The tactics small-scale producers used to change the landscape of the spirits industry.
4 Aug 2017
It takes some guts to enter an industry dominated by global players with very strong brands, in a category that was decidedly uncool, and with an obstructive and seemingly impenetrable licensing regime in place. It’s remarkable that a handful of entrepreneurs were able to make their mark at all, let alone develop a wave of trade and consumer interest to take craft spirits to where they are today, with little sign of slowing down anytime soon.
It’s telling that while these new distilleries have taken market share – according to Nielsen this year’s craft spirits value share is 14.7%, up from 10.6% last year – both craft and mainstream sales have grown. Parallels are often drawn between craft beer and craft spirits, with the former helping to set the scene and prepare consumers for more choice, from a more diverse, authentic range of products. But while craft beer was arguably a response to bland, homogenous lager produced by the multinationals, the big players in spirits were, and still are, producing quality products supported by very strong brands.
Taking on the big boys
The big spirits companies are well set up to tackle the drinks trade’s specific set of challenges, acquire listings in the various wholesalers and have a presence in the fragmented bar, hotel and restaurant – or ‘on-trade’ – industry. Small brands have to pound the streets between bars to sell their spirits and complain of the barriers to gaining distribution, such as listing fees. But without any presence, a brand is finished before it’s started. Spirits brands are built in the on-trade – bars, restaurants and hotels are a showcase, where recommendations can be made and brands can be presented at their best. When experimental distillers Sweetdram released a new type of spirit, Escubac, convincing bartenders to use it was the first hurdle. But bars seldom buy direct, preferring at most a handful of wholesalers.
‘The hardest thing in spirits is the big four companies [Diageo, United Spirits, Pernod Ricard and Beam Suntory] and the influence they have,’ says Chase Distillery’s James Chase. ‘But I still think you can influence people, and educate consumers. You can disrupt so easily now.’
Spirits startups have cracked the market in different ways. For Chase, a turning point was taking the top prize in the 2010 San Francisco World Spirits Competition for its vodka, gaining unexpected levels of recognition from consumers who expected vodka to be from Russia or Poland, not Herefordshire.
For East London Liquor Company’s founder Alex Wolpert, being able to supply the 10-strong pub and bar group where he had previously worked provided a good foundation for the distillery, as did having its own bar and shop on-site. But for Wolpert, the low price point of around £20 has been crucial, too. ‘There’s still no one making gin at our price point and scale, so we can really push the boat out on challenging people’s perception of value,’ he says.
Seizing the shelves
Achieving a listing in one of the big on-trade groups can be hugely beneficial, as relatively recent entrant Silent Pool Distillers found. ‘Working with [pub operator] Mitchells and Butlers in its “Premium Country Pubs” category has taken us away from being just a local distiller and allowed us to operate nationally,’ says co-founder James Shelbourne.
Once established within the on-trade sector, the next segment to conquer was retail, which brings its own set of problems; meeting large order numbers, and potentially having to supply ‘under bond’ (which allows for duty to be paid later). New spirits businesses would often face tighter margins with the multiple grocers too.
The independent retail sector has proved to be a gentler way in – a format that’s well suited to showcase this new wave of diverse, and local spirits, and gain some devoted consumers. ‘Independents have played a key role in getting craft spirits out there,’ says Nielsen’s Stares. ‘They have bigger shelves to put more spirits out there. We hear of independent retailers running tasting nights, and doing their own promotion.’
The titans fight back
Overall, the response by the major players to this surge of small spirits brands has been varied. Industry giant Pernod Ricard, owner of Absolut Vodka, found a way to get involved early on. It created Our/Vodka, a global, seemingly-independent brand that tapped into demand for local products by setting up micro-distilleries with local entrepreneurs in select cities around the world. It’s also wasted no time in acquiring majority stakes in small brands like German gin maker Monkey 47 and, most recently, mezcal brand Del Maguey.
Diageo, meanwhile, invests in drinks startups through an independent business, Distill Ventures, established in 2013. Brands get mentoring and investment, as well as access to the multinational’s expertise and global distribution and retail network. In return, Diageo has the right to acquire the business at a later date. So far £70 million has gone to 19 brands around the world.
The established spirits brands owned by the big players have themselves changed. Seemingly influenced by the rise of craft producers, marketing campaigns and new line extensions by major brands in recent years have focused on ingredients and provenance.
Bombay Sapphire acquired Laverstock Mill, a London production site, in 2010, opening its doors to the public in 2014, following the growing trend of offering distillery tours and visits. In the same year, Beefeater opened its visitor’s centre in London, allowing consumers to see the city’s longest-standing established gin producer for themselves.
Flooding the market
The biggest concern for startup spirits brands, particularly gin makers, is how long the market can sustain the volume and flow of new entrants, with predictions and speculation about when the bubble will burst. And while there aren’t any concrete signs of that happening any time soon, there’s been some evidence of rationalisation, both in the on- and off-trade.
But if there was any concern that the market is saturated, Silent Pool offers a hint of the opportunities still out there. Launching in March 2015, this gin brand combined striking packaging with a finely tuned product, as well as a strong sense of place and a good brand story. It has already achieved listings in all of the UK’s on-trade distributors, the majority of retailers, and is exporting to 23 countries. ‘The gin wave had already hit the UK when we launched. I thought we were a little late but sales have proved otherwise,’ says Shelbourne.
Is it sustainable?
Where does all this leave the rapidly expanding startup spirits market, the gin boom, and the new wave of whisky producers? Consolidation is likely, with more acquisitions like Suntory’s 2016 purchase of Sipsmith for an undisclosed sum. But new distilleries keep popping up around the country. By the Wine and Spirit Trade Association’s estimates, if current trends continue, the UK could have more than 300 distilleries by the end of 2018 and more than 400 by the end of 2022.
Those distillers will need to be more inventive and more determined than ever before. Fortunately, they’ve already proven that this is what they’re good at.
How to set up a gin distillery
There are as many ways to set up a craft distillery as there are craft distillers, but the following is a typical roadmap to go from idea to world-beating brand.
1. Start with a concept. It could be around the location of the distillery, a story about the brand, or something unique about the way it’s produced. This will not only give direction, but is crucial when it comes to differentiation in a crowded market.
2. Secure a licence. For gin, a rectifier’s licence (which allows for redistillation of spirits) is most likely needed. Approval in principle can be asked for, and the whole process should take no more than 45 working days. For any problems, contact the British Distillers Alliance.
3. Decide between duty paid or suspended. The simplest option is to buy in duty-paid spirits, but this has a serious impact on cash flow. To work with spirits in duty suspension (to be paid at a later date), apply to have a premises approved as a trade facility warehouse.
4. Find a location and source equipment. Expect a waiting list for the best still manufacturers, such as Carl in Germany or Forsyths in Scotland. They will be able to consult on various technical aspects and create a still to match requirements.
5. Develop a recipe. Non-distillers should enlist the services of someone with experience to ensure the product is living up to the brand story. Get some feedback from people in the industry – bartenders in particular.
6. Source the raw materials. There are only a handful of neutral grain spirit suppliers and any of these will be fine. Cargill is one such supplier. For botanicals there’s a bit more choice but Joseph Flach and Sons has been operating since 1882 and provides the botanicals for gins such as Fords.
7. Develop packaging and branding. This covers bottles, labels, identity, cartons, and closures. Decide between developing in-house, with a freelance gun-for-hire, or all-out branding agency, depending on requirements and budget. Similarly, as nice as they are, custom bottles are expensive and minimum order quantities are high. There are lots of really good stock bottles available.
8. Secure a contract bottler. A number of startups have initially tried to bottle their own spirits to save money before realising the practicalities, and moved their bottling out of house.
9. Promote the brand. This will require lots of time visiting bars, talking to wholesalers and online retailers, running sampling events and trade masterclasses and exhibiting at trade shows. Build a website with online sales.
10. Sell into cocktail bars. Bartenders are the spirit tastemakers and have the ability to propel a new brand. Next, target independent retailers and the food and drink section of departments stores such as Selfridges.
11. Allow distillery visits. Both trade and consumers are interested in where spirits are made and there’s arguably no better way to build loyalty. Direct sales are a good additional source of revenue, too.
12. Build national sales. Convince a major supermarket or national bar group to list the product. The market is increasingly crowded, but retailers and bars are well aware of the impact craft spirit producers are making.