Survey: 60%+ of Craft Distillers Open to Partnership or Acquisition

FILED OCTOBER 11, 2016

In light of current drink trends, 97% of the craft distillers who took part in our second annual craft spirits survey will post growth in 2016. Most will deliver between 10%-40% for the year, but there were a healthy number of respondents (nearly 40%) who said they would post between 40%-100% growth. Only one distillery said it would not grow in 2016.

WHO PARTICIPATED? Our informal survey consisted of about 30 craft distillers ranging in size from less than 1,000 nine-liter cases produced annually to more than 20,000 cases. Though about half of them fell in the 1,000 to 6,000-case range, and another 20% in the 10,000-20,000-case range.

ENTERING BETWEEN 0-5 NEW MARKETS ON AVERAGE. Although the amount of growth expected for the year was a mixed bag, we did find there was a consensus on the number of new markets entered in 2016. The vast majority (83%) of distillers claim they will enter between 0-5 new markets by the end of this year. Just 10% will enter 6-10 new markets and the rest of those surveyed (nearly 7%) will enter 11-15. Compared to last year's results, which had about the same number of respondents with more distillers on the larger size, only two distillers didn't enter any new markets and 76% entered between 1-5 new markets.

Consistent with last year's results, half of our respondents said they would spend less than $500,000 on capacity buildout this year. 20% said they would spend between $500,000 and $1 million; 13% said they will spend between $1 million and $5 million; and one craft distiller is spending between $5 million and $10 million.

As you might have guessed, the amount spent on capacity buildout was strongly correlated with the amount of growth a distiller predicted for 2016: the higher the growth rate the more they will spend.

CRAFT'S COMPETITION. Now here's the kicker: despite big spirits coming in as the No. 1 competitor for the craft category, most of the distillers surveyed are open to partnerships or acquisitions by a larger spirits company. Let's dig deeper into that.

When asked to name their biggest competitors, just two options captured the lion's share of answers: big spirits was No. 1 and retailer lack of education was No. 2. Taking into account the respondents could choose multiple answers, both aforementioned competitors received over 50% of the vote.

Here are a few examples of their thoughts on competition:

-- "While small distilleries are really competing collectively against 'big' spirits, shelf space is getting more and more difficult to come by," says one respondent.

-- "Contract distilling absolutely turned our business plan inside out. The ability to make quick money distilling bulk for other DSPs or other entities was an unexpected, breathtaking development. *It will certainly be a crowded playing field in a few years when our whiskey comes of age. We believe quality, patience, and honesty will carry the day."

-- "It seems like things are getting more serious. There are still people getting into the business. But the field is already crowded. A top tier is separating from the crowd, one that is well financed, with solid products and a good distribution network. The opportunity for smaller distilleries to expand into mainstream outlets is growing. We are seeing multiple mainstream outlets get onboard now."

And yet, more than 60% of respondents said they would be open to a partnership or acquisition, and only 28% gave a hard "no."

One respondent is looking to partner with a larger non-competitive premium supplier that can offer a larger and more diverse sales organization. Another respondent says that while an acquisition is most likely out of the question, strategic partnerships are always an option.

ZOOMING OUT. The fact that the majority of craft distillers are open to a partnership or acquisition speaks to the possibility of the craft spirits business reaching a tipping point, making it more difficult for distilleries to keep their doors open without a partnership or boost in capital.

One distiller wrote that the current banking system makes it harder for craft distillers to increase capital and that "being properly funded during our growth curves is more of a challenge than actually getting out there and depleting cases."

2016 HARVEST: "GOOD YIELDS AND HIGH QUALITY"

The 2016 harvest is coming to a close as picking wraps up in most AVAs, per the last installment of the St. Helena Star's 2016 Harvest Report. Overall, it seems growers are pleased with the "good yields and high quality."

DIAMOND MOUNTAIN DISTRICT. Only a few vineyards at the highest elevations still have some harvesting to do in the Diamond Mountain District, such as Constant, The Vineyardist and Andrew Geoffrey. "The rest of us are now occupied with monitoring fermentations and liking what we're seeing," says Dawnine Dyer of Dyer Vineyards.

SPRING MOUNTAIN. Growers' comments out of Spring Mountain include: "Great vintage," "looking really good," "very happy with the fruit" and "what an easy harvest," according to Smith-Madrone Winery's Stuart Smith. This year's crop is up from 2015 and some wineries even reached traditional averages for their merlot and/or cabernet sauvignon yields.

RUTHERFORD. Meanwhile, harvest for some Rutherford wineries is still about another week or two away from wrapping up and hopes to be finished by October 24, according to Derek Cronk of Colinas Farming. "There is still quite a bit of valley floor fruit remaining to be harvested," says Honig Vineyard & Winery's Kristin Belair. And Honig's final bit of grapes are expected to go into the crusher by October 14.

OAK KNOLL. Overall, growers in Oak Knoll have been "thrilled" with this year's grape quality and have nearly completed harvest, says Trefethen Vineyards & Winery's Jon Ruel. For Trefethen Vineyards there's still a few blocks of cabernet sauvignon to pick as well as its late harvest riesling.

To read the full report, and final harvest progress of the other AVAs, click here.

WSD BRIEFS:

PERNOD TO BEGIN BOTTLING MALIBU IN ARKANSAS. As a part of Wal-mart's project to bring more manufacturing of goods it sells back to the US, Pernod Ricard USA will expand its Arkansas production facility to begin bottling the Malibu Rum it sells to Wal-mart, according to a local news affiliate. The company's Fort Smith plant produces about 5 million cases of spirits including Seagram's Gin, Kahlua Liqueur, Smithworks Vodka and Malibu Rum.

PREISS IMPORTS ADDS ITALY'S TURIN VERMOUTH TO PORTFOLIO. Turin Vermouth makes bitters and vermouth in what is known as the birthplace of Vermouth, Turin, Italy, per a release. Preiss Imports will carry four vermouths, Drapo Bianco, Drapo Rosso, Drapo Dry and Drapo Gran Reserva, and three bitters, Tuve Bitter, Tuve Fernet Amaro and Amaro Black Note. The products will be available in select US markets.

INNOVATIVE WINE BRAND RELEASES MENAGE A TROIS GOLD. Menage a Trois Gold is the latest addition to the Menage a Trois portfolio, which includes 16 offerings. Gold is a white blend of chardonnay, viognier and verdelho. It will be available for approximately $12 a 750 ml.

WSD SUMMIT SPONSORSHIP OPPORTUNITIES. WSD will be accepting a limited number of sponsorships for our 2017 Summit at the Hotel Del Coronado in January. For more info on pricing and opportunities, please email rena@winespiritsdaily.com.

Until tomorrow,
Your Editors

Emily Pennington - emily@winespiritsdaily.com
Sarah Barrett - sarah@winespiritsdaily.com

"Keep your face always toward the sunshine - and the shadows will fall behind you." -- Walt Whitman

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