Fermentation and human civilization have coexisted since the beginning of history. Right up there with fire, the ability to make alcoholic beverages was largely considered one of the gods’ best gifts to humankind. Because of alcohol’s history of popularity, it is easy to assume that it must be one of the most profitable businesses on the planet.
But craft products like small-batch spirits and family-owned wineries face huge startup and overhead costs in the form of equipment; production facility real estate; and, in some cases, years before they can sell a product like aged whiskey or wine. Once the product can finally be sold, governments at all levels are quick to take their cuts. It turns out money doesn’t grow freely on the liquor tree.
On the upside, Jeff Lindsay-Thorsen of WT Vintners points out that the booming tech industry means an influx of new consumers with cash to spare. Restaurant openings are happening at a lightning pace, especially on the Eastside, creating new opportunities for breweries, wineries, and distilleries to connect with potential customers.
We asked local craft beverage makers to distill the process of turning grapes into gold and reveal what it takes to operate an alcohol-based business.
Many brewers and winemakers start out in the proverbial garage, but when the business gets serious, production space becomes a must. Some type of warehouse facility is the norm. Fermentation tanks, barrel racks, and stills have both lofty heights and large footprints. Once the product is made, there also needs to be a place to store wine and whiskey while it ages.
It’s helpful to have a clear idea of production goals before choosing a site. Kempton Bushnell, owner of Bushnell Brewing in Redmond, said it didn’t take long to realize he had underestimated how much beer would be produced. The three-barrel (one barrel equals 31 gallons) brewery opened in 2014, and he quickly discovered it was undersized.
“We have learned a ton since we opened,” said Bushnell. “First of all, you will never have enough beer. Brew as much as you can, and you’ll still wish you had more.”
Just two years later, Bushnell purchased 5 acres in Redmond Ridge and has been transforming a barn on the property into a 10-barrel brewhouse. Bushnell estimated the total cost of the new project will be between $200,000 and $250,000.
Bushnell deviated from a standard brewery/tap-house model by incorporating food service from the beginning. As a restaurant owner, he went into business paying retail costs, which are significantly higher per square foot than the light industrial spaces generally preferred by the brewing industry.
Space in Woodinville’s Warehouse District, where dozens of wineries base production, averages about $15 per square foot, with the average size for a production facility measuring more than 2,500 square feet. Eighty-three of Woodinville’s 118 wineries have production onsite, but the remainder are tasting room outposts of wineries based either east of the Cascades or even in the Willamette Valley in Oregon. Tasting room spaces average 1,500 square feet and cost between $30 to $35 per square foot.
Orlin Sorensen, co-owner of Woodinville Whiskey Company (the largest distillery in the state), said most distilleries lease space from a multi-tenant industrial building and spend somewhere between $1 to $1.50 per square foot. He estimates that distilling requires a minimum of 2,500 square feet to operate, especially for whiskey, since it requires space for aging. Woodinville Whiskey is somewhat unique in that it operates out of an 8,000-square-foot stand-alone structure with an aging warehouse that is three times that size. But it can be done on a smaller scale, according to Erik Liedholm at Wildwood Spirits in Bothell. His distillery produces small lots of vodka, gin, and bourbon from a 1,200-square-foot production facility underneath Beardslee Public House.
The financial outlay for equipment can be significant. Some wineries opt to pay for custom crush services, which allow them to pay a fee to have their grapes crushed, destemmed, and a number of other possibilities by a commercial operation, rather than purchase their own equipment. Others share big-ticket items like forklifts or destemmers with nearby neighbors, but many end up purchasing their own equipment since everyone deals with harvest at the same time of year. Despite the fact that Wildwood Spirits is a boutique distillery, Liedholm said it took about $400,000 to invest in the equipment, the shiniest of which includes two copper pot stills (150 and 450 liters) and two eight-plate column stills.
Since most people shy away from having a beverage poured directly into their cupped hands, these tasty liquids require a container. Jason Spears of Locust Cider said that during his first year, he tried a number of different packaging formats by analyzing sales trends at retail spaces, environmentally friendly considerations, and shipping costs. He finally committed to cans, purchasing in-house canning equipment. “We like cans because they’re extremely recyclable, energy-efficient, and stack tightly so shipping is easier,” Spears said.
The Time Factor
It may sound clichéd, but time really is money. During the time it takes to manufacture an alcohol-based beverage, there is no money coming in. Conversely, the longer certain products are aged (red wine, whiskey), the more money they can potentially generate in sales.
Beer isn’t generally aged and therefore has the quickest return on investment. Ale-style beers take around 18 days from start to finish; however, lagers such as Kirkland-based Chainline Brewing Company’s Polaris Pilsner can take 35 to 40 days to mature, according to Chainline’s Scott Holm. Cider can go from apple to can in a quick three weeks, but Locust’s Spears said some aged ciders can take up to a year. Wine ranges from six months to three years before it is ready for the consumer, with reds taking longer than white varietals due to extended time in barrel. Some winemakers choose to hold their wines back even longer before releasing them to the public, allowing them to bottle age to improve flavor and structure.
Jeff Otis of Matthews Winery points out that wineries starting from scratch need three years’ worth of cash up front just for the product before any of those costs can be recouped by revenue. “It takes careful planning, and incredible budgeting, to run a profitable wine operation,” said Otis.
Some spirits like vodka can be made in a week, according to Woodinville Whiskey’s Sorensen, but whiskey takes years to age in barrel. When his company started in 2010, it produced vodka and unaged whiskey with a DYI aging kit to sell immediately, as well as the flagship product — a five-year straight American bourbon — that was put in barrel, aged, and finally released in 2015. Now that the company has a continuous line of aged products, it sells five-year bourbon and rye whiskies exclusively. At Wildwood Spirits, Liedholm began with vodka and gin — though they are far from “filler” spirits, having won numerous awards. He also distilled a bourbon and just released it in early 2018. Liedholm calls the corresponding jump in sales “The Whiskey Effect.”
Sales and Expansion
Without a sale, beverage production is just a very expensive hobby. Everyone has a slightly different approach to sales, but it is usually some combination of direct-to-consumer (tasting/tap room sales, wine club memberships) and distribution (retail outlets, restaurants). Direct sales are the most profitable because they cut out the middleman fees charged by distributors (which can be a 60 percent cut), but they have a smaller reach and are reliant on the vigilant efforts of the in-house employees.
Chris Sparkman of Sparkman Cellars notes that many people get excited about the prospect of making wine. “Making wine is great, but selling wine is a tough job,” he said. “If you can’t sell wine, you probably shouldn’t get into the wine business.”
Sparkman said direct sales are key to staying alive in the business, but he thinks it is smart to diversify revenue centers to increase the number of places to sell. And that generally means working with a distributor. With upwards of 500,000 labels out there in the wine marketplace, it takes distributor connections to break into a tough market like New York City, for example. It often requires special pricing for high-end restaurants, because “if you want to become the shiniest,” you must deliver value they can’t get elsewhere.
Lindsay-Thorsen agrees that direct sales are crucial to success since distribution sales, while a key component, strip away most of the profits. “Our sales mix is about 60 percent direct and 40 percent via wholesale channels. At 80 percent direct, we would have a very healthy business.”
Tourism accounts for a large number of sales in Woodinville, with more than 1.7 million visitors in 2017 (800,000 attributed to the wine industry). According to Woodinville Wine Country Executive Director Sandra Lee, tasting rooms are reporting a quarterly sales increase of 25 percent.
While Bushnell Craft Brewing may be expanding locally, Woodinville Whiskey Company and Locust Cider are taking the show on the road. Following its acquisition by Moët Hennessy North America, Woodinville Whiskey announced plans to expand distribution into California and Oregon. Locust Cider has seen such a great response to its ciders from the Texas market, it is opening a production facility near Fort Worth in July.
“We do well selling wholesale in Texas. Having a production facility there saves us money in freight and reduces our carbon footprint,” said Spears.
Taxes and Fees and Paperwork
Aside from the many challenges facing small business owners, the alcohol industry has layers of additional hurdles due to regulations, licenses, taxes, and reporting that must be completed at state and federal levels.
“Beyond basic federal regulations, every state regulates alcohol autonomously, and many continue to operate under largely Prohibition-era laws,” said Lindsay-Thorsen of WT Vintners. Some states require monthly reports on every drop sold, which he said leads to a mountain of paperwork.
“Making sure that all of the overlapping requirements are met for any given agency can be difficult,” said Liedholm. Everyone seems to agree on this point, and all reiterate the importance of maintaining accurate compliance as crucial to this business, though the administration costs can be staggering, according to Lindsay-Thorsen. While recognizing states’ rights to regulate business practices and collect taxes, Sparkman said, it would be nice if there were more coordination between the states.
Some of the laws make very little sense, such as a brewery can sell Spears’ cider in its tap rooms, but Locust Cider can’t add beer taps at its tasting room without a restaurant permit because cider is technically considered an apple wine. Spears said both alcohol content and the amount of carbonation in his cider are limited by taxation laws.
Liedholm said excise taxes play a massive role in Wildwood’s business, though on a federal level they were recently reduced for distilleries producing less than 100,000 proof gallons. Liedholm noted, “The sales tax for spirits in Washington are the highest in the country.”