Wednesday, October 10, 2012

Boston Cocktail Summit: How The Spirits Industry Works

"In sales, you need a story."
--Sam Rubenstein

That is a truism, something I have also stated on multiple occasions before. Stories can fascinate and intrigue consumers, creating an emotional connection which would be missing otherwise. And if you consult the studies and science, it is that emotional connection which plays a very significant role in consumer behavior. Storytelling has been a part of our history and culture from the very beginnings of time and it still resonates deep within our souls.

At the Boston Cocktail Summit, the first seminar I attended was "How The Spirits Industry Works," which was led by Brandy Rand, a writer and consultant with 12 years in the beverage alcohol industry in marketing and PR, and Sam Rubenstein, one of the owners of Horizon Beverage, a New England distributor of wine, beer and spirits. This was a more educational seminar, full of history, laws and statistics yet Brandy and Sam kept it lively and interesting.

The discussion began with an explanation of the Three Tier system, the manner in which alcohol gets from the supplier/manufacturer to the retailer, via the middlemen of wholesalers/distributors. That topic could have easily been the focus of its own seminar. It was stated that a significant reason for this system is to more easily collect taxes. It is amazing that approximately 55% of the price of a bottle of spirits is a tax of some type. Spirits get taxed more than wine and beer and that can be seen in the federal excise tax. For distilled spirits, the tax is about $14.50 per proof gallon while it is only $6.18 for beer and $4.86 for wine.

It was noted as well that the Three Tier system can limit consumer choice, that some small brands can have difficulty gaining access to the market. In addition, in some states, a supplier/manufacturer must stay with their original distributor and cannot leave even if that distributor does a poor job of selling their products. We didn't get into an involved debate over the advantages and disadvantages of the Three Tier system, but the presenters did acknowledge some of the pluses and minuses.

We moved on to some specific laws dealing with Massachusetts, though also setting a foundation with the standard industry drink sizes. That includes 12 oz. beer, 8 oz, malt, 4.5 oz. wine, 3.5 oz. fortified wine, 2.5 oz. cordial/liqueur, and 1.5 oz. shot of 80 proof spirits. Since 1994 in Massachusetts, you can now get a Cordial & Liqueur license, which allows you to sell some spirits but the determination of which spirits are permissible is based on sugar content and not alcohol content. The Cordial/Liqueur must contain at least 2.5% sugar, and the proof level is irrelevant. That license allows restaurants and bars to create unique cocktails form cordials and liqueurs.
With the potential advent of casinos in Massachusetts, the issue of Happy Hours has risen once again. Currently, establishments cannot provide discount pricing for liquor for a Happy Hour, though discount pricing is permitted if it lasts for an entire week. Casinos often provide free cocktails and they will likely seek to provide such in Massachusetts as well. So there have been some calling for Massachusetts Happy Hour laws to change. Yet Sam claimed that the vast majority of Boston restaurants and bars are actually against lifting the Happy Hour restrictions.

For many bars and restaurants, they usually make the greatest margin from alcohol and not food. So, if they have to discount their alcohol, they often will cut deeper into their margin than if they offered a discount on their food. So there is a clear business reason why they might oppose lifting Happy Hour laws. In addition, as Happy Hours tend to make people drink more, that can heighten the potential liability of restaurants and bars for drunk patrons.

Now on to some statistical information, mainly concerning spirits, figures which certainly intrigued me. We begin with the fact that about 110 million Americans legally drink alcohol. Spirits production, sales and consumption have been rising in the U.S. In 2011, the value of spirits increased by 2.7% while spirit exports reached a high of $1.34 billion. Of that export figure, about 69% consisted of American whiskey and the European Union purchased about 47% of that whiskey.

In the U.S. market, the share of spirits has risen 4.2% since 2000. Currently, the market is divided into 52.2% beer, 31.8% spirits and 15% wine. Since 1995, shares of wine and spirits have both increased while shares of beer have actually decreased. In 1995, beer occupied a 61% share, but we can see that has dropped nearly 9%. I think spirits have gained market share because of the boom in more artisan and high end spirits that are now entering the market. Twenty years ago, spirit selections were much more limited but now the selections almost seem endless. The added choice is certainly welcome.

Yet, despite all these added choices, it is difficult for a small brand. Currently, about 25 brands occupy 45% of the spirits volume in the U.S. The top 5 brands are Smirnoff, Bacardi, Captain Morgan, Jack Daniels and Absolut. It takes at least 5 years for a brand to reach big name recognition. Since 2009, there have been about 1800 new spirit products although most of those were merely line extensions, different flavors of a known brand, many which will come and go. It is interested that growth in the "super premium" category has grown +8.9%.

As for individual spirit categories, it is also interesting to see what has been popular, the changes that have occurred from 2010 to 2011. Vodka continues to reign supreme, growing 6%, and selling about 65.8 million cases. Considering other spirits, rum has risen 1.3% (25.8 million), tequila has risen 3.8% (12 million), American whiskey has risen 5% (20.85 million) and Irish whiskey had a huge jump, up 23.9% (1.76 million). Brandy & cognac remained at the same level (10.37 million) though a few other spirits saw a decline. Gin decreased 2% (10.8 million), cordials decreased 1.2% (19.4 million) and even Scotch decreased 1.4% (8.5 million).

Another reason for the increased market share of spirits may also be due to the growth of microdistillers across the country. If we look back in history, to around 1800, we know that there were over 14,000 distilleries in the U.S. Fast forward to 1993, and there were only about 60 microdistillers around, a microdistiller being one which produces less than 40,000 cases annually. Now, there are over 250 microdistillers across the country, with new ones sprouting up all the time.

Overall this seminar was quite fascinating, with plenty of valuable information, and it would have been even better if it had been longer as there was much more they could have discussed. As the first seminar I attended, it set an excellent and positive foundation for the others to come. Fortunately, all of the seminars I attended were worthwhile, both educational and entertaining.


Myrna Greenfield said...

Thanks for this fascinating article. Don't you think that the extensive advertising is part of the reason why vodka has increased in popularity?

Corey Glenn said...

The wine industry is definitely a good industry to be in! Going to the bar is also a great idea to hang out and relax with your friends and co-workers at the end of the day. I also heard that wine is very healthy, but you have to make sure that your customers take alcohol in moderation. Alcohol is good on occasion, but it can be troublesome if you drink one too many.