Dehner Distillery

Prepair for the FALLOUT!!!

31 posts in this topic

It seems to me that we all need to batten down the hatches and pre-pair for the fallout. I feel that the distillery bubble is just about ready to burst. This year (2017) will be by far the biggest year on record of distilleries going out of business. There are many factors why I feel this way bust just to name a few.

Two main reasons to always reflect on.

The battle for Shelf Space, and Operating Capital.

And a couple more.

1. To much bourbon. I believe that this is the year that the larger number of distilleries will for the first time be trying to sell there brown spirits. The problem is not there local area it would be everywhere else they are trying to sell the brown juice. The Distilleries will be battling in a marketing game, and that in it self requires MONEY and TIME, and time cost MONEY. To put up all that bourbon cost Money straight out of the operating capital. When product does not move as quickly thought. The R.O.I. Is much greater and the hit is much harder.

2. I Deal with people from every corner of the world, in every facet of this industry. I deal with people that have big budgets and small budgets. I am aways blown away when someone just wants to make a little booze and thinks they have got to have a $200,000 dollar still, or pay $75,000 for a 50 gallon pot. The reason for item #2 is the spending of MONEY in the most stupid ways possible. People don't stop and think that some of the biggest components of equipment are truly the least important. People think the need the biggest and baddest still but forget about the boiler, chiller, mash cooker, ferm tanks, bottles, labels, and all the small things that nickel and dime a start up. Stop and think "how many bottles do I have to make to pay this off".

3. Sell out, sell off. One of the biggest mistake someone could make is to sell off the larger part of stock in the company to get to the place they need to be or get the equipment they think they need. When you realize that you are not really the owner and your are more a employee that person cares a little less and gives up quicker. When you work the hours we all do at a distillery and think...."I could be making more money flipping burgers".....how much heart do you have really in it. People have medical problems but I am floored by how many distillers are selling out because of it. I get it no one on earth want to admit "I Failed". So don't sell your soul just to crush your dream.

4. This one will be easy. Operating Capital- how many times have you looked around your distillery and saw a piece of equipment that you bought a while back and thought "man, I wish I never bought that" Or "I would like to have the money I spent on that".   #4 = Don't buy stupid Crap. THINK. It comes right out of your Operating Capital.

5. Distilleries trying to do something so so different that they Distill there way right out of a business. Think about what you do before you spend the money. I just checked yesterday and let me see, time, grain, water, labels, bottles, and corks still are not cheap. So is it a good idea to have 100 cases of something that won't sell. Please, impress the bank with your massive over stock of junk.

6. This one is kinda like #5. Not listening to your patrons. People that will go out of business are probably bull headed and think "If I make it they will come". Make products that is proven that people like. You don't have to copy, put your own spin. Know what is selling on the markets.

7. Getting out in front of the public. You may be making booze, but you are also selling your self / story. You spent all this money on a shiny piece of copper, where is your advertising money? Distilleries have to get out in front on the public doing tasting, and ect. I see a trend of people not doing that as much as is needed.

8. Part of #7. I was in a very top self liquor store today and there was 250 different types of brown spirits. Which one do I choose? 

9. Battle for shelf space. With the gates opening on distilleries all over the us and more imports coming in, the battle for shelf space has begun. All the money you spent making that rum, whiskey, vodka, ect, will be for nothing if you can't get it on the shelf. Enough said.

Summary-Rough seas ahead. Tighten your belts. I am all ready seeing lots of used NOS everywhere. It used to be when something was put online it was gone in hours. Now it just sits there...

I wish everybody always thoughts. I wish everyone the very best. Let us all be in good SPIRITS in 2017 and the years to follow.

Joseph Dehner

 

 

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So you're saying there should be some little used equipment coming to market soon B)

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20 hours ago, nabtastic said:

So you're saying there should be some little used equipment coming to market soon B)

There is used equipment on the market right now. 

 

19 hours ago, Silk City Distillers said:

Let me know when I'll be able to find a Vendome for the scrap value of the copper.

Well if I find some I'll be buying it. Right now there is Vendome and other name brand equipment that is being sold for .50c on the dollar. I would be willing to bet if you offered less to those people they would take it.

 

All good comments. Thanks.

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While much of what Joseph says is, and always was, true (operating capital management, marketing 101), I don't buy the bubble argument for one second. People have been saying the same thing about craft brewing for 20 years. It's still growing in volume nearly 13% year on year. Spirits are just getting started.

Millennials re-wrote the markets for craft beer and wine, and they're about to do the same for spirits. They don't have the age statement bias of their parents. They're not afraid of trying new things (would you or I have ever tried a cinnamon whiskey - bleah!) They also crave experiences. So, putting capital into your location and tasting room may be FAR wiser than into name-brand copper in your stillhouse. There's also the international markets that are clamoring to experience US craft spirits. Know what an ounce of Stranahan's goes for in NL? 25€

The tired old shelf space argument never ceases to crack me up. Do you honestly mean to tell me your local liquor store had 10-12 beer coolers back in the 80s? Liquor stores are in the business of selling booze. If there's a market, THEY'LL MAKE SPACE. There's this absurdly tiny liquor store on my way home from work. Not even 500 sq ft. They are incredibly convenient though. I stopped in looking for my go-to beer (Trumer Pils) about a year ago. Of course they didn't carry it. I just mentioned to the owner that I was looking for Trumer. He said "I'll have it here next Tuesday". Now he didn't know me from Adam, but you know what? He somehow made space. Trumer Pils is always there and I pick up a six every week.

250 types of brown spirits? LOL. Have a look at the wine isle and imagine yourself in THAT market. Oh, and they're thriving.

Sure, there will be some craft distillery closures. The days of "if I make it, they will come" are over. For every closure though, there will be 2+ more opening. And some of those will actually have a clue about marketing. FFS, High West just cashed out for $160M, selling whiskey they didn't even make!

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I guess my humor was lost.. 

I think 3dog and Dehner are saying the same thing.. the "easy money" days are over.  We are approaching market saturation for whiskey brands and we will need to be a little more competitive to stay alive.  It seems to me like we constantly forget the ebb and flow of our industry. There will be a ton of (I hesitate on the vernacular but..) cheaper whiskey on the market bc the big dogs have massively increased production which should start coming due about now.. 

Thus the importance of brand equity, actual quality or uniqueness as opposed to perceived, and cost control (which I think was Dehner's point).  

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More to my point. There will be spirit increases in every category this year the ever seen before. More vodkas, rums, whiskeys, ect, but there is only so much shelf space. Increased companion across all craft distilleries along with massive movement of the big boys only tighten the out let to sell product. Out of the store front is most ideal, with the most profit gained, but unless that is where all of your income from (and it normally does not) most distilleries will feel the pinch. Thus harding the fact to take precautions for tough time ahead. 

Be smart about building you marketing plan and execute with little wavering.

3DOG- I do get your point, but unlike beer or wine, when we brew 1000g of mash we are not selling 1000g by the pint for $8 a glass, or a small glass or wine for $4.50. If that was the case I would have more money than I know what to do with.

**** Shelf Space*****

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I also think there will be a big rash of closures, and pretty soon. The distilling industry has spent the last 200 years going through boom and bust cycles, I'm not sure why that would change.

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I agree with 3d0g, I think that this will be another booming year for the distilling industry as a whole.  I bet we will have more growth and demand than we had last year.  I predict at least 5 more years of fast growth and then after that many years of steady but slower growth.  I do not fore see a bursting bubble which will cause everything to come crashing down.

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I love the feedback from ya'll.  Good points on the many facets of our industry.  Thanks for taking the time and guts to detail what's on your minds!

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19 hours ago, 3d0g said:

People have been saying the same thing about craft brewing for 20 years. It's still growing in volume nearly 13% year on year. Spirits are just getting started.

Millennials re-wrote the markets for craft beer and wine, and they're about to do the same for spirits. They don't have the age statement bias of their parents. They're not afraid of trying new things (would you or I have ever tried a cinnamon whiskey - bleah!) They also crave experiences. 

The tired old shelf space argument never ceases to crack me up. Do you honestly mean to tell me your local liquor store had 10-12 beer coolers back in the 80s? Liquor stores are in the business of selling booze. If there's a market, THEY'LL MAKE SPACE. There's this absurdly tiny liquor store on my way home from work. Not even 500 sq ft. They are incredibly convenient though. I stopped in looking for my go-to beer (Trumer Pils) about a year ago. Of course they didn't carry it. I just mentioned to the owner that I was looking for Trumer. He said "I'll have it here next Tuesday". Now he didn't know me from Adam, but you know what? He somehow made space. Trumer Pils is always there and I pick up a six every week.

250 types of brown spirits? LOL. Have a look at the wine isle and imagine yourself in THAT market. Oh, and they're thriving.

I don't necessarily disagree with 3d0g here, but I do want to point out a few things. 

Craft beer was up 13% by volume sure, but they were up 15% by number of breweries, so that means they were making less beer per brewery than the year before.  If you are getting your data from here (https://www.brewersassociation.org/press-releases/2015-craft-beer-data-infographic/) you will also notice that regional breweries were up 26% versus the smaller pubs (10%) and micros (20%). Which means more of the volume from big players. So while I don't believe a bubble to the point of falling flat is going to happen in either industry, there is definitely crowding as more players get in the game. 

The argument about shelf space is true as well, just remember though that owner kicked some other beers slot out to make space for a beer he knew he could sell. We are seeing this everywhere with taplines and coolers with beer, and I've witnessed it with spirits as well.

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Just saw that today when doing a tasting at a small local store. He commented that he is going to drop all the big name flavored vodka to carry more local spirits. He is seeing a change in his customers.  They want local. 

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I don't agree with this, and it's not because I have a biased or vested opinion as an owner (after all, where you sit is where you stand.)  Yeah yeah, easy money is over.  Everyone with a first mover advantage that didn't parlay that into growth and investment has lost that opportunity.  Are we talking about a small craft producer turning into a national brand?  Hell, that's always been a long shot.  Are we talking about new business failures and failure to launch?   I don't think that's new, I think it's just becoming more visible through places like ADI, etc.  Remember, 80% of startups fail on average.  This business is no different.  Like I said, that first mover advantage that might have lowered this rate to 60% - that's gone, but all that means is it's no different from trying to open up a franchise sandwich shop.

First, I don't understand how you define or easily identify brand saturation in a market.  From my position, if the market sufficiently fragmented such that smaller players are able to gain or retain enough market share to be viable, what does it matter the aggregate number of brands?  How is it that the wine market is not sufficiently brand overloaded?  I personally think that the Scotch section is incredibly confusing and cryptic, but it continues to grow.  In addition, the bulk of the craft brand growth has been local/regional, with very few being in national distribution.  There is no single national "shelf", unless you are a major national player, everything else comes down to the local shelf.  And not even all of the local shelves, but the local shelves that matter.  A single strong specialty spirits retailer can move more product in a month than dozens of nondescript mom and pop corner liquor shops.  Why would you even bother to waste your time with the latter (more on this later).

Is it about the ability to respond to market changes?  Craft distillers can very rapidly adjust their business models to account for short-term preferential changes in the marketplace.  We have the advantage of agility.  If tomorrow, anchovy vodka was the next hot thing, most of us could be in the artisan anchovy vodka business relatively quickly.  A national producer would not have similar agility.  We have the advantage of being significantly more agile in the marketplace, this should not be overlooked.

Also, are new entrants able to grow the size of the overall market themselves?  You might think the question is a little bit silly, how can new market entrants grow a market that major players have trouble doing whilst spending tens, if not hundreds of millions in aggregate, on advertising?  But I I think the answer is that they can, by virtue of being local, and by virtue of being experiential.  

IMHO, that word, "experiental" is going to be the key, and it's not going away.  I think the last piece is the key differentiation that craft brands have over nationals, the ability to be experiential.  But what the nationals can't do, is appeal to the experiential buyer at mass-scale.  They can only be experiential in so far as their marketing material takes them.  I don't think that translates into local market dynamics.  Awareness is not experience.

How can you ignore the demographic change that is driving this longer-term market shift?  A shift which clearly has legs.  Every retailer is incredibly focused on this.  Every consumer service business is incredibly focused on this.  Even the financial services industry is spending millions on this.  And hell, who wants to be caught dead in a bank branch?  What kind of "experience" is that?

There are dozens and dozens and dozens of studies and articles talking about this paradigm shift, there are probably just as many consultancies that state that they have the secret keys to be able to navigate this.  But, the fact is, nobody has figured this out yet.  It's fair game.

I'll just leave a few keywords and concepts here, which I think are really important to think about.  This is not your father's Oldsmobile.

Experience, not Things

Authenticity, Sincerity, No Bullshit.

Social (as in Conspicuous) Consumption

In Collaboration, actually Listening

Environmental and Social Conscience

Local and Artisanal

Obvious Passion

Respect, and Respected

Unique and Limited, not Mass Market and Undifferentiated

I firmly believe that a new craft distillery entrant in a crowded craft market can absolutely destroy the incumbent players if they master this experience component, and can scale it.  Let that be a warning to anyone sitting on their ass.  A millennial marketing to a millennial will absolutely beat the pants off you.  Are you still hanging onto that trope about your great uncle Cletus' secret recipe?  Sorry, they don't give a shit about that.  Doing a private spirits pairing at the hot local restaurant, with a custom menu designed by it's hot local chef?  Pretty food, pictures plastered all over Instagram, now we're talking.  Personally?  I don't think this demographic is interested in mass market anything.  It's about creative differentiation, limited availability, having a brand image that a demographic wants to be associated with.  It's not about being able to spend massive marketing budgets either.

It should be the national brands who are shaking in their boots.

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If you’ve never heard of the Whiskey Loch look it up. 

For the future I do see the distillery business going much more like the craft brewery/brewpub business model. Due to regulations, taxes, and aging requirements I don't believe you'll see it getting as big. If you look back at pre-Prohibition history for brewpubs they operated slightly less prolifically as bars. So how many breweries can there be? Probably a fair percentage of bars/restaurants can turn into brewpubs without the market getting over saturated. In Pgh we have at least 30 with more coming. So how many small distilleries can there be? A lot. With the increase of small distilleries becoming a regional or national player is going to get harder. To do that you'll probably need to be bought out by a larger company. 

If you own a distillery and want to get bigger without getting bought out you’re going to need to hire to supplement your weak areas. The biggest issue with small businesses I’ve worked with is knowing the difference between marketing and sales. The two most common new business owners are either Technical or Sales people. Most technical/engineering people don't understand it and most sales people misunderstand it. I personally didn't really get it until I spoke to a CEO of a car company. He explained it to me like this: Marketing is getting people into the store, sales is what happens once they walk in. It's a good model for distilleries. You can market the hell out of something but if it's not in the store then it doesn't matter. And you can work with stores all you want but you need to get people to them. And even if you're in a store you hope that the store promotes your item so it stands out over other choices there.  It's a problem that a lot of money can help. It's trying to figure out how to do it with little money to get to the big money that is the trick. 

Shelf space is tricky. Like 3dog said smaller stores can do whatever. Larger stores or chains don't necessarily want to deal with little guys. And larger drinks companies can buy shelf space (directly or indirectly) to crowd out the little guys. In PA state stores most of the shelf space is big name only. PA distilleries do get favorable terms. If you're a craft person from outside of PA good luck, I see nothing in my local stores that is even close to craft made. In the end retailers want to sell product, not sit on stuff that won't sell.

I think you'll also see the return of regional specialization. The localness and terroir of grains, fruits, potatoes, sugar cane, etc is already important and will become even more so. Like Europe you'll likely see majority grain spirits in the north and more fruit and sugar based ones as you go south. With the ease of transport you won't see a strong differentiation but it will be there. And with the weather (warmer summers or in the south) you'll see seasonality in people's drink choices. The haute drinks will change too. Currently it's Bourbon. You can guess what's next and hope it works out. That's typical business, trying to stay a step ahead of the customer's interests. Excellent, cheap, or well marketed products will stick around, the rest will probably fall by the wayside.

Two big things I see as changing the future also: Legalization of Home Distilling and the reduction of the FET for craft distillers similar to wine/beer exceptions. Both are in bills being presented to congress with a lot of appeal to the majority party. 

SCD - I was betting on Cod Vodka. I called it Codka! I guess I will miss the Anchovy wave. I was so close!!!!!!!! 
 

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Oh and I also forgot another factor in changes to the business: Deregulation at the state level. It's getting a lot friendlier to distilleries in many states. PA is one that is really working to help them out. Other states are getting there too. 

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-In reference to Silk City - that's kind of what I was getting at.  There are still a lot of repackaging of spirits out there and I think that will get a lot harder.  Is the industry tapped dry? No, of course not.  We didn't even know that people liked shitty cinnamon whiskey until it blew up.  Whiskey does have a tipping point (saturation) domestically - all spirits, and arguably all products, do.  Flavored vodkas trended but no isn't cool anymore.  Whiskey was easier to sell a few years ago but as competition increased (and consumer education with it), authenticity and quality is forced to trend upwards too.  

- If 80% of businesses fail across the board, why would spirits (or beer) be any different?  I'm not subscribing to the "sky is fallling" mentality by any means but we are quickly approaching the era where skill and competency matter most.  I mean that in all capacities, from cash flow management and in-store experiences to blending spirits.  

- I fully agree that you'll see an increase in terroir and probably farm-to-bottle companies as well.  This 100% "  you'll see seasonality in people's drink choices. The haute drinks will change too. Currently it's Bourbon. You can guess what's next and hope it works out. That's typical business, trying to stay a step ahead of the customer's interests. Excellent, cheap, or well marketed products will stick around, the rest will probably fall by the wayside. "

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Thanks you very much to everyone who is talking here. All good stuff.

I see every every body having there own problems. Mainly state to state. Here in Iowa we can only sell a max of 1.5L per person per day, what happens when you have 10 products? Iowa, we can't have cocktail rooms.. :(    But in MN you can have a cocktail room, but MN can only sell 1 - 375ml per day.  Every region will have there troubles.

Same goes for shelf space tighter and tighter, or the shelfs get bigger and bigger and you just become lost. I was in a store down in TN that had 60 feet shelves of bourbon...... it was over wellming. 

I don't think that there is going to be a "POP" and we are all out of biz. I think there is going to be a ceiling of sorts. I know some will go over this ceiling but lots will be kept under. Under this ceiling will those who turn over a lot.  It was said above that there will 5 years of steady growth, I just don't see that. But I hope that I'm wrong.

As said above, if you are not marketing your products, you had better get out there!

And another thing, If I had a dollar for every time someone says "you need to make X"...... just because you make a ton of crap products, means you have a lot of crap products. Make good products, and make look good to!

 

Keep the comments flowing. 

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I agree with Foreshot. States are getting friendlier to distilleries. Mo changed it's liquor laws in 2009 to become one of the best states for distillery start ups.  Home distilling is legal in MO.  You can hold both a distributors licence and a distillers licence.  You automatically get a by the drink and carry out licence with your state DSP.   There are no limits to what you can sell at your distillery and you do not have to sell it to the state government and buy it back.  Some people will say that it does not matter that home distilling is legal in MO, because it is not legal under federal law.  It does matter.  My county sheriff has no problem with it.  My county prosecutor says he enforces state law so as long as the state laws are fallowed it is fine with him.  Most importantly, I called the state ATC  (alcohol tobacco control) officer for my area and he told me that as long as state laws are fallowed, a person can make up to 200 gallons per year of distilled spirits for consumption by the family on that families property.  Typical scenario:  Lady next door calls local law enforcement and says her neighbor is making moonshine.  Local law enforcement goes out to the guys house and asks some questions to make sure that he is fallowing state law and if he is, they leave him alone.  The lady is still not satisfied so she calls the TTB or federal ATF and says; "My neighbor is making moonshine in his back yard".  The federal ATF fallows protocol tells the lady to call the alcohol enforcement agency for the state of MO.  The lady calls them and they do the same thing as local law enforcement.  I'm not saying that it is not possible to be charged by the feds for home distilling in MO. I'm just saying that it's not very likely.  Before the Civil war, states could nullify federal law and it can be argued by the states that under the constitution nullification is still legal.  Also there is precedent now, because several states have in effect nullified federal laws concerning cannabis.   Because of my business I would never home distill.  I hold a fuel ethanol DSP and within the next year we will open our distillery and I will have a beverage ethanol DSP.

MO statute 311.005  "No person at least twenty-one years of age shall be required to obtain a license to manufacture intoxicating liquor... for personal or family use"

 I apologize for getting off the subject and I know that many DSP holders do not like the idea of home distilling, but I personally think that legal home distilling will help the industry, because home distilling gets more people interested in distilled spirits and therefore they will buy more distilled spirits.  As far as everything coming crashing down around our ears at some point.  I don't think that is going to happen, unless we have a major down turn in the economy and even then I think that our industry will do better than most, because in that situation people tend to drink even more.  In the near future you will see more distilleries fail because there are more distilleries to fail.  Also, in the distilling industry, because we have so many people coming into our industry who have no background in distilling, I think that we may end up with more failures than other industries.  Also, I think that you need to have equal parts business sense and creative drive. I have talked to a few people that have way more creative drive than business sense and I think that those people are more apt to fail.  There is nothing wrong with being extremely creative as long as you have good business sense.  Also if you are not going to keep your day job and you do not have another source of income you need to start with at least a 300 gallon still.  A 75 gallon $60,000.00 German still is not going to produce enough to make a good living.   It is much better to start with a 300 gallon still that costs $22,000.00 that will produce just as good and last just as long.

I am very confident that we have years of growth ahead in this industry, so confident in fact that we will be opening our distillery and distilling school in the next year and we will be starting a cooperage within the next year as well. http://distillery-equipment.com  http://moonshine-still.co

 

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2 hours ago, Southernhighlander said:

I know that many DSP holders do not like the idea of home distilling, but I personally think that legal home distilling will help the industry because home distilling gets more people interested in distilled spirits and therefore they will buy more distilled spirits.

Only have to look at craft beer, which was largely built on the backs of the homebrewing movement, to see this.

Latest DISCUS report is quite rosy (and biased, of course): http://www.distillerytrail.com/blog/discus-report-distilled-spirits-sector-sales-up-4-5-and-volume-up-2-4/

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Looks like several people are going under according to the "for sale" section. Also, If I could take a survey....I would like to know how many distilleries are setting on whiskey they can't sell. 

I think there may be, if anything a sharp rise in distilleries for a very short time ( 1 1/2) years and then there will be a massive collapse of many many people. The old ones going under along with the new ones giving up.

But with this said, If I knew the future then I would not be distilling, and the casinos would hate me.

The whole distilling at home in MO, well its still not legal on the federal level, but one could say the same thing about weed.

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Wow.

How many distilleries can the US support? 

How many per capita in larger population areas? 

I don't think we're near saturation yet. I expect that chart to go even higher before it starts to level off. I hope to open something in the next 1-2 years, if I don't I will really have to think about how I would do it. In Pgh we already have 4-5 distilleries with 3-4 more in process/rumored. 

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I think the craft distillery industry has reached phase 2 in its lifecycle.  No longer will you be able to just build it and they will come.  The novelty of small batch, locally made spirits has pretty much worn off.  I think that to succeed now, new distilleries have to have a strong story/brand and most importantly, make a quality product.  The days of putting a still in a nondescript building and making sub par spirits are behind us (in my opinion).  There is still plenty of opportunity for distilleries that provide a quality product and a compelling brand to succeed.

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Yep, the days of putting junky equipment in junky buildings is coming to an end. Now we have gleaming equipment in gleaming buildings, where "distillers" re-bubble and squeak other companies alcohol.

what seems to be happening is that most new distillers find it much easier to buy their product in bulk, do the minimum required to label it as their own, and dupe the market with craft price.

as this goes away, the real craft market will continue to flourish. 

It just depends on what you want to be when you grow up. 

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