a production so we took our products to one of the few remaining mid-size wholesalers, which has worked for us,” he says.

This kind of start-up strategy is possible in California, Khosrovian says, but is either too difficult or prohibited in other states. He says one possible solution would be for investors and others to realize the potential of craft distilleries by offering smaller, niche distributors to serve this budding industry.

“We are unique and offer a higher quality at a fair value, which is something that has happened with other products such as coffee,” says Khosrovian. “Once there were only very large companies such as Maxwell House and Hills Bros., but then companies such as Starbucks and other smaller specialty producers came in and changed the market place. It’s the same with what we are doing; we are a smaller producer that can offer products that the larger producers either can’t or won’t produce.”

Jon Cook, COO of Blackwell Distilling, believes a strong market for craft distilled products could be created. However, he notes that the customer awareness that made craft brewing and coffees possible is not quite ready yet.

“One of the biggest challenges we face is education,” Cook says. “It is commonplace for consumers to understand many aspects of producing beer and wine. When you make an artisan niche product, which uses production method as a differentiator this is key. We find ourselves in this position, but dealing with consumers who don’t know nearly as much about the production of distilled spirits as they do about brewing beer or making wine.”

Robertiello, of the Adams Beverage Group, adds, “When brewpubs first opened the selection of quality beers in the US was quite limited. With spirits, high-quality spirits are widely available and well supported by suppliers.

“Niche markets are certainly open for this sort of enthusiastic business, but the brewpubs that succeeded were always mindful that customers need good food with good beverages,” Robertiello says. “As for micro-distillers with no restaurant operation, it’s always a matter of getting distribution and good marketing, which distributors will likely not provide to small output distillers.”

Looking to the future of the industry, Cook says, “I think growth will be similar to what we have seen in terms of the value with the microbrew beer industry, but will involve fewer companies in the long run. There is plenty of regulatory ground to overcome with distribution, onsite retail sales and tastings. That said, I think some very solid companies will evolve over the next ten years and this will develop into a well-recognized segment of the spirits market.”