The spirits world is dominated by massive multinational conglomerates, companies like Diageo, Pernod Ricard, and Beam Suntory. They own a huge spectrum of booze brands across different categories, and compete against each other on the largest of scales. One of the reasons why the craft distilling boom in the U.S. has been so exciting is how it juxtaposes against that mass consolidation — there are literally more than 1,000 independent producers in the country right now, with consumers reaping the rewards of added choice.
But has the craft spirits industry hit its tipping point? "There is already considerable M&A [mergers and acquisitions] activity involving craft spirits," says Tom Mooney, co-owner of Portland, Oregon’s House Spirits Distillery. "I believe over the next two years we'll see many of the sector's best-known distilleries and brands somehow join forces with a large company."
According to Mooney, a former president of the American Craft Spirits Association (ACSA), industry pressures may soon force many brands to make a deal, whether a sale or distribution agreement. "The number of producers, and the amount of product going into both bottles and barrels, is growing more rapidly than demand," Mooney says. So are the independents bound to be gobbled up by the big players? And if so, how will that affect the consumer?
WILL CRAFT SPIRITS MOVE IN THE DIRECTION OF CRAFT BEER?
From the distillery's perspective, selling to a larger company provides serious benefits aside from quick cash. The first is better distribution. "Multinationals have huge advantages with distributors," says Josh Morton, co-owner and founder of Brooklyn’s independently owned Barrow's Intense Ginger Liqueur. By providing huge volume across potentially dozens of brands, the big boys are essentially guaranteed space on store shelves. "Through their contracts with the distributors, they're able to push products out into the market," Morton says. "Craft producers simply are not given that opportunity."
"There are only so many accounts, menus, and shelves, and in most cases there are only two or three distributors who control each market," Mooney agrees. "Craft distillers who choose to remain independent will have to invest heavily in sales and marketing assets, or they will be left out."
But one of the major differences between beer and whiskey: big whiskey distillers don’t make the swill that certain major beer producers put out there.
But according to Mooney, the situation is a win-win. A large company that aligns itself with a craft brand may attract that brand's customers with a newfound "craft halo"; craft producers, in turn, reap the benefits of greater market access and support.
If all of this sounds familiar, it’s the same track taken by the craft beer industry, which can provide an intriguing case study on what might happen in spirits. The low-water mark for breweries in the U.S. occurred in the 1980s, following rounds of consolidation. A trickle of microbreweries emerged, and then a full deluge. By the early ‘90s, there were hundreds, and not long after, thousands. Craft distilling would appear to be on the same track, although if anything, the burgeoning spirits industry has progressed even more rapidly than that of beer.
But one of the major differences between beer and whiskey, in particular, is that big distillers don't make the swill that certain major beer producers put out there. Conversely, whiskey distilleries’ economy of scale has simply enabled them to churn out their standard-bearing, high quality product at affordable prices. "The big distillers make really good whiskey, and companies like Buffalo Trace and Glenmorangie are every bit as innovative as 98 percent of craft distillers," says Lew Bryson, author of Tasting Whiskey and noted craft beer authority. "The big distillers are not as easy a target, which served the craft brewers well for over 20 years."
Bryson also believes that big distillers have taken note of what happened in the world of beer. "They're not making the mistake of ignoring them or belittling them, like the big brewers did," he says. In other words, big liquor brands don’t plan to be ambushed in quite the same way, following a proactive rather than reactive approach.
So how does the current state of affairs stack up to craft brewing’s timeline? "I can pinpoint it almost exactly; it's about 1993 in craft beer days," says Bryson. "Distillers are getting bigger, and better, their number is rapidly increasing, wholesalers are picking up brands they know nothing about... and a correction is coming. I think there's going to be a fair amount of lightly used small distilling equipment on the market within three to five years."
Whether brands flounder and die, succeed independently, or succeed and then get bought out, the role of "craft," however hard that is to define, is crucial. "Large companies aren't very good at innovating, so they use startups for their R&D," Morton says. "Several of the big guys have even gone as far as to create venture groups that are investing in craft brands so they can get in early."
RISKS OF BEING BOUGHT OUT
The advantages of selling a brand are clear. More money with less risk. Superior infrastructure and resources. Easier access to and recognition with consumers. But there are risks, as well: particularly of homogenization, the new great breadth of American whiskey and spirits being quickly brought back down to a more controllable, cheaper, acceptable-to-most-consumers standard.
"We'll probably see both, from different segments and different companies," Bryson says. "But don't pin 'homogenization' on big companies. I remember Harlen Wheatley [Buffalo Trace's master distiller] recently, as he stepped back from cutting down an oak in Missouri — literally, with a chainsaw — that would go to make another batch of Single Oak Project bourbon, saying: 'I'd like to see those craft guys do that.'"
In other words, when the resources of a major player are put to good use, they have a far greater capability to experiment and innovate. "Big makers can do really cool things if they want to, and the current market gives them the support to try," Bryson says. "And remember what makes Buffalo Trace's continued innovation possible: sales of Fireball [both are owned by Sazerac]. So there it is, one company going in both directions."
Another risk is that the buyer can change the direction of a company against the founder's will. That played out most memorably, and publicly, in Chip Tate's departure from Balcones. While the two sides still tell a different version of the same story, in either instance, the money and the founder differed, and separated. Beyond that example, there's also the risk of a big player purchasing a craft producer, then instantly eliminating its operation by fundamentally changing the product. Some buy brand name and then produce it cheaper and on a larger scale, based upon their own internal capabilities and efficiencies.
"I do fear that a few deals will produce negative results," Mooney warns. "And the most likely model for failure will be for a larger company to acquire a brand, take it out of the craft distillery that hatched it, and send it off to a large co-pack facility, or an in-house factory, to reduce costs. Credibility will be lost, and everyone will lose."
WAIT FOR THE DOMINOES TO START FALLING
As 1,000 American distilleries turns to 2,000 and beyond in the years ahead, dominoes will indeed start falling. How that plays out, for better or worse, should at least make for an interesting show.
One of the first major signs that American craft spirits were coming of age was the acquisition of Tuthilltown Spirits and its Hudson Whiskey lineup by William Grant & Sons in 2010. But that was six years ago, and there hasn't been a tidal wave in its wake. "Hudson was an outlier, an exception; I don't think it's a harbinger," Bryson says. "Production brands will need more time to establish themselves as something worth buying; look at how long it took until craft brewers started getting bought up." Angel’s Envy is another brand that made the jump. The non-distiller producer, currently transitioning to fully-fledged distillery, was bought out by Bacardi by last year. The conglomerate had already been an investor in the brand.
Meanwhile, even as the vast majority of craft brands have not been acquired by larger players, other pieces have been falling into place internationally. As the big boys continue making more moves, a domino effect is inevitable. One company acquires a new Irish whiskey, and another matches them; one adds a Scotch to the portfolio, so does another.
As the big boys continue making more moves, a domino effect is inevitable.
For instance, Sazerac bought Irish whiskey brand Paddy just months ago; it’s arguably a response to the 2015 purchase of Slane Castle Irish Whiskey by Brown-Forman. Also earlier this year, Sazerac bought the Southern Comfort and Tuaca liqueur brands... from Brown-Forman. Perhaps that helped fuel Brown-Forman's next move, obtaining a trio of single malt distilleries and brands, Glendronach, BenRiach, and Glenglassaugh.
Such companies are loathe to talk about their specific plans, of course, but according to Sazerac CEO Mark Brown, "we think it is likely for more small whiskey brands to be bought up by larger companies, much as we have seen in the craft beer sector. Sazerac continues to actively look at acquisitions in all sectors of the industry."
And while the industry didn't receive another massive shakeup as was expected after Suntory bought the entire Jim Beam portfolio in 2014, creating Beam Suntory, a trickle could turn into a waterfall at any time.
When this does start to unfold with more frequency, expect a rush to nab the most established craft brands. Does that happen in two years, as Mooney projects? In five years, as craft brands start to flounder, as per Bryson? Farther down the road? It's too early to call, but once the first pieces get taken off the board, more and more will follow in rapid succession.
WHAT SHOULD CRAFT BRANDS DO?
Counterbalancing the potential consolidations are several factors beneficial to the owner of a small craft brand. One is what Morton calls craft investing, as allowed by title III in the Jobs Act which went into effect this May. The new legislation allows an individual to invest in a private company in exchange for equity. "Craft investing is unlike traditional stocks in that investors have a more direct relationship with the companies they invest in, and the people behind those companies," Morton says. "Not only does this open up a new source of capital to small craft distillers, it builds a community of investors who can help promote the companies they're investing in. This won't level the playing field with the big boys, but it will improve the odds."
Mooney believes that tax relief and incentives — including one tax reduction bill currently being considered in Congress — would provide a much-needed boon to the independents, as well. Both provide the financial shot in the arm that selling a controlling stake in a brand would provide.
"Either way, what most founders care about is the long-term health of the brand they created."
But Mooney contends that selling to a big company isn’t necessary a bad thing. "Companies and brands need scale to survive and eventually succeed, and a spot in the portfolio of a large company is an effective way to achieve this," Mooney says. "Acquisitions of craft distillers and brands will invigorate the portfolios and organizations of several large companies, and will eventually bring new thinking into 'big spirits.'"
"That's good for consumers," he continues. "Some craft distillers will achieve scale independently, and that's even better. Either way, what most founders care about is the long-term health of the brand they created."
Ultimately, the people with the money control the show, so if they're coming from the right place, there's a greater chance of success in the ways that matter to the brand's founders, but also to the consumer — quality, innovation, new choices on the market, and affordability. "Is it a good or bad thing for drinkers?" Bryson asks. "That all depends on quality and pricing. Unfortunately, pricing seems headed up; that's not a good thing."
Every match won't be made in heaven, but the situation can work for all parties — buyer, seller, consumer — with the right intentions. "I believe that whether an acquisition is good or bad depends on the buyer and their approach," Mooney says. "If a large company acquires a craft distiller but leaves everything great in place, and simply offers market access, everyone wins."