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Craft Distillery Closures Raise Concerns Of Looming Shakeout

December 27, 2018

Craft distilleries continue to open at a breakneck rate, but a string of recent closures may point to trouble ahead. Overall, the number of U.S. craft distilleries has grown from approximately 100 in 2005 to more than 1,800 in 2018, according to the American Craft Spirits Association. The sector generally is still booming, but the increased competition has made prospects much less certain for individual distillers.

Behind all the growth, closures have been occurring with increasing frequency. According to the TTB, some 31 distilleries closed in 2016, followed by 29 in 2017—representing a sharp acceleration in closures from previous years. In 2015, for example, only nine distilleries folded after an average run of under two years. The 60 closures in 2016 and 2017 involved distilleries that had been operating for an average length of six years.

Among the recent craft closures, Death’s Door Spirits in Middleton, Wisconsin, is the most high profile example. Death’s Door founder Brian Ellison brought in Serrallés USA as a minority investor in 2009 to help build a facility capable of producing 200,000 cases a year. But the Death’s Door brand struggled to expand, and never sold more than 40,000 cases. Ellison estimates that he would have needed to hit 100,000 cases for the business to remain viable.

“If you get up to 100,000 cases and can maintain cash flow, it can make a lot of sense as a smaller national craft brand,” Ellison tells SND. “We had a go-big strategy. But when you have a go-big strategy, you need partners who have the financial and intestinal fortitude to continue dumping in money and playing the long game.”

Despite an enthusiastic fan base, Death’s Door didn’t take off as hoped, and the relationship with Serrallés frayed over unpaid distribution fees. Ellison characterized it as a Catch-22 situation: paying back the fees would leave no funding for future distilling, but failing to restore distribution would allow competitors to edge out Death’s Door in the marketplace. In the end, the craft distiller filed for bankruptcy on the day before Thanksgiving.

Cooper River Distillers in Camden, New Jersey, which closed last May, has a similar story. Owner James Yoakum launched the distillery in 2014 with just $100,000 in capital, envisioning Cooper River as a “purist, traditionalist type of distillery.” In 2017, Cooper River posted approximately $200,000 in sales on 400 cases of volume, but it struggled to scale the business. “It’s very hard to scale up production when you’re doing things the hard way,” Yoakum notes.

While competition is stiff, both Ellison and Yoakum think they could have done more to engage their local communities. Ellison regrets not opening a taproom. At Cooper River, half of total revenue was coming from on-premise sales. Yoakum considered moving farther in that direction, but realized he would soon be running a bar instead of a distillery.

Cash flow problems and undercapitalization remain key challenges for craft distillers in general—especially as they look to expand into new markets. “Expectations grow as you move from being a small craft brand that’s fun to have in a portfolio and makes good margins to one wanting to move volume,” says Ellison. “You need to afford to give incentives, distribution and depletion allowances, things like that. Suddenly, all this structure comes into play for you to be able to continue growing the business.” —Danny Sullivan

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