Before you open up your distillery, read on to discover the four overlooked pitfalls whiskey-making startups have to navigate:
Have a Solid Capital and Business Plan
Opening a distillery isn’t cheap and will require significant capital to get started. Around $200,000 will get you the distillery itself and the license, but you will need to have a cushion in your funding as there will be lots of trial and error before you get your recipe and branding down.
Keep in mind distilling involves aging, so you will need to have money set aside for marketing products that will not be ready to sell for 3-5 years. Experts say creating a business around any product that requires aging will entail millions of dollars, so keep this in mind before you jump in.
Banks are frequently hesitant to lend to a start-up distillery as profit margins are low, startup costs high, and there is significant risk involved. Traditional financing may be possible if you are willing to put up collateral, such as your home.
Many individuals turn to friends, family, and other, more nontraditional lending options for startup money. Involving investors means your business plan must be concrete to ensure investors that the risk is minimal.
Choose your Market and Don’t Deviate
The idea that you can create a great product and the customers will come to you is outdated.
No one can create a successful business on quality alone; you need to have a way to reach your customer base.
Not only do you need to figure out how your product is different from every other whiskey brand, but you also need to understand how to communicate that to potential customers.
Who is your target market? When you figure this out, you can mold your product around the needs of individuals in that group.
For example, if you want to target high-end whiskey drinkers, you will want to make sure your branding will entice older, more seasoned drinkers who will be willing to pay more for a “craft” brand.
If you are planning on doing business in a major city and want to appeal to locals, you will want to make sure your brand plays up its ties to the community and the location of the distillery itself.
Understand Regulations at All Levels
Alcohol production is lucrative but involves regulation at the Federal, State, and City level. Each agency acts independently, and regulations are sometimes contradictory.
Look up your State’s Distillers Guild and become an active member. You will be able to network with other distillers in the state who can give you insight into sourcing ingredients and connecting to customers. You also have the added advantage of knowing first about rules and regulation changes.
Having a lawyer who specializes in the industry on retainer to vet your business plan and help you avoid any sticky legal situations is crucial. A good lawyer will be able to warn you if startup decisions could pose future legal risks as you expand.
Most states have a three-tier system. Producers sell a product to distributors who then sell to retailers. Big time manufacturers work hard to control distributors, and maneuvering this tight hold can be challenging.
Liquor stores have the room to carry products from multiple distributors, but bars and restaurants typically only carry one or two.
It is advantageous to be picked up by a major distributor as you have a better opportunity getting into bars where your profit margins will be much more significant.
Understand your End Goal
If you want to create a brand that stands on its own, you will need to plan on not turning a significant profit for ten years. Whiskey making is about playing the long-game.
You can shorten this time slightly if you add a tasting room. A tasting room means you can sell alcohol on-site, where the markup is much better and avoid having to compete for distributors.
Ultimately, you must understand where you want to be in ten years to make decisions that will help get you there.
Be prepared to navigate high start-up costs, jump through hoops to entice distributors, and live on little to no profit for years on end. If you have a passion and are confident you can handle these challenges, go for it!