Introduction

Imagining a post-Covid world, where the economy recovers ... what will the future of the craft distilling industry look like? Will it be a sustainable future? And under what conditions will it achieve long-term success? In this iStill Blog post our founder and CEO Odin does a deep dive on the above topics. He focusses on the US market, since that's both the biggest market for craft distilling and it is ahead of the curve. Lessons learned in the USA are applicable internationally. They help paint a global picture.

Competition

A sustainable future depends on the ability of the craft distilling industry to make a difference, relative to the competition. Yes, there is a large customer base for alcoholic beverages, but who is going to serve that market?

Up until a decade ago, this market was served by Big Alcohol. A small number of big companies pushing out industrial quality spirits catered the market. Craft distilling is relatively new to the scene. For the craft distilling industry to attain a long-term future, it needs to take market share away from Big Alcohol. It needs to do so by growing its own market share and by then maintaining that market share.

Market share and adoption rate

What market share is needed? To what number does the craft distilling industry need to grow? More is better, but I feel there is also a very specific long-term goal. A goal that needs to be achieved in the coming decade. What that magic number is? It is 14%. For the craft distilling industry to take on Big Alcohol on the long term, 14% market share is needed.

Why? Here's why! New technologies or innovations disperse in a standardized pattern. It is called "Wright's Law". At first a new innovation or technology grows at a slow pace, then that pace picks up, only to slack-down by the time full market potential is reached.

The reason that a new innovation or technology, like craft distilling, isn't embraced immediately, has to do with how the human mind works. Some people love to try new stuff. Others hold on to what they know.

Based on purchase psychology, four categories of customers or consumers can be distinguished:

1. Early adopters (14% of the market);
2. Early majority (36% of the market);
3. Late majority (36% of the market);
4. Laggers (14% of the market).

An adoption rate of 14% is the overall minimum goal, since it means that all early adopters are wheeled into the domain of craft distilling. The strategic advantage is that this creates a defendable (and thus sustainable) market share. The more early adopters are "conquered" by craft distillers, the more difficult it will be for Big Alcohol to make intrusions in that trend-setting market.

A second strategic advantage, to conquering the early adopters market, is that it sets the industry (any industry, actually) up to grow further. The early majority will only try things that others, the early adopters, will try first. Late majority consumers and customers will only be persuaded to try something new, once most of the early majority (so close to 50% of the total addressable market!) is doing it.

Is a 50% to 86% market share feasible for the craft distilling industry? No, it isn't. Not in any foreseeable future. Not in any sustainable future. But 14% is achievable. Achievable and important, because it creates both a defensive and offensive position that puts pressure on the competition from Big Alcohol.

Valuation

Creating a sustainable long-term future all depends on value creation. I hope the above paragraph makes that clear. But how do we measure value? Well, that's actually pretty easy.

Money has been invented a long time ago. It serves as a great way to measure value. We can use it to calculate the total value of the total addressable market. Here is a simplified example:

If the global market is 1000 bottles big, and the average selling price of a bottle of spirits is EUR 20,-, well, then the total market value is 1000 x 20 = USD 20.000,-.

So what's the value of the craft distilling industry, relative to the total addressable market? The craft distilling industry holds about 4,5% of the value of the total addressable market (in the USA). Big Alcohol owns 95,5% of the total market value. Quite a discrepancy. How do we bridge the gap?

Growth curve

Craft Beer has been around for a decade longer than craft distilling. Their growth curve and our industry's growth curve match very well. The market share value of Craft Beer is currently around 12,5%. It is therefore expected to see the craft distilling industry grow with similar numbers. Given a 12% growth, year over year, a market share of 14% is obtainable within a decade. As follows:

Differentiator

But why would consumers buy craft distilled spirits? I mean, Big Alcohol has taken care of consumer demand pretty successfully for over a century and a half now. What sets craft distillers apart? What "weapons" do we bring to the battle? Simply put, craft distillers can distinguish themselves by their personal approach, via the experience and storytelling they offer, and by producing better quality spirits. Big Alcohol takes the efficiencies of scale and low production costs, as well as huge marketing budgets with 'm.

If you bring the price difference between craft distilled and Big Alcohol produced spirits up, it becomes clear that the craft distilling industry cannot compete on price. The 4,5% market share they have in value equals a less than 4,5% market share in bottles, simply because purchasing one bottle of craft distilled spirits is about 50% more expensive than a bottle that's produced industrially.

This means that a personal approach to sales, the adventure of having a drink at your distillery, and - especially - the quality of your product NEED to be 50% better! That's how the craft distiller carves out a living for himself and his family.

Sleeping with the enemy

All right! Bright future ahead then? Easy growth targets. Lots of amazing new entrepreneurs entering the craft distilling industry. All good, right? No, something is amiss. Something is seriously wrong. We - the craft distilling industry that is - has been sleeping with the enemy. And it is costing us dearly.

Craft distillers design their own recipe, produce their own spirits, and are responsible for selling the bottles they make. Leave anything out and you are either a recipe developer or a contract distiller or a producer that fakes in-house production.

Due to a lack of knowledge, a lack of funds, and a lack in modern spirits production technology no less than 2/3rds of so-called craft distilled spirits are basically outsourced and purchased at companies like MGP. Those spirits are bottled and labeled by the "craft" distiller, but they are not craft distilled spirits! Since they are bought in from Big Alcohol, 2/3rd of the 4,5% value market share is actually only 1,5%.

There you have it: the real value of the market share of the craft distilling industry in the USA is closer to 1,5% than it is to 4,5%. The real value market share of Big Alcohol isn't 95,5%, but a whopping 98,5%.

This is harming for various reasons. First of all, with every new craft distillery that opens shop, it is actually Big Alcohol that is gaining more market share! Secondly, industrially produced spirits do not support the story telling at the distillery, nor does it provide the 50% increase in spirit quality. A 50% increase in spirit quality, that is needed to defeat Big Alcohol at their game! Here's how the future numbers will look, if we do not change that:

As you can see, outsourced, Big Alcohol produced, so-called "craft distilled" spirits will be 9% of the total market value. Less than 5% is true craft distilling market value. Now, let me introduce a third reason why this scenario should be prevented at all costs. The USA government grants craft distillers substantial tax advantages over Big Alcohol. Based on the above numbers, Big Alcohol, within a decade, could make a successful push in terminating those advantages. Why give craft distillers an advantage, if they use it to source at Big Alcohol, whose advantageous position needed correction in the first place? Check mate craft distilling industry. Or is there another solution? Something that can turn the tide?

iStill's mission

Our mission is - and has always been - to empower the craft distilling industry. We call out what's wrong (see above). My team and I go the extra mile to help each and every person, that wants to become a craft distiller, with better education, better recipes, and vastly improved equipment.

iStill customers make most of their products in-house. Why? Because we educate our customers. And because we provide them with modern, efficient technology, that allows them to make spirits that are 50% better at less than half the costs.

Our customers show the industry the way forward. They win more medals, they have more success, they have better business cases than those craft distillers, that invest in expensive and outdated equipment, that invest in self-proclaimed "master distillers" that aren't hampered by any kind of experience or information.

iStill aggressively pushes its technology, so that we can reach more craft distillers. We aggressively speak out when Big Alcohol backed old boys networks try to sell you solutions that do not support your competitive advantages.

Here's what the future would look like, when the industry as a whole embraces true craft distilling. Where the stories that we, the craft distilling industry, tell our customers actually add up to us designing, making, and selling the product. In-house. If we do so, in just about 10 years, we will achieve a profitable and sustainable future for the craft distilling industry. For our businesses to grow, for our families to prosper. This is how the numbers, in terms of market value division, would look like:

iStill University is the industry's leading educational facility. The iStill Laboratory has helped design over 450 recipes for customers all over the world. iStill provides the advanced distilling (and mashing and fermenting) technology you need to take the next step and to bring spirits manufacturing in-house. To become a true craft distiller. To kick Big Alcohol's butt.

It's the only way forward and the ball is in your court. Wanna play? I am available at Odin@iStillmail.com.

www.iStill.com