Should You Outsource Your Barrels?
Start-up distilleries face challenges in the first few years in business. While their barrels are fermenting, they aren't making a profit. It's a common issue for any distillery, so how can you implement a business strategy that doesn't see such a high risk? Liquid sourcing. Buying spirits allows start-ups to shorten the time it takes to see a profit. Many companies in the adult beverage industry find it to be an economical solution to maintain price points and margins.
Why Should I Source Barrels?
Spirit production is a natural process that requires time. Wine, beer, and spirits all need fermentation to produce the final product. The length of time that's necessary? It varies. All the sugars and ingredients need exposure to carbon dioxide to ferment and become alcohol. Some spirits might need only twelve months, but if you are wanting to produce bourbon or whiskey it takes longer. It can take sometimes five years for the distillate to be ready for sale.
The first few years requires a lot of overhead with very little profit. Fortunately, some workarounds allow spirit distillers to produce a product that contributes toward profit. They either use smaller barrels to speed up the process, or they source their liquid until their product is ready to launch. Buying from another producer is a jumping point to get into the game while the spirits mature. Before turning down the opportunity in favor of staying true to your brand, consider the seed money required to get production started.
The Investment of Owning Your Distillery
In 2014, the Kentucky Distillers Association estimated there were 5.6 million barrels of bourbon aging in Kentucky with an assessed value of $1.9 billion. That would cost distillers somewhere around $300 per barrel. In a recent article from Distiller Magazine, they broke down the financial obligations for bringing whiskey to market.
A distillery with access to a 500-gallon fermenter would need 1,050 pounds of grain. If the assumed distillery was making whiskey with a mash bill consisting of corn, rye, and malted barley with an ABV of 8% the cost estimates somewhere just under $500 a barrel for grain and yeast. That's not even factoring in the barrel itself which costs somewhere between $150-$250.
Paying yourself or a distiller could set you back $160 a day for an eight hour work day. Distilleries who choose to utilize smaller barrels require twice the amount of work. It's safe to estimate $300 a barrel for labor and around $100 in utilities.
Time is money. Capital acquired through a loan accrues interest. The example distillery has already spent somewhere around one thousand dollars to produce a single barrel. The interest rate could come to just over $100 for two years of aging.
Let's continue with our example and suggest that the distillery has invested $1,200 for a two-year-old barrel of whiskey. That barrel could probably produce 300 bottles, but there is a risk. Over the next two years, evaporation will reduce the contents by 14%, meaning the whiskey’s expected value will go down.
Is Outsourcing a Better Investment?
Many businesses launch their brand by sourcing bulk spirits. Most distillers will invest in buying from more than one supplier and blending the liquid to match their final product closely. Others choose to source and then add somewhere between 25%-50% of the distillate from their distillery before transitioning to the in-house product.
Terry Thome, president of J.B. Thome & Co. once said, "it's an intelligent way to go. Rather than throwing two or three million into something and in the end, finding out that you don't have the way to distribute it properly or the right sales approach. The three-tier system is not like selling hardware. You can have the best product in the world, but if you can't make it stand out, it's not going to sell."
Getting Capital to Start Your Distillery
The alcohol industry is a lucrative market. If owning and producing your spirits is how you want to carve out your corner of the market, there are ways you can finance the business. Working with experts like Brindiamo Group can help you obtain connections with those who want to invest in your brand. We work with different organizations to help them understand the various investment opportunities that are available to get the business off the ground.
If you need liquid sourcing, you'll also need connections. The logistics surrounding liquid sourcing is a challenge. Over the years, we have made valuable connections with trusted partners to deliver comprehensive sourcing solutions.