Craft distilleries toast surge in sipping

The drinks are flowing, but there’s not a pint glass to be found. Highballs, snifters and shot glasses hold a variety of potent, clear, honey- and amber-colored liquids. Carbonation and foam are nonexistent.

It’s still Northern Colorado, but instead of a highly lauded microbrewery, the setting is that of a craft distillery.

Eighty years after the repeal of Prohibition, Colorado is home to 46 craft distilleries, five of which are situated along the Front Range. They produce a wide variety of spirits from honey vodka to blue-corn and rye bourbon. And more are on the way.

In a microbrewery-saturated state, Colorado’s craft distilleries trail craft breweries by about 20 years and wine by about 40, according to the American Craft Distillers Association, but they’re coming into their own.

“This isn’t just a temporary trend,” said Rob Masters, president of the Colorado Distillers Guild and head distiller at Spring44 in Loveland. “We’ve just begun to scratch the surface of exposure. There is a big target market for craft spirits.”

It’s still seeking its true identity. “Craft tends to mean you might be able to go down and shake the distiller’s hand and see what they’re doing,” said Pennfield Jensen, executive director of the ACDA. “It’s the difference of a real person versus a big factory.”

Not only is the craft-spirits industry gaining a following, but more people are ordering a dirty martini or Manhattan in place of a chardonnay or lager. As generations X and Y get older, drink-of-choice preferences have shifted in the past two decades toward both spirits and wine – but more toward spirits, based on findings from an August Gallup poll.

Those between ages 30 and 49 have moved strongly toward spirits, although beer remains the No. 1 drink in the nation.

According to the Liquor Handbook, a publication of the Norwalk, Conn.-based Beverage information Group, consumption of distilled spirits has been on the rise for 15 consecutive years and is expected to be up 3.5 percent by the end of 2013.

“Craft distilling is expanding in new markets and seeing growth in existing markets,” Masters said. “In the eight years I’ve been distilling, I haven’t seen a whole lot of failures. Everyone is doing really well, and this goes to show that there is room for more craft distilleries.”

One of the reasons craft distilleries are able to thrive is the diversity in business models, said Heather Bean, owner and ‘Still Mistress’ of Syntax Spirits in Greeley. Since 2010, Syntax has been in operation with a focus on being local.

“We are strictly a grain-to-glass operation,” she said. “We get our grain from local farmers, distill all our own alcohol in-house, including our mixers, and give back all our spent wash to farmers.” Spent wash refers to the used grains from which liquor is distilled.

Syntax currently distributes only in Colorado and Wyoming.

Spring44 in Loveland follows a different model. Ryan Jackson, production manager, said the distillery buys neutral grain alcohol from Missouri and uses that to produce its spirits. All infusions are made at the distillery, however, and once a month he makes the trip up County Road 44 to collect 2,000 gallons of water from its personal water supply at the base of East White Pine Mountain in the foothills of Western Larimer County.

“Distilling is a very passionate thing,” Jackson said. “It’s not just for the money. It’s a labor of love. We put in a lot of long, hard hours.”

Spring44 can be found in 6 states, and is being received very well on the East Coast, said Jackson.

From labeling to branding to presentation, both distilleries want to stand out, be sustainable and combine their Colorado heritage with their unique distilling style.

“Drinking has a certain classic popularity and there’s much more of a craft market now,” Bean said. “With the increase in distilleries, the question is, ‘How will you stand out?’ ”

One thing Bean and Jackson agree on – in addition to bourbon on the rocks as their drink of choice – is that taxes take a significant toll on their operations.

“The government is pretty excited about getting their tax money,” Bean said. “We’re taxed on every drop of alcohol we produce; we have to measure to within 1/10 of a proof of alcohol.”

One bottle of vodka at 40 percent alcohol by volume is taxed $2.14 at the federal level. Distilleries are taxed on alcohol content, whereas breweries and wineries are taxed by the gallon.

According to the Distilled Spirits Council of the United States, the federal excise tax burden per proof gallon for distilled spirits is $13.50. In comparison, the tax burden per proof gallon for beer and wine is $6.18 and $4.86, respectively. Federal, state and local taxes accounted for $7.83, or 54 percent, of the average $14.42 price for a typical 750-millileter bottle of 80-proof distilled spirits in the United States in 2012.

Colorado collected more than $24 million in spirit taxes based on excise taxes and license fees, with more than 10 million taxable gallons of spirits produced in 2012. The Colorado distillery industry is responsible for 130 jobs and more than $3 million in wages last year.

High taxes can make it hard for a distiller to make a profit. Bean said she aims for a 30 percent profit margin. Masters said some companies try to come closer to 40 percent or 50 percent. In order to do that, though, the price has to be right.

“For example, if my cost of one bottle of liquor is $13, I will be taxed about $3 on that,” Bean said. “By the time it gets to a liquor store, the price of the bottle will have increased to include distributor fees, retail fees and sales tax. That one bottle now costs a lot more.”

Distilleries see a break on “angel share volume,” the amount of alcohol that evaporates during a product’s aging process. Because Colorado has such a dry climate, distilleries see more evaporation of alcohol than in other states. The volume amount is measured as the product is bottled. This final amount is what gets taxed by the federal government.

One reprieve for distilleries is that, as with breweries, they can have a license to produce and sell their products in the same location. Anything bought in a liquor store has to go through a three-tier system that regulates the alcohol industry: The producer goes through a distributor who sells the product to a retail store. At each junction, the bottle is marked up so that a profit can be made.

As of September, more than 10 billion taxable gallons of spirits have been produced this year in the United States. That’s up from 8 billion in September 2012, according to the Alcohol and Tobacco Tax and Trade Bureau.

This heavy tax burden, along with strict liquor laws, makes it more difficult to start up a craft distillery than a craft brewery.

“Everything we do is scrutinized. Everything has to be closely accounted for,” said Masters. “Starting a distillery can seem unapproachable. There’s a lot of red tape to go through.”

Jensen agreed.

“It’s an economic challenge because distilled spirits – thank you, Al Capone – are highly regulated,” Jensen said. “There are a lot of hoops to jump through at the state level and code level within a community; with the TTB; there are very big concerns about fire control, wastewater management, etcetera. All those things and more can slow down the advent or starting of a distillery.”

Bean said she was able to start Syntax Spirits with about $100,000. A background in mechanical and chemical engineering served her well as she was able to build her own equipment, including the still she uses today.

“We could have spent five times that easily if we had had welders and design people,” she said. ”It can take as little as $20,000 or up to $2 million to open a distillery. It depends what the goal is. There is such a range of what people can do.”

Despite strict government, state and community regulations, the proof that craft distilling is on the rise and successful in Colorado is in the … proof.

Fort Collins will see another distillery open in early 2014. Started by two Colorado State University alumni, CopperMuse will sell two types of vodka and two rums. The only other distillery in Fort Collins, Feisty Spirits, opened in June 2012 and features whiskey and bourbon.

Events such as the Liquid Arts Festival that took place in early December work to raise awareness of the craft-distillery movement. Additionally, Denver will host DSTILL in March, a week-long event that will host American small-batch distilleries from across the nation.

“More awareness of distilleries can only help,” Bean said. “People will get more comfortable with the notion of spirits and distilleries the more they know.”

Colorado ranks fifth nationwide for its number of distilleries. Although pint glasses are still more prominent than shot glasses in Northern Colorado, craft distilleries are bringing diversity to the sipping market and making themselves known.

That merits a bourbon on-the-rocks cheers.

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