Introduction
A so-called "Perfect Storm" is defined as an especially bad situation, that is caused by a combination of unfavorable circumstances. Is the craft distilling industry in a perfect storm? Underneath, I'll argue that our industry is facing its very first perfect storm, and what the underlying unfavorable circumstances are.
After that, please join me on some further investigations. Let's figure out how long this perfect storm will take. Is it a never ending story, or just a lot of turmoil for a limited period of time? Can we do some calculations here ore maybe come up with educated guesses?
Finally, I want to think about what the craft distilling landscape post perfect storm might look like. If you allow me to elaborate on the "Perfect Storm" metaphor, the questions of relevance address how we design ships, trade routes, and sea transport, so to speak, to be able to deal with the unfavorable circumstances. Do we change nothing and allow ourselves to be swept of our feet, in case the perfect storm takes like forever? How do we change, in order to weather the stormy conditions that might be us for a long time? Or can we just ride out the storm, expecting it to be of short duration?
As an industry expert, I do not presume to know all the answers. As a change manager by trade and education, again, I am not sure I know all the answers. But I am darn sure that we need to start thinking about what's going on in the world around us, if we are to make a lasting impact, as craft distillers. Maybe consider this iStill Blog post as a thought experiment you can now apply to your own operation? Maybe look at it as a worst case scenario, which is indeed the one we - as entrepreneurs - should all prepare for?
What are the unfavorable circumstances?
There are four generic sets of unfavorable circumstances:
- Exploding input costs;
- Component shortages;
- Inflation, interest, and uncertainty;
- Lack of manpower.
Rising grain (and other substrate) prices and rising energy prices make the production of spirits more expensive. Craft distillers are hit harder by this unfavorable circumstance than Big Alcohol, because of their limited buying power. Big Alcohol buys larger quantities of grains and other substrates, as well as energy. This delivers them an advantage over the craft distilling industry, creating a less equal playing field, as the perfect storm conditions continue.
Component shortages have been an issue ever since Corona. Machines that use components take longer to build and become more expensive. This unfavorable condition, again, hits the craft distilling industry harder than it hits Big Alcohol. Why? Because the barriers to new market entry become higher. Established Big Alcohol brands and existing production facilities are, in a way, safe-guarded from new competitors. And usually these new competitors would have been craft distillers. The components shortage problem therefore further extends the lead Big Alcohol has over the craft distilling industry.
Inflation, interest rates, and uncertainty are on the rise. Together, they limit investment opportunities. As before, this set of unfavorable circumstances hurts the craft distilling industry disproportionately hard. Why start a new business if even the planning stages show red numbers?
Finally, the world faces a population implosion. The generations that usually do the heavy lifting in the job market are smaller than ever before. The generations that will become the work force of tomorrow is even smaller. Older, less active generations are bigger than they have ever been. It becomes more difficult to find qualified people, especially for blue collar jobs. Much of the craft distilling industry is very hands-on. This, in term, means that many struggle (or will soon struggle) to find adequate staffing levels to maintain production levels.
In summary, there are four sets of unfavorable circumstances that, in conjunction, create a perfect storm. They all hit us hard, they hit us hard at the same time, and they hit our industry harder than it hits our competitors. Metaphorically, the storm is blowing harder and harder, the waves are higher and steeper, and - to add to the pain - it is getting dark. If we can ride it out depends on two things: 1. How long will it take? 2. How fast can we adapt?
How long will this perfect storm last?
In a way, your guess is as good as mine. But to take some of the guessing out of it, let's see if there's anything we can say about each set of the unfavorable circumstances. Maybe that'll add up to a clearer insight, something that can help us predict if this is a short-term event or a new normal?
The exploding input costs are mainly caused by the Russo-Ukranian war. Will it have implications in 2023 and 2024? Yes, most likely. But as soon as the war stops, both energy and grain prices will get lower. Back to normal levels? That is not sure, as the world is facing a huge de-investment in oil and other traditional energy sources, while newer and greener solutions are not yet able to replace 'm at the same speed. My prediction would be that the current exploded substrate and energy costs will die off in two to three years, but even after that period, prices will remain higher until at least the end of this decade.
Summary? I expect the current peak input costs to last throughout 2023 and maybe 2024. I expect input costs to fall to about half their current levels from 2024 until 2030. From 2030 onwards energy especially may drop to significantly lower levels.
The global component shortages were supposed to lift this summer, but they didn't. The world made China its production hub and with free trade and sea transport failing, this has become a huge issue. Will the shortages lift shortly? I find that unlikely, especially since the USA has put an embargo on medium and high quality semi-conductors for China. This will likely not only hamper component construction directly, but also indirectly. Many machines that make components need higher grade semi-conductors.
My expectation? It takes seven to 10 years to design new semi-conductors and take them to production. The global component shortages, especially with rising tensions between the USA and China, may well last into the next decade.
The convergence of break-through technologies like AI, electrification of transportation, the switch to renewable energy, and bio-engineering will push the global economy into safer waters. But when will this convergence take place? My best guess is from 2026 onwards. Why is this trend important? Because it potentially offsets the inflation, interest, and uncertainty induced global recession we are facing. This means that the current economic downturn may well last into 2026.
Finally, let's have a closer look at the pending population implosion. Numbers are not great and could collapse to half by 2050 to 2060. No swift recovery is expected, so this is the one problem, the one set of unfavorable circumstances that's here to stay.