Craft Distillers Tackle Prominent Issues at WSD Summit

FILED SEPTEMBER 10, 2013

Dear Client:

Craft spirits are still a young segment in the big scheme of things, and if there's anything to be learned from following in the footsteps of craft beer it's that the farther along you get the more issues the segment has to address. Craft spirits leaders from Death Door's Spirits, Garrison Brothers Distillery, Tuthilltown Spirits and House Spirits Distillery gathered together at the Wine & Spirits Daily Summit recently to discuss some of these issues facing the growing segment today.

GEARING UP TO TAKE ON EXCISE TAX DISPARITY: One thing House Spirits Distillery ceo and co-owner Tom Mooney hammered home is that in order for craft spirits to obtain as much of the spirits market share as craft beer has, the high excise tax rate collected from craft spirits needs to change. "The excise tax treatment of spirits versus beer and wine overall is pretty unfair," he said.

"In particular, the smaller producers of beer and wine get very substantial breaks over the first X amount of product and that X amount of product keeps going up every year as Jim Koch [of Sam Adams] needs to increase it. In spirits there's nothing like that. We pay the same $13.50 per gallon from the first brew kettle." If it weren't for his high excise tax bill, Tom said he could have doubled his sales team.

Ralph Erenzo, partner at Tuthilltown and board member member of the American Craft Distillers Association (ACDA), added that the newly formed ACDA's "first job" is addressing the excise tax disparity. He agreed that small brewers and wineries pay a very small percentage of their excise tax rate, whereas distillers still pay 100%. Not to mention that spirits is a very equipment and labor intensive business with a lot of capital involved. "So we're now addressing this situation with the federal government and about to introduce a bill."

TRUTH IN LABELING: All of our panelists agreed that there needs to be more transparency among spirits producers. Dan Garrison, proprietor of Garrison Brothers, believes that if you made the spirits you should be able to say you made it on the label, and if you didn't, you shouldn't be able to claim you did. "I think the TTB has to change their policies to accommodate that," he said. Additionally, Ralph takes issue when a large company pulls a few barrels out of its million-barrel warehouse and slaps the "small batch" term on it.

While Dan believes the American Distilling Institute's (ADI) recent addition of a craft spirits certification program (see WSD 07-19-2013 ) is a good start to creating transparency, Ralph said "I think that the idea of establishing a standard of some sort of certification program is a good one, but I don't believe ADI is the right organization to do it." He believes ACDA is the organization that should be setting criteria for craft spirits. Meanwhile, Tom said, "I don't think we should be overzealous about that definition." He believes the size and volume definition is really only necessary in a discussion about excise tax.

PARTNERING WITH THE BIG GUYS: If you pay attention to craft beer at all, you know that as the craft industry first began growing it was met with some pretty heavy resistance from the larger brewers. Thankfully, craft spirits has not had that problem yet. "It seems like the very large distilleries, from my point of view, are taking a little bit more of a progressive position," said Ralph. "Hopefully, they're seeing all of those distilleries out there and all of those successful brands as an acquisition target and not the enemy."

"It's important that now we work with as many of the large producers as we can, rather than against them," he continued. The panelists largely agreed that DISCUS has been instrumental in bringing the two groups together with its advisory council. "We're a part of that and ACDA and ADI because we want to be at the table whenever decisions are made."

You may recall both Death's Door and Tuthilltown's Hudson Whiskey have been drawn into the portfolio's of larger players. Serralles USA has a stake in Death's Door while William Grant & Sons owns Tuthilltown's Hudson Whiskey. Brian Ellison, founder and ceo of Death's Door, said he was initially not interested in partnering with Seralles when they approached him two year ago. But at the time Death's Door was expanding very quickly and he was out on the road virtually every week. It came down to the fact that they either needed to raise a bunch of money to build a sales team or partner with Serralles, he explained. And so they went with Serralles, but he was the one who suggested they buy a minority interest. "'Frankly, I want to make sure that you care about what we're doing and it's not just a broker deal to help you out with your national sales program,'" he told them.

Ralph said partnering with a larger company is a lot like marrying into a different level of society. "We're this little tiny brand in the Hudson Valley scraping by with a primitive operation and suddenly we're sitting down across the table from a 128-year-old, family-owned company that is the sixth largest whisky producer in the world," he said. "It took a little bit of bending on both parts before we found how best to work with each other."

Dan is staunchly against a partnership with another producer saying he actually prefers the company of livestock to humans. "If we can figure out how to keep the lights on, we're just going to make bourbon. We're not interested in taking on the world."

Though Tom was whistling a different tune for House Spirits' flagship brand Aviation Gin. Aviation is 80% of the company's revenue and has a nearly unlimited potential, he claimed. "I think as the brand gets bigger it becomes more and more possible that the best way to unleash that potential is by us working with a larger partner or with a larger partner actually taking control of the brand. I think it's something we're open to."

AND EDUCATION IN DISTRIBUTION: Obviously, wholesalers play an essential part in building a successful brand. "When we first started the first couple of years I hated wholesalers," said Ralph. "I couldn't understand why they were getting such a large percentage and why was it so necessary to have them out there." But overtime he came around when he realized they have the networks, the relationships and the economies of scale to deliver his spirits better than he could out of the trunk of his car.

"In the beginning the distributor you go with is the one who returns your call," said Tom. Though you may recall that Aviation gin has recently signed a national distribution deal with Southern Wine & Spirits (see WSD 02-26-2013 ) "One of the things that very few craft producers understand in the beginning is what a franchise state is...We certainly had to be extricated from some abusive relationships," he added.

As it became clear that craft spirits were headed for a substantial share of the market, distributors needed an education of their own. Now "I feel like every meeting that I have with a distributor team there's always people who are more and more educated. People who are doing more to learn about craft spirits and actually asking really smart questions," said Brian.

Where does the craft segment go from here? "I think that what's likely to happen is we're going to go through a continued acceleration of growth and these small spirits industry and then it'll shakeout," said Ralph. "Then people will get down to making more and more SKUs because for a small distiller... the real key is to have a wide variety and sell them right at the distillery."

CAMPARI'S CABO WABO GETS COFFEE FLAVORED EXTENSION

Although it has not made it's official debut, Campari has announced the first flavored extension to the Cabo Wabo tequila brand via Twitter and Facebook. A quick COLA scan reveals the extension, called Cabo Diablo, is a 70-proof coffee liqueur made with Tequila Blanco. Cabo Diablo will join Cabo Wabo's other expressions: Blanco, Reposado, Anejo and Cabo Uno Anejo Reserva.

Representing about 2% of Campari America's sales, per UBS estimates, Cabo Wabo has been delivering great growth patterns for the company lately. You may recall in Campari's first quarter ended March 31, Cabo Wabo and Espolon Tequila's combined sales were up nearly 25% for the period.

With a distinctly devilish campaign, Cabo Diablo will be going up against the likes of other big coffee-flavored tequilas including Patron XO Cafe (srp $25) and Avion Espresso liqueur (srp $25). Although Patron XO has other flavored offerings, Cafe has been the standout performer in its liqueur line.

As of press time, Campari America was unable to comment on the newest addition to the Cabo Wabo line.

WSD BRIEFS:

PINNACLE VODKA HAS LAUNCHED SOME NEW FALL FLAVORS that include: Caramel Apple, Peachberry Cobbler, Pecan Pie and limited release Peppermint Bark. In addition, the Pumpkin Pie limited edition will be back again this year for a time. All flavor extensions are available nationwide for $13 a 750 ml.

SMALL BATCH TEQUILA COMPANY Blue Nectar Spirits has hired Jose Chao, former vp at Bacardi, to be its vp and national sales director. He will oversee expansion and sales initiatives for the company's three tequila expressions: Silver, Reposado and Special Reserve. Jose will report to Nikhil Bahadur, co-founder and coo of Blue Nectar.

ALBERTSON'S HAS ANNOUNCED PLANS TO ACQUIRE Texas-based regional independent grocery company United Supermarkets. United Supermarkets operates 50 retail locations under the names United, Amigos United and Market Street outlets, reports Progressive Grocer. Idaho-based Albertson's grocery company operates 76 stores in Texas and 600 company wide.

Until tomorrow, Emily

"Fate often puts all the material for happiness and prosperity into a man's hands just to see how miserable he can make himself with them."
-- Don Marquis

--------- Sell Day Calendar ----------
Today's Sell Day: 6
Sell days this month: 21
Sell days this month last year: 20
This month ends on a: Mon.
This month last year ended on a: Fri.
YTD sell days Over/Under: 0

MAKE YOURSELF HEARD, your opinions count. Anonymous feedback and tipster form: http://www.winespiritsdaily.com/hotline.php

WINE & SPIRITS DAILY
Subscribe or check back issues at: www.winespiritsdaily.com
Send news and comments in confidence to: emily@winespiritsdaily.com or megan@winespiritsdaily.com

© 2013 Wine & Spirits Daily, all rights reserved. Please, no forwarding or copying. May quote with attribution. Individual subscriptions $360/year. Corporate rates available.

Follow me on Twitter http://twitter.com/WineSpiritDaily

Editor-in-Chief: Megan Metcalf - megan@winespiritsdaily.com
Editor: Emily Pennington - emily@winespiritsdaily.com
Customer Service: Kim Griffin - admin@beernet.com

We have a new mailing address: 909 NE Loop 410, Suite 720
San Antonio, TX 78209

Go back to listing Go to next article Go to previous article

Comments

Top Secret News Hotline:

Got wine and spirits news for WSD?

Submit Anonymously
twitter facebook