Distilling Industry in Dire Straits and is AQEC the Answer?

Introduction

The distilling industry is in dire straits. Craft distilleries are shutting down their operation. Big Alcohol distilleries run at 50% or sometimes even 30% of their normal production rates. What's going on? Let's dive in deeper and find causes and - maybe - some solutions that I think are essential for the industry getting back up its feet.

Causes

As distilling is energy-intensive, raw material dependent, and asks for a lot of pre-financing, it is very much intertwined with and dependent on the general state of the economy. And the economy has been "difficult" to say the least. Here are the four macro-economic trends that hamper today's distilleries a lot, both craft distillers and Big Alcohol:

1. Higher energy prices;
2. Higher grain and alcohol prices;
3. Higher interest rates;
4. Inflation.

And then there are five more industry-related, micro-economic trends that work against the craft distilling industry specifically:

1. Small business tax incentives for craft distilleries;
2. Clogged-up distribution channels;
3. Low overall spirit quality;
4. Lack of authenticity;
5. Mediocre customer experiences.

Higher energy prices result in higher production costs and lower margins. Both Big Alcohol and craft distilleries are faced with the challenges of high energy prices eating away at their margins, or even at their financial buffers.

Raw material prices have risen considerably. Like the higher energy prices, they put a strain on production costs and eat away the margin the distillery is looking for. And - together with the rising energy prices - today's distillers are faces with a double whammy.

Double whammy? Make that a triple whammy! Next to higher energy and raw material costs, the costs of capital have also, well, tripled. This impacts distilleries in multiple ways. First, new start-ups have it more difficult as they pay more for loans or simply get smaller loans. Secondly, existing distilleries see their costs of investing in aging drinks sky-rocket. Thirdly, as interest is on the rise, the willingness for investors to come onboard dwindles.

Closely connected to the higher costs of capital is the increase in inflation. Not as it results in the higher prices mentioned in the above paragraphs, as we discussed that already, but as importantly where a rising inflation eats away at the spending potential of the larger customer population. If, for example, the general customer earns EUR 3.000,- per month and has EUR 200,- to spend on luxury items that are more in the "I want" than "I need" category, what happens at a 10% annual inflation rate? Well, the value of their overall spendable monthly income decreases from EUR 3.000,- to EUR 2.700,-. Where do you think this customer is going to spend his remaining money on? On "want to"-items or on "need to"-items? On drinks or on bread?

Specific to craft distillers, there is the issue of small business tax incentives. This has supported craft distillers in an artificial way. Often - at craft distillers conventions - the talk of the day was more about taxes than about spirits! Apart from supporting craft distilleries in an artificial way, this has also lead to too many new market entries: often hobby distillers that came to the market under-financed and not well versed in the art and science of making good quality spirits.

Too many new entries and all of them are fighting for market share and a shot at the table with big distributors. This has clogged up distribution channels. I mean, who needs another UK gin? Other than it offering an amazing experience or it being local to where you live?

And quality - or lack there off - has also been a major issue, especially hurting craft distilleries. Why? Well, it costs more to do small-batch production than to produce on a continuous and industrial scale. This puts craft distillers at the back foot when compared to Big Alcohol. The way to overcome it? Easy: make better quality spirits to make the extra price you put on your products count. More on that later.

Over 99% of gin producers buy in their alcohol with Big Alcohol. Over 90% of North American craft distillers purchases their whiskey with Big Alcohol, claiming that barrel aging it at their location is what makes it "craft". Some even go so far as to say - when challenged - that just their marketing (read: label & bottle selection) make it craft ... or at least a work of art worthy of the higher price!

Finally, customers do not want drinks at distilleries. They want experiences! For a drink, they can go to their local bar or liquor shop. So what does your location offers that the bar or shop does not? Right, a learning experience or at least a chance at being entertained.

Solutions

I think that the following craft distillers are going to survive. Yeah, forget about Big Alcohol. Not interested in that, other than it being a target that you are after. So, yes, a focus on craft distillers. What is needed to survive? What craft distillers will survive and come better out at the other end of the tunnel, the whole industry is currently in?

I think the road to consistent success ... and to becoming a consistently successful craft distiller is rooted in the grooming and completely internalizing four qualities, that we summarize as AQEC. And no, that does not stand for Aerospace Qualified Electronic Components! Instead, for us, for the craft distillers, it stands for:

1. Authenticity;
2. Quality;
3. Experience;
4. Costing.

What sets you apart as a craft distiller is your authenticity. You designed the spirit, you produce the spirit, and you - passionately! - sell the spirit! Anything less, any part that you are not in control off is going to eat away at your authenticity. And without authenticity, why should you be allowed to be in business? I mean, let's take iStill as an example ... Do you think that buying-in distillery columns and kettles and heaters from China would have created extra value? Would it have added to our authenticity to be limited in the amount of innovation we bring to the industry ... if we were using what that industry already provides? The answer is a most definite "NO"! For us, but more importantly: also to you.

Quality is where you need to shine. You need to make BETTER product than Big Alcohol. With all the new market entries, you need to make better spirits than your colleagues. There is only one spirit quality level that you are after, and that is being the best. And if you cannot be the best at all, then forget about "all". Better focus on what adds to the quality of your spirit or spirit portfolio. Much better strategy than diluting a quality portfolio with the next drink that's "en vogue". Please be inspired like Madame Veuve Clicquot once was: "only one quality, the finest"!

Augment the experience you give to your customers. As distribution channels remain clogged up for a decade to come, and as both bars, liquor shops, and Big Alcohol is stepping up their game, what do you do? Make their visit about your story and passion. Share what you learned. Your spirits are not the goal, but your journey is, so take them by the hand and make them feel what you felt and still feel. Your struggles. Your choices. Your passion. That's what people truly want to find in their glasses! A guided tour, the owner-bartender, a gin school? Go for it ...

Bring costs in focus. It will keep your business afloat in more challenging periods. A focus on costing means that you strictly and diligently analyse your whole production process, and optimize it. Anything that does not add value has no place. Anything that does not add to your authenticity, your quality, or the customer experience needs to go. Did you identify your critical path? Look at how it is managed. Investigate the tooling you use. Is it the best, in terms of lowering production costs while augmenting quality? Keep it. Not? Replace it.

IStill's support

How we support the craft distilling industry getting back on its feet? In multiple ways. We offer amazing distilling technology that allows you to make more high-quality spirits at lower production costs. Our tech helps you make your own spirits. How's that for authenticity? Of for us helping you to focus on where your value is to be found?

Want to make quality product? Use the iStill University to become the best distiller you can be. It is the biggest and best distilling education available. Do you think you can excel without that level of training? Who are you fooling? Yourself. And - in the longer run - your customer. And we - and more importantly - our customers have the awards and medals to back that up, including the feedback on how tremendously important our solutions and educational facilities have been to them.

In order to improve your customer's journey, talk to other distillers. What do they do? What works? What does not work? The iStill Facebook Group is an amazing place to find other distillers, often ahead of your learning curve. iStill keeps on supporting its customers by facilitating community, communication, and the bonding and sharing of experiences and knowledge.

So ... do you want to be part of the future of craft distillation? Reach out to us via www.iStill.com!

www.iStill.com