Contract Distillers: Crafting Whiskey and Returns for Investors

In the ever-evolving landscape of the whiskey industry, one term has been gaining significant attention recently: contract distilling. This practice, which involves one company producing whiskey on behalf of another, is reshaping the way distilleries operate and offering a range of benefits for established brands, newcomers and even investors.

The Evolution of Contract Distilling
Whiskey has been produced commercially in the United States since the 1700s and contract distilling is as old as the industry itself. In the early days, it was as simple as a farmer asking his neighbor with a still to make whiskey from his extra corn. Then, after Prohibition, contract distilling began to evolve into a separate business for distillers. They could augment their revenue by making barrels of whiskey for another brand using their unique mash bill and style.

Many brands started out using contract distillers out of necessity. It takes time and money to build a distillery. And even once distilling begins, whiskey typically needs to age for a minimum of two years, though most brands are aged from four to eight years. This means it can be several years before a new brand has any of their own whiskey distilled, aged and ready to bottle. Sourcing barrels of mature whiskey with the desired mash list, or recipe, from distilleries with excess capacity can help fill that gap.

With the rapid growth in the American whiskey market in recent years, we’re now seeing the rise of purpose-built contract distillers. Rather than distilling their own brand first and selling excess capacity for contract distilling, they’ve flipped the business model and are focusing on contract distilling first. There are several new distilleries, including Staghorn’s Garrard County Distilling Co., that launched recently using this approach. Garrard County is the largest, all-new independent distiller in Kentucky, with the capacity to produce up to 150,000 barrels of contract whiskey a year.

Two other large players in the space are Whiskey House of Kentucky—which bills itself as the most technologically advanced distillery in the U.S.—and Western Kentucky Distilling Co. Both offer custom contract distilling exclusively, with no brands of their own. Together with Garrard County, these new distillers are capable of producing more than 300,000 barrels a year for hundreds of separate brands, transforming the contract whiskey market in the process.

Contract distilling is also helping meet the rising demand of investors for whiskey-backed investments. Investment funds have invested millions into new-fill whiskey casks in recent years, with the goal of holding the aging barrels for several years before selling them for a profit. Some of these investments are in “branded” barrels, but the majority are produced by contract distillers.

Let’s look at some of the other growth drivers for contract distilling and the benefits for the American whiskey industry.

Diversification and Innovation
Contract distilling opens doors for brands looking to diversify their product offerings without the need for substantial investment in equipment and facilities. For established whiskey producers, this means the ability to experiment with new recipes, ingredients and aging techniques without the risk associated with building or expanding their own distillery. Similarly, as mentioned previously, startups and craft distillers can enter the market swiftly, leveraging the expertise and infrastructure of contract distillers to bring their unique creations to fruition.

Access to Expertise and Resources
Partnering with a contract distiller provides access to seasoned professionals with years of experience in the art and science of whiskey making. From master distillers to skilled blenders, these experts can offer invaluable guidance throughout the production process, ensuring that each batch meets the highest standards of quality and consistency. Moreover, contract distillers often have access to top-of-the-line equipment and resources, further enhancing the quality of the final product.

Scalability and Flexibility
One of the most significant advantages of contract distilling is its scalability. Whether a brand requires a small batch for a limited release or a large volume to meet growing demand, contract distillers can adjust production accordingly, offering the flexibility needed to adapt to market fluctuations and consumer preferences. This scalability eliminates the need for brands to invest in excess capacity, allowing them to allocate resources more efficiently and focus on other aspects of their business, such as marketing and distribution.

Cost-Effectiveness
Building and operating a distillery requires a substantial upfront investment in equipment, facilities and personnel. By outsourcing production to a contract distiller, brands can avoid these capital expenditures and allocate their financial resources more strategically. Contract distilling offers a cost-effective alternative, allowing brands to pay for production on a per-batch basis without the long-term financial commitment associated with building and maintaining their own distillery. This cost-effective model enables brands to invest in other areas of their business, such as branding, packaging and market expansion.

Market Penetration and Expansion
For brands looking to enter new markets or expand their presence globally, contract distilling offers a streamlined approach. By partnering with established distilleries in target regions, brands can leverage their local expertise and distribution networks to penetrate new markets more effectively. Moreover, contract distilling allows brands to comply with regulatory requirements specific to each market, ensuring compliance with local laws and regulations without the need for extensive research and legal expertise.

So, while not a new concept, the modern take on contract distilling is revolutionizing the whiskey industry, offering a host of benefits for brands of all sizes and whiskey investors. From diversification and innovation to access to expertise and resources, contract distilling provides a cost-effective and scalable solution for producing high-quality whiskey without the need for substantial upfront investment. As the demand for premium and craft spirits continues to rise, contract distilling is poised to play an increasingly important role in shaping the future of the whiskey market.

About Spirits Capital
Spirits Capital is a fintech company that merges technology with the alternative asset class of premium American whiskey. Spirits has built a platform that provides investors with a secure and transparent way to capitalize on the growth in value of whiskey while it matures in the barrel. In addition, Spirits has created the Distilled Barrels Financial Exchange (“DBFEX”), a cutting-edge digital platform for the global trading of aged whiskey barrels. Learn more at www.spiritscap.com.