Increase in craft distilleries indicates going small is key to future

LEXINGTON, Ky. — Kentucky's bourbon industry is in the middle of its biggest expansion since Prohibition, building $300 million in new distilleries, warehouses and tourist centers, and filling a million barrels annually. But the future of bourbon isn't big. It's small.

Small craft distillers in the state will soon outnumber the big ones, if they don't already. New spirits makers are setting up shop almost monthly: At least nine new craft distillers received licenses or announced plans to build this year alone, including Wilderness Trace Distillery in Danville, Ky., which celebrated its grand opening this month.

With the addition of Wilderness Trace, there are now as many stops on the craft tour as on the original Kentucky Bourbon Trail, which focuses on the big guys.

The bourbon boom has come full circle, back to small startups, which is what Jim Beam, Brown-Forman and Heaven Hill once were.

"They've definitely come to Kentucky," said Eric Gregory, executive director of the Kentucky Distillers' Association. The KDA has 16 members, with two more in talks to join soon, he said.

"By the end of the next year, we could have 26," Gregory said.

The problem, he said, is that other states want them, too, and are willing to give small distillers economic advantages.

Now the big distilleries are angling products into the craft space.

"The American populace is interested in exploring right now. The epicenter for experimentation is not the big guys; it's the little guys," said Dave Pickerell, who was the master distiller at Maker's Mark for 14 years. In the past five years, by his count, he has helped at least 40 small distilleries get up and running and has consulted on about 80, including several in Kentucky.

Many small Kentucky distillers — including the people behind Old Pogue, Willett, Limestone Branch, Silver Trail, Wilderness Trace, Peerless and Angel's Envy — have family history in the distilling industry. Others — including M.B. Roland, Corsair and Barrel House — jumped on the distilling revival.

Everybody brings something new.

The small distillers have come up with products that push the boundaries of bourbon and whiskey — including Corsair's cheekily named Insane in the Grain 12-grain whiskey and M.B. Roland's Black Dog, a white whiskey made from corn that has been smoked like dark-fired tobacco.

Several Kentucky distillers, including Barrel House and Wilderness Trace, are experimenting with locally grown sorghum to create spirits that redefine rum.

Many have returned to bourbon's roots with white whiskey or flavored moonshine.

"Innovation is part and parcel of what the craft movement is about," Pickerell said. "People have asked me: What are the unifying factors of people starting crafts? It's a passion for craft distilling, and that's it."

From 2008 to 2012, the number of craft distilleries nationwide grew by 125 percent, said Thomas Hogue of the U.S. Treasury's Alcohol and Tobacco Tax and Trade Bureau, known as the TTB. That tops the 40 percent increase in wineries and the 60 percent increase in breweries.

"This industry is going gangbusters," Hogue said.

There are 300 to 400 small distilleries around the country now, producing moonshine, gin, vodka, bourbon, rum, brandy and more. The American Distilling Institute, a trade group for small distillers, predicted that there will be 600 to 800 craft distillers in the United States and Canada by the end of 2015.

Compared to the big distillers, the amount that crafts produce is small — but it's growing.

According to the Distilled Spirits Council of the United States, craft distillers bottled 700,000 nine-liter cases in 2010; by last year, that had grown to 1.2 million cases, a 71 percent increase in less than two years.

One reason Kentucky, the birthplace of bourbon, lags behind: The tax structure isn't as friendly as other states, including Oregon, Washington, Colorado and New York, Pickerell said.

"If you're a distilled spirit in Kentucky, you get hammered on taxes," he said. One of his craft clients considered locating in Louisville, Ky., but ultimately went elsewhere.

"New York is at the top of the list. Almost overnight, New York went from two to 32 distilleries," he said. "New York has gone overboard at making it easy and relatively inexpensive to start up a craft distillery."

When Prohibition ended Dec. 5, 1933, the Lexington Leader trumpeted the news with this headline: "Higher Grade of 'Corn Likker' Promised by State Moonshiners."

Today's "moonshiners" have delivered on that promise.

Modern legal moonshine is one way small distillers can get started: They sell some and put a little back to age and turn into bourbon in the next few years. The moonshine keeps the business afloat.

"Everybody needs a product to sell. Depending on where you are, you're either selling vodka, gin or moonshine. We're in the South, so we sell moonshine," said Steve Beam of Limestone Branch Distillery in Lebanon, Ky., which opened in early 2012. Beam is a direct descendant of bourbon industry patriarch Jacob Beam.

His Spanish-made hammered-copper pot still can make about a barrel of whiskey a day, but "in the meantime, we have to sell moonshine," Beam said. "Fortunately, people are really interested in moonshine right now."

Once a novelty, white whiskey, or moonshine, has become a serious product, and big distillers want a taste: Last year, Jim Beam brought out Jacob's Ghost, a barely aged version of its mainstream brand, the biggest selling bourbon there is.

Witness the phenomenon of "Moonshiners," the Discovery Channel reality television series in its third season of following Virginia moonshiner Tim Smith and his pal Tickle. In the season two finale, almost 4 million (mostly male) viewers tuned in to see whether the moonshiners would go "legit."

They have. Smith's Climax moonshine is now made at Steve Beam's Lebanon distillery, which proudly waves a banner featuring Smith's Catahoula dog, Camo.

"There's about 60 brands of moonshine out there now, and that's just in the last four to five years. And more on the waiting list," Smith said. Every label and product must be approved by the TTB, which tracks sales by type of product.

Smith came to Kentucky after he was turned down for a distiller's license in Virginia. At first he was cautious about setting up shop in bourbon's backyard.

"We don't want to step on nobody's toes — being in Kentucky, you always got to deal with the bourbon guys," Smith said. "Some of them feel like it's undrinkable unless you put it in a barrel. But I feel like if you make good moonshine, you can drink it straight out of the still."

Another Kentucky distiller also is basking in the moonshine glow. Spencer Balentine showed Smith how to make legal 'shine at his Silver Trail Distillery in Hardin County, Ky., where Balentine is keeping his family's proud Land Between the Lakes distilling traditions alive with his award-winning LBL Moonshine.

"It was only going to be, like, a sleepy hobby," Balentine said. "Then one thing led to another."

Now, Balentine is working on his Barrel-Incarcerated Moonshine, a 100 percent corn liquor aged one year in a barrel with serious char.

Moonshine might seem like the low-rent side of the business, but its distillers take it seriously.

"When you talk to us, you're talking to the head distiller. That's what defines a craft: There's one guy in there. That's something the big guys can't re-create on a large scale," Balentine said.

Putting up spirit is costly in resources.

"That's the whole conundrum if you're a small distillery: You can only put away what you can afford," said Paul Tomaszewski, distiller and co-founder of M.B. Roland in Pembroke, Ky., just north of Nashville, Tenn. "It's an investment business. Whether you want to make a barrel a day or 20 barrels a day, something has to pay for that."

Open four years now, M.B. Roland has successfully juggled those decisions well enough to outgrow its first 100-gallon still. Two new ones being installed over the winter will more than quadruple capacity next year.

But releasing an aged product will be several years away.

There is another way: buying whiskey from someone else.

Tomaszewski and his wife, Merry Beth, decided not to buy other distillers' bourbon, but he admits that it's tempting from a business standpoint.

Most Kentucky small distilleries haven't been around long enough to age much bourbon, which generally takes four years.

Tomaszewski said the bottom line is, "If you get your hands on a bottle of Kentucky bourbon, it's made or sourced from one of the main distillers. That's starting to change. But it will be a few more years before that starts to happen in a large amount."

Without sourced bourbon, few craft distillers would have much to sell, said Richard Wolf, a former Buffalo Trace executive and former KDA president who now works as a bourbon broker and industry consultant.

"Historically in the bourbon business, that was the model, until fairly recently," Wolf said. "It's still very much the model in the world of scotch and other aged spirits. That tradition is a kind of a natural thing."

Wolf said he works with many craft distillers, often pro bono, to find spirits. Some are reshaping them by blending or finishing them in barrels that held other spirits.

"I would much rather see the craft folks securing and deploying found spirits in the creative ways they are and become successful until their own products mature than see them go out of business because of lack of cash flow or feel compelled to put something on the market that's not good enough for prime time," Wolf said. "There's a lot of art in selecting the right found spirits."

Distillers often evolve, starting with a label and sourced whiskey and moving toward producing it themselves. But that is a long and difficult transition that so far no one in Kentucky has completely made.

When the Pogue family wanted to revive its historic brand, members worked with Kentucky Bourbon Distillers to source whiskey that could match a specific taste.

"We actually had an old bottle from 1902 — Old Pogue Bourbon. We took that to them, and cracked it, and that was the product we wanted to make," distiller John Pogue said.

Old Pogue now has its own still, installed on the grounds of the family's original Maysville distillery, and production might gradually shift there, he said. But that's down the road. So far, the distillery has produced only "experimental" barrels of the original recipe, he said.

This kind of arrangement is common, said Britt Chavanne of Willett Distillery, also known as Kentucky Bourbon Distillers, in Bardstown, Ky.

Willett also is returning to its distilling roots.

The family distilling history dates to shortly after the Civil War, and the Willett Distilling Co. and warehouses were built in Bardstown after Prohibition.

The family stopped distilling in the 1980s but maintained its bottling operations and warehoused aging spirits; it continued to sell whiskey under a variety of long-standing labels, including Old Bardstown and Johnny Drum, and the newer Willett Pot Still Reserve.

The Willett distillery has been restored, and the family began distilling again in January 2012. So far, the family is waiting to release its bourbon, rather than release its unaged product.

"If you are a startup operation and in a position in which you don't have the capital to wait around a number of years, all you can do to survive is to release your white whiskey," Chavanne said. "We are fortunate enough to have existing brands in the market and to have been in business for quite some time. Otherwise, we may not be afforded the opportunity to be as patient to release our whiskey. As a result, I think it is strictly a financial decision for some people."

Angel's Envy, another craft brand, took a different path. Wes Henderson wanted to find a way to get his family back into the business after his father, the late Lincoln Henderson, retired from Brown-Forman, maker of Woodford Reserve and Old Forester.

The Hendersons buy bourbon and rye and then age it in port and rum barrels. The formula has been a huge hit, winning rave reviews and selling out at super-premium prices. Now the company is building a $12 million distillery on Main Street in Louisville.

Angel's Envy will have a lot of company in Louisville. Peerless Distilling is going in on 10th Street, Evan Williams Bourbon Experience just opened on Main, and another old building across the street is expected to eventually house a craft still for Michter's, to cater to Louisville's burgeoning bourbon tourist trade.

In a nearby industrial area, Michter's larger distillery should get a big still next year from Vendome Copper and Brass Works. Until then, the company will continue releasing products made from sourced whiskey.

Although this practice isn't rare, it created a certain amount of confusion when Wine Enthusiast named Michter's its 2012 distiller of the year for the quality of its products.

Whiskey expert Chuck Cowdery dubbed Michter's a "Potemkin" distillery because it doesn't distill anything yet.

Joe Magliocco, president of Chatham Imports, the parent company of Michter's, shrugged off the criticism: "We have an agreement with another distillery, and a confidentiality clause with them. I can't say who they are, but on certain days, Michter's is made there with our mash bill, our recipe. It's different than buying whiskey on the spot market after it is made."

Whiskey fans clearly like the results: This month, Michter's released 273 bottles of a special blend of 30-year-old, 20-year-old and younger whiskeys, hand-bottled by white-gloved workers to protect the 18-karat gold labels.

Michter's Celebration Sour Mash Whiskey, all of which is apparently spoken for, was priced at $4,000 a bottle, thought to be the most expensive craft product bottled in Kentucky — so far.

"The Celebration name was my idea," Magliocco said. "I thought it was a good name for a very special whiskey to drink at a special time when someone wants to celebrate."

Tom Fischer, who writes and produces The Bourbon Blog, said that trend is likely to continue.

"The price is in line with what the market will bear. These are bourbons for the collectors," Fischer said. "My hope is bourbon in general doesn't increase in price too much, because that's what makes bourbon so special. I would hate to see bourbon go up 20 percent in the next year."

Despite the economic challenges, the future of Kentucky's distilling industry looks bright, even for startups, experts say.

"I think this craft movement's here to stay. "¦ There's money in it," said Pickerell, the craft distilling consultant. "Almost nobody goes out of business as long as they don't have a stupid business plan. "¦ There just aren't failures."

Shane Baker, Wilderness Trace's distiller, and his business partner, Pat Heist, are counting on that.

They got into whiskey from the science side: For years, their company Ferm Solutions helped ethanol and other alcohol producers make a better product.

"We decided, why not do it for ourselves and have fun?" Baker said. "We're chasing the dream."

They also claim a bourbon heritage. For decades, Baker's grandmother Doris Ballard worked with Pappy Van Winkle, namesake of the most sought-after bourbon on the planet.

Wilderness Trace is young — only three barrels of bourbon have been filled so far — and it will be years before it is ready to drink. But their first barrel is already sold, as is much of the rest.

"Right now, we're on a roll," Baker said. "We're as close to the Pappy model as you can get: We're selling all we make."

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