How Distilleries Should Plan For The Future
There is reason to believe that 2021 will be a good year for distilleries. 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, the EU has issued a four-month suspension on tariffs on American spirits. While the pandemic still presents problems, many distilleries are in a position to think about how to handle additional profits.
Plans for the Future
If you’re a craft distillery, how should you plan for the future?
Obviously, if you’re losing money, you should be thinking about how to increase revenue—perhaps with DTC offerings.
If you are in the black and looking for where to invest money freed up by FET, you have several options. Here at DistilleryCFO, we recommend that you carefully consider your choices. 2020 showed that investing in tasting rooms, for example, might not pay off. But maybe you can 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, revisiting your fulfillment relationships, adding new product lines or brands, or purchasing new equipment. Other options include 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. Working with the right finance and accounting team and leveraging all the information at your disposal can really make the difference.
There are a lot of great reasons for distilleries to be optimistic about 2021, and we are so excited about the possibilities!
Federal Excise Tax
That sound you hear is craft distillers around the country breathing a big sigh of relief.
With the passage of the Craft Beverage Modernization & Tax Reform Act in December 2020, Congress made permanent a reduction in federal excise tax (FET) that had been temporary. It lowers the tax on spirits from $13.50 to $2.70 per proof gallon on the first 100,000 proof gallons. This is a particularly meaningful victory for craft distillers, 98% of which produce less than that. Previously the FET reduction had to be 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.
Direct to Consumer and Cocktail-to-Go Sales
The pandemic has prompted some states to ease restrictions that limited distilleries’ ability to sell directly to consumers. Ten states plus Washington, D.C. now allow DTC spirits sales, while six states are permitting in-state DTC shipping on a temporary basis. 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. A year ago, it was a niche market, but today 30 states plus Washington, D.C. are temporarily allowing cocktails-to-go from bars and restaurants.
The pandemic has pushed states to reconsider the usefulness of such restrictions. Distilleries would like to see those changes made permanent and are hoping that additional states will follow these examples.
Reasons for Caution
However, ADI’s January survey also found that 55% of distilleries lost money in 2020; craft spirit sales declined as much as 41%. While liquor sales were up overall in 2020, losses were disproportionately borne by smaller vendors. They don’t have the name recognition or marketing muscle of well-known brands and often promote themselves through tastings and festivals—which were canceled in 2020.
In addition, many bars have unused inventory from 2020 and aren’t restocking. The EU tariff on whiskey remains in place (and is set to increase over the summer), reducing European consumption of American whiskey by 39%. It makes sense for craft distilleries to proceed cautiously.
Are you 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!