‘There’s going to be a lot of dead distilleries’

Craft spirits makers have trouble getting product to market.

For Todd Thrasher, it seemed like a sure bet. In October 2018, he opened a sprawling bar and rum distillery along the newly revitalized District Wharf in Washington, D.C., with three floors, space for 300 diners and 56 employees. He figured that with the area’s heavy foot traffic and a booming local economy, his wager would pay off quickly.

And for a while, the bar, Tiki TNT, and the adjacent Potomac Distilling Company were a huge hit. Then came the coronavirus outbreak. In late March, Thrasher closed the bar and furloughed his entire staff, including himself. Though he is still distilling, he doesn’t know how long he can stay in business.

“If nothing changes, I’d say I have until July,” he said. “It’s hard to build a brand when no one is buying.”

The coronavirus recession has left no industry unaffected, but the one-two punch of shuttered bars and mass unemployment has hit craft distilling particularly hard. In a survey of its members by the American Craft Spirits Association, more than two-thirds say they may have to close permanently in the next few months.

The crisis isn’t just threatening to decimate the industry; it is also reshaping its future. How can a sector that relies so heavily on bars, tasting rooms and face-toface sales — not to mention customers willing to pay a premium for its products — move forward in an economy defined by social distancing and thinner wallets?

“There’s going to be a lot of dead distilleries coming out of this,” said Paul Hletko, founder and distiller of FEW Spirits, in Evanston, Illinois. “Even if you survive, the new normal is going to be punishing for small brands.”

For many distillers in the United States, 2020 was supposed to be a banner year. The craft-spirits boom was entering its second decade, and the number of distilleries had grown to more than 2,000. The sector employed about 25,000 people directly and sup

ported 100,000 more jobs, according to an analysis by the American Craft Spirits Association. Sales grew by 27%, to $4.8 billion, in 2018, the most recent data available.

“We were ready to announce at our upcom- ing national convention that the industry was growing by leaps and bounds,” said Margie Lehrman, the association’s president.

This blossoming industry was therefore uniquely vul- nerable to the ravages of the coronavirus crisis. To make things worse, the market for craft spirits is centered in large cities and among millennial and younger consumers — all of which have been especially hurt by the sudden economic downturn.

“We were poised for this awesome surge,” said Nicho- las Jessett, a founder of MKT Distillery in Katy, Texas. “And now we can’t go anywhere. We’re stuck.” His distillery sold most of its products through its tasting room, and Jessett was in negotiations with a distributor to get MKT’s whiskey and gin into nearby Houston and other parts of Texas. But after the state shut down nonessen- tial businesses, the distributor pulled out.

“It’s difficult to see how we weather the storm when can’t get to market,” Jessett said. “I’m looking at the busi- ness and wondering how we’re going to survive.”

Like scores of distilleries around the country, MKT responded to the crisis by making hand sanitizer, though this had its own com- plications, from navigating Food and Drug Administration regulations to figuring out how to find small plastic bottles. Almost all the distilleries are giving away the sanitizer free.

“At this point, everyone is tired of talking about the hand sanitizer story,” said Heather Greene, a founder of Milam & Greene, a distill- ery outside Austin, Texas. “But it showed the importance of local distilleries.”

Many small distillers worry that the crisis could aggravate some of the worrying trends that were already pressing on the industry — chiefly, a wave of consolidation, as private-equity groups and multinational companies buy distilleries like High West, Wyoming and Smooth Ambler. That will no doubt continue, Greene said, with investors scooping up distressed brands at fire-sale prices.

“I fear for the small distilleries,” she said, adding that the landscape could look a lot like the spirits industry after Prohibition and the Great Depression, in which a few large companies gobbled up dozens of formerly independent distilleries, often selling the facilities and keeping just the brands.

To avoid such a fate, craft distillers are pinning their hopes on regulators. Along with seeking federal emergency loans and tax relief, they are pushing states to loosen restrictions on how they get their products to market. This includes permission to ship directly to consumers, bypassing the expensive hurdles of going through a distributor, a step that Kentucky and Virginia took this month. Several other states have passed laws allowing restaurants to sell bottles online and cocktails to go.

The sudden deregulatory wave is a welcome change, and one that the craft-industry has been dreaming of for years. “All of a sudden, with very mild lobbying, these states allowed something that was not possible a few months ago,” said Tom Mooney, the president of Westward Whiskey in Portland, Oregon.

This regulatory easing, if it becomes widespread and permanent — a big if, given opposition from distributors and other established interests — could have a profound effect on the future of craft distilling.

In one scenario, fewer regulations would lower the cost of entry for new distilleries, Campbell said.