On February 14th 2019 two bills introduced to the Illinois General Assembly, with both House and Senate sponsorship, have the potential to change the financial future of Illinois craft distillers. In this article I’ll highlight the proposed changes and the impact they stand to have on the future of craft distilling in Illinois.
Where do we stand today?
Let’s start with the current landscape for craft distillers and how it differs from other alcoholic beverages like beer and wine. Illinois producers of beer and wine enjoy significant freedoms not afforded to spirits distillers. For example, they are allowed to transfer and sell their spirits at different physical locations they own without going through a distributor. This allows them to brew their beer in a more affordable industrial location yet sample and sell it at more urban locations accessible to the masses. Beer and wine producers are allowed to sell alcohol from other producers in their tasting rooms; giving consumers more reason to stick around and increasing tap room sales. Small producers of beer and wine also enjoy the financial benefit of self-distribution until they are large enough to strike a deal with a distributor. Warehousing product is yet another sticking point for distillers as their options for storing spirits is severely restricted when compared to other alcohol producers. And finally, there’s the elephant in the room that is direct to consumer sales. Craft distillers are allowed to sell up to 2,500 gallons per year in their distillery gift shops, and not a drop more.
What changes are being proposed?
The Illinois Craft Distillers Association (ICDA) is backing new legislation to modify some of the above rules and allow craft distillers new opportunities to grow this industry. By amending the Liquor Control Act of 1934 craft distillers will be allowed some of the same freedoms that enabled the craft beer industry to explode nearly two decades ago.
When I spoke with Noelle DiPrizio , ICDA President, she had this say. “We are working with a lobbyist for the first time in an effort to make progress in updating the laws for Craft Distillers who are seeking parity with other Illinois makers, the Brewers and Wine Makers. All of the points in our bills have been changed in laws impacting Craft Brewers and Wine Makers to allow them to grow and make Illinois a place that businesses want to establish themselves. We see our businesses having the ability to contribute to Illinois through tourism, job creation, supporting farmers and increasing the economic impact on small towns and out of the way destinations.”
Satellite Locations
“…a craft distiller tasting permit license shall allow the licensee to sell and offer for sale at (i) the craft distiller’s licensed premises and (ii) at up to 2 additional locations for use and consumption and not for resale.”
The bills propose to allow distillers to obtain a craft distiller tasting permit license allowing the sale of spirits at the distillery as well as up to two additional locations. Currently Illinois distiller direct to consumer sales are restricted to their physical distillery.
Sale of Other Alcohol
“Provides that a craft distiller license and a craft distiller tasting permit license shall allow the sale and offering for sale at retail for use and consumption on the premises specified in the license any form of alcoholic liquor purchased from a licensed distributor or importing distributor.”
This provision allows distillers to sell alcohol from other producers in their tasting rooms. Currently, only alcohol produced on premise at the distillery may be sampled and sold to visitors. This restricts the sampling or sale of cocktails containing alcohols not produced by the distiller. The change would allow distillers to sell up to 5,000 gallons per year of “3rd party” alcohol. Last year this privilege was extended to Illinois craft brewers. They are allowed to sell beer and cider from other brewers, though not wine or spirits.
Limited Self-Distribution
“…a self-distribution exemption to allow the sale of not more than 2,500 gallons of the exemption holder’s spirits to retail licensees per year.”
The third goal laid out by the Illinois Craft Distillers Association (ICDA) and identified in this bill aims to allow limited self-distribution. This would potentially delay imposing the “three-tier system” requirements on craft distillers up to a certain size. Craft brewers are able to make their own sales calls, sell, and deliver beer to on-premise retail accounts (bars and restaurants) all without engaging a distributor. They can do this until they reach a certain size. Make no mistake, this is hard work. In addition to the chores/joys of brewing they are running a business and hitting the streets to both sell and deliver their beer to bars and restaurants. But often something in shorter supply than time, is money. This makes it worthwhile for breweries to self-distribute for as long as they can until they can afford to cut a full-time distributor into their revenue.
Dave Dahl, founder of Lo-Rez Brewing, had a few thoughts to share with us on the topic of self-distribution. He says that as the trend for consumer’s to “look local” increases it is important for him to have strong relationships with local bars and restaurants. This is a built-in advantage of self-distribution. Dave went on to say that, in the beer world, going through a distributor results in an immediate 25-30% reduction in his revenue, the discount provided to the distributor. He surmised that like a small craft brewery, craft distillers pushing low volumes may not be at the top of a distributors mind compared to their larger accounts. As the owner of his brewery, customer relations is always at the top of Dave’s mind.
On the other hand, says Dave, there are trade-offs to starting your business without the help of a distributor. There’s the opportunity cost of spending days on the road meeting with bar managers that a distiller would otherwise spend at the distillery. There are the hard costs of time spent managing orders, making deliveries and fielding phone calls. Distributors play an important role as distilleries mature. Dave circled back to say that, in his opinion, self-distribution is a valuable option for a start-up brewer or distiller and a tool that he uses while growing his own brewery.
Warehouse Storage Permits
“Provides that a craft distiller warehouse permit license may be issued to the holder of a craft distiller tasting permit license and shall allow the holder to store or warehouse up to 500,000 gallons of spirits manufactured by the holder of the permit.”
As it stands today distillers are restricted in where they can store their spirits. This can be be especially troublesome when talking about aged spirits such as bourbon. Every barrel filled must find a home to rest for months, years, or even decades. This provision allows distillers more flexibility in where they can store their spirits.
Increase Direct to Consumer Sales
“Provides that certain craft distillers may sell up to 10,000 gallons (instead of 2,500 gallons) of spirits to non-licensees.”
At the end of 2018, as we approached the holiday season, some Illinois craft distillers ran into this unfortunate limit. I remember seeing this post from Blaum Bros. showing that they reached the 2,500 gallon limit and were prohibited from selling bottles to consumers at their distillery. Not being able to sell your product is a pretty big deal any time of year. But it hits especially hard at the holidays, the busiest time of the year for alcohol sales.
Today, distillers are allowed to sell directly to consumers in their tasting rooms. If you’ve ever been on a distillery tour you’ll be familiar with the freedom of tasting then purchasing your favorite bottles before walking out the door. However distillers are limited to selling just 2,500 gallons of their spirits per year directly to visitors. Once they hit that hard limit they must clear their shelves until the calendar flips. The bills proposed earlier this month suggest raising this limit to 10,000 gallons per year. This change directly impacts the bottom line of a craft distiller and provides them much needed revenue to expand operations. Craft breweries in Illinois have no limit on the amount of beer they can sell from their tap room each year.
Craft distillers need off-premise retailers to succeed in getting their brands in front of consumers. But selling their spirits through these retailers costs them. When sold via a distillery gift shop the distillery keeps a much larger piece of the revenue for themselves. The more they can sell themselves, the higher the profit per bottle.
This article from The Daily Beast breaks down the cost of a bottle of bourbon: Why Is Bourbon So Damn Expensive?
Final thoughts
Running a business is hard work. Running a strictly regulated business is even more challenging. The transition from less than 1,000 U.S. breweries in the mid 90’s to over 6,000 today was made possible in part by reasonable regulation that encouraged growth. Consumers today have many high quality beer options from national to local breweries. This competition has raised the bar for beer quality in the U.S..
When scouring the Internet looking for the average cost to open a brewery a number often cited is $1 million, though it’s certainly been done for less. On the other hand, the average cost to open a craft distillery in the U.S. is $3 million to $5 million, according to industry consultants Thoroughbred Spirits Group. The craft spirits industry is growing with the potential to continue to do so. Today the number of craft distilleries in the U.S. is above 1,800 with double digit year over year growth. Prior to the years leading up to prohibition that number peaked over 8,000. Shouldn’t we provide craft spirits producers the same growth opportunities afforded to beer and wine producers? If you think so, you can find direct contact information for our state representatives supporting these measures at the links below. Reach out and let them know you support these important changes.
Links:
Illinois Craft Distillers Association Statement
Illinois General Assembly House Bill 2674
Illinois General Assembly Senate Bill 1672
