Founded by Dan Garrison in 2005, the Hye, Texas-based brand reflects many of the core ideals that separate the craft segment from its large-scale counterparts. It proudly embraces its regional identity, touting its legacy as the home of the first and oldest legal whiskey distillery in the state. It adheres to traditional, small-batch production methods — such as using harvested rainwater to cut the alcohol — and sources its corn from local organic farmers, along with organic wheat from its own 65-acre farm. Its speciality bourbons, such as its unfiltered, 136-proof Cowboy Bourbon, have won awards.
Yet even as the U.S. craft spirits industry expands at a rapid pace, Garrison is one of many distillers facing the same challenge: once established, how can small-scale producers breakthrough to the next level? For many, the answer is simple, but not necessarily easy: sell out.
“You reach a point in your development or your growth where you feel a little bit stunted,” Garrison told BevNET. “It’s almost impossible for a small craft distillery with just three or four employees, or maybe ten like we have, to grow beyond their region. That’s why we are seeing so many acquisitions all of a sudden.”
According to statistics from the American Craft Spirits Association (ACSA), a non-profit trade group, craft distillers, which the ACSA defines as products that are physically distilled and bottled on-site by independently-owned distilleries with maximum annual sales of 52,000 cases, are enjoying a period
of robust growth.
The Craft Spirits Data Project, a year-long research initiative into the craft spirits industry launched by the ACSA, reports that the U.S. craft spirits market, which includes 1,315 active distillers as of August 2016, generated $2.4 billion in retail sales in 2015. From 2010 to 2015, the market share of U.S. craft spirits in volume more than doubled, going from 0.8 percent to 2.2 percent. In that same period, the market almost tripled in value, going from 1.1 percent to 3 percent.
For the purpose of the project, U.S. craft spirits were defined as distilled spirits that have not removed more than 750,000 proof gallons from bond, market themselves as craft, are not controlled by a large supplier and have no proven violation of the ACSA’s Code of Ethics.
While representing only $2.4 billion of the $72 billion U.S. market, the craft spirits segment is expanding at a compound annual growth rate of 27.4 percent in volume and 27.9 percent in value from 2010 to 2015.
PARTNERS = POWER
The kind of growth has not gone unnoticed by the spirit industry’s larger players, who have begun to develop the capacity to innovate by acquisition, making bets on smaller brands in much the same way as their fellow giants in beer, soft drinks, and food.
The last six months alone have seen a flurry of investments and acquisitions in craft from multi-national liquor brands. In December, NBV Investments Inc., a subsidiary of French spirits powerhouse Pernod Ricard SA’s North American division, purchased a minority stake in Smooth Ambler Spirits, makers of Old Scout bourbon and Greenbrier gin.
Meanwhile, Constellation Brands, a beverage alcohol conglomerate with a portfolio that includes Corona beer and Svedka vodka, has announced multiple acquisitions; after completing a $160 million deal in October for Utah-based High West Distillery, the company made minority investments in whiskey producers Catoctin Creek Distilling Company and Bardstown Bourbon Company in January.
Partnering with a bigger company, whether through strategic investment or outright acquisition, can solve issues of cash flow and distribution for craft distilleries almost instantly, and many have been more than happy to take advantage.
“I think it can be a win-win,” said Tom Jensen, co-founder of Philadelphia-based New Liberty Distillery and former President and CEO of Pernod Ricard USA. “I don’t think what you just described is that different from what happened in craft beer, where good regional brands ended up getting acquired and then others come in.”
Jensen noted that while capital demands for producing whiskey are high, an even bigger challenge for small-scale operations is securing distribution. The popularity of craft spirits has drawn the interest of major distributors, but an increasingly crowded field of distilleries means there are more brands fighting for the same small space in a distributor’s liquor portfolio. Partnering with a large company, Jensen said, was one way to solve that issue.
“When I was at Remy (Martin), the distributors were phenomenal,” he said. “But as a small craft person, [the distributors] are just so controlled by the big spirit houses that even if they want to do well for you, they don’t. Unless they put in some kind of dedicated division just working on craft, they, 95 percent of the time, fail on selling craft brands.”
Paul Hletko, founder of Few Spirits and President of the Board of Directors at the ACSA, has seen how the increase in the number of craft spirit brands has shifted distributors’ attitudes toward the category, for better or worse, over the years.
“When we started, distributors would have the attitude of ‘what’s a craft spirit?’” Hletko said. “Whereas now, I think it can be very challenging to get into distributor’s books because they already have all the craft spirits that they need or want. At first it was hard to convince them that they needed a craft spirit in their book, now they need to be convinced that they need yet another one.”
Jared Fix, CMO of Constellation Brands, explained the process by which the company evaluates potential investment or acquisition opportunities, which can involve tracking a company’s growth over several years.
“We do very comprehensive analysis in spirits across the different categories and subcategories,” said Fix, noting that Constellation does not have a fixed range for the size of potential investment. “So taking whiskey and then looking within bourbon, looking within rye, segmenting that across price tiers to see where there is growth, and therefore an attractive segment. We also look at where there might be single brand phenomenons in a segment that may otherwise be attractive. We look at those brands from all stages, all sizes and all scales.”
Besides the spirit itself, craft distillers also present interested investors with opportunities to tap into the authenticity of their brand – an increasingly important attribute for consumers. Fix said that High West’s location – nestled on a mountain ranch about 15 minutes outside of the ski mecca of Park City, Utah – and on-premise customer experience, in the form of a renovated saloon, helped make the brand more appeal from a marketing standpoint.
“When we were evaluating the brand in the acquisition phase, the question I asked was ‘why the hell would you start a whiskey distillery in Utah?,’” he said.
“It’s just not the most intuitive place. The founder David Perkins took this risk and it’s made it something that’s very unique and distinctive. If I put a dozen marketers on it, it wouldn’t have had that same realness.”
On the other hand, Christian Krogstad, founder and head distiller at House Spirits, pushed back against the assumption that every craft distillery is seeking outside funding to scale up operations.
“There seems to be this prevailing assumption that every distillery wants to grow,” Krogstad said. “I meet a lot of folks for whom their distillery is a retirement hobby. They are self-funded. It means there are a lot of people out there for whom profit isn’t important. And so they are going to invest and act differently than a profit-driven company. That has some interesting impacts on the market.”
Back in Texas, Garrison said he worries that, despite the boom in craft distilling, the pace of acquisition and access to scale and cash means that the gap between the haves and have-nots in craft spirits will continue to widen, particularly as the large companies invest heavily in marketing and sales. Yet despite those fears, he admits that he himself hopes to draw the interest of a strategic partner that could help the brand expand its distribution footprint.
“We are not looking to be acquired, we are fiercely independent,” Garrison said. “But we would be very interested in partnering with the right company. It has to be the right company, it’s got to be the right deal terms.”
Drawing from his own experience on the other side of the boardroom table, Jensen says the time to get in the business is now.
“I would tell [large spirits companies] to ignore it at their own peril,” Jensen said of the craft spirits market. “It captures so many things that are important to consumers nowadays – buying local, sustainability, things like that. I almost would say it’s a bargain way for a big company to innovate, to go out and let somebody else do the innovation for them and then go buy them. I’d let them stay independent and have a right of first refusal or something, but go lock up some people now while the price tag is still cheap.”
Mixers Push Towards Premium
By Martín Caballero
If you are drinking a premium spirit, why wouldn’t you pair it with a premium product?
Across the mixer and cocktail-enhancer category, that’s the question brands at the Winter Fancy Food Show in San Francisco were asking both consumers and retailers. From local cocktail haunts to home wet bars and up through mass channel giants like Wal-Mart and Target, it’s a category that an increasing number of manufacturers are betting on. And while there are plenty of other companies offering new takes on mixers – from large spirits companies and beyond – the Fancy Food Show gave a clear view of the trends that have opened up the category to new growth.
There’s a reason hundred-year-old cocktail recipes like the Old Fashioned and Moscow Mule remain popular today – they simply work. But in the era of the upgrade, many brands are eschewing radical innovation in favor of tweaking and developing high-quality versions of classic mixer staples.
Fentiman’s, founded in 1905, is steeped in such tradition. The U.K.-based botanical brewery makes a variety of products, including craft sodas and an alcoholic ginger beer, but has largely kept its mixers aligned with classic flavor profiles like ginger ale and tonic. All varieties are made with natural ingredients using the same small-batch production process that the company has used since its founding. While the brand’s U.S. business has been mainly driven by retail, Fentiman’s also packages its mixers in a single-serving 125 mL size that is used as part of on-premise table service at 68 U.S. and Canadian locations of casual dining chain Earls.
Similar to Fentiman’s, craft soda brand Grown Up Soda has created a clear distinction between its soft drinks and its dedicated line of mixer products. At the Winter Fancy Food Show, the company showcased a new line of non-alcoholic sodas designed as single-serving pairings for specific spirits, available in 7 oz. glass bottles in four varieties – Moscow Mule, Sparkling Cosmo, Mojito and Tonic and Lime. Each will retail for around $3 per bottle. (Q Beverages has also rolled out a similar size, below).
While some brands focus on refining and improving on the classics, others are seeking to broaden the possibilities of what a mixer can and should be.
Cocktail Crate has taken the former approach to its line of mixers. The New York-based brand’s six varieties, packaged in 12.7 oz. glass bottles, each offer a nuanced twist on familiar cocktail flavors, through SKUs like Spicy Old Fashioned, Maple Whiskey Sour and Sriracha Margarita. The company also debuted a new flavor at the Winter Fancy Food Show: Spicy Michelada, made with lime, orange juice and sriracha and intended to be paired with Mexican lager. In a sign that retailers are also looking to offer consumers more premium options within their mixer set, Cocktail Crate has recently been launched at 300 Target locations in California.
While gaining popularity in their own right, drinking vinegars are also positioning themselves as a viable alternative mixer option for consumers seeking something slightly different to pair with spirits. California-based Crafted Cocktails makes fruit-infused shrubs, or vinegared syrups, in 16 oz. glass bottles, which they market as a cocktail enhancer at a suggested retail price of $12.99.
Founder Felicia Vieira said that one-note flavors like Asian Pear and Pineapple, each developed by the brand’s staff mixologist, has helped temper the intimidation some customers feel when approaching the product.
Pok Pok Som brings Asian inspirations to its own line of drinking vinegars. Available in 16 oz. glass bottles, the brand focuses on creating high-quality versions of vinegar flavors typically consumed in Taiwan, Korea and Thailand, like Chinese celery, Thai basil and tamarind. Also working with vinegars is Brooklyn’s Morris Kitchen, which makes a variety of cocktail pairings and syrups including a new mixer made with small batch vinegar and coconut nectar.
The Owl’s Brew, which has produced tea-based cocktail mixer products since 2013, has pushed further into category with its line of radlers, a ready-to-drink cocktail made with organic tea and craft beer. Available in 12 oz. cans in four SKUs, each variety features a different pairing of tea and beer; “That’s My Jam” for example, includes amber ale and Darjeeling, along with hibiscus flower, fruit juice and agave nectar.
Even as brands make inroads at retail, the development of cocktail culture still takes places primarily at bars and restaurants. Before making their own drinks at home, consumers are discovering premium spirits and mixers through on-premise service, and brands are eager to use the channel to drive sales and develop a loyal customer base.
“Selling into food service is the best way to grow,” said Jordan Silbert, CEO and founder of Brooklyn-based Q Drinks. The brand’s new labeling and packaging, showcased for the first time at the Winter Fancy Food Show in San Francisco, underlines that principle; both the new can format, reduced from 12 oz. to 7.5 oz. and the glass bottles, going from 9 oz. to 6 oz., are now sized as a single serving for cocktail pairing. In addition, a color-coded label around the neck of the bottles and the rim of the cans makes each SKU, including a reformulated grapefruit flavor and a new “kola”-style variety, easily identifiable for those working behind the bar.
The brand’s “Spectacular Serve” initiative is another key component of their food service strategy. In locations that use Q Drinks products, servers are encouraged to present a bottle of Q Drinks mixer alongside the spirit and allow patrons to mix the drink themselves, similar to how cocktails are typically served in Europe.
Food service can also be a potentially critical component for brands that may need to educate consumers about their products. Crafted Cocktails partnered with mixologists at the Wynn Hotel in Las Vegas to develop recipes that use the brand’s Asian Pear flavor.
“Having a strong on-premise program has helped build awareness and made people more familiar with our products,” Vieira said.
As mixer brands across the category continue to seek ways to become more accessible to consumers, the same can be said for bitters.
“We are like Robin to Batman,” explained Jomaree Pinkard, co-founder of Hella Cocktail Co., of the relationship between bitters and cocktails.
Along with producing a wide variety of bitters, syrups and cocktail mixers, the company has made educating consumers about bitters and overall mixology a part of its mission. In addition to its bitter multi-packs, Hella sells a “Craft Your Own” kit that includes all the tools and ingredients (minus the alcohol) needed for making bitters at home. Pinkard said the brand has also put on several classes in the New York area on topics related to alcohol extraction and mixology that are open to the public.
Dan Brazelton is one-half of The Bitter Housewife, a line of bitters that he co-founded alongside his wife Genevieve, for whom the brand gets its tongue-in-cheek name. Brazelton explained that the Portland, Ore.-based company , which also owns cocktail syrup line RAFT Syrups, has made its mission to debunk the idea that bitters are esoteric ingredients which require a deep understanding of cocktails (or a wispy ironic mustache) to enjoy.
“Most bitter brands market to bartenders,” Brazelton said, adding that nearly 80 percent of consumers who purchase bitters are new to home cocktail preparation. “The industry is not understanding the market from a consumer level, and that’s what we are trying to focus on. We are about empowering people to make their own choices.”
Those choices include the brand’s signature aromatic bitters, which Brazelton compared to a higher quality version of Angostura, to flavors like cardamom and coriander. The brand has also paired with spirits brands for special formulations, such as a richer, spicier version of their standard bitters that has been aged in whiskey barrels from Bull Run Distilling Company. Each come in 3.4 oz. glass bottles and are priced at $15.
Minnesota-based Dashfire Bitters has gone even further with its range of fruit and botanical-infused SKUs. Claiming to offer the largest selection of bitters in the world, the brand’s square, 3.4 oz. proprietary bottles are designed with bartenders in mind, including the bottom label. Flavors like lavender, grapefruit, clove and cardamom are designed to broaden the occasional use, but the brand also has an innovative streak, as seen with the inclusion of flavors like Chinese All-Spice and Mole.