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Distilled Spirits Could Follow in Footsteps of Craft Beer Cluster

A very small batch of San Diego’s craft beer brewers are making early headway in the ultra-competitive market for distilled spirits, which last year racked up $23.1 billion in U.S. sales, according to industry reports.

Companies such as San Diego’s Ballast Point Brewing & Spirits and Santee’s Twisted Manzanita Ales & Spirits have recently been winning honors on the spirits-tasting awards circuit for their offerings such as whiskeys, vodkas and gins, and the products of both are featured on the shelves of several major retailers.

But there are reasons why most local craft beer brewers have yet to make the jump to the harder stuff. Those include entrenched distributor networks and customer relationships enjoyed by global spirits makers, many of them able to offer volume discounts not feasible for small craft breweries.

Another major factor is that California and other states don’t allow distilled spirits to be sold by the bottle in places where they are currently being sampled, the way in which beer and wine are routinely sold in tasting rooms.

“It’s a totally different animal than beer,” said Jeff Trevaskis, president and CEO of Twisted Manzanita, a longtime local beer-brewer that began making spirits in 2012.

His company now produces and sells about 1,000 bottles annually, with offerings like SoCal Moonshine and Rebellious Rye Whiskey. Promising markets for future growth include Canada, Nigeria, Hong Kong and China, where Twisted Manzanita has dedicated sales agents working on growing the brand globally and has already begun receiving and filling batch orders on a sporadic basis.

Building the Business

Trevaskis said locally made craft spirits have the potential in eight to 10 years to reach the same cachet as that now enjoyed by craft beers, but there are several obstacles to be surmounted.

He has joined with other California brewers, distillers and local economic development groups, including the San Diego Regional Chamber of Commerce, to support proposed state legislation that would rescind current sales laws covering distilled spirits that date back to the 1930s.

Assembly Bill 1233, recently introduced by Marc Levine, D-San Rafael, and co-authored by Brian Jones, R-Santee, would allow direct sales of up to three bottles of distilled spirits per person at a distillery. If passed, the measure would apply to spirits containing all types of fermentable ingredients, such as potatoes, sugarcane, molasses, rice and other grains.

Currently, California distilleries can only sell bottled fruit-based brandies at their onsite tasting rooms.

“California law currently just doesn’t make sense — the distilleries are allowed to have tastings on their premises but are barred from selling their product,” Jones said in a statement.

California law maintains a three-tier system mandated in part by provisions dating back to Prohibition. Distillers must sell bottled products to retailers, who in turn can sell to consumers, but distillers can’t sell bottles directly to their loyal customers.

Pioneer Spirits

Ballast Point is the region’s second-largest beer brewer and was the first local beer maker to delve into distilled spirits eight years ago. COO Yuseff Cherney said company officials also like to point out that Ballast Point was the first local beer-maker to take that plunge since Prohibition ended.

The company has recently won national awards in San Francisco and Kentucky for offerings such as its Devil’s Share Bourbon, along with flavored gins, rums and vodkas produced at its Scripps Ranch facility. Retail sales in recent years have grown significantly, though exact numbers were not immediately available.

“We’ve gone in the last couple of years from one full-time distillery employee to four full-time workers,” said Cherney, who is also Ballast Point’s head brewer and distiller. “We’re shipping out pallets now instead of just cases.”

Cherney said a change in state laws could bring comparable results for smaller local brewers who might decide to venture into craft spirits in coming years. While there is potential to open up new economic generation for the region, banking experts who deal with brewery financing note that beer-makers have several things to consider before venturing into spirits production.

Jonathan Dale, a local vice president with California Bank & Trust, said brewers with the best chance to succeed at spirits on a national basis are those like Ballast Point that have a long-established brand, sales track record and wide distribution network in the beer world.

Dale said brewers will also need to decide whether they want to offer aged whiskeys to compete with similar products sold by global players. Aged products must be placed in storage and won’t generate revenue for several years, and smaller companies will be hard-pressed to bear the carrying costs.

“The smaller brewers need to make some choices about how they want to use their space,” said Brian Mulvaney, a local senior vice president with Bank of America. “Some are more focused on how to meet current demand for their beers, rather than whether they’re going to expand into something like distilled spirits.”

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