Future of the Distillery Business Environment

An interesting post on ADI that I took a lot from. I've been there done that with the mistakes and this is a good reminder of some things on basic business operations and the pathway to success. I find that as I get older I am starting to delay purchases so I can see if the need is truly there. I've been stuck without cash flow but heavy into assets enough times that I would like to minimize that.

Anyway. Here's the link. I encourage you to look at the discussion as some good comments are made disputing some of his assertions that bear consideration.

I'll cross post it for convenience and discussion of experiences of our guys here.

Post below from Joe Dehner:

It seems to me that we all need to batten down the hatches and pre-pair for the fallout. I feel that the distillery bubble is just about ready to burst. This year (2017) will be by far the biggest year on record of distilleries going out of business. There are many factors why I feel this way bust just to name a few.

Two main reasons to always reflect on.

The battle for Shelf Space, and Operating Capital.

And a couple more.

  1. To much bourbon. I believe that this is the year that the larger number of distilleries will for the first time be trying to sell there brown spirits. The problem is not there local area it would be everywhere else they are trying to sell the brown juice. The Distilleries will be battling in a marketing game, and that in it self requires MONEY and TIME, and time cost MONEY. To put up all that bourbon cost Money straight out of the operating capital. When product does not move as quickly thought. The R.O.I. Is much greater and the hit is much harder.
  2. I Deal with people from every corner of the world, in every facet of this industry. I deal with people that have big budgets and small budgets. I am aways blown away when someone just wants to make a little booze and thinks they have got to have a $200,000 dollar still, or pay $75,000 for a 50 gallon pot. The reason for item # 2 is the spending of MONEY in the most stupid ways possible. People don't stop and think that some of the biggest components of equipment are truly the least important. People think the need the biggest and baddest still but forget about the boiler, chiller, mash cooker, ferm tanks, bottles, labels, and all the small things that nickel and dime a start up. Stop and think "how many bottles do I have to make to pay this off".
  3. Sell out, sell off. One of the biggest mistake someone could make is to sell off the larger part of stock in the company to get to the place they need to be or get the equipment they think they need. When you realize that you are not really the owner and your are more a employee that person cares a little less and gives up quicker. When you work the hours we all do at a distillery and think...."I could be making more money flipping burgers".....how much heart do you have really in it. People have medical problems but I am floored by how many distillers are selling out because of it. I get it no one on earth want to admit "I Failed". So don't sell your soul just to crush your dream.
  4. This one will be easy. Operating Capital- how many times have you looked around your distillery and saw a piece of equipment that you bought a while back and thought "man, I wish I never bought that" Or "I would like to have the money I spent on that". # 4 = Don't buy stupid Crap. THINK. It comes right out of your Operating Capital.
  5. Distilleries trying to do something so so different that they Distill there way right out of a business. Think about what you do before you spend the money. I just checked yesterday and let me see, time, grain, water, labels, bottles, and corks still are not cheap. So is it a good idea to have 100 cases of something that won't sell. Please, impress the bank with your massive over stock of junk.
  6. This one is kinda like # 5. Not listening to your patrons. People that will go out of business are probably bull headed and think "If I make it they will come". Make products that is proven that people like. You don't have to copy, put your own spin. Know what is selling on the markets.
  7. Getting out in front of the public. You may be making booze, but you are also selling your self / story. You spent all this money on a shiny piece of copper, where is your advertising money? Distilleries have to get out in front on the public doing tasting, and ect. I see a trend of people not doing that as much as is needed.
  8. Part of # 7. I was in a very top self liquor store today and there was 250 different types of brown spirits. Which one do I choose?
  9. Battle for shelf space. With the gates opening on distilleries all over the us and more imports coming in, the battle for shelf space has begun. All the money you spent making that rum, whiskey, vodka, ect, will be for nothing if you can't get it on the shelf. Enough said.

Summary-Rough seas ahead. Tighten your belts. I am all ready seeing lots of used NOS everywhere. It used to be when something was put online it was gone in hours. Now it just sits there...

I wish everybody always thoughts. I wish everyone the very best. Let us all be in good SPIRITS in 2017 and the years to follow.

Joseph Dehner

Comments

  • Making alcohol is easy, anyone can make alcohol. Making alcohol does not qualify you to be successful, that ship has long since sailed.

  • Quite sobering

  • I haven't even started yet and can see a lot of this already. I never dreamed how much its selling yourself over product. Marketing is totally the way to get the edge but it for sure is expensive. Good read thanks

  • Great follow up post from silk city.

    I don't agree with this, and it's not because I have a biased or vested opinion as an owner (after all, where you sit is where you stand.) Yeah yeah, easy money is over. Everyone with a first mover advantage that didn't parlay that into growth and investment has lost that opportunity. Are we talking about a small craft producer turning into a national brand? Hell, that's always been a long shot. Are we talking about new business failures and failure to launch? I don't think that's new, I think it's just becoming more visible through places like ADI, etc. Remember, 80% of startups fail on average. This business is no different. Like I said, that first mover advantage that might have lowered this rate to 60% - that's gone, but all that means is it's no different from trying to open up a franchise sandwich shop.

    First, I don't understand how you define or easily identify brand saturation in a market. From my position, if the market sufficiently fragmented such that smaller players are able to gain or retain enough market share to be viable, what does it matter the aggregate number of brands? How is it that the wine market is not sufficiently brand overloaded? I personally think that the Scotch section is incredibly confusing and cryptic, but it continues to grow. In addition, the bulk of the craft brand growth has been local/regional, with very few being in national distribution. There is no single national "shelf", unless you are a major national player, everything else comes down to the local shelf. And not even all of the local shelves, but the local shelves that matter. A single strong specialty spirits retailer can move more product in a month than dozens of nondescript mom and pop corner liquor shops. Why would you even bother to waste your time with the latter (more on this later).

    Is it about the ability to respond to market changes? Craft distillers can very rapidly adjust their business models to account for short-term preferential changes in the marketplace. We have the advantage of agility. If tomorrow, anchovy vodka was the next hot thing, most of us could be in the artisan anchovy vodka business relatively quickly. A national producer would not have similar agility. We have the advantage of being significantly more agile in the marketplace, this should not be overlooked.

    Also, are new entrants able to grow the size of the overall market themselves? You might think the question is a little bit silly, how can new market entrants grow a market that major players have trouble doing whilst spending tens, if not hundreds of millions in aggregate, on advertising? But I I think the answer is that they can, by virtue of being local, and by virtue of being experiential.

    IMHO, that word, "experiental" is going to be the key, and it's not going away. I think the last piece is the key differentiation that craft brands have over nationals, the ability to be experiential. But what the nationals can't do, is appeal to the experiential buyer at mass-scale. They can only be experiential in so far as their marketing material takes them. I don't think that translates into local market dynamics. Awareness is not experience.

    How can you ignore the demographic change that is driving this longer-term market shift? A shift which clearly has legs. Every retailer is incredibly focused on this. Every consumer service business is incredibly focused on this. Even the financial services industry is spending millions on this. And hell, who wants to be caught dead in a bank branch? What kind of "experience" is that?

    There are dozens and dozens and dozens of studies and articles talking about this paradigm shift, there are probably just as many consultancies that state that they have the secret keys to be able to navigate this. But, the fact is, nobody has figured this out yet. It's fair game.

    I'll just leave a few keywords and concepts here, which I think are really important to think about. This is not your father's Oldsmobile.

    Experience, not Things

    Authenticity, Sincerity, No Bullshit.

    Social (as in Conspicuous) Consumption

    In Collaboration, actually Listening

    Environmental and Social Conscience

    Local and Artisanal

    Obvious Passion

    Respect, and Respected

    Unique and Limited, not Mass Market and Undifferentiated

    I firmly believe that a new craft distillery entrant in a crowded craft market can absolutely destroy the incumbent players if they master this experience component, and can scale it. Let that be a warning to anyone sitting on their ass. A millennial marketing to a millennial will absolutely beat the pants off you. Are you still hanging onto that trope about your great uncle Cletus' secret recipe? Sorry, they don't give a shit about that. Doing a private spirits pairing at the hot local restaurant, with a custom menu designed by it's hot local chef? Pretty food, pictures plastered all over Instagram, now we're talking. Personally? I don't think this demographic is interested in mass market anything. It's about creative differentiation, limited availability, having a brand image that a demographic wants to be associated with. It's not about being able to spend massive marketing budgets either.

    It should be the national brands who are shaking in their boots

  • Was probably drinking when I wrote that.

  • I dont het on ADI too much self promotion even for me, but when i do i dont listen to most of the regular posters.

    Besides, the sky is falling.

    StillDragon Australia & New Zealand - Your StillDragon® Distributor for Australia & New Zealand

  • Great lessons and I cant really talk a lot because I am not in operation, but I will be before September. But I will be getting some gear to be able to make beer and flog that as well for cash flow. I am in the situation with no craft distillery in the city where I live. So maybe competition wont be that great. There has been one craft distillery just start up in Argentina in Cordoba with crap gear and they are selling every bottle they make. @fijisprits is spot on with his post from what I understand. Digital marketing is the key to success. And you can get access to huge amounts of people in a very short period of time for almost nothing.

  • edited July 15

    I personally see a lot of similarity in what we presently do in our cider production and for that matter any other production.

    My schooling in this in the last few years has made me realise;

    Without marketing you are stuffed and this costs a LOT of money.

    Without proper distribution, you are similarly stuffed. Getting a distribution company to do this results in complete highway robbery where they take up to 30% of the trade price.

    Collecting money from customers takes a serious amount of time and effort and is a real shitty job. Ideally you ought have a COD delivery but in reality this does not happen. So cash flow kills you.

    I think the easiest and most profitable option is to sell via your taste room but this does always result in volume sales.

  • The whole thread is based on one guys thoughts on seeing some classified ads and arguing against all the evidence.

    Not that thought shouldnt be given to these things when you set out and again at every stage of expansion. But once its weighed up and you have made a realistic decision, stride boldly.

    StillDragon Australia & New Zealand - Your StillDragon® Distributor for Australia & New Zealand

  • @grim I actually really resonated with the part about the experiential thing for millenianials. It's not just the way THEY are doing things, it's the way the world is moving necessesarily as the economic environment changes for the average person. I think you really hit the nail on the head on that. Create an experience first.

    @punkin. I agree. If you are gonna do it, then do it. i thought the important take away from dehners comments was to be more realistic in our expectations and not get stuck in the "I gotta get the equipment for my projected demand before I actually sell anything" mindset. That just hardly ever works in any industry. Moving forward, I could see where I'd use the capacity of an 8" column , but my starter 4" will still be put to work getting reconfigured as a continuous or pot or sample still even with the 8" running. So it's not like I wasted my money or even limited myself by starting small. My entire distillery setup can easily produce 1200l of product a month running 5 days a week. It cost me $30,000usd.

    So I took it more as a reminder of good old fashioned business startup advice, hard earned and worthy of repeating, and not so much as a "sky is falling" thing.

    My attitude is that when I walk into a bar that has 25 guys and 7 girls, I see 7 opportunities and 25 potential wingmen not 25 competitors and 7 hurdles. Reality check on that is that if I have to walk away empty handed, i still have enough cash left to hit another bar or three.

  • edited July 15

    I did a lot of analysis on opening a distillery a couple of years back. The show stopper for me was the realization of how much I would need to sell to be profitable. The three-tier system here is a back-breaker. The only business model that made sense to me is tasting room sales - direct producer to consumer sales, without two other uninterested parties with their hands in the revenue stream.
    AND taxes on top of that.

    The people I know in the brewing and distilling businesses spend a hell of a lot more time on marketing and PR than on brewing and distilling. I admire their industriousness and successes.

    Ultimately I decided that I didn't want to fuck up a perfectly good hobby. The ROI is not worth the effort, to me. I can make whatever comes to mind now. Mistakes are not costly. That would not be the case if I went pro. The firm "No Sales" model is pretty liberating. Also, I do not need other people's approval to confirm my skills as a brewer/distiller. I trust my own judgement.

    YMMV

    “Do I have to explain everything? Can’t you just be amazed and move on?”

  • edited July 15

    Running 5 days a week means you are hiring employees.

  • edited July 15

    @grim said: And this is exactly the reason that Jim Beam is paying Mila Kunis millions of dollars a year.

    If I had the money, I'd pay her $millions a year too. She is smokin' hot! B-)

    “Do I have to explain everything? Can’t you just be amazed and move on?”

  • @grim said: Running 5 days a week means you are hiring employees.

    It only takes one person to run the thing really. Hard work tho by yourself.

    I do pay a tribal guy $2.5usd/hr to run the still. He's pretty good at it and is even getting cuts now. If I break it down into steps he can follow basic instructions and knows when to stop and come get me. So not really a burden financially. More of a huge benefit. My out of pocket costs including labor are something like $4/L usd (bulk spirit no bottling etc. )

    I'm also not burdened by a tier system here and our regulations are far less restrictive generally.

    Hard part is getting permission from the gatekeeper of licenses. Arbitrary issuance means you can do everything right and still not get licensed. Until then I just practice my process and recipes then sell product as chemicals for labs and hospitals and industry. Still able to pull around $10/l profit. This will eventually also broaden my market base which helps with sustainability.

  • @Fiji_Spirits said: Hard part is getting permission from the gatekeeper of licenses. Arbitrary issuance means you can do everything right and still not get licensed.

    I would think some well-placed samples might smooth that problem over.

    “Do I have to explain everything? Can’t you just be amazed and move on?”

  • Thanks for linking this. I've been here all along boys, kinda watching and reading. MY last 9 months at my corp job have really convinced me that retirement should be planned and what am I going to be when I get there...

    So I have been studying starting an artisan operation here, like some of the distillers I know. No, they don't make much money, work their asses off in the Texas heat, and yes they struggle agin the shelf, the intimidation the local distro's say to the retail shops. Yep, tasting's and such are good avenues. Basically, this old fellow told me "If you need to earn a salary at this, you should stay at corporate, even thou the mash there smells like horseshit" He tells me that there are good months, and there are bad ones.. A microbrewer opened two doors down from these guys tasting room in our little shithole town (It's two blocks long, boys), so that hurt them too. Texas is a huge BEER state - they teach beer brewing at day care around here...

    I have been reviewing business models, looking at various plans and keeping my conceptual visions small. Given the direction of Corporate in France, all the remaining IT Engineer (And architects like myself, too) jobs will be offshored to India, Poland and Romania within 3-4 years so the glory road will not go on forever.

    And yes, development contines, but I am not saying jack until my next offering hits. But it's going to be a big one.

    Cheers, and happy summer to thosee above, and winter to those below the equator

    Hobby Distillers Association Member - Join us today!

    The only sillae question is the one you don't ask folks...

Sign In or Register to comment.