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spirits

Distilled spirits marked their ninth straight year of record sales in 2018. 

Distilled spirits continue to take a bite out of beer and wine in the American drinking market. In fact, 2018 marked the ninth straight year of record sales and volumes, increasing to $27.5 billion of supplier sales — or 37.4 percent of the total alcoholic beverage market.

That’s good news for business, according to David Ozgo, the senior vice president for economic and strategic analysis at the Distilled Spirits Council of the United States, the national trade association for producers and marketers of distilled spirits.

“Over the last three or four years, in volume terms, we’ve gotten into a consistent growth pattern of 2 percentage points,” Ozgo said in a phone interview. “The 5.1 percent increase in revenue means that we’ve grown revenues by over a billion dollars.”

And yet, even with distilled spirits continuing to make inroads against beer and wine, Ozgo says there remains cause for concern, as excise and “sin taxes” imposed by various states are not only increasing the per-bottle cost to consumers, but also endangering many jobs.

“Like it or not, whenever a political party thinks they need new revenue, they try to tax distilled spirits,” Ozgo said. “When you tax distilled spirits, you’re really just taxing the hospitality industry. And, ultimately, these taxes cost jobs.

“Even though the economy is doing fairly well right now, you never want to [levy] a tax and cost somebody their job.”

Furthermore, such taxes typically function as a moral judgment on personal behavior: Rather than stopping “problem drinkers” from indulging, the levies slow buying across the board, resulting in less taxes to even collect, officials said.

“You’re not doing anything from a public health standpoint to curb abusive drinking,” Ozgo said.

“But when you really lay out the facts for a state legislator, they’re usually pretty receptive to the fact that these taxes are going to cost people their jobs [and] they’re usually pretty willing to back off.”

Sometimes, but not always. This year marks the centennial of the Volstead Act, which forbade alcohol sales in the United States starting Jan. 1, 1920. Even after its repeal at the federal level in 1933, state-level laws prohibiting distillation were on the books into the 21st century. Nebraska changed things only in 2007; Alabama now allows distilling but forbids its producers from shipping out of state without the government’s approval.

And blue laws remain on the books as well, and not just in the South. Liquor stores in Massachusetts still have reduced Sunday hours — a holdover of Puritan influence.

“There are still a number of states where you can’t buy spirits through a package store on Sundays — Texas being one of them,” Ozgo said, adding the Distilled Spirits Council has introduced legislation in the Lone Star State to change that. They are also working on a similar bill in West Virginia. (Since 2002, the council says it has helped pass Sunday sales legislation increasing access to some 86 million American customers.)

Other states, such as Virginia, can sell alcohol on Sundays, but they are known as “control states,” meaning non-beer and non-wine items must be purchased at state-licensed liquor stores seven days a week. Although Virginia has approximately 7,000 outlets for beer and wine, Ozgo estimates there are perhaps just 350 outlets in the Old Dominion where spirits can be purchased — all of them government-run.

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“We’re trying to convince the Virginia ABC and the legislature that you need to have more access,” Ozgo said, adding that because the state’s beverage control agency acts as both wholesaler and retailer, “it’s in their best interest to increase access and maybe win back some of the sales they lose from [neighboring] Washington, D.C., and Maryland.”

The council is advocating that Virginia open “agency stores,” which are privately run businesses essentially acting as agents of the state. The gamble would be taken by private industry, not the government, thus undercutting any arguments that having extra hours of access would cost the state in the end.

Ozgo said that a major player in the continued growth of spirits sales has been in the “high end super premium products.” This means more consumers are looking up past the bottom shelf and are willing to spend more on a bottle.

The growth in consumption of higher-end spirits isn’t coming from the older demographic of seasoned drinkers, but rather from the up-and-coming millennial market. As in all consumer products, the key may be branding: Ozgo said these younger consumers are willing to spend more for a product with “a good backstory.”

“If there’s one thing that we really know about the millennials, it’s that they don’t buy things like a lot of people did in previous generations; they like to buy experiences,” Ozgo said. “They’re willing to pay a little bit more for them when they feel they’re getting quality. And spirit cocktails are really ideally suited for millennial buying patterns.”

There are more drinkers and more drivers than ever before, but data provided by the council shows that underage drinking is at historic lows. Their 2018 report included information from the Department of Transportation that alcohol-impaired driving fatalities “as a percent of total vehicle traffic fatalities” is at its lowest point since 1982.

At the federal level, the council is backing the Craft Beverage Modernization and Tax Reform Act of 2019 (S.362/H.R.1175), a bipartisan measure that would maintain excise tax relief across the entire alcohol beverage sector — initially passed in 2017 — while also making the tax structure fairer for brewers, distillers and winemakers. However, the two-year Federal Excise Tax cut on distilled spirits will expire Dec. 31 unless it is renewed by Congress, at which point American distillers could face a 400% tax increase, the council estimates.

Furthermore, the state-by-state victories against sin and excise taxes have been fruitful, but nobody wins them all, Ozgo said. The council reports that retaliatory tariffs on exports of American whiskey are harming the bottom line for many of the smaller distillers anxious to get their products to the European market to compete with scotch and Japanese whiskeys.

“Every year we have tax battles, and that’s just the nature of the beast,” Ozgo said. “[Our] goals revolve around market access. We like to try and at least have the same access to the marketplace that beer and wine do.”

At the same time, “consumer sampling laws” passed around the country — with the council’s push — allow for consumers to taste products before they buy and further stoke the trend toward “premiumization,” the trend toward higher-end products.

“When you talk to a bartender today, they’re probably more knowledgeable than they ever have been,” Ozgo said. “I like to say that these men and women are part engineer and part artist.

“We’re in the age of the bespoke cocktail,” he said, calling it a “second golden age.”

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