Want To Start A Distillery? Read This
At Craft Beverage Expo, we celebrate every entrepreneur who pours their heart and soul into their craft business. If this is a business you’re trying to crack into, it’s going to take a lot of passion and dedication to make it a success.
Our Executive Director, Kellie Shevlin, has been around long enough to see what gives a new craft business the edge in a competitive market. If you’re looking to start a distillery, check out her advice featured in Forbes Magazine.
Want To Start A Distillery? Read This
By Fred Minnick, Contributor, Forbes
Want to start a distillery?
Well, you better be ready to invest some significant capital and have an inside track into one of the most complex industries.
From fickle consumers to heavy government regulations, the distilling business is not for the faint of heart.
Now that nearly 2,000 U.S. distilleries churn out distilled spirits, though, a cottage industry of consulting and conferences have emerged for upstarts.
One of these is the Craft Beverage Expo, December 4 through 6, in Louisville. The conference serves all adult beverage business interests.
Founder Kellie Shevlin says she takes the “romance” out of the distillery business, which is saying something since every liquor bottle seems to have a backstory these days. “I make sure that people who want to start a distillery have a good business plan and the capital they need to get to market,” Shevlin says.
What’s the typical mindset of new distillery owners?
When someone decides to start a distillery, they think it’s all about making product, making friends, and if you build it they will come. But the real story starts once the product is in a tank or barrel as the access to the market place gets harder and harder for every new distiller who opens. When we started this conference and expo, there were only 500 craft distilleries. Now there close to 2,000 in the United States. How do you differentiate your product from every other craft producer? How do you find a distributor that is not beholden to the big brands? Why are you even starting a distillery?
And of course, money must be one of the most important aspects of this introspective business look. So, How much money does one need to start a distillery?
For $200,000 you can get up and running with a still, a building, and a license. If you want to make whiskey or any aging products you need millions of dollars to make it on a scale that is sustainable because you need to carry an inventory for years which takes buildings, cash flow aging warehouses and marketing dollars for product you can’t sell for 3-5 years. Tasting rooms are an expensive part of the build-out but can account for a large part of overall profits later-on. In terms of specific costs retrofitting your space for ADA or industrial requirements will take a chunk of your budget. Good quality stills have various price points based on your business model, bottles are about a dollar a piece, cork will set you back .10 cents to a dollar per cork but the most important part of this is also the piece that is most critically under-funded–introducing your brand to a new marketplace is a very expensive endeavor and could take upwards of millions of dollars based on your business plan and how many markets you want to serve.
How does one get money in distilling?
Finding money to start a distillery is always a challenge. If you already have the money, that is the best scenario. Banks are reluctant to lend to craft distillers because the profit margins are so small and there is a lot of risk in these loans. Many distillers raise money from friends and family or find some angel investors who want to be part of a distillery experience. Once you are a proven commodity, it gets much easier to raise money through venture capitalist or institutions to grow your already successful business. If you are set on getting money from a bank, you must know what you are willing to put up for collateral. Are you willing to put your house on the line to start this business?
Do you recommend people practice distilling in their basement to get the hang of it?
My legal advice would be to practice distilling water in your kitchen as it is illegal to distill spirits at home. That said, most distillers have made a few hush hush batches in their garage.
What are the usual stumping blocks for starting a distillery?
You have federal, state and city regulations that you must follow and not all of it makes sense and each agency acts independently. For example, in New Mexico, it is illegal to own a still without a distilling license and to get that license you must have federal license, which you must have to own a still. And each state is filled with these wonky laws that contradict each other.
Distributors can pose a barrier, too.
Once you have a distillery and product your single biggest problem will be access to market, the big guys have worked very hard to control access and to control distributors. How you maneuver through this will make or break your business.
Another major pitfall for many craft distillers is cash flow, depending on your distributor, it could take upwards of 90 days to get paid for your product in the market. Surprises are the norm in the spirits industry. Don’t spend your last dime to build out a beautiful distillery. You need capital to run a successful business and many distillers leave themselves underfunded for marketing and sales costs. If you do not build in a cushion for unexpected costs or late payments by vendors, you could be sunk before you even get started.
How long until people start realizing profits?
Sales revenue will not cover operating cost for several years. A good rule of thumb is 10 years to real profits.
How can you make more money quickly?
If your goal is small profitability, you can have a tasting room and be self-sustaining after 5-7 years. Tasting rooms are like your neighborhood tavern. If you get that space going it can help you survive the many distribution challenges, you will have. Tasting Room product has a better mark-up and let’s you make direct relationships with your customer which is the best way to find repeat customers.
Another issue with profitability is what type of spirits you want to produce. If you want to age anything at all you better be able to put some resources into other products like vodka or gin to get your brand in the marketplace and create some other revenue streams while you are waiting for your whiskey to age.
Typically, an overnight success in this industry takes 10 years and Tito’s was an overnight success and it took them 20 years.
What’s more important: marketing or great product?
Almost more important than both marketing and great product is consumer need. You could make the word’s greatest grappa and spend a million dollars on marketing and still get a sliver of a sliver of the market. That said, you need to invest significantly in marketing. Look at the top selling spirits in the United States. Are they the best products being produced? Be realistic with your marketing program and budget accordingly. The best spirits in the world do not sell themselves. That said, good marketing can get someone to try your spirit for the first time, but great product creates a repeat customer.
What’s something that’s often overlooked when starting a distillery?
I cannot stress enough, that you need to get involved with your state distillers guild and get to know the other distillers in the state. They know first hand the rules and regulations you must deal with to succeed in this business. Network, network, network. Opening a distillery is a maze of rules and regulations and the path to market is not obvious. You need to build a network of people you can talk to about sourcing ingredients, building a business, access to consumers and distribution.
Fred Minnick is a spirits author and editor-in-chief of Bourbon+. Sign up for his free newsletter at FredMinnick.com.