19 Mar Distiller Mag: This Recession Will Not Be Televised
Congratulations! You have chosen to be a distiller! If you are like most people, you got into the craft-spirits business for the love of the craft and the spirits, not the business part. While being a distiller means long hours of arduous work, a challenging regulatory landscape and an ultra-competitive marketplace, there is, at least, always demand for your product. In fact, the business of alcohol is often called recession-proof. When the economy is good, people want to celebrate, and when it’s bad, they want to drown their sorrows. During the recession of 2007–2009, Americans drank just as much as ever, keeping spirit industry sales stable while the rest of the economy was in freefall.
In the decade since the recovery began, the alcohol industry as a whole, spirits in general and craft spirits in specific have seen strong, consistent growth every year in volume, revenue and market share. A confluence of factors including changing laws, a strong economy, evolving consumer tastes and the lifestyle choices of a new generation have fueled the explosion of craft distilleries across the country. However, every silver lining has a touch of gray.
The huge growth of craft distillers over the last decade means most of them have only ever known growth. While no one knows when the next recession will hit, we know it inevitably will, and some indicators suggest it could be sooner rather than later. Since business owners feel the impact of a recession long before economists can prove one is happening, distillers can’t wait for an official announcement to prepare for its onset. What can craft distillers do to prepare for, survive and thrive in a downturn? Distiller magazine asked four industry experts, and they offered sage advice about managing your brands, products, operations, staff, marketing, consumer engagement and business fundamentals that every business should consider regardless of the economy.
Take Action While Things Are Good
“While the industry is riding a 10-year high, it is not actually recession-proof, it’s only recession-resistant, so prudent financial planning is vital for craft distillers,” says David Ozgo, senior vice president of Economics & Strategic Analysis at the Distilled Spirits Council. “The best time to lock in a line of credit and boost cash reserves is now when the economy is good. It’s hard to save and get credit when your sales and the economy are trending down.” One thing he thinks every distiller should do to help the bottom line is get involved in lobbying efforts for pro-distiller laws. “I know I work for the Distilled Spirits Council, but unless you want your excise tax rate to jump 400%, help us get the Craft Beverage Modernization and Tax Reform Act passed. You can do it in just two clicks on our website. Those savings are great now, but they will be even more important in a recession.” He also warns against being too reliant on high-margin sales: “Those tasting room and on-premise sales have the fat margins, but they are also the first things to dry up when consumers have less cash to spend. Off-premise sales are generally much more resilient to recession, so make sure you’re not overly reliant on the high-margin sales.” Ozgo also points out that premium and super premium spirits have been two of the biggest areas of growth over the last few years, but during a recession many consumers will trade down to less expensive options.
Donald Snyder, founder of the craft distillery management platform Whiskey Systems, agrees with Ozgo. “When times are good, people drink the good stuff, and when times are bad, they drink the cheap stuff… and sometimes more of it.” Craft distillers and their higher price points are thus at greater risk in a recession, so they have to think ahead and be proactive with their product offerings. “Big producers have a portfolio of products at every price point so they can capture buyers regardless of the economy. Craft distillers can mitigate their risk and grow their businesses by expanding their price portfolio, but it should be done under a different brand. You’ve worked hard to brand your high-priced flagship products. Don’t dilute your brand or undercut your pricing with lower-quality offerings.” Snyder says there is a potential gold mine in lower-priced GNS, flavored or shorter-aged products, but due to their smaller margins, to profit off them you need to have a strong handle on your cost structure (which, conveniently, you can track using his Whiskey Systems platform). “The time to lay the groundwork for these brands and products is now, before the economy turns. If you’re chasing the market, you are already too late, especially with aged spirits. When the economy turns, along with all the other considerations, shelf space will be at an even higher premium, so elbowing your way in then is not ideal.”
Build a Strong Consumer Base
Some products and distilleries will weather the storm better than others. Michael Kinstlick, CEO of Coppersea Distilling in New Paltz, NY, thinks, “Craft vodka from grain will be especially hard-hit because of the minimal differentiation to price ratio. Also, longer-aged products like whiskeys may not sell at the prices or volumes distillers planned for when they barreled them.” One way to mitigate that is to simply age them longer until the economy rebounds and charge even more for them then, but that can pose short-term cash flow challenges. “A banker would be happy to drink your long-aging spirits, but they’re not going to lend you money against them.” He also warns that distillers who rely primarily on their local economy are at risk of falling victim to the circumstances of their geography. “If the city or region your distillery is in has business or factory closings, big job losses or a seasonal tourism cycle that misses even just a season or two, you could be at risk of going out of business even if you have excellent products and a strong local following.” Kintslick’s biggest suggestion for distillers is to invest in their brand and connections with their consumers, because that pays off in any economy. “Each state has different laws about how distillers can market and sell their products, so the specific strategies will depend on your specific set of
circumstances. But the lifeblood of any business is the dedication of their consumers, especially when times are tough. How can you engage with them, build their loyalty and get them to love your brand and products? The answers to those questions can help you thrive in any economy.”
Build a Long-Term Team
Timo Marshall started Spirit Works in Sebastopol, CA, with his co-founder/wife, Ashby, during the last recession. He says it was a great time to get started because, “We got some sweet deals on secondhand equipment, got to learn from other people’s mistakes and were well positioned for the inevitable upswing.” As the former president of the California Artisanal Distillers Guild, Marshall saw firsthand how other distillers have managed their businesses, and that insight led him to believe, “Distillers obviously need to focus on business basics like managing cash flow and inventory, creating multiple income streams, etc. But maybe more important is managing your team, clarifying your values and being true to who you are, what you believe in and why you got into the business in the first place. Part of that is figuring out what makes you different. What are you offering that consumers can’t get somewhere else? Part of that is also building a good team. That’s what has enabled our success. No one ever succeeds on their own. Finding, training and retaining good staff, keeping them happy and motivated is so important. I think, ultimately, your long-term team is more important than your short-term growth because they really can be the difference between success and failure, and staff turnover can really stunt your growth, even in the best of times.”
No one wants a recession. And although one could be around the corner, it could also be years away. Regardless of when it hits or whether your distillery has been through one or not, the experts we spoke with agree that it’s possible not only to survive a recession, but thrive in one. To do that, you need to start planning for its inevitable arrival now and maybe do some things you haven’t had to do during the golden age of the last decade. Above all else, you need to be forward-thinking, creative, disciplined and a bit lucky. Following these steps will also help:
- Prepare financially by tracking costs, obtaining credit lines and saving for rainy days.
- Clarify and invest in your values and brand.
- Manage your operations and staffing so you can keep growing.
- Diversify your price point/product portfolio and revenue streams without diluting your flagship brand.
- Connect with your consumers and figure out how to foster their loyalty and engagement.
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