Craft beer? Old news! Today’s in-the-know consumers are heading straight for the craft spirits aisle.
According to the Craft Spirits Data Project, there were more than 1,300 craft distillers in the United States as of August 2016. And Mintel found that craft spirits account for 15% of new global spirit launches, representing a whopping 265% increase over 2010 numbers.
To learn more about current trends in craft spirits and what the future might look like for this industry, we spoke with Charles Florance, the founder of Indiana Whiskey, a craft distillery committed to supporting our nation’s veterans as well as the local Indiana economy.
Florance left the U.S. Army in 2011. He was suffering from Guillain–Barré syndrome caused by some inoculations he had received for service. His physical recovery took about 18 to 24 months, and during that time, he spent a lot of time with other veterans at the American Legion and the VFW talking about what they would do next. “Those were some of the most cathartic moments for me,” he said. “You have a real sense of solidarity when you’re sitting around a table with people you like, talking about things you enjoy.”
One of those things was whiskey.
Florance had studied chemistry and physics as an undergrad and got his MBA at Notre Dame. He had noticed in the business press how regional distilleries had begun to pop up. He started thinking, “Can we create something locally with what we do best?”
In Indiana, what they do best is corn, so Florance decided to start what he calls a “small potatoes whiskey distillery that makes delicious whiskey from Indiana products.” In fact they source every ingredient and almost every piece of equipment they use from Indiana (the glassware comes from Illinois).
Indiana Whiskey officially became a company in 2011, and the first liquid came off the still in 2013. In 2014, the company won a silver medal at the World Spirits Competition for their Silver Sweet Corn Whiskey, which is a non-traditional color: white. “It’s been a rocket ride of fun,” Florance says.
The craft movement and relaxing regulations
There’s no question that the craft beverage movement has reached something of a fervor. There are now more than 5,000 craft breweries in the United States, an all-time high, and over 9,000 wineries, 96% of which are classified as small, very small, or limited production.
The craft spirits movement hasn’t quite reached those heights yet. But with investment growing along with consumers’ increasing interest in local products, it’s very likely craft distilleries will soon find themselves at a similar level.
Florance notes that one of the biggest factors that will determine growth in the spirits sector is changes in the regulatory environment state by state. He notes that Indiana has lagged somewhat behind other states in this regard.
When Indiana Whiskey first started, the only license available was a standard distiller’s permit, which was designed for large companies and didn’t allow direct-to-consumer sales. It wasn’t until 2013 that the Indiana Legislature created the Indiana Artisan Distiller’s Permit, which allows small distillers to sell directly to their consumers.
This didn’t put an end to the hurdles, however. The permits were available for only a limited period, and a distillery had to be in business for three years before it was eligible to do direct sales. Fortunately, Indiana Whiskey met the requirements, and they now have a tasting room in South Bend, Indiana.
Florance thinks that the future will bring more deregulation as states move away from regulating morality, which has its roots in the Prohibition era. He believes that legislators will see the value of manufacturing in their own states and also exporting products out of state or out of country. As a result, they will take steps such as reducing the excise tax and decreasing packing and shipping requirements, which hinder the growth of small producers.
Achieving excise tax parity will be particularly important for craft distillers’ success. Currently, craft spirits producers pay six times more in excise tax than craft brewers do, and 17 times more than small wineries for equal quantities of alcohol. The excise tax, which is calculated on a “proof gallon” basis, is responsible for about $2.20 to $2.50 a bottle, or between 10% and 20% of the off-the-shelf retail price.
More competition will bring more opportunity
One thing Florance is particularly excited about with more people getting into the industry is the challenge that comes with increased competition.
“Whenever there’s competition, you get to raise the level of quality,” he says. “We’re seeing this in craft beer now. It’s not enough to just casually get into it. You have to be excellent because there are already excellent people in the space. In the next three to four years, some companies will fall by the wayside because they couldn’t adapt or their quality wasn’t high enough. But it will be great for customers because they will have more options, and competitive pressure will make each of those options better, tastier, and more adaptive. That will be great for the industry in the long run.”
This environment will also create more opportunities for equipment manufacturers to develop better solutions for small and growing producers. Distilling equipment is becoming more specialized (“We’re no longer tinkering with old beer equipment,” Florance says), and that opens the door for suppliers.
In particular, Florance thinks there will be development in the materials used to make distilling equipment. While 304 and 316 stainless steel are ubiquitous, copper is actually better for distilling. Florance believes we’ll see more equipment made out of 110 cold-rolled copper because of its heat capacity and sulfur-limiting effects, which “all play such a huge role in the final product output that you can get a lot more large-scale manufacturing capability.”
Copper equipment is so effective that Florance tried to make his first copper still himself. “The failure of an entrepreneur is thinking you can do a lot on your own,” he says. He put a ¼” plate of copper in a child’s sandbox, heated it up, and started hammering on it. “The output was absolutely pathetic.”
Fortunately, Indiana has a huge manufacturing backbone, so he was able to reach out to local expertise, a still manufacturer in South Bend run by third- and fourth-generation sheet metal workers. Rather than purchasing off-the-shelf components, they were able to build a still at a low cost. This has enabled Indiana Whiskey to keep their cost structure down so they could be patient and focus on getting their product right.
Florance also emphasizes the opportunity for equipment manufacturers to help small distilleries grow into regional or even multi-state or national brands.
“There will be a desperate need for capacity that maintains the brand standard while also increasing operational efficiency and driving quality control. This will be an opportunity for the companies that supply the large producers to bring their instrumentation and capital equipment into that transition. The deals may not be the same size that suppliers are used to, but a $2 million contract is still a $2 million contract.”
As these small companies grow, Florance thinks we’ll see a pattern similar to what we’ve seen in other beverage sectors: consolidation, with the best regional producers rising to the top and either being acquired by large beverage companies or figuring out a way to stay independent, like Yuengling and Sam Adams have in the beer market.
Now, about that white whiskey…
“I had no intention of selling a clear whiskey,” Florance said. All alcohol is colorless when it comes out of the still. It’s what you do to it afterward that gives it its color. For whiskey, the color comes from being aged in a charred oak barrel.
So, what happened?
“Unfortunately, when the first drops of whiskey came off the still in 2013, it was delicious. We weren’t sure what to do. Since cash flow is the ruler of all things, we decided to put it in a bottle. No one has been more surprised than I am at how well it’s doing! As a bourbon, the clear whiskey is abysmal. It doesn’t have the characteristic flavors. But, as an unaged whiskey, it’s divine.”
Unless you’re a distributor or wholesaler, you can’t currently get spirits shipped to you (another Prohibition era law). So, the next time you’re passing through Indiana, be sure to make time to head down to South Bend to give Indiana Whiskey’s surprisingly delicious spirit a try.