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Principal reason why distilleries fail ?


DonMateo

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I am just curious for to ask the forum as to what are the main reasons that people know of why micro and start up distilleries fail. Just reading on the distilling forums you read of more successes and people eventually expanding than you do of the failures. But then again people dont normally advertise when a business has failed and they have lost a lot of money. I would guess the main reason is goverment regulation, lack of marketing and insufficient cashflow in the first year from non distillery sources to be able to sustain the business until it is self sustaining. Divorce could be another one.

I am about to pull the trigger on purchasing my main equipment as I think I have done enough homework and I have the spare cash but I am curious to hear the pitfalls.

Any comments would be greatly appreciated.

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Reasons for failure: It costs allot more than you think to get up and running. You make allot less than you thought you would. You cant get distributed. You get distributed and cant keep up or your quality falls, and your distributor dumps you. Even if you get into a bunch of local bars and restaurants, and the bartenders don't push your product your bottle sits on the shelf and doesn't move. You get into a few liquor stores local or chain, and you bottle become one of 800 different bottles of booze, so you move very little product. 50% of the places you market to turn you down. You get tired of paying thousands of dollars a month for the privilege of working 80 hours a week for free. you have a spouse that is not involved and does not understand why you are working 80 hours a week and losing money.

one of the biggest i feel is supply chain. getting your consumables at a decent price with decent shipping costs. you have to get your cost per bottle pretty low to make any profit.

These are some of the reasons I see distillery's fail. I'm sure there are many more. Don't take expansion as a sign of doing well. It may be just to try and move to a level of production that they feel may be profitable. it may work out or not. I have seen a few distillery's do a big expansion just to go under.

After being open for 1.75 years I push on. However, if I would have known how hard this business is I may not have put that application in the mail.

I am sure I missed many things.

Wish you the best of luck

Dave Tucker

Tucker Distilery

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Don,

This is a great question for a post...and you're probably correct, in that the distilleries which have closed, probably aren't sharing their stories, with good and fair reasons. Here are a few from my experience:

  • "If I build it they will come", not coming true. I've seen a few distilleries just believe in the coolness so much that they ignored all of the other reasons for attracting customers.
  • Lack of Operating Capital: You should have a minimum of 1.5 years of operating capital ready before you commit...better 3 years. Carrying cash is a huge issue for startup distilleries and can get to a "zinger" stage when buying containers of bottles, not getting good terms on the AR side or worst yet, poor terms on the AP side. If you have an AR/AP cycle of greater than 90 days for typical products sold, you're really stretching your ability to survive.
  • You read the ADI Book that said, "make vodka, gin, and white whiskey and sell that while you wait for your brown stocks to age".....That worked great for distilleries about 5 years ago. But as mentioned above, if you show up to a liquor store or bar with a "vodka, gin, and white whiskey", they're going to point to the mass of those products already on the shelves and send you packing.
  • Company organization and structure....especially as it relates to investors. If they're ready to make their call and you aren't ready to pay, then you're done.
  • "You only run out of cash, once". Every small business conference will reinforce this message....why once? Because when you're out of cash, the business is done.
  • Marketing....."you are opening a marketing company that happens to make hooch". If you don't understand this from day one, you're probably not going to make it in the long run. This does not detract in any way from making great spirits in a craft fashion, it just means that if your message doesn't resonate with the customer, they're not going to buy it.
  • Concentrate on selling the 2nd bottle: That first bottle sold hits every bar and then collects dust (as mentioned above). Its easy to sell the first bottle, concentrate on your plan to sell the 2nd to that same customer....build repeat customers or you're done.
  • Understand the commitment to man-hours on your equipment. Batch distillation is hugely inefficient, especially in stills smaller than 250g. Make sure you have man-hours planned in your budget to allow for production and marketing/sales, with the split 30/70 respectively.

Of the 7 (or so) distilleries that I've heard of failure or unwilling sales:

  1. Ran out of money
  2. Had no effort put to marketing
  3. Didn't sell well
  4. Made poor product

Cheers,

McKee

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Ultimately because they don't sell enough booze - for many of the reasons mentioned above.

Many probably can't make enough booze to turn a 'real' profit either, even if they had demand... The economies of scale in distilling are massive. Beneath a certain of threshold of production capacity it's pretty impossible to make any money...

But of course, the majority of small/medium businesses across the board - in all industries - fail within 5 years (over 50%).

Distilling isn't any different.

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I'm in my first year and hopefully will be around long after *fingers crossed*

One of the biggest reasons I could see is planning on the dream during startup and then facing reality after you're open. Meaning one thinks they'll be doing 800 cases each month and then discovering it's only 200 cases.

There's some who can afford to operate in the red for 5+ years before things turn around, but most small businesses can't operate like that for longer than a couple months.

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Agree with most of what is said above. The big issue I see killing many distilleries now is simply the sheer number of us out there. Differentiating is tough when there are so many "craft" options now. The problem is compounded as I think the new players coming in are much better capitalized than the early adopters who bootstrapped to success. I think the days of the successful bootstrap distillery have passed.

My DSP completed in August 2012. I worked at my business plan for a good two years before that, and had to start a farm to grow cane concurrently. We are only now approaching a positive cash flow. Marketing is also much more important than most startups know. I said to myself when I started that my marketing budget should be at least 5x my capital expenses in the first 3 years. Looking back, I would say that is accurate on the low end. It is so easy to buy shiny machines and cool equipment, but most distilleries have a "if I build it, they will come" mentality and those days are just over, in my opinion. Make something awesome and market the heck out of it. Put in the crazy hours, and forgo any salary for the foreseeable future. Only quit your day job if you can do this with no income. That is another big killer to distilleries.

On a positive note, I truly believe all the work that went into starting my business will pay off well. If I had it to do over again, I would still do it, but I would do it much differently. I would say I started both undercapitalized and over-expensed. Don't do it that way :)

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I am interested in this as the only reason why I want to get into this is because where I want to set up, Mendoza Argentina, there is no other craft whiskey distillery around. There are 3 other small distilleries making brandy and other sorts of things but no-one making whiskey and the place has 1,5million wine tourists a year. There are some whiskey producers in Argentina but they are the beer companies who take left over NGS and add colouring and flavouring and its horse piss. So I am going to start small and market the place like crazy in the peak months, which are Jan through to March. In those months there are 450,000 tourists a month. If I can sell via the cellar door 250 bottles I am breaking even. I think I may end up selling a lot more but I have to make the stuff first. I really appreciate all the comments and guidelines here. I was wondering if in fact the craft distillery industry in the US was becoming over supplied. I know in South America there are 6 Craft distilleries in Brazil, 1 in Argentina, but way in the south, none in Chile none in Peru and none in Colombia. I am going to do one in Mendoza because of the amount of tourists it gets and if it wasnt for that I wouldnt risk the money. The truth is my day job pays pretty well so I can float the business for a while but I want it to make good money and make happy customers. I really appreciate the comment about getting your second sale. That was great.

Anyway great comments and thank you very much gentlemen.

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Personally, I think many distilleries fail because they aim to compete with big brands in terms of their target market. They make products that have already been made to death and are forgettable, instead of making products that are novel, unique and carry through to execution in terms of promise.

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  • 4 weeks later...

I'm in my first year and hopefully will be around long after *fingers crossed*

One of the biggest reasons I could see is planning on the dream during startup and then facing reality after you're open. Meaning one thinks they'll be doing 800 cases each month and then discovering it's only 200 cases.

There's some who can afford to operate in the red for 5+ years before things turn around, but most small businesses can't operate like that for longer than a couple months.

Skaalvenn is from MN, so he talks in 6-packs.

Over all it does not matter how much you sell, it is how much you keep.

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Personally, I think many distilleries fail because they aim to compete with big brands in terms of their target market. They make products that have already been made to death and are forgettable, instead of making products that are novel, unique and carry through to execution in terms of promise.

I think that could go both ways. I see your point. But I see some distilleries making so weird stuff that would never go big. There is a middle ground in all of this. I like making our own version of something main stream because people can relate.

Example- Spiced Rum...... good idea

Example- pistachio rum........bad idea

example- cinnamon whiskey...... good idea

example - grape whiskey....... bad idea

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  • 6 months later...
On 11/3/2015 at 5:08 PM, DonMateo said:

I am only banking o selling 200 cases a month and where I am skill labour is very cheap. So I hope I might be doing something right.

Thanks for the comments everyone. I think I will hire two marketing gals to start with rather than one.

Matt

Just remember that you are probably your prime marketing tool and those gals should know that...

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On 11/3/2015 at 9:10 PM, DonMateo said:

I am interested in this as the only reason why I want to get into this is because where I want to set up, Mendoza Argentina, there is no other craft whiskey distillery around. There are 3 other small distilleries making brandy and other sorts of things but no-one making whiskey and the place has 1,5million wine tourists a year. There are some whiskey producers in Argentina but they are the beer companies who take left over NGS and add colouring and flavouring and its horse piss. So I am going to start small and market the place like crazy in the peak months, which are Jan through to March. In those months there are 450,000 tourists a month. If I can sell via the cellar door 250 bottles I am breaking even. I think I may end up selling a lot more but I have to make the stuff first. I really appreciate all the comments and guidelines here. I was wondering if in fact the craft distillery industry in the US was becoming over supplied. I know in South America there are 6 Craft distilleries in Brazil, 1 in Argentina, but way in the south, none in Chile none in Peru and none in Colombia. I am going to do one in Mendoza because of the amount of tourists it gets and if it wasnt for that I wouldnt risk the money. The truth is my day job pays pretty well so I can float the business for a while but I want it to make good money and make happy customers. I really appreciate the comment about getting your second sale. That was great.

Anyway great comments and thank you very much gentlemen.

Terrific DonMateo - good luck to you. 

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  • 4 weeks later...

DonMateo,

You are on the right track. In the beginning 7+ years ago, distillers made what they drank and sold that.

The build it and they will come worked for a while as previously noted. 

This business is like any other; spot your target market and revolve around that. You are doing that and as you proceed you will see many opportunities. You are not just making booz for travelers, you are enhancing their entire trip experience. That's what you do, how you do it is by making really good spirits. Congrats to you and best of luck.

Cheers,

Allan

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Thanks for the response Allan, 

I am just putting together my basic gear and then starting my learning curve on making really good spirits.  Here in Argentina there are lots of high quality cheap grains and I have 24 recipes to try and then 12 gin recipes. Just as well my mates here are drunks.  I beleive I have learn and practice the techniques like crazy before going public. There is no substitute for practice when attaining technical excellence in anything. 

Thanks to all of the other commentators here. 

Regards

Matt 

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