The State of the Craft Distillery Industry in the U.S.

The State of the Craft Distillery Industry in the U.S.

Posted by Timothy Felkner on

Over the past two decades, the craft distillery industry in the United States has undergone a meteoric rise. Once a niche segment, craft spirits have become a key player in the broader alcohol landscape, offering consumers a diverse range of flavors, techniques, and innovations. However, while the industry is thriving, it is also facing new challenges and shifting consumer behaviors that could significantly impact its trajectory in the years ahead. Let’s take a look at the current state of U.S. craft distilleries, the forces shaping their future, and the opportunities and risks on the horizon.

1. Growth and Popularity: A Continuing Trend

Craft distilleries have surged in number and visibility. Today, there are over 2,000 craft distilleries across the U.S., a number that continues to grow. This boom can be attributed to:

  • Consumer Desire for Authenticity: As with craft beer, many consumers are seeking unique, artisanal spirits with stories behind them. Small batch production, local sourcing, and an emphasis on craftsmanship are driving demand, especially among millennials and Gen Z, who are willing to spend more on quality over quantity.

  • Sustainability and Local Sourcing: Craft distillers have made sustainability a cornerstone of their business models. From locally sourced grains to eco-friendly packaging, many distilleries are positioning themselves as environmentally conscious. This resonates with modern consumers who are increasingly concerned about the environmental impact of their purchases.

  • Innovative Product Offerings: From experimental gins and whiskeys to agave spirits and botanical vodkas, craft distilleries have expanded the variety of spirits available. Consumers eager for new tastes are flocking to these diverse options, spurring further growth.

2. Regulatory Hurdles: A Complex Landscape

While the industry is booming, craft distilleries face significant regulatory hurdles that make scaling difficult. Though there have been advances in direct-to-consumer sales and federal tax relief through the Craft Beverage Modernization and Tax Reform Act, issues remain:

  • State-by-State Variations: Alcohol laws in the U.S. differ significantly across states, creating a patchwork regulatory environment. While some states have made it easier for distilleries to ship directly to consumers, others still impose stringent limits on where and how products can be sold.

  • Excise Taxes: While the excise tax relief from CBMTRA has been helpful, it’s not permanent. If tax relief is removed, smaller distilleries, who operate on tight margins, would be hit hard.

  • Zoning and Licensing Issues: Local zoning laws and complex licensing processes remain significant barriers to entry, especially for new distilleries. This is particularly evident in major metropolitan areas where access to prime real estate is limited and regulations are stricter.

3. Changing Consumer Preferences: Bourbon's Decline and the Rise of RTDs

While bourbon has long been the flagship spirit for American distillers, recent trends suggest a slowdown in its previously unstoppable rise. This shift may have a more profound effect on craft distilleries than some realize.

  • Bourbon’s Decline: For years, bourbon has been the driving force of the American whiskey boom. But recent reports indicate that fewer people are reaching for a glass of bourbon. According to the Distilled Spirits Council, bourbon sales in the U.S. have seen a dip, particularly among younger generations who are more inclined to experiment with lighter spirits like gin, tequila, and rum. The rise of wellness trends, along with a desire for lower-alcohol drinks, may also be contributing to this decline.

    The shift in preference from bourbon to lighter, more versatile spirits could force craft distillers to rethink their production strategies. While many are adapting by diversifying their offerings, the industry might see a temporary dip in demand for traditional bourbon-based products, especially those aged for longer periods.

  • The Boom of Ready-to-Drink (RTD) Cocktails: At the same time, the rise of Ready-to-Drink (RTD) cocktails is providing a bright spot for the industry. RTDs, which include pre-mixed cocktails like margaritas, gin and tonics, and whiskey sours, have been growing rapidly in popularity. In 2020 alone, the RTD market grew by 23%, and that momentum has continued into 2023.

    Craft distillers are getting in on the action, creating premium RTDs that feature their own spirits. This trend offers an exciting avenue for growth, especially as consumers look for convenience without sacrificing quality. For distillers, RTDs are an excellent way to introduce their products to new audiences and increase brand visibility. With a strong focus on high-quality ingredients, these pre-mixed cocktails could open new doors for small-batch producers, giving them an additional revenue stream while capitalizing on an expanding market.

4. Supply Chain Struggles: Shortages and Rising Costs

The craft spirits industry has not been immune to global supply chain disruptions. As with many industries, the cost of raw materials and packaging has skyrocketed in recent years.

  • Grain and Ingredient Shortages: Craft distillers, especially those focused on whiskey, are heavily reliant on grains like barley, corn, and rye. Due to weather events, global supply chain disruptions, and increased demand, these essential ingredients have become more expensive and harder to source. Distilleries that rely on local sourcing have been hit hardest, as price fluctuations can significantly affect their margins.

  • Glass Bottles and Packaging: Craft distillers have also faced delays in obtaining glass bottles, corks, and other packaging materials. In some cases, distilleries have had to change packaging styles or reduce their product output to cope with these shortages. Since packaging is a significant part of a brand’s identity, these disruptions can be particularly challenging.

  • Barrel Shortages: Whiskey production often relies on oak barrels that can take years to produce. Given the global demand for aged spirits, many distillers are finding it difficult to secure the barrels they need. This is especially problematic for smaller producers, who may not have the purchasing power of larger brands.

5. Tariffs and Trade Tensions: Impact on International Markets

While domestic challenges are significant, international trade could pose a new threat to U.S. craft distillers. Tariffs on U.S. Spirits—particularly in major markets like Mexico and Canada—could complicate expansion efforts for U.S. craft distillers hoping to tap into the global demand for American-made products, especially whiskey.

  • Tariffs in Canada and Mexico: In 2018, the U.S. faced retaliatory tariffs from Canada and Mexico, two of its largest export markets for spirits, particularly bourbon. Although these tariffs were eventually reduced, ongoing trade tensions or future tariff impositions could hurt smaller distillers more than their larger counterparts. Unlike big brands with deep pockets, small distillers may not be able to absorb the cost increases, potentially causing them to lose market share abroad.

  • Export Opportunities at Risk: While U.S. craft spirits are highly regarded in international markets, tariffs could discourage foreign distributors and retailers from carrying craft distillery products. As many craft distillers already face challenges breaking into these international markets, the addition of trade barriers could stymie their global ambitions.

6. Innovation: Experimenting with New Techniques

Despite the challenges, innovation remains a defining feature of the craft distillery movement. From unusual ingredients to creative aging techniques, U.S. craft distillers continue to push the boundaries of what’s possible in spirits production.

  • Accelerated Aging Techniques: Some distilleries are experimenting with technologies like heat cycling, sonic waves, or even rapid oxidation to speed up the aging process. While these methods are still in their infancy, they could change the way spirits are aged and open up opportunities for faster-to-market products.

  • Collaborations Across Industries: As the craft distillery scene matures, many distillers are collaborating with brewers, winemakers, and other artisans to create cross-category products. This results in unique offerings, like beer-barrel-aged whiskey or wine-finished rum, which not only broaden the product portfolio but also reach new customer bases.

7. Looking Ahead: Challenges and Opportunities

Looking ahead, craft distillers face a delicate balancing act. On one hand, they must continue to innovate to meet consumer demand for new experiences. On the other hand, they will need to navigate trade disruptions, supply chain woes, and shifting alcohol preferences.

  • Distribution and Marketing: As new distilleries continue to emerge, finding a sustainable way to stand out in a crowded market will become increasingly difficult. Strong branding, effective marketing strategies, and building relationships with distributors and retailers will be crucial.

  • Global Expansion: U.S. craft distillers have significant potential to expand internationally. However, securing access to global markets without the risk of tariff impositions or trade barriers will require diplomatic maneuvering and creative strategies.

  • Consumer Education and Loyalty: Education will play a key role in helping consumers understand the nuances of craft spirits. By telling their unique stories and highlighting quality ingredients and production methods, distilleries can build long-lasting relationships with loyal customers.

Conclusion

The U.S. craft distillery industry stands at an exciting crossroads. Despite challenges like shifting consumer preferences, regulatory complexity, supply chain disruptions, and trade uncertainties, there are clear signs of opportunity. With the rise of RTDs, ongoing innovation in products and aging techniques, and an ever-growing demand for quality, local spirits, the craft distillery sector is poised for continued success. For those who can adapt to changing market dynamics and navigate the hurdles ahead, the future looks promising.

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