Top Challenges Starting A Distillery Business

This decade has witnessed remarkable growth in the craft spirits business in the US, which according to industry association has experienced exponential growth, rising from 200 distilleries to 1700 and still counting. The growth is mainly on account of some states making legal changes that make it possible for craft distillers like Iron Ton Distillery & Crafthouse (https://irontondistillery.com/) to engage in selling spirits, liquors, and cocktails to consumers directly. (Images Credit: Pixabay)

The changes in law pioneered by New York state has enabled farmers to pursue their farm-to-flask philosophy as it has become easy to use their home-grown produce for distilling and marketing spirits. The immense potential of craft spirits business to create jobs has encouraged 13 other states to change the law for taking advantage of the economic opportunities in tourism, agriculture, and other fields. In addition, a reduction in the Federal excise tax in 2017 has fueled the growth.

Taking a plunge in setting up a distillery

Encouraged by the prospects of growth, entrepreneurs are taking a lot of interest in the sector that is witnessing several startups. You could be one of them, planning to start a distillery thinking about the product and expecting it to invite consumers once it makes its presence felt. However, the real challenge begins once the product is ready in a barrel or tank as it gets quite tough for new distillers to get access to the market.  Firstly, you must be clear about what inspired you to open a distillery and what objectives you want to achieve through it. You must learn how to differentiate your product from that of other craft producers. Lastly, it might be tricky to find a distributor who does not have an obsession for big brands and is ready to take your product to the market.

Think about the money to start with

Finance is the most basic requirement for any business, and you must gather good knowledge about the amount of money you need to start a distillery business. You need some good money for starting the business because to acquire a license and set up a building with a still you would need $200,000. If you have any aging product like whiskey in your product range, then it could take millions of dollars to achieve a sustainable scale of production. The problem with such products is that you must carry the inventory for 3-5 years before you can sell it and the costs could be huge in terms of building space for storing it and locked in the capital.  Setting up tasting rooms is quite expensive, but the investment pays back well when you start making profits.

Arranging finances

Arranging for finance can be difficult because craft distilleries operate on low-profit margins that make banks skeptical about giving loans that can be quite risky and they are reluctant to finance distillery projects. Finding angel investors or someone who wants to gain experience in distillery business is another way of raising money, and you can even approach family and friends for funds. To find institutional investors or venture capitalists, you must have a proven commodity to convince them about business viability. Even if banks agree to give loans, you must be ready with collaterals that you can offer to get the loan. It could be a test of your risk-taking ability because you may have to put your house on the line and be ready to do it.

The law is the first stumbling block

The law is the biggest stumbling block that you will face because you must navigate through several federal, state and city regulations that are often quite baffling and even seem insensible. Sometimes, it could put you in a situation when you are in a fix unable to decide whether it would be right to put the cart before the horse as it would seem like what the law demands.  For example, to get a federal license according to the federal law, you must first own a still whereas, in New Mexico, it is illegal to own a still without a license.

The barrier of distributors

The market is under the control of big distillers and no matter how good a craft product you might have, gaining access to the market can pose a big problem. The bigger players control and maneuver distributors who act like linkmen and can help you to take the product to the market.  How best you can make headway by tackling the problem determines the fate of your business. Distributors work on a lengthy credit cycle that can go up to 90 days, and this puts heavy stress on cash flow that you must manage diligently to keep the business going.

Waiting for profits

The distillery business takes a long time to break even and going by the thumb-rule you must wait for at least 10 years to taste profits. However, to shorten the time it takes to earn profits, you could aim for low profitability and become self-sustaining with a tasting room after 5-7 years. But then, you must be ready to make the more interim investment to achieve the goal. Once done, tasting rooms should help you to circumvent the challenges of distribution. Tasting rooms help to develop direct relationships with customers, and your product gets a better mark-up.

Focus on marketing

Great products need to demonstrate its goodness which is only possible when you can make it available to customers through effective marketing. Unless the product lands up with customers, its worth remains unknown to the world. Invest well in marketing because you would know how much it is worth by looking at some best-selling spirits which customers swear by even though it is hard to say if it is one of the best products in the market.  Create a realistic marketing plan and back it up with a matching budget.

Before you take the plunge into distillery business, educate yourself by knowing what other distillers in your state are doing. This should help to get along easily with the law that saves a lot of time in setting up the business.

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