Finding Innovation in One of the World's Oldest Businesses
Ninety years ago, Prohibition eradicated the hundreds of small liquor distilleries scattered around the United States. Now, after decades of domination by big names, small competitors are making a resurgence.
Thanks to loosened restrictions on the production and sale of liquor, and drinkers with a thirst for premium, one-of-a-kind options, ambitious entrepreneurs can carve out a niche in the burgeoning space. According to the American Distilling Institute, in 2003 there were about 60 licensed distilleries in operation. Today there are about 330. One is Tuthilltown Spirits, an 18-person distillery based in Gardiner, New York--one of the first craft distilleries in New York State since Prohibition.
When it opened a decade ago, Tuthilltown, founded by Ralph Erenzo and Brian Lee, sold small amounts of spirits to liquor stores and bars around New York State, peddled out of the back of Erenzo’s trunk. In 2012, the company churned out 6,500 bottles of whiskey, its leading product. This year Erenzo estimates Tuthilltown will sell close to 60,000 bottles of whiskey and make $3 million in sales through its onsite shop, farmers’ markets, and a distribution network.
The microdistilling industry grew 32 percent in 2012, boosted by consumer desire for all things local, artisanal, and unique. According to AnythingResearch director Daniel Berch, in the age of customization and individuality, big spirits brands are starting to read as boring. "What we’re seeing now is the rise of small distillers who are branching out and creating small, subtle variants in bourbons and whiskeys," Berch says. "Larger companies like Jim Beam aren’t going to be able to change what they do. Customers go to them for consistency, whereas microdistilleries can be experimental and innovative."
In 2001, Tuthilltown Spirits was still Tuthilltown Grist Mill, a 36-acre site on the National Register of Historic Places. Erenzo, a former consultant and rock climber, owned several climbing gyms and planned to convert the Hudson Valley land into a climber’s ranch replete with a bunkhouse, café, and shop. But after three years of opposition from locals, Erenzo sold all but eight acres of land to pay off legal fees and began considering how else to use the space.
He stumbled upon right-to-farm laws that protect agricultural expanses, but winemaking didn’t appeal to him. The New York soil was inhospitable and the market was crowded. Then, Erenzo discovered the 2002 B-1 distiller’s license, which permits holders to manufacture up to 35,000 gallons of spirits each year in New York State. He realized he had struck liquid gold. He partnered with Lee, an engineer and technical designer, and the two spent $300,000 on building conversions, construction, and equipment, including a 100-gallon still from Germany.
The spirits industry is one of the most heavily taxed, heavily regulated, and competitive industries in the world, but the challenge of breaking into it appealed to the founders. Lee had experience entering new frontiers as a technical consultant for ESPN’s conversion to HD-TV; and it took Erenzo eight years to open one of New York City’s first public climbing gyms. Attempting the impossible was the founders’ main pursuit, though a healthy dose of naïveté about the industry helped. "Sometimes there’s an advantage to not knowing what’s practical or possible," says Erenzo. "That’s a mentality most entrepreneurs have."
Erenzo traveled to Europe to learn how grappa is produced in Tuscany, calvados in Normandy, and absinthe near the Swiss border. He returned to the States with a better idea of how small distilleries operate and spent a winter fermenting cider in his basement, while Lee figured out the technical aspects of the machinery. To keep costs low, the pair installed all of the equipment on their own.
Large, established brands have sizeable marketing budgets, established distribution channels, and lobbyists who campaign on their behalf. Small producers, though, have begun to benefit from loosening state restrictions that are designed, in part, to drum up new tax revenue. In 2010, New York State began allowing distillers to sell their goods at state fairs, county fairs, and farmers’ markets, which provided a taxable revenue stream. Equally significant, farm operations like Tuthilltown have applied for a license that permits them to sell liquor to tourists on site. Last year, the Tuthilltown Spirits shop made $500,000 in sales from up to 200 visitors a week who traveled from numerous countries in Europe to see how a small distillery in the States is getting the job done.
Face time with customers is critical. "Craft distillers are to industrial producers of liquor what corner bakeries are to a Wonder Bread factory," Erenzo says. "Small distilleries allow consumers to get close to the product, meet those who make it, and see how it’s done. They can identify with what’s in their glass in a new way."
Though price varies according to liquor type and bottle size, the average bottle of Tuthilltown brew costs $35. A typical customer is a 25-to-40-year-old New York or California sophisticate willing to pay a premium for products like Tuthilltown’s Half Moon Orchard Gin.
Big competitors have noticed. In 2010, Tuthilltown signed a multi-year royalty contract with 19th century Scottish behemoth William Grant & Sons. Though he declined to state the cost of the deal, Erenzo notes that Tuthilltown spirits are now available in all 50 states, Australia, Europe, and Hong Kong. Production has doubled every year over the last five years, and the founder projects $3 million in sales this year, much of that coming from its five different whiskey offerings, which they continue to experiment with.
"For us, premium relates directly to the handmade nature of our goods," Erenzo says. "We’re a farm and the goods are picked up many times and checked along the way. Customers can actually meet the people who make our products and establish a relationship with them. Those are things that mass producers can’t do."