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Are there too many new distilleries?

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I did wonder the same thing before I attended last years ADI in Louisville

After looking at bigger distilleries as part of the conference tour, then afterwards visiting LDI, the mysterious former Seagram’s distillery, I realised what a miniscule volume is being produced by craft distillers.

The bubble WILL eventually burst, but I doubt that volume oversupply will be the cause, it will most likley be caused by too many products of inferior quality and/or poor marketing.

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All of the news articles, related to craft distilleries, are positive. So whenever a new one opens and gets a few nice articles, it probably inspires 2-3 other entrepreneurs to investigate the business.

When we start having a few articles about small distilleries failing, perhaps that would be a signal to others that the market is saturated with too many brands. However, small distilleries don't typically flame out with any big news release. They likely close quietly and no broader message is broadcast about the odds of failure to warn potential new entrants.

The barriers to entry are low. I have visited a few distilleries that are amazing in their ingenuity for cobbling together their equipment so as to not need big bucks for a Carl still. One that I visited looked like a mad scientist operation on a shoestring budget, but he is producing Gold Quality spirits. They recently got a high scoring (over 90) Beverage Testing Institute medal.

So based on my observations, I think we will definitely have over 1,000 craft distilleries operating.

The only real question is how much of the overall market they will cumulatively capture.

If we are one of the survivors and continue to grow, in a few years I plan to look for some barely used Carl stills going on the used market.

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Because by their nature their output is small, I don't think there can ever be 'too many' in absolute terms. I think we're already past the time when the shear novelty of a micro-distillery can assure success. The drinking public has shown that it really loves the idea of small, local distilleries, so everybody does get a fair shot. In some ways, they seem even more popular than micro-breweries. Ultimately, being little and just being won't be enough. You have to run a smart business and you have to keep giving customers a reason to pay attention and buy your products. But in terms of the question as asked, no, there aren't too many. In fact, having a large and robust micro-distiller community, such as they have in Oregon, can make everybody stronger.

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I agree completely with you, Chuck. I hope Hawaii blossoms the way the Pacific Northwest has in micro-distilling. We have unique vodka, rum, okolehao, and shochu here now, and I expect to see more and more growth given the tourist market and affinity for Hawaiian things on the mainland. I also believe some will inevitably fail and there will be a consolidation much the way micro-breweries consolidated in the past. I have spent nearly 4 years getting my distillery going, and I am still not operational. While I agree this can be done on the cheap, the barriers to entry are still significant for most entrepreneurs. Hard to quit your day job and start a distillery, and, as far as I know, not too many VC are out there with big dotcom style funding opportunities. We might hit 1000 distilleries as many suggest, but most of them will serve smaller markets and just be good old fashioned cash flowing small businesses. I think that's good. One size doesn't need to fit all in this business. Find a good niche and exploit it from all angles. Then, stay fresh and present. It really is a fun business, so I hope everyone just enjoys the journey.

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The same will happen as did with craft breweries. An over-abundance will start up and put out some good products. Once the financials show their wear and tear, around 3-5 years of production, the small distilleries will begin to fade away. Those left over with the funds to carry on will do well. They may even take over some of the formulas of those going out of business.

Here in the Missouri we are seeing the exact same thing happen with 'wineries'. The put out the vines took care of them for several years, and got some good yields. Then came the bottling and selling, which lasted for a few years. After looking at the books, many are now cutting back to simply selling the crop with no production themselves.

So....Give it another 5 years and you'll see a decline in the number of micro-distilleries out there. Either from buyouts or attrition.

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The white paper that Michael from Coppersea wrote talked on how there were over 1000 distilleries in NY state alone before prohibition and as of this past year there are something like 34... yeah, I'd say there's room for growth for a while.

Within that 1,000 were mostly garage type distillers. With current laws, that is not likely to happen except the home distiller for personal consumption.

Even a small craft distiller is likely producing a lot more proof gallons than the typical distiller before prohibition.

And the level of regulation and enforcement now is much higher. To operate in this business today simply requires a certain minimum level of capital even for a small craft distillery.

I simply don't expect there to be the same number of distilleries as we have for Starbucks.

1,000 in distilleries in New York state? I doubt it will happen.

50-100 distilleries in highly taxed and highly regulated New York? Yeah, I could see that. They likely won't all be successful and most will just limp along based on the free labor of the owners.

During that time period before prohibition, there were no national brands taking up most of the market. Now we have a situation where companies with vast resources can make decent spirits at a very low cost.

A small number of companies have over 90% of the market share.

So within that market, the craft distilleries are battling against an environment that is entirely different than pre-prohibition. On a cost basis, we cannot compete with the scale of the large companies. They have huge efficiencies of scale that none of us can match. The large companies will continue to dominate 80% to 90% of the market.

So I would estimate that there is not nearly enough room in the market for 1,000 distilleries in New York (for example). Not while Absolut, Jim Beam, Jack Daniels, etc are around.

Another new feature is the "private label". I doubt that existed before prohibition. There is no need to have a distillery in order to produce spirits. Outsourcing is common and quite practical.

There are quite a few news articles that refer to "distilleries" in Idaho that don't even exist. They are made at a former ethanol factory in Rigby Idaho by Distilled Resources. Blue Ice, 44 North, American Harvest, Glacier, Square One, etc. So when those trade names are pretending to be "craft spirits", that indicates to me that we won't have nearly the number of distilleries making it as we think.

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There certainly are a lot of start-ups in the States!

Whether there are too many or not will be determined, and subsequently corrected by the market.

That said, in my view, competition is unlikely to be the most significant factor leading to failure over the next five years. And I can see many successful distilleries starting up throughout the next few decades.

As with any business, incompetence, lack of experience, neglect etc. are likely to be more significant factors in success/failure in the short-term. Indeed, I can say I've seen some brilliant marketing and tasted some brilliant spirits, and I've seen some poor marketing and tasted some poor spirits.

Looking at the bigger picture, one could say distilleries are simple food/drink manufacturers. And like any start-up business there is an inevitable rate of failure... which might be around 50% in 4 years (a figure I pulled from http://www.statisticbrain.com/startup-failure-by-industry/ ) - something I can certainly see ringing true.

However, that is not to say the nominal distillery population will not continue to rise...

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