The Booze Boom: Behind the Rise of Craft Spirits and RTDs

Credit: BevNet
By: Ferron Salniker

While doing research for her book, Movers and Shakers: Women Making Waves in Spirits, Beer, and Wine, writer and bartender Hope Ewing got the inspiration to start her own company. In 2019, she and two co-founders launched Vervet, a farm-to-can sparkling cocktail line, in Los Angeles.

“It was having the experience of talking to all of those craft distillers and winemakers who were launching their own brands that let me see it was possible,” she said.

Multiple opportunities had to align for Ewing and partners Tuan Lee and Alex Rosenblum to get Vervet off the ground. Legal restrictions on craft distillers in California were recently relaxed, allowing them to collaborate with a local distiller. Evolutions in the stabilizer world synced up perfectly: a new plant-based preservative had just hit the market, enabling them to make an all natural product. The farm-to-table movement was starting to translate to spirits, inspiring consumer interest in transparency and local
ingredients. And in 2016 when their planning started, the founders saw a niche for portable craft cocktails.

Those factors— as well as others— have created a fertile environment for companies like Vervet, who are part of a rise of spirit brands and spirit-based canned cocktails founded in the past decade. In 2005 there were 50 craft distilleries in the U.S. — in 2021 there were 2,300, according to the Distilled Spirits Council of the U.S. Spirits are experiencing their fastest growth in two decades, with revenue growing by $3.3 billion in the past year. Spirit-based ready-to-drink cocktails have had a more recent but fast rise: Today there are nearly 650 RTD brands on Drizly, up from 450 in 2021, which was a 45% increase over the previous year, and a whopping 170% increase over 2019. Regular spirit mergers and acquisitions, plus a barrage of product launches, have put the industry front-and-center. But what has fueled this booze boom, and what infrastructure has grown to support it?

From Niche to Mainstream

Craft distilled spirits, in particular, emerged as a staple on bar shelves decades after the category’s founders, such as St.George Spirits in northern California, pioneered a path to growth in the early 1980s. To zoom in on just the past seven years, the number of craft distillers has grown from 1,163 to 2,279, according to the Craft Spirits Data Project. The U.S. craft market share in value has also gone up from from 3% in 2015 to 7.1%. Some of the growth is the result of states shedding prohibition-era arcane distilling laws to accommodate budding alcohol industries.

“It was probably in the early 2010s, you started to see a lot of these production laws around distilled spirits loosening,” said Ewig. “And so that sort of precipitated this craft distilling boom, which then trickled down to the start-up RTDs.”

New laws enabled craft distillers easier access to licenses, and as regional distiller communities grew, so did advocacy for legislation that would make business even easier: upping capacity levels, for instance, or allowing tasting room sales and on-site cocktails. Starting in 2007, New York distillers benefitted from a series of laws accommodating craft beverage producers that also stimulated local agriculture. By 2014, when production allowances were increased, the state boasted nearly 50 new distilleries. In California, a 2015 act allowed distillers to sell limited amounts, provide samples and cocktails, and operate restaurants from their premises.

Most recently, federal reform has reduced tax rates on spirits, beer and some wines. The Craft Beverage Modernization and Tax Reform Act was first passed in 2018 and made permanent in 2020. Designed to help create jobs and provide investment incentives for American distilleries, wineries, and breweries, the program also benefited importers of foreign producers. Since its passage, investments by craft producers have continued to increase: in 2020, the amount of capital invested by the U.S. craft spirits industry was $759 million, an increase of over $61 million from 2019, according to the Craft Spirits Data Project. In the last year and a half, the industry has also seen the end of many beverage alcohol tariffs.

“This represents a major permanent economic opportunity for new, emerging, and established brands,” said Gabe Barkley, CEO of MHW, a beverage alcohol importer, distributor, and service provider.

A Pathway to Innovation

In some ways the trajectory of the spirit industry mirrors shifts in the larger beverage and food industry. Roy Milner is a co-founder of Blackberry Farm Brewery and a partner at Cask Catalyst, a premium beverage-alcohol brand consulting and investment firm focused on helping emerging brands scale. He also spent 11 years working at Red Bull.

“If you look at almost every beverage category, there was a dominance of a few players— major national and international strategics,” he said. “The proliferation of
seeing innovation has not only brought an emergence of so many smaller players and smaller brands, but it has forced a lot of these bigger strategics to create emergent brand departments where they’re funding and doing research and innovation.”

From Milner’s perspective, we’re now in an era when smaller players, like Red Bull, can come into the scene and become not only dominant players, but category leaders. Cask Catalyst— which was founded as an offshoot of its traditional food & beverage predecessor, Craft Catalyst – is among other consulting and investment firms such as 99 Proof or InvestBev that have sprung up in the past decade focused on supporting these players in the beverage alcohol industry. It even formed a craft spirits brand of its own – Art of Alchemy Spirits, which produces small batch blended spirits from Kentucky that demonstrate a passion for curiosity from the distiller and consumer sides.

While larger companies may not be as flexible or nimble as smaller brands, emerging spirit producers have gained attention for their eagerness to experiment with new styles, ingredients, local supply chains, and connect with consumers who are excited to try new products that exemplify shared values or local and organic food trends.

For Sagamore Spirit co-founder and president of distillery operations, Brian Treacy, reviving a lost regional distilling tradition was part of the drive to produce a Maryland-style rye whiskey. Sagamore Spirit is one of the 20 plus distilleries that have opened in the last decade aiming to reignite interest in Maryland style rye. The resurgence has fueled an ecosystem of suppliers and consumers: Treacy formed reciprocal relationships with grain growers less than 20 miles from the distillery, and often hosts events for the public, in addition to collaborating with other members of the Maryland Distillers Guild. While Sagamore is a national brand— it’s distributed in 42 states and 11 countries— it also demonstrates how distilleries have enshrined themselves in local economies, and become destinations. There are now more than 30 distillery trails across the country, according to DISCUS.

“I think consumers are thirsty for education, they want to know as much as possible,” Treacy said. “And so many of them are going to soak it up if you give them the opportunity.”

Consumer promiscuity is also higher in the U.S. compared to other markets, according to MHW’s Barkley. “Not only do new brands have a fertile, valuable market, but consumers here are also willing to try new products at higher clips,” he said.

This creates a valuable environment for entrepreneurship, particularly in spirits. Consumers have been trending towards spirits, which have gained 10 share points over the last 20 years, and spirit start-ups can generally come to market faster than wine start-ups and are less capital intensive as well, Barkley added.

“A decade ago, we also entered into this golden era where large brands across consumer product good categories have been choosing to acquire other companies at a faster pace, which reinforces the ecosystem,” Barkley said.

That’s when spirit acquisitions, particularly of craft brands, began to accelerate. William Grant & Sons made one of the first craft acquisitions, Hudson Whiskey, in 2010, and by 2017 nearly all international conglomerates had invested in craft spirits or above premium brands, many of them now tied to a celebrity backer.

Pandemic Acceleration

But the rise in spirit brands in recent years doesn’t mean there haven’t been challenges for start-ups. Vervet, a self-funded venture, couldn’t compete when it launched with just $100,000 to target non-traditional on-premise venues— the kinds of entertainment venues that shut during the pandemic. The founders closed the business a few months in and were only able to raise enough money to re-launch earlier this year. The social unrest in 2020 may have opened up opportunities for investment in an AAPI and woman-owned brand.

“When it comes to us and how we came back, the investment community all of a sudden looked at their investments and they realized that they only scaled one community— white men,” said Lee.

Global investment into venture-backed startups in the alcohol sector dipped in 2020, Crunchbase data shows, but it came back strong in 2021, surpassing $1 billion for the first time towards the end of the year. Recently, incubators like Pronghorn and the Distilled Ventures Pre-Accelerator, have begun aiming to open up capital opportunities so that entrepreneurs who face institutional challenges can unlock resources too. Vervet was one of the first companies backed by the Distilled Ventures’ Pre-Accelerator, which has attracted more than 300 applications from a broad range of backgrounds. Meanwhile, Vervet has found distribution with Southern Glazer’s Wine & Spirits in California, and relaunched with ecommerce nearly country-wide.

While the pandemic may have not been directly responsible for producing new brands, it did advance existing trends. With the rise of e-commerce, spirit companies face lower access barriers compared to traditional distribution and retail. Online alcohol sales jumped 234% year-over-year in the early weeks of the pandemic, global data analytics company Nielsen Corp reported, and have continued to turn e-commerce platforms into equalizers for smaller brands who could pivot budgets into digital marketing.

Ready-to-drink cocktails was one of the segments that came out of lockdown on a high, boosted by the demand for convenience and single-serving products. Last year, premixed cocktails surpassed other spirit categories as the fastest growing category, according to a report by DISCUS. The category also experienced a 56% increase in volume, selling 13.1 million more cases than in 2020, according to the same report.

That’s been good news for the packaging and infrastructure side of the business, which has stepped up to meet the diverse needs of its customers with everything from mobile canning lines to beverage formulators and new packaging formats. LiveWire Drinks is an MHW client, created by a star bartender to take signature cocktails from other bartenders and package them in 375 ml bottles for people to enjoy at home.

“This wasn’t possible in 2005,” said Barkley. “A lot of these trends create a new environment and hotbed for growth.”

While organizations like DICUS and the American Crafts Spirits Association push for direct-to-consumer shipping privileges and other reforms to grow the industry, advisors
like Milner still think there’s room for emerging brands to hone in on their positioning, and deliver on quality and scale. The craft beer industry did that well, while innovating with frequent product drops that made consumers fanatical, he added.

“Once people fall in love, I’m not sure there’s any limitations on what a brand can do as far as expansion and growth,” he said.