U.S. Craft Distilleries Are in Crisis

At first glance, there’s never been a better time to be a producer of craft spirits, nor a better time to be a consumer of them. More distilleries are producing more spirits of all types than ever. Yet, the true state of the industry is not as rosy as it seems.

Westward Whiskey founder and CEO, and former American Craft Spirits Association (ACSA) president Thomas Mooney refers to the looming crisis that craft distilleries are facing as “one of the great ironies in the history of the beverage alcohol industry.”

Mooney says that despite overall growth and innovation, “producers and consumers are on opposite sides of a chasm.” 

That chasm is the result of what some in drinks industry view as a skewed and perhaps even predatory distribution system. Industry insiders also cite the inequities in how consumers can shop for spirits versus wine, mainly in the lack of legal direct-to-consumer (DTC) spirits shipping.

Craft spirits industry stats

According to the most recent ACSA Craft Spirits Data Project, there are 2,753 active craft distilleries in the U.S. However, the 43 craft distilleries (1.6% of the country’s total) considered to be “large” account for 54.5% of craft sales by volume, versus the 2,418 “small” craft distilleries (89.2%) that account for 11.3% of sales. 

The numbers reflect that it has become increasingly difficult for small producers to grow into medium-sized ones, and for medium-sized producers to graduate into large ones. The growth momentum just isn’t there.

Consider that for large producers who already have access to widespread distribution, 69.1% of their sales are out-of-state. It’s a self-sustaining bit of momentum wherein a larger platform enables larger sales. For small producers, only 6.9% of sales are out of state. 

“That’s not for lack of trying; it’s because of lack of access,” says Jordan Cotton, the co-founder and CEO of Cotton & Reed Rum Distillers. “Without additional paths to market, the distillers won’t make it.”

Distribution roadblocks, challenges and consolidation

Enough distilleries across the country are feeling the squeeze that many are now shutting down.

“I’ve collected a list of about 45 distilleries who have closed up shop since the beginning of 2023, and [I think] it’s just beginning to pick up steam,” says Becky Harris, another former ACASA president who is now president and head distiller of Catoctin Creek.

For Harris, the most severe impact stems from a lack of distributors. 

“Distribution outlets have consolidated by more than 30%, and the number of products has exploded,” she says. “There needs to be a path for small brands to build their following and grow their market to the point that they can successfully build relationships in distribution.” 

Mooney adds that while there are few options on the whole, there are only three distributors to consider if a distillery has aspirations of growing into a regional or national brand: Southern Glazer’s Wine & Spirits, Breakthru Beverage Group, and Republic National Distributing Company, LLC (RNDC).

Even attuned industry observers may be surprised at the true scale of a company such as Southern Glazer’s, and the resulting power it holds over its suppliers. It ranks as the 10th largest private company in the U.S. according to the 2023 Forbes ranking and holds a 36% market share across wine and spirits.

Mooney estimates their dominance in the more consolidated spirits sector is even greater, exceeding 60% in certain major markets. The company’s projected $26 billion in revenue this year is more than three times the approximate $8 billion in revenue of the entire craft spirits industry.

According to these drinks industry insiders, it’s more than the type of competitive numbers game that businesses in any industry face. A lack of viable routes to market and a reduction in distributors is detrimental, they say, to the thousands of small producers sharing the same space. 

“Distributors have the right to operate that way, but using their cash and influence to buy up the competition and promote laws that restrict market access — from a small distiller’s standpoint, that’s playing dirty pool,” says Cotton.

When a single distributor has three times the revenue of every craft distillery combined, the power dynamics at play aren’t just a squeeze; they’re an all-out crush. 

“Those who are not cut [from a distributor’s roster] face what I consider an abuse of monopoly power,” says Mooney. 

He cites several examples including distributor margins between 25 to 30%; seven-figure payouts in the event of a change of ownership control for the supplier, i.e., a craft distillery selling its business; a right of first refusal when a producer enters a new market; and onerous long contracts “that exceed the planning horizon for a small company, with very expensive termination provisions.”

The best solution for small producers contending with a competitive and monopolistic distribution landscape is providing them with the type of direct consumer access that wineries have long enjoyed. It’s also something distributors are fighting against. 

“Distributors are intent on avoiding a similar loss in spirits, and they have lobbied and spent aggressively to prevent the possibility of DTC parity for spirits producers relative to wine producers of similar size.”

Wineries have legal interstate DTC shipping in 47 states plus the District of Columbia, while distilleries are afforded the same rights in only 8, plus D.C. This is harmful to those small- and medium-sized producers who are contending with distribution inadequacies, yet are barred from alternative paths to reaching consumers at the same time.

How consumers are affected

According to the 2023 Direct-to-Consumer Spirits Shipping Report by Sovos ShipCompliant, 86% of regular craft spirits drinkers would be likely to try a new spirit from a distillery if they could purchase via DTC; 82% say DTC should be legalized; and 78% say they would be more likely to try products from out-of-state producers as a result.

The Sovos report states that all wineries under 5,000 cases in size “rely in a significant way on DTC sales and shipping. If the DTC shipping channel were turned off overnight, most of the wineries in this category would either close down immediately or significantly reduce their production.”

That size level represents almost the entire number of craft distilleries in operation today. “It’s forcing them to stay at hobby size, sell prematurely to large companies, or go out of business trying to grow,” says Mooney. “It’s nearly impossible, and prohibitively expensive, to build a regional or national craft brand in 2024.”

Catoctin Creek’s Harris is thankful for having customers who know and love their products from across the country, but she’s often unable to sell to them while vying for out-of-state distribution slots. 

“DTC is a way to connect small independent producers directly with their customers, something which is not accessible to us anywhere but in person in our tasting rooms,” she says.

A need for change and a call to action

The three-tier distribution system for alcohol in the U.S. is a structure many in the drinks industry think of as an arcane and outdated remainder of the post-Prohibition era and is ill-suited to today’s world of globalization and e-commerce. “The alcohol distribution system has worked roughly the same way for 90 years while the world has changed around it,” says Cotton.

Mooney compares the growth of his brand at home in the U.S. versus abroad. “Westward has a higher market share of luxury American whiskey in Australia, and in Taiwan, than we have in the United States,” he says. “The difference is the route to market that suppresses brands like ours in the U.S.”

This represents a “state-sanctioned stranglehold on commerce,” says Cotton. “If a business doesn’t want to distribute my products, fine, that is their right. But opposing small distilleries’ right to sell a bottle directly to a consumer, or to a store? To serve a tasting flight? To offer cocktails? To sell online? That doesn’t serve consumers,” he says. “That’s just pulling up the ladder behind yourself.”

Cotton and other distillers across the country are seeking state-level legislative support that ensures competition, allows for e-commerce, and increases allowances for on-site sales and tasting room rights. 

“Modernizing any of these areas would improve small distilleries’ market access and odds of survival, but distributors view this as a threat,” says Cotton.

Direct-to-consumer spirits shipping is the biggest and most important factor. 

“It’s the best path to get everybody what they want: The major distributors can keep focusing on selling big brands the old school way, the consumer can get a bottle of the cool new spirit they heard about without flying across the country, and the brand reaches a previously inaccessible audience,” says Cotton.

“Small businesses would see sales growth, customers would have access to the small production, innovative products they want, and states would gain access to the taxes due to them for these products,” says Harris.

It’s a precarious time for the still-nascent craft spirits industry, and there’s no guarantee that the number of producers and products currently available, and the innovation, choice, and excitement they represent, will remain available. 

“If you love a craft distiller, either because they are local or because you like what they do, don’t assume that we will still be around in a year,” says Mooney. “Craft distillers are fighting to change the market conditions that make it nearly impossible for us to succeed, and we need support from the public along the way.”