Small-batch distilleries saw immense growth in past few years, but COVID-19 lockdown is forcing the sector to innovate to survive.
Prior to the COVID-19 pandemic, Oregon distilleries were experiencing a renaissance.
In April of 2020, distilled spirits sales had grown 20% from the previous year to $66 million, according to the Oregon Liquor Control Commission. Oregon consumer’s passion for microbreweries and local wineries led to a growing interest in craft spirits. Much like the wine and beer industries, customer taste had begun trending away from larger brands toward small-batch distilleries.
The pandemic caused a sharp decline in sales as distillers closed tasting rooms. Despite increased demand for craft spirits and taprooms reopening across the state, COVID-19 exposed the logistical challenges facing small-batch distilleries. Tasting-room taxes and out-of-state permitting procedures continue to favor larger brands with more money to spend on gaining permits and marketing.
The distillery system at Pioneer Whiskey Credit: Pioneer Whiskey
These challenges could mean many small distillers are unable to recover from the shutdown. Unless the issues are addressed, Oregon distilleries may not be able replicate the beer and wine sector’s success.
Like many small-batch distilleries before lockdown, Pioneer Whiskey had experienced double-digit growth over the past three years. Todd Kemp, co-founder of the distillery based in Talent, says many of his colleagues went out of business quickly when COVID-19 closed tasting rooms.
“Every month I got two or three emails from distillers asking if I wanted to buy equipment since they were going bankrupt,” says Kemp. “The taxes and permits for out-of-state shipping were just too much for smaller companies.”
Todd Kemp, co-founder of Pioneer Whiskey Credit: Pioneer Whiskey
Unlike beer and wine, spirits are regulated differently by states and taxed based on alcohol content. Different permits are required for each state, which means a distillery needs to have buyers lined up before it undergoes the expensive permitting process. This requires marketing and salespeople across state lines.
While other alcohol sectors could pivot to online sales, many distilleries had to rely solely on liquor store sales for survival.
“Often if my product sells, it sells in our tasting room,” says Brandon Conover, who owns and operates Sundance Distilling with his wife in Grants Pass. Conover has had to dip into his retirement savings to keep the business running. But the downtime has given him a chance to experiment with different malts and grains.
Sundance Distilling taproom Credit: Sundance Distilling
“I’m not dealing with the public as much, so I’ve got more time to focus on booze. We’ll have a lot of good stuff coming up. Once we get back to normal, I expect things to really take off,” says Conover. “People get tired of drinking beer all the time. What the little distillers have to offer is a really high-quality product by sourcing as many local products as possible.”
Interest in craft spirits has led to new research distillers can use to improve product lines. An international study conducted this year with the help of Oregon State University tested how different climates, soils and air quality affect the overall flavor of grains used for making spirits. While studies on terroir for wine grapes have been expensive, the research at Oregon State University is among the first to test the effects of terroir on spirits.
“The real implication of the study is that it allows for a terroir model to source grain from different parts of Oregon to yield different flavors,” says Dustin Herb, a co-author of the study and professor of agricultural sciences at Oregon State University. “Oregon is blessed with a wide variety of climates and soil types. People want to know how and where the grain was grown and geek out about it. There are a lot of places for the industry in Oregon to grow.”
As tourism returns and distilleries reopen taprooms, small businesses say the state’s 33% tax on taproom sales could hamper their recovery.
“Right now, I pay more tax on a shot of whiskey than Oregon craft breweries pay on a whole keg of beer. If we could get a tax break for small distilleries, we could be on par with wineries and breweries,” says Kemp. “I think Oregon is at a crossroads.”
Help may be on the way for small distilleries. Senate Bill 1565, introduced last year, would give small distilleries the same tax break afforded to breweries and vineyards. The bill would return 45 cents on every taxed dollar for the first $250,000 of tasting-room sales. The bill faces heavy opposition; if adopted, it would cost the state an estimated $4 million in tax revenue by 2023.
Tax breaks for small distillers would make distilleries more profitable. But,to replicate the success of the beer and wine industry, small-batch distilleries would need the ability to ship out of state more easily.
Lenny Gotter founded Eastside Distilling in Portland in 2008, but sold his business when it became clear the company could not continue growing.. Given the various state permitting processes and out-of-state marketing required to sell across state lines, Gotter decided the best choice for the business was to sell it to a larger brand that was able to cover the costs.
“It’s easy to go from doing $200,000 in sales to $300,000. But once a distillery runs up against the $600,000 to $1 million mark, there isn’t enough room to grow,” says Gotter. “Wholesale sales across state lines require you to have permits and a salesperson. You have to be able to lose $50,000 a year, which is prohibitive to small distillers.”
To make it easier for small-batch breweries to ship nationwide, action would be required at the federal level. Since larger distilleries capable of making campaign contributions profit from the lack of small-batch competition, Gotter says he does not expect the federal government to relax the requirements.
But it could be the case that small-batch distillers find a way around the regulation. One avenue that distillers could use to circumvent state guidelines are online sales. Drizzly, an online alcohol delivery platform, gets around certain state permitting laws for spirits by delivering directly to consumers from a large, permitted shipping center. While the legality of this app is murky in some states, a similar platform could be developed for smaller distilleries to send products anywhere in the county.
Such a platform would be costly, but feasible. “If Jeff Bezos wanted it to happen, it could happen,” says Gotter.
To subscribe to Oregon Business, click here.