TheU.S.CraftDistillingMarket:2017Update

©MichaelKinstlick,CEO,CopperseaDistilling,LLC

Noreproductionwithoutpermission.http://www.coppersea.com

ThisbriefisanupdatetotheWhitePaperIreleasedinApril,2012,“TheU.S.CraftDistillingMarket:2011andBeyond,”andtheannualupdatesthatfollowed.Theoriginalpaperandsubsequentupdatesareavailablehere:http://bit.ly/HxUwj1.

IntroductionTheUSCraftDistillerymarkethasnotonlycontinueditstorridgrowth,butlookstobuildonexistingnumberswithanunprecedentedincreaseinnewDSPlistingsin2017.ThenumberofCraftDistillerieshasblownthroughthe1000mark,andthefutureshowsnolet-up…Oncurrenttrendswewillhave2000operatingCraftDistilleriesby2020.WebaseournumbersonarigorousanalysisofalllistingsintheADI’s(AmericanDistillingInstitute)annualDirectory,andselectiveanalysisoftheDSPlistingsintheTTB“Producers&Bottlers”fileavailableonline.Thisyearwealsodidafullanalysisofthe2015newDSPs,whetherADI-listedornot,toensuretheaccuracyofourstatistics.Webelievethisproducesthemostaccurateestimateofthetruenumberofoperating,productioncraftdistilleriesintheUnitedStates.Thisyearwedistinguishbetweenthosedistillingspiritfromrawingredients“CraftDistilleries”),andthoseinfusingliqueursorAmari,orblendingfromspiritmadeelsewhere(“OtherCraftProducers”).Atyearend2017weestimate1400CraftDSPs,including1200CraftDistilleriesand200OtherCraftProducers.DSPListingsTherateofnewDSPformationhasincreasedfromitsrecentplateauofabout350/yeartoover500/yearin2017.Therearenow2DSPsbeingissuedeveryworkingday.Chart1:DSPMonthlyAddRatesince2010

WithnewDSPsbeingaddedatanincreasingrate,totalDSPshavebeenrisingatthesamekindofexponentialgrowthrateasoperatingCraftDistillers.Chart2:DSPsOutstanding2010-2017

DSPstandsforDistilledSpiritsPlantandweuseittomeantheTTBPermitofthesamename.WhyareDSPsimportant?AllspiritsmanufacturersintheUnitedStatesrequireaDSPPermittoprocessbeveragealcohol.So,listingsintheADIDirectoryorStateGuildswithoutacorrespondingDSPareguaranteedtobenon-producers.However,notallDSPholdersare“Distillers”inthesensethatwenormallyassociate:makingspiritalcoholfromfruitorgrainmash.OuranalysisclassifiesDSPholdersintoseveralcategories.First,weseewhethertheDSPhasbeenlistedintheADIDirectory.TheADIhaspublishedtheirDirectoryannuallysince2006,providingaconsistentbenchmarkoflistingsthroughtime.WefindthatasignificantmajorityofCraftproducersbecomeADI-listedwithinacoupleyearsofbeginningproduction.Wethenclassifythemintothefollowingcategories:

• “CraftDistillers”areADI-listedDSPsmakingspiritfromrawmaterials• “HiddenCraft”areNon-ADI-listedDSPsmakingspiritfromrawmaterials• “OtherCraftProducers”areinfusers,blenders,rectifiers,andotherCraftDSPswho

aremanufacturingwithsourcedspirit.• “OtherProducers”areMajorbeveragealcoholcompanies(Diageo,Beam-Suntory,

Korbel,etc.),Co-packers,andothernon-Craftmanufacturers(RTD,etc).• “Non-Producers”areactiveDSPswhohavenot(yet)begunproduction• “Drops”areformerDSPswhodonothaveanentryas-ofJanuary,2018

Webaseourclassificationofnon-ADIholdingDSPsonprevioussamplingofseveralentrycohorts,andafullanalysisofthe299DSPAddsinthe2015cohort.Wechosetolookat2015becauseitstraddlestheearlierandmorerecentcohorts.Thisanalysisyieldsthefollowingpathdiagramforthe560DSPsinourinitialpanelandthe2300Addssincethen.Chart3:OutcomePathsof2900DSPsListed2010-2017

Whilethis“wide-angle”viewprovidessignificantinsightsjustbyitself,lookingmorecloselyatthedevelopmentofthemarketthroughtimeyieldsbetterconclusions.

Chart4belowshowsonlythe2010DSPlistingsand2011-12Adds.Thisgrouphashadplentyof“seasoning”afterappearancetomaketheseinferences:

1. VirtuallyalloftheCraftentrantsareobserved.

2. VeryfewADI-listedNon-Producersremaina. After5yearstheytypicallydroporgetintoproduction

3. TheremaybeasmallnumberofHiddenproducersagingspiritforlaterrelease

Chart4:OutcomePathsDSPsListed2010-2012

AswemoveintothethickofthemiddlesetinChart5,weseeDSPsmakingthetransitionfromPermittoADIDirectorylistingtoproduction.ThevastmajorityofADIDirectory-listedDSPsfromthisperiodareproducers.Onepoint:adroppedDSPdoesnot(necessarily)meanavanishedcompany.Wehaveseenmanydistillerieschangelocation(includingsometootherstates!),whichoftenleadstoanewDSPinthenewlocationandadroppedDSPintheold.However,thedisparitybetweenADI-listedDSPsandnon-ADI-listedonesstartstomanifest,also.AstimegoesontheHiddenproducersbecomeseen,andtheNon-ProducersgoontobecomeeitherProducersorDrops.Chart5:OutcomePathsDSPsListed2013-2015

WiththeyoungestsetofDSPsinChart6weseetheextraordinarypotentialwaitinginthewings.The2017cohortof583AddedDSPsislargerthantheentiresetoflistingsin2010!Whileonlyahandfulofthe93Non-Producersfrom2012andpriorwillbecomeproducers,wecansaywithhighconfidencethatmanyofthemorerecent766Non-Producerswillgoontoenterthemarket.WealsoseewiththisyoungcohortthathardlyanyDropshaveregistered.Chart6:OutcomePathsDSPsListed2016-17

AnalyzingentryanddropratesovertimesuggeststhatrecentAddsareactingsimilarlytoearliercohorts.RecentTTBchangesmakingiteasiertogetaDSPPermitmighthavebeenexpectedtoleadtoareducedentryrateofnewDSPs,butthatdoesnotappeartobethecase.Earliercohortshaveyielded70%Craftproducers,suggesting500(orso)ofthosecurrent“Non-producers”willjointheranksofactivemanufacturersoverthecomingfewyears.

CraftProductionTheTTBstartedpublishingdataonremovalofspiritfrombondbysize.Withseveralyearsofthisdatawecanseecleargrowthtrends.First,Chart7showsthatthesignificantgrowthinDSPshascomeinthesmallersegmentsofthemarket,consistentwithouranalysisofnewDSPlistings.Chart7:#ofDSPsListedbyWithdrawalSize2010-16

LookingattheactualvolumeswithdrawninChart8showsaverydifferentstory.Simplyput,thefewdozenlargePlantsnotonlymassivelyout-producealltheothers,thegrowthinoutputvolumeatthosefewdozenDSPsoverthepast5yearsisgreaterthan3Xtotalcurrentproductionvolumeatalltheotherscombined.Someofthose750k+PlantsarecertainlythemegagrainprocessorslikeADMmakingGNSandindustrialethanol.AndsomearecertainlyproducinglargevolumesofwhiskyforBrown-Forman,Beam/Suntory,Diageo,andthelike.

Considerthattheaveragewithdrawalfromeachofthoseplantsisover7mProofGallons,asmuchasalltheDSPsinthe100-750kcategoryrelease.Onthatbasis,thesignificantgrowth(200%+)involumefromthesmallerproducersbarelyregisters,butitalsosuggestssignificantroomtogrowforsmallermanufacturers.Chart8:VolumeWithdrawnByDSPSize(inKs)2010-16

CraftDistilleriesbyStateLookingback10yearsto2007weobserve:

• 19statesdidnothaveacraftdistillery• 16stateshadexactlyone,includingcurrentleaderslikeWA• 15stateshadmorethanone.

Map1:CraftDistilleriesbyState,2007

Today’slandscape,with1200identifiedproducersandourestimated200Hiddenoneslooksverydifferent.Severalstateshaveretainedtheirpositionsasleadersinthecraftdistillingcommunity,whileothershaveexplodedbeyondexpectation.Map2:CraftDistilleriesbyState,2017

California’ssheersizehaskeptitnearthefront,andColorado,NewYork,Texas,andOregonhavesimilarlymaintainedtheirrole.TheSoutheasternstateswithastronghistoricalassociationwithfolkdistilling(ie.,moonshining)havegrowntheirnumbersmorerecently,butithastakenchangestoProhibition-eralawsatthestateleveltoacceleratethosedevelopments.Whatisreallystunningisthecompletecoverage,andtheongoinggrowthinnumbersacrosseverystateinthecountry.ComparisonwithCraftBrewingMarketAsnotedpreviously,aftertorridinitialgrowththecraftbeermarketsawaroughly10yearperiodofconsolidationand“churn”betweenentrants&exitsfrom1997-2007beforefindingnewenergyandskyrocketingagain.So,whilethechartmaysuggestasimilarperiodofconsolidationlooms,everymarketisdifferent,andtherehavebeennosignsofoneyet.Chart9:CraftDistillersvs.CraftBrewers(fromIndustryFoundingDate)

Thegrowthfrom1200breweries10yearsagotoover5000todayhasbeenunprecedented,especiallygiventhebroadavailabilityofexcellentproducts.Moremicrobreweriesalonehaveopenedinthepast2yearsthantherearecraftdistilleriesinoperationtoday.

ConclusionMarketacceptanceoftheCraftDistilleryasasocialformisnowwellestablished.Manynewestablishmentsare,liketheir“Brewpub”forebearers,launchingas“Barstilleries”wheretheon-premiseexperienceisbuiltintothebusiness.These“NanoDistilleries,”oftenwithnopretensionofdistributionbeyondtheirdoors,areakeypartofthenextwave.Wegetaskedthesekeyquestionsfrequently:

• Havewereached“PeakCraft”?,and

• IstheCraftPocalypecoming?Theanswertobothatthistimeseemstobearesounding“No!”WehaveseennosignofaslowdowninthenumberofprospectivenewentrantsasindicatedbyaddedDSPs.Infact,tothecontrary,therateofnewDSPaddshasonlygoneup.AndnorhaveweseenanysignsthatrecentlyaddedDSPsarebehavinganydifferentlyintheirprogresstowardsbecomingproducers.Thepipelineremainsasfullandrobustasever.Ontheotherside,thereisnoindicationofanyaccelerationinDSPdropsoruptickinADIDirectorylistingremovalsthatwouldsuggestExitsataratehigherthanprevious.Wewouldexpectthesheernumber(ofDrops)togoupsimplybecausethepoolofpotentialDrops(intheformofcurrentPermittees)issomuchlarger.Buttheanalysisbycohortindicatesarateconsistentwithpriorhistory.Intermsofmarketpenetration,Craftproducershavegonefrom1.5%to1.75%oftotalvolumes,evenwhilethemegaDSPsarealsogrowing.WithCraftBeeratabout12-15%ofUSbeervolumes,CraftSpiritshavealongwaytogobeforetheybegintoreachsimilarvolumemarketshare.Finally,Chart10offersareallylong-termperspectiveonthestructureoftheUSdistilledspiritsmarket.WeseeahighlyfragmentedmarketconsolidatetoasmallnumberofproducersfromboththemarketpressureofscaleproductionandmodernizationandthesocialpressureofProhibition.Nowthathighlyconsolidatedmarketisgivingwayagaintoincreaseddiversity.

Chart10:OperatingUSLicensees,1880-Present