The Whiskey Industry

Insight from Steven Mckeen, orginally published on February 28th, 2021.

When it comes to economies of scale and steep barriers to entry, many people think of industries such as power or manufacturing. In fact, there is another industry that on average takes $1 million to enter, has an average burn rate of $2,000, and has a product that takes 2–5 years to make. These conditions seem like an untenable, dangerous investment, however they are exactly what whiskey distilleries are forced to open in. Even with these daunting barriers to entry, the whiskey industry is seeing huge growth and many new distilleries are opening up with inventive ways to combat high start-up costs.

Whiskey projections are anticipated to grow at about 140% between 2000 and 2023. If this were a traditional market, such as the app market, this information would mean an influx of entrants due to the new opportunities and the profitability of the market. However, how do new distillers find capital without realizing a return for at least 5 years? Distillers and manufacturers have come up with multiple solutions to combat this exact problem.

The first solution to recoup some of the invested money is blended whiskey. The designation of blended whiskey references the appropriation of multiple different spirits blended together in designated percentages and bottled to be sold as their own. Culinarily, this means that the owner can construct a unique spirit without dealing with the timely aging process. From a business sense, separate from purchasing the base spirits, the generated revenue can present itself within the business cycle far earlier than anticipated, offsetting start-up costs. On top of that, even if you are not the one manufacturing the product, the blended whiskey helps the company build a brand for later product releases.

A common next step, following the aforementioned blending process, is the construction of an unaged limited edition spirit, such as vodka or gin. Distillers will use their own equipment for the first time to carry out this feat. Gin is usually most popular due to the creative nature associated with it. These limited edition spirits, made by up-and-coming distillers, have created a niche market of craft gin. Similar to making blended whiskey, the profits that arise from these exclusive batches also play a role in offsetting steep start-up costs.

Another strategy that has proved to be a lucrative business move is the addition of hand sanitizer to production lines. In light of the current state of the world, hand sanitizer has become extremely relevant in the manufacturing and delivery of goods. Since the demand for sanitizer has reached an all-time high, big-name brand companies, such as Purell and Germ X, simply did not have the capacity to make enough hand sanitizer for everyone. This gave an opportunity for distillers to fill this void in the market by using their own sanitizer and turning a profit relatively quickly.

In conclusion, inventive distillers with high start-up costs and barriers to entry have made blended whiskey, craft gin, and hand sanitizer to increase revenue and quickly recoup some of their investment.

Sources:

https://www.marketplace.org/2016/03/07/iaw-whiskey/

https://flaviar.com/blog/craft-gins

https://www.statista.com/statistics/895158/straight-whiskey-consumption-us/

https://www.distilledspirits.org/distillers-responding-to-covid-19/distilleries-making-hand-sanitizer/

Steven McKeen is a senior from Westford, Massachusetts studying Marketing and Economics. He is driven by a passion for innovative and emerging markets. Combining expertise in marketing and economics has allowed him to provide insight into customer acquisition strategy and market research.