The Craft Distilling Industry May Be Felled by Social Distancing

For Todd Thrasher, it seemed like a sure bet. In October 2018, he opened a sprawling bar and rum distillery along the newly revitalized District Wharf in Washington, D.C., with three floors, space for 300 diners and 56 employees. He figured that with the area’s heavy foot traffic and a booming local economy, his wager would pay off quickly.

“If nothing changes, I’d say I have until July,” he said. “It’s hard to build a brand when no one is buying.”

The crisis isn’t just threatening to decimate the industry; it is also reshaping its future. How can a sector that relies so heavily on bars, tasting rooms and face-to-face sales — not to mention customers willing to pay a premium for its products — move forward in an economy defined by social distancing and thinner wallets?

For many distillers in the United States, 2020 was supposed to be a banner year. The craft-spirits boom was entering its second decade, and the number of distilleries had grown to more than 2,000. The sector employed about 25,000 people directly and supported 100,000 more jobs, according to an analysis by the American Craft Spirits Association. Sales grew by 27 percent, to $4.8 billion, in 2018, the most recent data available.

“We were ready to announce at our upcoming national convention that the industry was growing by leaps and bounds,” said Margie Lehrman, the association’s president.

While some craft distilleries had expanded rapidly and achieved high-profile national distribution, including FEW, most are like Mr. Thrasher’s: local distribution with a focus on so-called on-premises sales, like bars, restaurants and their own tasting rooms. And about a half are less than five years old, too young to have built strong relationships with distributors, retailers and customers.

Then there is the debt — distilling equipment, staff and paperwork require enormous amounts of money, and many distilleries spend their first few years hustling to repay investors.

This blossoming industry was therefore uniquely vulnerable to the ravages of the coronavirus crisis. To make things worse, the market for craft spirits is centered in large cities and among millennial and younger consumers — all of which have been especially hurt by the sudden economic downturn.

“It’s difficult to see how we weather the storm when can’t get to market,” Mr. Jessett said. “I’m looking at the business and wondering how we’re going to survive.”

Like scores of distilleries around the country, MKT responded to the crisis by making hand sanitizer, though this had its own complications, from navigating Food and Drug Administration regulations to figuring out how to find small plastic bottles. Almost all the distilleries are giving away the sanitizer free.

Good will doesn’t pay the bills, at least for now. Nor is shifting to off-premises sales a surefire fix. While liquor store sales were up 26.2 percent for the week ending April 11 over the previous year, according to Nielsen, customers are mostly hoarding low-priced household brands — instead of buying a bottle of craft whiskey, they’re buying two bottles of Jack Daniel’s.

In a struggling economy, it’s going to be especially hard for an upstart distillery to get noticed. “If I just put my product on a shelf with 500 other rums, it’s going to be hard to get retailers excited,” Mr. Thrasher said.

Many small distillers worry that the crisis could aggravate some of the worrying trends that were already pressing on the industry — chiefly, a wave of consolidation, as private-equity groups and multinational companies buy distilleries like High West, Wyoming and Smooth Ambler. That will no doubt continue, Ms. Greene said, with investors scooping up distressed brands at fire-sale prices.

“I fear for the small distilleries,” she said, adding that the landscape could look a lot like the spirits industry after Prohibition and the Great Depression, in which a few large companies gobbled up dozens of formerly independent distilleries, often selling the facilities and keeping just the brands.

This regulatory easing, if it becomes widespread and permanent — a big if, given opposition from distributors and other established interests — could have a profound impact on the future of craft distilling.

In one scenario, fewer regulations would lower the cost of entry for new distilleries, Ms. Campbell said. The craft industry is overwhelmingly white and wealthy, or at least well-capitalized.

“If we can make it easier for distilleries to get products to consumers, we’ll see people who can’t raise a million dollars in capital being able to open a new business,” she said. New voices could, in turn, prompt more innovation into a potentially diverse category that is dominated by just a few spirits, like bourbon and gin.

Or the industry could turn inward and become even more exclusive. Direct-to-consumer sales could push the craft spirits industry to look more like the upper reaches of the wine industry, where consumers have to join clubs to get access to bottles.

“There are lots of craft distilleries that in the absence of regulation would have a list of buyers. They would ship to them, and the rest of us would never seem them,” said Mr. Mooney, of Westward.

Whichever path the industry takes, distillers say they expect a future with fewer of them, and much less money to go around. That might not be an entirely bad thing, if it forced distillers to set aside big expansion plans and focus instead on deepening their relationships with their communities. The craft-liquor industry may no longer be a gold rush, but that doesn’t mean craft spirits will go away.

“The ones who get through will be the ones the communities closest to them decide it’s important that they survive,” Mr. Mooney said. “If your community values your existence, your community will rally around not just making sure you survive, but thrive afterward.”

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