Earlier this month, an article in Food & Wine proclaimed craft spirits in crisis, kicking off a tense debate between wholesalers and craft spirit representatives about the root causes of the challenges facing distillers. The dispute centers not only on consolidation among distributors, but also a changing market under stagnant regulation that has put pressure on the creative backbone of the spirits industry. So where’s the relief for craft distillers?
Craft spirits have been steadily pushing into the mainstream since early pioneers, such as St.George Spirits in northern California, forged a path for other independent distillers in the 1980s. Loosened distilling laws energized the segment in the early 2010’s, and as regional craft spirit communities grew, so did advocacy for legislation that would make business even easier: upping capacity levels, for instance, or allowing tasting room sales and on-site cocktails. In 2005, there were fewer than 50 distilleries; now there are some 2,700.
But simmering tensions have come to a boil amidst an industry-wide slowdown, to which craft distillers haven’t been immune. In 2022, U.S. craft spirits topped $7.9 billion in sales, growing 5.3% in value and 6.1% in volume, but slowed considerably from the year prior (12.2% in value and 10.4% in volume), according to the 2023 Craft Spirits Data Project, released by the American Craft Spirits Association (ACSA) and Park Street.
Craft’s market share of total U.S. spirits maintained a 4.9% share in volume and increased value share to 7.7% in 2022, up from 7.5% in 2021. But that’s still relatively small compared to craft beer, which makes up 13.3% of the U.S. beer market by volume and 24.7% of the $117 billion U.S. beer market, according to the Brewers Association.
It’s possible that craft spirits’ trajectory is becoming more condensed than its bubbly counterparts. Since January 2023, at least 49 craft distilleries have closed and the rate of closures has accelerated in 2024, according to the ACSA.
“We are still a young industry,” said Margie A.S. Lehrman, CEO of ACSA. “And just as we thought we were getting our footing we find our legs have been cut off.”
Distribution Consolidation Putting a Damper on Growth?
The Food & Wine article lay bare some of the points of contention with the industry, ascribing craft spirits’ problems largely to distribution consolidation, including the growing market share of the biggest three distributors, as well as the legal barriers preventing distillers from taking sales into their own hands.
As consolidation continues within all tiers, the top 10 wholesalers now hold 80% of market share with the top two accounting for more than 50%, according Shanken’s April 2024 Impact Newsletter. The ACSA argues that this means consumers are increasingly unable to locally access independent craft spirits products on shelves or behind the bar.
On behalf of distributors, the Wine and Spirits Wholesalers of America (WSWA), argued that the growth of distributors gives brands “the chance to find multi-state players, increasing options in the market.”
But that doesn’t mean craft spirits are able to access those distributors. According to a recent ACSA survey on distribution, a majority of craft distillers (72%) have been seeking distribution in one or more states, but just over half of them (51%) have been turned down and 22% have entirely given up looking.
Distributors often limit their craft selections regionally, explained Lehrman, meaning, they will carry products, regardless of the spirit category, from one distiller in an area in which multiple distilleries are operating. Control states also often have selection committees that determine who can come into the state system.
“The consolidation is really good for people who have the appropriate funding to be able to go out there and launch a brand nationally, and perhaps they’ve created something innovative enough that the market nationally wants to consume,” said Adam Spiegel, who started Sonoma Distilling Company in 2010 and more recently added on Corning & Company, an industrial services program for people in the spirits space.
The current wholesale market is not designed for low-volume brands that are not national in scope, argues Lehrman. For those who do find wholesalers, they can be dropped with low sales, she added.
Distributors Brand Building Less
Some of the pressure on both distillers and wholesalers is likely related to the amount of products wholesalers can represent.
“I think the distributors are being given a very impossible task,” said Spiegel.
With distributor’s “books” filling up, sales reps can’t keep up with learning about each brand, and in many cases are being incentivized by the bigger brands to help sell products, he said.
That shifts the onus onto distillers to sell their own products rather than rely on distributors to help build brands, a considerable challenge when craft distillers on average have fewer than a dozen employees, according to the ACSA.
“You can’t put it all on a distributor [to] just ship your product to a warehouse, and then hope it finds its way to the consumer,” said Matt Reilly, president of the Family Jones Distillery, a Colorado farm-to-bottle distillery founded in 2017.
Reilly joined the company to help expand out of state, which they recently did into Oklahoma and Nebraska. But with 25 employees with only a few sales reps, budgetary decisions must be ruthlessly scrutinized, and Reilly said they’re not quite ready to extend further for the moment.
Instead, they’re pulling plenty of sales levers locally: a “spirit house” bar allows local visitors to sample and buy bottles, they sell at unconventional channels like farmers markets, and are pushing their premium ready-to-serve cocktails into local restaurants and bars.
Southern Distilling Company in North Carolina started in 2013 with a different approach. Founders Pete and Vienna Barger aimed to launch their own scalable bourbon brand but built their distillery at a scale larger than 95% of craft distilleries in the country to create revenue by contract manufacturing. They now have 150 clients, and their own Southern Star Bourbon line. Vienna Barger said using an internal salesforce over contractors has proved to be the most successful tactic so far, with that team focused on the company’s backyard and the rest of the Southeast.
“Even though Southern Star has been on the shelf since 2017, we still have a lot of room to grow right here in our own market,” she said.
Those playbooks look similar to how Spiegel counsels distillers: he often has the ‘come-to-Jesus’ conversation about their sometimes too-lofty ambitions in terms of immediate growth. His counterargument? There are still paths into a regional footprint that bypass upending a startup’s budget to go national.
Go Deep Before Going Wide, If You Can
While larger distributors have been slowly swooping up regional operators, there are still small to midsize operations in the mix.
Mark Harmann, national sales director of the Independent Distributor Network, represents many of them. The network connects 33 wholesalers in 31 states with the idea of giving midsize to smaller wineries and distilleries a path to leapfrog from market to market.
“You don’t always have to go to the ‘A’ markets,” Harmann said. “In B and C markets you can sometimes do a much better job because they [consumers] don’t see all these other brands like your A markets do.”
For Vienna Barger, North Carolina’s control state model creates a level playing field for craft distillers locally, as the prices are dictated by the state, instead of a free market. That eliminates the financial incentives that might be part of retail deals in open states, she said. The Bargers also helped form the first state distillery association and successfully lobbied for more direct-to-consumer sale privileges at distilleries.
But for some distillers, despite the innate logic of building in one’s backyard, going deep before going wide can be tricky.
For Jill Kuehler, whose Portland, Oregon-based Freeland Spirits is distributed in 20 states, finding a mid-sized distributor that can tell her company’s story in a meaningful way – along with having sufficient capacity in its sales team and account portfolio – has been the sweet spot to expansion. The brand is planning on adding a few more sales reps in the next few years to create a hub-and-spoke model, with one rep grounded in a key geographic area with ambassadors able to do tastings and demos in those markets, versus traveling with a pair of sales staff around the country.
But with stubborn inventory gridlock and high taxes in some home markets, Kuehler now feels the three-tier system’s hit on her margins. Oregon has the second-highest tax rate in the country, so it’s almost imperative for Freeland to get out of its home state to make the business work, she said.
“What a bizarre system— I could ship something halfway around the world and make a better margin than in our own three-tier system,” she said.
The Need for Market Modernizations
One work-around to the three-tier system is direct-to-consumer shipping, which in recent years has loosened up for the wine business. But despite progress made in some states last year, direct shipping for spirits is still largely off limits. Currently there are 8 states and the District of Columbia that allow craft distillers to ship products to consumers.
The WSWA maintains that the Food & Wine article missed broader economic conditions, and complained that it oversimplified the potential of direct-to-consumer shipping as a way for brands to make ends meet.
“The assumption that opening this channel would single-handedly resolve the industry’s struggles is unfounded,” read a statement.
But the ACSA snapped back about the need for market modernizations that could give craft distillers a fair chance. That means expanding direct-to-consumer shipping as well as self-distribution privileges, or improving trade practices in certain states that would allow distillers to sell and sample in new channels.
“ACSA members are happy to compete but outdated statues, rules and regulations make it impractical and in some cases impossible to compete,” said the ACSA’s Lehrman.
Spiegel argues that some state and national regulatory shifts could boost craft distillers’ market access without cutting into distributors’ pockets: self-distribution (even with limits) could help distillers develop an account base before going to a distributor that otherwise won’t take them on, and more DTC privileges could allow brands to gather data and connect with consumers in a faraway state before approaching distributors.
To be clear, many spirits brands do still ship their products, often through a retailer or other three-tier compliant system. But the ability to directly market and have conversations with fans of the brand is what could create a building block to more accounts, argues Spiegel.
Family Jones Distillery just launched online sales in 40 states, on the heels of winning a Tales of the Cocktail Spirited Award for its ready-to-drink cocktails.
“We’ve added a lot of different platforms and it’s definitely not going to be a silver bullet, but it helps elevate our story and get some awareness out there, which is very much what we were hoping to see,” said Reilly.
Innovation Stalled?
Looking beyond the distribution chess game for a moment, could the problem simply be too many brands on the market?
It’s hard not to argue that we’re now in “peak craft”, with nearly 225,000 brands and 2,700 distilleries – that’s something of a traffic jam. The funnel is becoming smaller as distributors consolidate, however – for those craft spirits businesses that want to, as Food & Wine put it, move beyond the hobby stage, the pressure is on to offer something different and to have a sound business plan.
“The pain that’s being felt among distilleries everywhere, nationally, regardless of size, has more to do with not being innovative and trying to continue to push the same stuff over and over again,” said Spiegel.
The U.S. market is the largest in the world and craft distillers are also competing on an international stage with imports. While there is a natural attrition, the ACSA’s concerns address the inability of craft brands to gain market access, said Lehrman.
But Spiegel says it’s still important for brands to find the holes in the market, a task that looks quite different from when the sector emerged and before major conglomerates began swooping up craft brands over doing their own R&D.
Creating “something that makes people curious,” is still important, said Reilly.
“You have to find ways to interact and get to the consumer, and get through the noise,” he said. “I don’t find that that’s particularly anything new.”