Most craft distillers enter the business with great excitement, confidence, and optimism that they can be highly successful and profitable in the short term, and even more so long term!
They know that they have developed expertise and refined their skills as a distiller, have acquired or built great distilling equipment, and have identified the specific raw materials and recipes to create unique, high-quality spirits that will be demanded by consumers. Unfortunately, in most cases, that’s not how things turn out.
The spirits industry is highly competitive, crowded, and controlled by the major suppliers, distributors, and even retailers. These market conditions make it both difficult and expensive to compete.
Are Craft Distilleries Profitable?
The big question is, are craft distilleries profitable? While the answer is definitely yes in many cases, it doesn’t necessarily start that way right off the bat.
A craft distillery profit margin can be substantial, but the distiller must invest significant resources to:
- Build a dynamic “commercially viable” brand proposition. To be competitive, this brand proposition may require a custom bottle, creative bottle & label design and materials, interesting bottle closures, and high-quality raw materials to be used to create the spirits. The combination of these elements may result in a relatively high “cost of goods”, especially in the early stages with little economies of scale.
- Partner and provide the necessary “support” to the distributor representing the brand. Your distributor will require support in terms of “sell in deals” for their customers (such as “buy 4/get 1 free”), incentives for their sales force to motivate and reward performance, display & point of sale materials, and even your own sales personnel in the market.
- Design and implement marketing programs. While you may have a great brand proposition, it will be necessary to tell your target consumers all about it. Investment in marketing will drive brand awareness, communicate the key selling points of the brand and drive consumers to purchase the brand. These marketing programs may include advertising, sampling, event sponsorships, public relations, or all of the above!
With the investment associated with these necessary business processes outlined above, the margins associated with the sale of the product to the distributor will likely be fully diluted and little will remain as “profit” to the craft distiller.
Over time, as your sales volume grows and your margins are enhanced with economies of scale, this dynamic will improve. A typical craft distiller will require 2-4 years of successful “brand building” and full investment of their margins before they are positioned to actually put profits into their pockets.
How to Open a Craft Distillery
If you want to know how to open a craft distillery, it’s best to start with these fundamentals. In order to achieve success and profitability, craft distillers need to clearly understand:
- The business
- Their competition
- The process to establish realistic financials and timelines
You, and your investors, should not expect strong returns in the short term, encourage investment in brand design, distributor support and marketing, and resist the temptations of cutting corners in an attempt to gain short-term returns.
The attempts to reduce brand-building investment for short-term profits will reduce your brand’s ability to compete, reduce your level of distribution and product availability in the market and reduce your brand awareness and sales.
While it is difficult to generate a significant craft distillery profit margin in the short term, it is certainly possible for them to build a fantastic brand, get their brand available at retail (On Premise and online), and build brand awareness, interest and sales.
These critical steps will establish a foundation and “success story” that can be leveraged for the expansion of their brand to a wider geography. Which will lead to a larger target of consumers and higher volume sales… and strategic profitability.
With a successful plan and investment in longer-term brand growth, comes a big opportunity for profitability via strategic partnership or acquisition from “major” suppliers.
The major suppliers are continuously looking to acquire or partner with interesting brands with a successful track record. They are typically willing to pay a significant price for these brands, as they are positioned with the national & international platforms to quickly expand production capacity, distribution and sales for these brands, and generate relatively quick and significant ROI on these investments.
The major suppliers are looking at brands with 15,000+ case annual sales and 50% growth rates as a base criterion within their success story as targets for acquisition.
Distillery Profit Margin
As craft distillers design their strategic plans, it is very important that they have realistic financials, timelines, and experienced personnel to ensure they “do it right” the first time!
The spirit industry is huge, but also a small tight-knit community that gives craft distillers one opportunity to make a great first impression. Simply seeking to maximize your distillery profit margin right off the bat could result in burning bridges unnecessarily.
The Firewater Firm is a specialized “agency” that works only in the spirits industry to assist craft distillers. We have over 60 years of industry experience, expertise & relationships, and a long track record of success. We “partner” with our clients to assist and guide them in brand design & development, and align them with the appropriate distributors. We help manage those distributors to maximize brand availability in market and design, as well as implement marketing campaigns to drive brand awareness, interest, and sales.
Our experience allows us to ensure our clients “do it right the first time”, eliminating the lost time and cost of mistakes.
We are committed to making our clients’ brands a success story, and ultimately positioning them for a highly profitable strategic business or big payout exist. Ready to start working toward that craft distillery profit margin? Let’s connect and discuss how the Firewater Firm may be able to help you.