The craft distillery industry has experienced numerous changes concerning legislation and taxation over the years. Congress has made a temporary tax reduction permanent, and many distilleries are benefiting from changes in regulations that allow direct-to-consumer (DTC) shipping and cocktails-to-go. Furthermore, we have seen the effects of the EU’s temporary suspension of its retaliatory tariffs on American spirits; export rates have risen. However, American distillers are worried about demand. This is because of considerations that customers’ tastes might have changed due to trade dispute-induced scarcity. Distilleries must leverage an understanding of their target market with on-demand decision-making tools in drafting a long-term business plan. 

Federal Excise Tax (FET)

Congress passed the Craft Beverage Modernization & Tax Reform Act in December 2020, making permanent a reduction in federal excise tax (FET). Previously the FET reduction was renewed annually, which made it difficult for distilleries to plan from year to year.

The FET decision has had a huge and immediate impact on the industry. Knowing that they don’t need to worry about a future increase in the FET, many distilleries can now invest more profits in the business. Distilleries must have an important conversation with their CFO to solidify their strategy for satisfying their target audience and maintaining optimal stock levels.

Direct to Consumer and Cocktail-to-Go Sales

The pandemic prompted some states to ease restrictions that limited distilleries’ ability to sell directly to consumers. An American Distilling Institute (ADI) survey of 269 distilleries in January 2021 showed that distilleries shipping DTC in 2020 generated 39 percent of total sales through this avenue. 

Similarly, distilleries have benefited from the loosening of restrictions on cocktails-to-go. While some states like Iowa, Ohio, Florida, Montana, and Alabama among others have permanently authorized cocktails-to-go, some others only have temporary policies allowing this. We can surely say that the pandemic encouraged states to reconsider the usefulness restrictions in alcohol sales and revise them accordingly. Concerns about those legislations post-pandemic are in order.

Plans for the Future

The distillery industry is a peculiar one with a variety of products. Most of the distilled spirits sold within the US are produced by a micro distillery and these businesses are susceptible to the harsh results of any unfavorable changes to law and taxation. The permanent FET reduction throws in some certainty concerning financial planning for micro distilleries. The extra money may go into improving brand awareness to reach potential customers. 

When you consider the relaxation of regulations concerning DTC and cocktails-to-go offerings for spirits, what do you see? Growth opportunities! Some players in the hospitality industry have kicked against these adjustments to regulations citing safety considerations and economic effects due to increased unemployment. However, these law updates will allow micro distilleries to grow their brand gradually and serve their faithful customers at a pace that aligns with their financial plan. Also, they do not disallow the sale of these spirits at authorized bars. An understanding of different state guidelines for the DTC delivery of spirits is necessary. Licenses are required for delivery personnel in some states. Others impose a volume-based fee.

If you are in the black and looking for where to invest money freed up by FET reduction and EU tax reduction, you have several options. Here at KBS CFO, we recommend that you carefully consider your choices. Investing in tasting rooms might not be the best option as we can see from 2020. Businesses that made money by gathering people together took a huge hit. You want investments that will ensure your financial position regardless of the social or economic climate. 

A great idea would be to make more profitable changes—such as considering contract bottlers or bringing bottling in-house.

Maybe now is the time to consider investing in capital improvements such as expanding storage facilities. The spirits industry is big on the age of stock and you always want to ensure that you have enough to sell and enough to store; this ensures variety and consistency of supply. The stock aging consideration will also influence your sales and marketing decisions. Your marketing division will consider stock levels and financial goals to direct sales traffic appropriately. 

This might also be the perfect time to add new product lines or brands. You can explore your target audience and maintain healthy sales by expanding product offerings. Other great ways to invest in the future of your business include purchasing new equipment, putting more money into sales and marketing, or hiring additional personnel. There is no one-size-fits-all answer as to where to invest when it is time to plan for an expansion or when it is time to pull in those reins. 

Work with the right finance and accounting team and leverage all the information at your disposal to make a difference. 

At KBS CFO, we provide an efficient system for financial reporting. We also use actionable data as pointers for key steps to take toward the actualization of the distillery’s financial goals. Financial planning is an ongoing process and you need capable hands to ensure that your plans are flexible enough to handle any changes in the economic climate.

Are you a Frederick County business looking for help determining your next move on the financial front or trying to get a handle on where you are, matching your accounting records to reality? We would love to hear from you. Contact us today!