It’s not a sensationalist headline, and it’s not a mirage: The headwinds that craft distillers currently feel are real, and the annual Craft Spirits Data Project (CSDP) is the latest in a parade of red flags for small producers.
[PAYWALL]
The latest CSDP, introduced in 2016 by the American Craft Spirits Association (ACSA), indicates that the once-booming craft segment of the larger spirits industry is now shrinking. Volume decreased from 14 million nine-liter cases in 2022 to 13.5 million cases in 2023, representing a 3.6 percent loss of volume and a 1.1 percent loss in sales value.
Those numbers follow a February report from the Distilled Spirits Council of the United States (DISCUS), which noted that the broader spirits industry had maintained its share of the beverage-alcohol market—more than 42 percent, with sales gains of 0.2 percent and volume gains of 1.2 percent. That flattening follows a 14-year trend of market-share gains, and the longer-term market-share increase of more than 13 points since 2000.
Chris Swonger, president of DISCUS, says there is pressure across the beverage-alcohol world—beer, wine, and spirits producers, small, medium, and large.
“It’s a tough marketplace right now, for sure,” he says. “The market has slowed down considerably for a variety of reasons, and there’s a variety of public policy issues that are really important to the industry that, if we don’t manage with care, could have a real impact on the industry.”
The Context of Consumer Trends
The increasing legal and social embrace of marijuana and THC products has drawn consumers away from alcohol, contributing to the wider generational trend of lower alcohol consumption.
Inflation and feelings of economic malaise also could be factors reducing the disposable income that consumers are directing toward craft spirits. Swonger also notes the level of political division and the reset of consumer habits that followed the pandemic. Protectionist tariffs that went into place in 2018 led to retaliatory ones on American whiskey and other exports; their potential return could impact the spirits industry as soon as 2025.
The industry also is watching for potential changes to U.S. dietary guidelines, where advocates are pushing for federal policies to state that there is no healthy level of alcohol consumption.
“There is a whole effort underway, and it’s funded by an anti-alcohol community, [that] the industry needs to be really, really aware of,” Swonger says. “You’ve got organizations like the WHO [World Health Organization] that published a document about a year ago saying there is no safe level of alcohol—and [it’s] not guided by science; it’s guided by an advocacy agenda, by some bureaucrats in the WHO. We have seen evidence of that in trying to influence the U.S. dietary guidelines, as well.”
Those anti-alcohol advocacy efforts have led to numerous headlines, eventually prompting pushback from organizations such as Harvard Public Health. This neo-Prohibitionist campaign remains in the public eye, continuing to affect policy development.
“I would say this is the most threatening time for beverage alcohol since I’ve been in and out of the industry for 25 years,” Swonger says, “and it’s probably the most perilous time for beverage alcohol since Prohibition.”
Economic and Demographic Shifts
Jeff Clark at Live Oak Bank, which includes specialty lending groups that loan money to wineries, distilleries, breweries, and related businesses, has been in the industry for more than 30 years; he says the current environment is uniquely challenging.
“Some of this is demographically driven, with the Baby Boomer population—which the beverage industry has depended on for decades—shrinking, while younger generations continue to experiment with alternative beverages, as well as marijuana, or choose not to drink at all,” he says. “Some of the current environment is due to the increased number of players in the market versus a decade ago. Competition in the alcohol-beverage industry continues to intensify.”
Clark also highlights the current economic climate facing distillers along with countless other small businesses.
“I think it will take many years for us to fully grasp the impact of COIVD on the economy, the beverage industry, and consumer behavior,” he says. “So many things have happened in rapid order. We saw cost of goods spike due to supply-chain disruptions, which fed into inflation. About the time we saw people returning to on-premise consumption, government subsidies ceased, and inflation materially increased the costs to producers, consumers, and retailers.
“Say what you will about the economy, but the consumer isn’t feeling confident. Personal savings are down, prices are up, consumer debt and interest rates are very high.”
The doubling of interest rates in the past few years also has impacted the cost of capital. Two years ago, Clark says, prime was 2.25 percent, while it’s currently at 5.5 percent. That means the distillery business loans that carried rates of 4 to 5 percent a few years ago are now 8 or 9 percent.
“That takes a big bite out of a small producer,” Clark says. “This increases operating costs, reducing profit margins. It is difficult to increase retail prices under the best of circumstances. Passing along costs during times of slowing demand is even more challenging. Distributors have reduced inventory levels due to the increased interest-rate expense, reducing purchases from producers.”
The Outlook
Dozens of craft distilleries have closed their doors in recent years, including several well-established producers—though new openings still outpaced closures, with an 11.5 percent increase in the number of active craft distilleries in 2023, according to the CSDP.
However, Clark forecasts more difficulty before the industry is clear of the current tumult.
“You will see more businesses fold up the tent,” he says. “The battle for consumer wallet share will only increase and, in my personal opinion, interest rates have a greater chance for staying higher for longer than going down.”
Some of Clark’s advice for distillers and would-be distillers is simply good business practices, such as minimizing investment in hard assets until your distillery’s cash flow can support those expenses, thus helping to prevent your business from becoming overleveraged.
He also encourages distillery owners to plan an exit strategy at the outset. “There will be detours,” he says, but “without a defined exit, you have no idea where you’re going.”
Any industry veterans in your circle can also be an essential resource, Clark says, noting the adage that, often, “it’s not what you know, but who you know.” One of those experienced hands should have a strong financial background—a common area of oversight for distillers, and increasingly important as cash grows less available and more expensive, even as the industry’s growth curve starts to flatten.
Whatever the future holds, it’s clear that this is more than a normal boom-and-bust business cycle.
“I think these things are cyclical, but I’ve been doing this for 31 years,” Clark says. “I’ve never seen the circumstances that we’re seeing now. You could argue there are too many producers in the spirits space, and that is exacerbated by competition from wine, beer, alternative beverages, etcetera. We are not seeing the same level of interest in new distilleries or brands as in the past, but we are experiencing robust loan demand. The interest we are seeing is from experienced industry players. Consolidation may address some of this, although there is a difference between consolidation for survival versus for growth and success.”
Notably, organizations such as ACSA and DISCUS aren’t sleeping on these issues. In an upcoming article, Craft Spirits & Distilling will examine some of the campaigns the industry is organizing and causes it is championing to help buoy distillers.
