State of the Bourbon 2019
Members of the industry discuss challenges facing American Whiskey in 2019
All photos by Maggie Kimberl
September is Bourbon Heritage Month, but as we all know, bourbon is good all of the time. Right now it is enjoying unprecedented popularity, and that popularity is extending into other categories of American whiskeys such as rye and American single malt. The bourbon boom began with a handful of Kentucky master distillers laying the groundwork in the 1990s—Wild Turkey’s Jimmy Russell, Jim Beam’s Booker Noe, and Buffalo Trace’s Elmer T. Lee have often been referred to as the ‘elder statesmen of bourbon’ for their work pounding the pavement to promote Kentucky Bourbon. Now hundreds of smaller craft distilleries have been founded nationwide. “A rising tide lifts all boats,” as you will often hear it said in the whiskey business, but even though the distilled spirits industry in the United States is more popular than ever, it is not without its challenges.
Among these challenges are accidental tragedies that this year included a devastating fire at Jim Beam . Luckily no one was injured, though it will take some time to recover losses. Retaliatory tariffs (more on that later) are one of the biggest sweeping issues facing the bourbon industry today, and both small and large companies have been financially impacted. Fortunately, the Distilled Spirits Council of the United States (DISCUS) along with other trade groups and industry professionals are working together to find a solution.
Bourbon Industry Challenges
19th century consumer protection laws came about as a result of tainted or substandard whiskey being sold to consumers. Colonel E.H. Taylor, who modernized what is today known as Buffalo Trace, then OFC, before founding the Old Taylor distillery nearby, led the charge of getting the Bottled-In-Bond Act of 1897 passed not only to protect consumers but to protect the bourbon industry. Shortly after this and other consumer protection laws were passed, Prohibition became the law of the land, and only six distilleries in Kentucky held medicinal licenses needed to legally operate during that time. As a result of Prohibition, many smaller distilleries went out of business.
On the heels of repeal, the war effort took over the manufacturing process of distillation. Instead of alcohol for consumption, during WWI and WWII distilleries were forced to produce ethanol for the war effort. Then, just as the distilled spirits industry was recovering, the 1960s saw a rise in popularity of clear spirits, beer, and wine, issuing a further blow to the American whiskey industry that would last for decades.
Despite these challenges and setbacks, the American whiskey and Bourbon pressed on, often through helping each other weather subsequent challenges. It is precisely these challenges that helped the bourbon industry to grow so strong over the decades as the brands learned to work together to their mutual benefit.
mash tun at MGP in Indiana
Whiskey tariffs—bringing the industry together?
What started off as a vague threat has quickly become an all-hands-on-deck situation for the distilled spirits industry.
“The President and the Trump Administration have embarked on a very aggressive posture to address some long standing trade barrier challenges in markets all around the world,” explains Chris Swonger, President & CEO of DISCUS. “Certainly in China, that’s top line in the news—issues related to steel and aluminum, where the Trump Administration is trying to bring steel and aluminum production back into the United States, and the whole variety of trade barriers in markets like China, the EU, Japan, Turkey, you name it. As a result of all of this, maybe two years ago the Trump Administration imposed tariffs on steel and aluminum, primarily in Europe and in China. As a result of that, unfortunately, the Europeans retaliated, and in June 2018 the EU put tariffs on a whole list of product categories that are not even directly related to steel and aluminum. That is when we got handed a 25% tariff on American distilled spirits including bourbon and American whiskey.”
Swonger continues. “The industry has been contending with that ever since. On behalf of the Distilled Spirits Council, we are actively working with our European trade partners to call on the EU to refrain from imposing tariffs on American whiskey and bourbon. The industry is anxious and worried that as a result of these retaliatory tariffs by the Europeans—and we also have tariffs by the Chinese and the Turks—but the European Union is American whiskey’s greatest number one export market. So we have been very focused on the challenges in Europe.”
Swonger notes there has been cause for real worry. “The industry is anxious because when you tariff a particular category there can be a tit for tat retaliation, and the industry in both the United States and Europe have enjoyed a great trading relationship as it related to distilled spirits since 1997.” A good business relationship has been disturbed. “Distilled spirits between the United States and Europe have been tariff free up until June of 2018. As a result of that, when the perfect picture of free trade during that 20+ year period ended, exports from the U.S. to the E.U. for American whiskey rose by 375%, “ Swonger points out. “Today since June 2018, exports from American whiskey to Europe have declined by 21%.”
It’s a shame because American whiskey was doing well overseas, and creating opportunities for smaller brands to find a new audience in a crowded domestic market. “As bourbon and American whiskey has blossomed with European consumers, and with consumers all around the world, we have small craft distillers as well as companies like Brown-Forman, Beam, and Wild Turkey, enjoying the opportunity for capturing these European consumers who gravitated toward these American whiskeys.”
In addition to the large decline in Europe, exports of American spirits are dropping worldwide at the same time. “For American spirits exports across the world, they have decreased by 8%,” says Swonger.
The spirits industry is starting to feel the pinch, and many companies, both large and small, are starting to worry about the future. Some distilleries are feeling the effects more drastically than others, and pivoting business plans hasn’t proven to be a successful coping tactic.
“Old Trestle has unfortunately suffered immensely, and directly because of the retaliatory tariffs policy of this administration,” says Old Trestle Head Distiller Jake Holshue. “One of our distillery’s founders has great business ties to China, specifically. It was our goal to have our exports of brown spirits (bourbon and ASMW) take not the majority of our business but rather a solid, dependable, slow growth market.”
It was time to rethink business plans with sensible targets. “Once it was announced that bourbon was going to receive increased tariffs we did what any reasonable company did- we pivoted, “ says Holshue. “We decided to aggressively target gin in China as our principal export, designing a specific gin for that market. After that, it was announced that the tariffs also extend to gin and vodka. The economics become much harder to process as a business once you add these tariffs on top. It has taken us a while to recover financially speaking, from not being able to account for the missing exports.”
still at James. E. Pepper
But there is good news
As of 2017, more than $1.1 billion in capital improvements have been made or were planned for the next five years in Kentucky alone, including new distilleries, rickhouses, visitor centers, and more, according to the Kentucky Distillers’ Association. This has made a major impact on Kentucky’s economy, to the tune of 17,500 jobs, $800 million in annual payroll, and $825 million in federal, state, and local taxes each year.
To continue this economic trend, the KDA has placed an emphasis on responsible drinking after finding that those who have an appreciation for the process of making distilled spirits are less likely to abuse alcohol. In order to promote responsible growth, this organization has supported education, safe rides, legal sales, and the mocktail movement.
Outside of Kentucky, the craft distillery boom has had a positive impact on the industry as a whole. Smaller distilleries face struggles larger distilleries take for granted, and one of those challenges is an out-of-date system of taxation. Large distilleries can often afford to write huge tax checks as a matter of normal business, but smaller distilleries often need all the capital they can get to stay afloat, especially in those early years.
However, the Craft Beverage Modernization Taxation Act, initially passed in 2017 and revised this year, drastically reduced the Federal Excise Tax on the first 100,000 proof gallons of whiskey a given distillery produces per year. This effectively gives smaller craft distilleries better footing to grow with less access to capital. In 2017, it was the first tax break on distilled spirits since the Civil War, and now the industry is pushing to make the tax cuts permanent.
“The typical time to get cash-flow positive and later to a profitable is stated as being 3-5 years,” says Dampfwerk Distillery Founder Ralf Loeffelholz. “We are in year three of production and two years in the market. Without the modernization act, I projected a significant delay to a cash-flow positive situation. Every craft distiller will tell you that every dollar counts the first five years, so this has helped us tremendously.”
Craft distilleries across the United States are benefitting from these tax cuts in real, measurable ways. “This act was an immense relief to many small distillers like myself that only have a crew of 10 or so people,” says Steamboat Whiskey Founder Nate Newhall. “Because of the reduced tax, we’ve been able to hire two full time employees, thereby stimulating the local economy and generating tax revenue.”
But there is a threat of a new recession, and the cuts could expire. “Frankly, I’m concerned about our ability to make payroll if our taxes jump to the rate it was before the act, “ says Newhall. “We need money to grow and we should not be on the same tax scale as the behemoths of the industry. That’s like saying someone who makes minimum wage should be taxed at the same rate as someone making $100k a year. It isn’t fair and it doesn’t make sense to tax the little guys—those producing less than 100,000 gallons/year)—to death when we can do so much more for the overall health of the economy by using those funds to hire more people and make more products.”
According to Swonger at DISCUS, if the tax cuts don’t get re-authorized by the end of the year, distillers could see a 400% increase in taxes. Fortunately there is broad bipartisan support for this tax cut, which has created a measurable increase in jobs across the beverage alcohol industry.
“Our distillery’s operations today are a direct result of the passage of the first bill in 2017,” says Holshue. “My employees’ salaries, the equipment we purchased, and our expansions into American Single Malt Whiskey are tied to those tax savings. If these FET reductions are allowed to sunset by the end of the year it’s likely that our expansions will be halted, and our hiring efforts will likely end.”
United they (should) stand. “Every distiller and distillery owner I've talked to has taken most of the savings they received, instead of taking a salary for the first time, are re-investing those savings into their business, “ says Holshue. “Old Trestle was lucky enough to participate in this year’s Public Policy Fly-In to DC, in combination with ACSA [American Craft Spirits Association] and DISCUS. My only lamentation about participating in the event, was not how many distilleries were represented, but rather how many distilleries and ‘industry groups’ chose not to participate. This affects all of us, the stakes could not be higher, the perceived apathy kills me a little on the inside.”
Fortunately, the number of legislators who support making this tax cut permanent is growing by the day, according to DISCUS. In addition to that, there is a growing push in the industry to open up new markets to exports to continue to grow the industry.
“Looking globally there’s tremendous opportunity around the world for American Whiskey to grow in markets where retaliatory tariffs are not being implemented,” says Rob Maron, VP of International Trade at DISCUS. “One good example is Japan. Looking at U.S. export data January thru June 2019 versus January thru June 2018, we have seen a 33% increase in American whiskey exports to Japan, so that is a market where there is a lot of opportunity for American whiskey distillers of all sizes to grow. Brazil is another market where we have seen a lot of growth, and in Australia that is a market that is not retaliating against American whiskey where there is a lot of opportunity for growth, especially for smaller craft distillers.”
DISCUS has also been working with the USDA to open these markets for the entire industry through a market access program, in which the USDA issues grants that are then used to send industry representatives, from distillery owners to distributors to media, into emerging markets to build the relationships upon which trade depends. (Editor’s note: this was evidenced at last year’s Bar Convent Berlin (BCB) with both a USDA-centric spirits booth and one promoting Virginia state agriculture. You can read more about that here.)
“We just launched grassroots platform called Spirits United to promote the pride and high spirits in the industry,” says Swonger. “It’s intended to harness all that great pride and get stakeholders within the industry—from consumers to suppliers to craft distillers to employees—to all join in and make sure that the industry’s voice is heard loud and clear in policy choices.”
There has been some positive momentum, as well, as it relates to tariff threats from Canada and Mexico, as well as some positive policy changes in the overall relationship with France, Swonger and Maron both explained.
warehouse at Castle & Key
What does the future hold for bourbon and other American whiskeys?
While this industry is facing some new and unique challenges at the moment, its strength comes from the fact that it knows how to handle challenges and adapt in the face of marketplace changes. “American spirits were exported from 45 states last year and American whiskey was exported from 42 states last year,” says Maron. “Not only is the craft industry national in terms of distilleries being all over the country, but also those distilleries are exporting.”
What does Maron see for the future of the craft spirits industry in the United States? “Nothing but opportunity and growth. I see an increase in spirits exports around the world beyond our major trading partners. I see them exploring opportunities in Asia, Africa—the sky’s the limit with their heritage and American ingenuity. It’s exciting to watch.”
As it is often said within the American distilled spirits industry, a rising tide lifts all boats. It’s taking a collective effort on the part of both industry giants and craft distilleries to keep the tide rising at the moment, but the momentum is still building toward a bright future for American whiskey. Cheers to bourbon, our native spirit, and the continued progress of the American spirits industry!