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The U.S. Craft Distilling Market: 2015 Update
© Michael Kinstlick, CEO, Coppersea Distilling, LLC
No reproduction without permission. http://www.coppersea.com
This brief is an update to the White Paper I released in April, 2012, “The U.S. Craft Distilling Market: 2011 and Beyond.” The original paper is available here: http://bit.ly/HxUwj1
Introduction Over the past several decades we have seen waves of change in U.S. consumer behavior and attitudes towards food and drink. The trend towards fresh, “handmade” products made with real and less-‐processed ingredients has affected all segments as consumers increasingly want assurances that the food and drink they are consuming is safe, healthy, and made with integrity. Knowledgeable and adventurous consumers also began seeking unusual and strongly-‐flavored products, in contrast with those designed for the mass-‐market, and those taste-‐makers broadened the appeal of once unique and hard-‐to-‐find items. These waves have affected drinking habits and norms. First came the “wine revolution” that began in the 1960s and continues to this day. Where over 95% of U.S. wine consumption was once “jug wine,” today that number is closer to 70%. And the number of winemakers has climbed from the mid-‐hundreds to over 7000 (over 9000 including virtual producers). Craft beer took up the baton next and has transformed the U.S. beer landscape since the mid-‐1980s. Once hard-‐to-‐find specialty items, one in every six beers enjoyed in the U.S. today is from one of over 4000 craft brewers. And now, following right on cue 20 years later, we are in the thick of the craft spirits renaissance. Given the additional technical and regulatory challenges in distilling, it is not surprising that spirits came last. The craft beer renaissance began in earnest with the 1978 legalization of home beer making, but it is still a federal offense to distill spirit alcohol in any quantity without a TTB permit. Over the past several years there has been a measurable shift in U.S. adult beverage drinking habits from beer towards spirits. While overall per-‐capita (over 21) alcohol consumption is essentially flat, spirits have been gaining “adult beverage share” (DISCUS). And the craft distilling boom is right at the heart of it. In the original Craft Distilling White Paper, published 4 years ago in April 2012, we identified 234 in-‐production craft distilleries as of year-‐end 2011. And I predicted at the time the number of craft distilleries would be over 1,000 within 10 years. I based that prediction on the exponential growth that showed no signs of slowing down. Simply: the number of entrants started doubling every 3 years in the early aughts. With over 250 entrants in 2012, it would take two more “3-‐year-‐doublings” to cross 1000 six years later in 2018. So a 10-‐year prediction was quite conservative and left room for a slowdown. In fact, the rate of new entrants has accelerated since then… And there will be over 1000 operating craft distilleries in the U.S. in 2016! New Research: Analysis of DSP Listings We seek to provide the most thorough review of the craft distilling landscape available and have always expanded our efforts. In 2013 in addition to the ADI directory listings we began looking at state guilds and DISCUS affiliate members. This year we add insights from the TTB’s Distilled Spirit Permit (“DSP”) listings. All “manufacturers” of beverage spirit alcohol (distillers, infusers, and bottlers/blenders) require a DSP, and the TTB publishes the list of current permit holders here:
www.ttb.gov/foia/xls/frl-‐spirits-‐producers-‐and-‐bottlers.htm. What the TTB does not provide are past version of the file, or lists of new permitees. Fortunately, I have been saving occasional snapshots of the file and now have enough history to analyze trends in new DSP listings and compare identified craft distillers from existing ADI Directory listings with the DSP files. Chart 1: TTB DSP Holders
The saved files are at somewhat irregular intervals, but what is evident is that the number of new DSPs issued goes from about 160 in 2011 to almost 400 in 2015. Table 1 shows the dramatic increase in new DSP rate in 2013, continuing to today. Table 1: DSP Add Rates Start Date End Date # months Total New DSPs Annual Rate 2010-‐10 2011-‐11 11 149 163 2011-‐11 2012-‐07 9 122 163 2012-‐07 2013-‐03 9 148 197 2013-‐03 2014-‐05 14 413 354 2014-‐05 2015-‐03 10 299 359 2015-‐03 2016-‐01 10 324 389
We undertook a full analysis of all new listings from the files dated Nov, 2011; July 2012; and March, 2013, and of a representative sample of new listings from the remaining 3 files. This analysis has helped us understand the “hidden entrant” problem at a much deeper level. First the good news: predominantly all (>95%) of the operating craft distilleries from the Nov 2011 and Jul 2012 files are listed and identified in the ADI directories by 2015. We always knew there would be a lag between market entry and identification for some entrants. And those who have remained unidentified are clearly very small. As Chart 2 shows, there appears to be a well-‐established “seasoning” process for new DSPs to become identified in ADI Directory or guild listings. The more recent years have followed right along with prior experience. Chart 2: ADI Observation Path for new DSP entries
There is also an observable lag process between the pool of new DSPs and their ultimate entry date, if ever. Some registered DSPs never make it into production and vanish, others, including many wineries and breweries, may add a DSP & continue to maintain it for years without ever actually manufacturing spirits. Chart 3 shows the initial production date relative to DSP issuance date for those observed entries with ADI or state guild listings. Here we do see a measurable drop-‐off in the percentage of observed producers, particularly in those added in May 2014 and Mar 2015. This is in contrast to those years’ entries following prior years observation paths.
Chart 3: Producer seasoning path for ADI-‐observed DSPs
The reason is that a much larger percentage of the recent ADI listings represent actual producers rather than those getting up-‐and-‐running or the “hopers and dreamers” who may never get closer to market than their ‘Under construction’ listing in the Directory. Chart 4: Producer seasoning path for New ADI Listings
Chart 4 shows 70% of new ADI listings over the past 2 years are already producing in the year prior to listing. That is, 70% of the new listings in the 2016 Directory have already started producing by year-‐end 2015, more than double the average of prior Directories. This could be the result of greater outreach on the part of ADI to identify true entrants and include them in the Directory, or it could indicate a change in the “path to market” for newcomers as the craft spirits boom enters its next phase. Chart 5 segments all new DSP holders by type:
• “Craft ID’ed” are those observed in an ADI Directory or Guild; • “Craft 2nd“ are new DSPs from existing craft distilleries (change of location, etc.); • “Hidden Entrants” are craft distillers known or estimated to be producing; • “Winery/Brewery-‐NoSpirits” are operating wineries and brewers with a DSP; • “NonCraft” are packagers, majors, and the like; and • “Unidentified” are those who have no footprint beyond their DSP listing.
Chart 5: New TTB Permitees by Type
We sampled from the unobserved DSP holders in May 2014, Mar 2015 and Jan 2016 to arrive at estimated frequencies of these types, then extrapolated to the full set. We also made reasonable assumptions regarding entry dates of those Hidden Entrants based on known trends. Table 2 details the distribution, by DSP date and entry date, of those hidden entrants. Note that the estimate of 195 current Hidden Entrants does not include the 342 remaining “Unidentified” DSPs, many of which will become producers in the coming years.
Table 2: Hidden Entrant Distribution by Entry Year
DSP File 2011 2012 2013 2014 2015
FULLY 2011-‐11 1 3 1 1 OBSERVED 2012-‐07 2
2013-‐03 6 10 3
SAMPLED & 2014-‐05
4 20 35 ESTIMATED 2015-‐03
15 50
2016-‐01
44
HIDDEN ENTRANTS 1 3 11 48 132 Cumulative
1 4 15 63 195
Market Growth & Trends With these estimates of Hidden Entrants, we arrive at a more robust view of the landscape of U.S. Craft Distillers, as shown in Chart 6. Note that although recent growth looks outrageous numerically, the growth rate is following a normal exponential path. Chart 6: Producing Craft Distilleries
We searched more deeply for Hidden Entrants because we realized that revisions of prior years were uncovering significant numbers of existing, but unseen, producers. As Chart 7 shows, our count of 2011 entrants rose from 234 in 2012 to 262 in 2015. More recent years have naturally been subject to larger revisions as newer entrants may not yet be in the ADI Directory or a state Guild in their early days. Thus, our count of 2013 entrants rises from 425 in the 2014 paper to 492 observed entries now (and to 507 including previously Hidden Entrants), while the 2014 entry cohort goes from 588 observed last year to 675 this year (and 738 including an estimated 68 Hidden). Chart 7: Revealed Producers by Entry Year
Time tends to reveal those in production. With four or five years of “seasoning,” most entrants in a given annual entry cohort are visible. Thus, in some sense, including these Hidden Entrants is simply front-‐loading the discovery process. We expect many of those now hidden to be revealed over the coming years. And we also expect many of those labeled “Unidentified” to ultimately enter the market, even if they are still in the formative phases. However, there is another side to this tremendous growth story. Not all who put plans in motion to open a craft distillery end up doing so. There are the “hopers and dreamers” with an ‘Under construction’ listing in an ADI Directory, and maybe even a DSP who never get any farther than that. We call these “Pre-‐producers.”
And there are those who actually make it into production, release a spirit for sale, and then exit the market either through an acquisition, a wind-‐down, or direct bankruptcy. We call those “Exits,” and we have now observed enough of them to share some data. The first observation is that it is very rare for a producer to start and exit in the same year, or even only a year later (although this may change). That is, there is usually a lag between entry and ultimate exit. Chart 8: Remaining Producers and Exits by Entry Year
Chart 8 shows the numbers of Exits and remaining Producers by Entry year. Just as the “Unidentified” DSPs are potential entrants, all current Producers are potential Exits. In Table 3 we observe exit rates generally increase with time. We expect the next several years to reveal hundreds of Exits as the craft distilling market matures. Table 3: Exits by Entry-‐Cohort Years Producers Exits Entrants % Exits 2005-‐2007 37 10 47 21.3% 2008-‐2010 115 11 126 8.7% 2011-‐2013 298 11 309 3.6% 2014-‐2015 275 1 276 0.4%
A natural question is whether there are any characteristics of the Exits that might be instructive for those now producing or considering entry. One element that seems to be highly correlated to exit likelihood is the number of product categories. “Monoline” producers are much more likely to exit than those producing in more than one category, and there appears to be a linear effect (more data will help confirm these findings). Table 4: Exit Ratio by # of Product Categories # of Product Types Producers Exits Total Exit %age
1 277 19 296 6.42% 2 197 7 204 3.43% 3+ 326 7 333 2.10%
This effect could also be masking a “hidden factor,” that of actual distillation versus sourcing & bottling. Most self-‐described craft distilleries are actually distilling themselves. Some are also sourcing externally (to bring a product to market now) while distilling other products for later release. And some are not distilling at all, but are exclusively sourcing external spirit to blend and bottle. It can be difficult to tell these “manufacturers” from actual distillers, but the practice is most prevalent in the Vodka market, where GNS + water + a nice label becomes a “Hand-‐Crafted, 6x-‐Distilled Premium Vodka.” Table 5: Exits in “Vodka Only” Producers
Entrants Producers Exits Exit %
Total 800 767 33 4.1% Vodka Only 73 64 9 12.3%
Looking strictly at those Monoline producers making Vodka, we observe a significantly higher likelihood of exit. With a large number of existing brands, challenges to differentiate on taste profiles, and low existing pricing expectations, a true craft distiller making only Vodka faces squeezed margins, while those simply watering down GNS have no barrier-‐to-‐exit in the form of capital equipment. The increase in Exits will inevitably start to put the brakes on the number of net new Entrants each year. But the number of new Entrants continues to climb. In fact, the entry rate itself seems to be doubling every 2 years from about 30 in 2008-‐9 to about 60 in 2010-‐11 to 110 in 2012-‐13 to 220 in 2014-‐15. Chart 9 shows the progress of new entrants, with 2014 and 2015 including both the Identified (gold) and total, including estimated Hidden entrants (red). The “decline” from 2014-‐2015 is likely due to our conservative estimate of the Hidden entrants for 2015. Recent years are still likely to be revised upward, although we hope by less.
Chart 9: New Entrants by Year
Craft Distilleries by Product Type Chart 10: Product Spilt by Entry Year
We continue to see the trend towards whisky, and it is likely that recent whisky-‐focused producers could remain “hidden” while aging their initial releases. As noted in previous editions of this paper, the drop in “Other” reflects the composition of early entrants, which was more heavily weighted towards wineries and orchards producing brandies. Vodka, Gin, and Rum have all held reasonably steady in their respective popularity. And, again, because distilleries can be producing in multiple categories, these numbers sum to more than 100%. Craft Distilleries by State We can now safely say that there is a producing Craft Distillery in all 50 of the United States of America, and the District of Columbia. Prior editions of the White Paper go into detail on the annual growth. Maps 1 and 2 below detail, respectively, the number of total Distilled Spirits Permits outstanding as-‐of year end 2010, and the number added since then, by state. Growth is nationwide and extraordinary over the period, particularly in the Appalachians and Deep South with their long history of small-‐scale distilling and more recently loosened state licensing laws. The Carolinas go from 10 DSPs to 80, and Georgia-‐Alabama-‐Mississippi-‐Louisiana from 5 to 46. Meanwhile, the top states like California, New York, Washington, Colorado, and Texas each added from about 75 (CO, TX) up to 150 (CA). Map 1: TTB Permitees (DSPs) By State, 2010
Map 2: TTB Permitees Added By State, 2011-‐15
Looking only at Identified producers shows broad agreement with the growth in DSP’s. Map 3: Identified Craft Producers by State, 2015
Comparison with Craft Brewing Market As noted above, in addition to the extraordinary number of new entrants, we have started to observe distilleries exiting the market. Currently the number of entrants overwhelms the number of exits, but as we see in the Craft Brewers, this isn’t always the case. The “dip” in the Brewers curve represents the time from the late-‐90’s to the mid-‐00’s when the number of exits exceeded entrants. Since 2006 Craft Brewers have resumed the exponential growth that appeared finished. Their numbers have tripled in the 10 years since then, driven this time by Microbreweries rather than Brewpubs. We are starting to see the “Distillery-‐Bar” phenomenon in Craft Distilling, but Prohibition-‐era “tied house” laws still need reform in many locations to turn this into a viable trend. Meanwhile, the Craft Distilling market appears to be ahead of the Craft Brewers at the same point in their development. I believe this is not an anomaly and is the result of more rapid spread of information in the internet age. Chart 11: Craft Distillers vs. Craft Brewers (from Industry Founding Date)
Conclusion The Craft Distilling market is no longer in its infancy. The pioneers of the 90’s and 00’s yielded to the explosion in new entrants over the past few years. And now we are seeing some of those entrants departing. The next phase of the market will see increasing numbers of Exits, even as the number of new Entrants continues to grow. The dynamics of consumer demand and the prior examples of farm wineries and craft brewers suggest that the Craft Distilling market is far from saturation. However, the days of bottling GNS-‐based Vodka and calling yourself “The First Distillery in Which-‐Where County Since Prohibition” may be over. Knowledgeable consumers are seeking truly local products with panache and differentiation. The next milestone, 2000 Craft Distillers, will not take nearly as long as the 23 years for the first 1000. But it will take longer than three years for the next doubling to that level. We predict another 1000 net entrants over the next 5 years, and that the number of Craft Distilleries will ultimately match the number of Craft Breweries. Appreciations Sincere thanks to Glenn Carroll at the Graduate School of Business, Stanford University; Anand Swaminathan at the Goizueta School of Businesss, Emory University; Bill Owens, Andrew Faulkner, Gail Sands, and Christy Howdery at the American Distilling Institute; and Bart Watson of the Brewers Association.
