The Rapid Revolution in Craft Distilling, and What's Ahead in 2015

The craft distilled-spirits business is taking off all across America.  States such as California, Colorado, Florida, North Carolina, Texas and Washington State spearheaded this niche industry’s phenomenal growth by enacting special legislation providing relaxed regulation for small-production distillers.  Now, the rest of the country appears to be falling into line.

PHENOMENAL GROWTH IN RECORD TIME

Many industry participants feel that the craft or micro distillery boom is in the same position as the craft beer market was ten years ago. The numbers seem to bear out this assessment. Within just the last decade, the ranks of craft distilleries have expanded from just 50 operating in the US in 2005, to more than 650 licensed distilled spirits producers in America spread out over 45 states last year, according to the American Distilling Institute. 

The mechanics of distilling have remained constant over the centuries.  Grains such as corn, rye or wheat are ground, mixed with water, fermented and then put through a still to separate the alcohol and water.  Alcohol has a lower boiling point than water does, so it vaporizes faster, allowing the collection of the condensed alcoholic liquid as the end product.

RELAXED REGULATION AS A DEVELOPMENT ENGINE 

What has changed radically in just the past decade is the manner in which small-production distilled spirits producers are regulated.  Whether classified as “artisan,” “craft,” “farm,” or “micro,” these distillers have achieved tremendous gains in lobbying for legal changes that reduce barriers to entry and facilitate new operation development. 

The states that got onboard earliest, or enacted the most extensive relaxations in regulation, have seen the greatest growth.  In 2014, Washington State was home to the most licensed craft distilleries (80), while Colorado (50) and Michigan (approximately 40) trailed closely behind.  Much of the growth in craft distilling is attributable to these and other states that have amended their alcohol laws to make it easier for small distillers to start-up and commercialize their products. 

Last year alone, Alaska, Arizona, the District of Columbia, Illinois, Indiana, Kentucky, Michigan, New York and Washington State liberalized their respective alcohol beverage laws to further support emerging, entrepreneurial artisan distillers.

Moving into the 2015 legislative season, additional initiatives favoring small distillers are likely.  The most recent example of new craft distiller legislation has been filed in Indiana.  That state’s beverage laws already recognize a distinct category for “artisan distillers” as a result of legislation introduced in 2013.  The bill proposed for the 2015 legislative session is Senate Bill 54, which was filed at the end of  December, 2014 and grants artisan distillers additional relief from certain administrative requirements.  The proposed legislation: (i) makes it easier to qualify as an artisan distiller; (ii) expands the licensee’s privileges to include Sunday sales; and (iii) allows the artisan distiller to conduct retail sales of the distiller’s products at up to three locations other than the licensed premises of the artisan distillery.  A summary of the legislation reads as follows:

2015 Indiana Senate Bill No. 54,
Indiana One Hundred Nineteenth General Assembly - First Regular Session
INDIANA BILL TEXT
TITLE: Artisan distiller's permit.

VERSION: Prefiled
December 30, 2014
SUMMARY: Removes and repeals certain permit requirements for artisan distillers. Allows the holder of an artisan distiller's permit to: (1) sell liquor for carryout on Sunday; and (2) upon approval, conduct business at three additional locations that are separate from the premises on which the artisan distiller manufactures liquor.

Looking ahead as the legislative sessions in many states begin, key issues likely to surface for small-production distillers include:

  • Legal definitions of what constitutes a “craft” or “artisan” product: Many small producers are expressing angst over efforts by large spirits manufacturers to enter the market with products that are marketed as hand-crafted, artisan products.
  • Additional tax relief for start-up distillers with micro-production levels: While the federal government and a number of states already provide some measure of tax relief for small-production distillers, further efforts to secure additional tax reductions are likely.  Small producers continue to stress that tax relief is instrumental to the success of a small, start-up venture.
  • Limited self-distribution: While such initiatives are guaranteed to produce an intra-industry battle, small-production distillers remain determined to pursue legal rights to sell their products directly to retailers and/or consumers, bypassing the distributors typically mandated by traditional “three-tier” regulation.  Small-production distillers typically complain that at their early stage of development, when their products are relatively unknown in the marketplace and working capital is extremely scarce: (i) they cannot readily attract distributors who will efficiently market their products; (ii) they need to capture every bit of margin possible in order to sustain and grow their start-up operations; and (iii) a significant portion of sales are (or could be) made to tourists at the production facility, such that it would make no logistical or logical sense to require a wholesaler to “distribute” the product from the distillery to an adjacent tasting room or other retail facility. 
  • Sunday sales:  Perhaps the least controversial legislative change that will be pursued this year, all producers (and other members of the alcohol industry as well) contend that the “Blue Law” prohibition on Sunday sales is an irrational holdover from a day-gone-by.  On its face, the prohibition of Sunday alcohol sales acts as an economic anchor by eliminating 14% of the marketing calendar for all licensees.  Additionally, artisan and craft producers argue that legal bans on Sunday sales are especially hurtful to them because their operations tend to integrate a tourism component to their production activities; Sundays are typically a non-work day that presents a prime opportunity to attract leisure tourists.  


What gets filed in which states will become clearer in the ensuing weeks.  Of course, from there it’s all a matter of sausage-making.  Time will tell what initiatives, if any, ultimately become law.

This article is published in the January 2015 issue of Fintech Focus. For more information, click here.
 
Author - Richard M Blau, Chair GrayRobinson’s Alcohol Industry Team