Here's a Whiskey Angle on the 2012 DISCUS Report

Each year at about this time, the Distilled Spirits Council of the United States (DISCUS) takes over the New York Yacht Club in Manhattan for its annual state of the industry presentation.

DISCUS is a trade association. Its members are most of the major distilled spirits companies that do business in the United States. DISCUS does those things the industry needs to do, and is allowed to do, collectively; such as lobbying and promotion, both here and in foreign markets.

The ‘news’ announced on this occasion is widely reported in the business and general media.

Here at The Chuck Cowdery Blog, we mostly care about the whiskey parts.

In the United States, Bourbon and Tennessee Whiskey (BTW) continued to be the best-selling whiskey category, outpacing other domestic whiskeys, as well as imported whiskeys by category.

BTW logged almost 17 million cases in 2012, edging out Canadian whisky at 16 million. The BTW category was up 5.2% from 2011. Sales of the two higher-priced segments of BTW, representing bottles (750ml) that sell for more than $18 at retail, were about 54% of the total.

It’s a sign of robust good health when most of your sales come from your most profitable lines.

The highest price segment, super-premiums (>$30/bottle), was up 12.4%. As good as the super-premium BTW segment looks, compare it to single malt scotch, up 13%; and Irish whiskey, up 22.5%.

Exports were another bright spot. The 2012 value of distilled spirits exports set a new record, at $1.5 billion, led by American whiskey (68% of export volume).

The top three export markets are the other three English-speakers; Canada, Australia, and the United Kingdom. The value of US spirits exports to Canada, our best customer, grew 212% last year. Most of the rest goes to the EU, starting with Germany. Japan comes in sixth, Mexico comes in ninth, but grew by 358% last year.

New trade agreements account for much of the growth.

Finally, the growth of craft distilleries in the US was cited as a trend. The number of distilled spirits plants bottling fewer than 100 thousand gallons annually more than doubled between 2010 and 2012; as did their sales volume, from 700 thousand cases to 1.2 million. That's about 1/2 of 1% of total US spirits sales.

No Matter How Poor You Are, If You Drink You Pay Taxes.

One of the biggest lies right wing extremists like to tell themselves is that poor people don't pay taxes. Instead they sponge off the noble and righteous people who do. Romney's famous 47% refers to American adults whose incomes are too low to owe federal income tax. The extremist part is taking that fact to mean 47% of Americans pay no taxes and use the federal government as a free ATM.

It's one of the right's oldest tropes, around for generations. Poor people are poor because they are lazy moochers and therefore deserve no help from the rest of us.

In addition to cutting off moochers, the right wants to reduce or eliminate taxes on businesses. If we take the tax burden off job creators, they'll use that money to create more jobs, thus more people will be employed, more people will pay taxes, fewer will need government benefits, and we'll all be able to pay a little less. How great would that be?

A lot in life depends on how you look at things. That's one way to look at things. Here's another.

Businesses don't pay taxes, they build them into the cost of doing business, as they should, and pass that expense along to their customers. That's what businesses do. That's how business works. If their customers are other businesses, they pass that tax along too until it is finally paid by us, you and me, everyone who buys goods and services. It's built into the cost of everything we buy.

I'm best qualified to tell you about one particularly excellent example of this, the federal excise tax on distilled spirits such as bourbon whiskey, aka the FET. This is not intended as a defense of taxes, the FET or any other, or of tax policy, either current or proposed. It is a defense of taxpayers.

All of them.

There is virtually no adult American who pays no taxes.

Included in the 47% of adult Americans who do not pay federal income tax are the poor, but also many low income working Americans, most retirees, most college students, and most veterans. Let's say you are one of those people and you like your Jim Beam Kentucky Straight Bourbon Whiskey. Here in the Chicago area, you will pay about $26 for a 1.75 L bottle of Jim, including the taxes that are added on at the register. Of that, about $4 is paid to the United States Treasury.

Congratulations, Jim Beam customer, you are a federal taxpayer.

That $4 isn't all of the taxes you pay, just the federal ones. State, local, and indirect taxes add another $10. In all, tax is about 54% of the retail cost of a typical bottle of distilled spirits. So of that $26, $14 is tax revenue, and $12 is split among the producer, distributor, and retailer. (As calculated by DISCUS, the distilled spirits industry trade association.)

Distillers and other businesses collect the taxes and remit them to the government, but they don't pay the taxes. You do, I do, whenever we purchase our favorite libation.

Because poor people spend all of their income, and spend most of it on taxed goods and services, they pay a higher percentage of their income in taxes than any other group. That's true whether or not they spend some of their money on alcohol, but if they do, they're paying even more tax. Alcoholic beverages are among the most heavily-taxed consumer products on the market.

The federal government first imposed the FET in 1791. It was the first federal tax on internal economic activity. All previous federal revenue came from taxes on international trade. Widely hated, it was the proximate cause of the Whiskey Rebellion, the first time the federal government used military force against American citizens.

In his 2006 book, The Whiskey Rebellion, William Hogeland argues convincingly that the FET was engineered by Alexander Hamilton, the Treasury Secretary, to favor large distillers over small ones, in order to make collecting the tax easier, and because Hamilton believed in general that a few big businesses were better for the economy than a lot of little ones. As the American polis began to form itself into two political parties, this became one of the major battle lines, and the FET became a useful symbol for Thomas Jefferson's Democratic Republicans against Hamilton's Federalists.

As president, Jefferson abolished the tax, so there was no FET between 1802 and 1814. We are currently celebrating the 200th anniversary of that tax-free period. Jefferson's successor, James Madison, reimposed it in 1814 but his successor, James Monroe, abolished it again. As a young man, Monroe had worked in a distillery and understood business better than his predecessors.

What followed was a long, 44-year period with no FET. In 1862 it was brought back to fund the Civil War, and we've had it ever since. In 1985, during the presidential administration of Ronald Reagan, it was increased to $13.50 per proof gallon, where it remains. A 'proof gallon' is one gallon of 100 proof spirits (50% alcohol by volume).

Although the FET hasn't gone up in 27 years, other taxes on alcohol have and as a 'vice,' alcohol is always a convenient target for politicians.

While producers collect and remit the FET, it only hurts their business inasmuch as higher prices affect sales. Would Jim Beam sell more 1.75 L bottles of bourbon if they cost us $12 instead of $26?

If alcohol taxes go up and so do prices, who suffers? I do, since it costs me more to get my drink on, but if I and all of my fellow moochers buy less alcohol, then it's mostly the people who make it and sell it to us who suffer, and most of them are members of the moocher class too. The bottling line at Jim Beam starts to cut hours and lay people off, so do my favorite bars and liquor stores.

When Reagan raised the FET in 1985, tax revenues declined because sales did. It took several years for tax revenues to return to pre-1985 levels.

So, in a democracy, we decide what we want to pay for as a community, then we figure out how to tax ourselves to pay for it. That's how it's supposed to work. It's hard to believe the hodge-podge of taxes and taxing authorities we have now is in any sense designed to be reasonable or fair. If it can even be said to have an overall purpose, it would be simply to maximize revenue.

How do we come up with a more rational way to run our country's finances? Not villainizing half of the tax-paying population might be a good place to start.

New Distinctive Products Agreement Protects American Whiskey In Brazil.

Yesterday, United States Trade Representative (USTR) Ron Kirk and Brazilian Trade Minister Fernando Pimentel signed an agreement to officially recognize each country's native distilled spirits products. The Distilled Spirits Council called it “an historic event that is sure to contribute to further acceleration of trade in distilled spirits between the two countries.”

The signing ceremony, which took place at USTR headquarters, involved an exchange of letters detailing the process by which each country will formally recognize its counterpart's distinctive distilled spirits categories; Bourbon and Tennessee Whiskey by Brazil and Cachaça by the U.S.

“This is a historic day for exporters of Bourbon and Tennessee Whiskey to Brazil, which is a rapidly growing market for American Whiskeys,” said Distilled Spirits Council President Peter H. Cressy. He noted that U.S. whiskey exports to Brazil shot up 519% from 2001 to 2011, growing from $517,000 to $3.2 million. “Brazilians are rapidly acquiring a taste for the finest American whiskeys, and today’s agreement—when implemented—will ensure the integrity and authenticity of these world class drinks,” Cressy added.

Under the agreement, the United States government will begin its process seeking public comments regarding recognizing Cachaça as a distinctive product of Brazil. Once a final rule is issued by the Treasury Department’s Tax and Trade Bureau (TTB), formally recognizing Cachaça, Brazil will then work to complete its regulatory process within a set timeframe to officially recognize Bourbon and Tennessee Whiskey as distinctive products of the United States.

“Formal recognition for Bourbon and Tennessee Whiskey producers is critical because it will ensure that only those products produced in accordance with strict U.S. standards will be permitted for sale in the Brazilian market. We wish to thank USTR and TTB staff, in particular, for their tireless efforts over the past several years to secure this important agreement,” Cressy concluded.

So if any of you micro-distillers were planning to make domestic Cachaça, too bad. It's about to become illegal.

Bourbon And Tennessee Now Number One In U.S. Sales.

The whiskey business changes slowly and it doesn't change very much, but it does change.

Here's an example.

According to Distilled Spirits Council (DISCUS) data, the Bourbon & Tennessee segment is now number one in U.S. whiskey sales, passing Canadian whiskey for the first time in, well, a long time.

There is some apples-to-oranges here because of the way DISCUS segments the marketplace. If you compare all U.S.-made whiskey to all Canadian-made whiskey (15.7 million cases sold in 2011), the U.S. wins by a wide margin, but DISCUS reports U.S. Straights (16 million) and U.S. Blends (5.3 million) separately.

Still, the fact that American whiskey drinkers have put American Straight Whiskey on top in the U.S. is reassuring for lovers of our national spirit.

The whole whiskey category is up, but only modestly, so there are some winners and losers. In 2010, Irish Whiskey slipped past Single Malt Scotch (SMS) and widened its lead in 2011.

SMS is doing very well in the United States, thank you, growing 9.5 percent in 2011 and reaching 1.4 million cases in annual sales.

But U.S. sales of Irish Whiskey went through the roof, growing 24 percent and selling 1.7 million cases, widening the lead over SMS that it eked out last year.

This is apples-to-oranges too, since the Irish figures include both blends and singles. Compare scotch to Irish, including everything, and there is no contest.

But the point is, it's significant when the rankings change.

Despite hard financial times, the losers in 2011 were all of the value segments, especially blended scotch, which declined by 2.6 percent. American blends and Canadians also lost volume. 

That doesn't necessarily mean everybody is buying the most expensive whiskeys they can find.

What seems to have developed in a 'sweet spot.' Let's call it entry-level super-premium. Jameson, which is leading the Irish explosion, is an import and perceived as a 'better' product, but it's hardly a budget-buster. In the U.S. Straights segment, Maker's Mark is a good example as, for that matter, is perennial champ Jack Daniel's.

Another oddity; while the tables seem to say blended whiskey is in decline across the board, the booming Irish segment is mostly blends, including Jameson, and it's glaringly bucking the trend.

The answer is branding. Jameson is a strong brand and its owner, Pernod, has put a lot of marketing muscle behind it. This proves again that people don't buy types, they buy brands.

Tried It? I Made It!

Someone asked me today if I'd ever had the George Washington Distillery Limited Edition Vatted American Whiskey?

"Had it?" I said. "I made it!"

When the whole project to restore George Washington's Mount Vernon distillery began, each DISCUS member donated a full barrel of their whiskey. It was delivered with much fanfare and then left to age a little longer at Mount Vernon.

The original bottling they did from that whiskey was special bottles of each brand, which were auctioned or otherwise sold at ridiculous prices to benefit the restoration project.

After that they still had a lot of it left and some of it was getting pretty old, so they came up with this idea to mix it all together. I was on hand for that event in the summer of 2005. The plan was to empty all of the barrels into a big plastic tub, mix them together, then put them back into the barrels for another six months.

As you can imagine, getting whiskey out of a barrel is pretty easy but getting it back in is not. The only way in is through the bung hole, which is about 2.5 inches in diameter.

Joe Dangler, from A. Smith Bowman Distillery, brought a small lab pump, which was too slow. This part of the plan had not been thought through. Because we all had planes to catch we started to improvise. My innovation was cutting some plastic water bottles into scoops and funnels. We were all dipping and dumping as fast as we could (including a female DISCUS lawyer wearing a Chanel suit...what a sport!) and we were in the tub up to our elbows.

I'm sure there is part of me in every bottle.

I managed to clean up a little bit at the airport but I'm sure we all smelled like...well, you can just about imagine.

I was also there when it was bottled a few months later and that's a good story too, but for another time.

(In the picture, that's Joe Dangler on the left and Dave Pickerell on the right. Ron Call is in the background. I don't recall the woman talking to Ron.)

Bill Samuels Is Going To Russia, Czech Republic.

Bourbon industry icon Bill Samuels, president of Maker’s Mark, will be the featured speaker at two upcoming American whiskey seminars in Russia and the Czech Republic. They are July 13 in St. Petersburg and July 15 in Prague.

The St. Petersburg event will be hosted by acting U.S. Ambassador John Ordway. The Prague event will be hosted by U.S. Consul General Sheila Gwaltney. The Distilled Spirits Council of the U.S. (DISCUS) is putting them on to educate key local hospitality industry executives about the taste, style, and heritage of American whiskey while showcasing the characteristics that make American whiskey unique.

Samuels' presentation will include a tasting of assorted American-made whiskeys (not just his). Following Samuels’ presentation, guests will discover the style and sophistication of cocktails prepared with American Whiskey during a mixology demonstration by renowned local bartenders.

The events are partially supported by the U.S. Department of Agriculture.

DISCUS Offers Craft Distillers Affiliate Membership.

The Distilled Spirits Council of the United States (DISCUS) today announced a new Craft Distiller Affiliate Membership program designed to organize the growing number of small distilled spirits producers across the nation and alert them to public policy issues affecting the industry at every level of government.

In the last decade, the number of small distillers in the U.S. has grown from a few dozen to more than two hundred, making an array of products from white spirits such as vodka and gin to liqueurs, aged whiskeys and brandies.

“The rapidly growing number of craft distillers in states across the nation represents an important grassroots base for communicating substantive messages about industry modernization, our strong marketing code and the important role distillers play in the hospitality industry,” said DISCUS President Peter Cressy. “Together, we can educate public officials and pursue positive public policies that advance the interests of the hospitality industry and the jobs we create.”

The new membership group will be headed by an eleven member Advisory Council of distillers chaired by Fritz Maytag of San Francisco’s Anchor Distilling. As a leadership body, its role will be to coordinate communications with the DISCUS policy teams, and engage and activate small distillers in their respective regions.

Other members of the Advisory Council include: Scott Bush, Templeton Rye (IA); Robert Cassell, Philadelphia Distilling, (PA); Jess Graber, Stranahan’s Colorado Whiskey (CO); Ted Huber, Huber Starlight Distillery (IN); Brett Joyce, Rogue Spirits, (OR); Marko Karakasevic, Charbay Distillery (CA); Brian McKenzie, Finger Lakes Distilling (NY); Guy Rehorst, Great Lakes Distillery (WI); Jorg Rupf, St. George Spirits (CA); and Rick Wasmund, Copper Fox Distillery (VA).

“I have long believed it is critically important for distillers of all sizes to work together to highlight the important and positive role we play in our communities,” said Chairman Maytag. “With the support of DISCUS’ public policy experts, small distillers can help ensure fair and equitable treatment for distilled spirits at the federal, state and local levels.”

The new craft distiller membership will be offered to producers under 40,000 nine-liter cases annually. They will receive numerous benefits, including a compendium of State Laws and Regulations; legislative newsletters; action alerts; consultations with DISCUS legal and regulatory experts; opportunities to showcase products at DISCUS-sponsored tasting events; ability to participate in the annual gala “Spirit of Mount Vernon” event; access to the annual industry economic briefing; and ability to participate in DISPAC. DISCUS will also organize an annual Public Affairs Conference on Capitol Hill in Washington featuring briefings, Congressional visits and a reception featuring their products.

Industry Council Reports Rising Spirits Sales.

The Distilled Spirits Council (DISCUS) reported today that distilled spirits grew for the eighth straight year in 2007, with sales up 5.6 percent, to $18.2 billion, and volume up 2.4 percent, to 181.5 million cases. Despite a weakening economy, the Council predicts that growth will continue through 2008. They estimate a 4.6 percent increase in sales, to $19 billion, from 185 million cases (up 1.9 percent).

They attribute this growth to continuing interest in cocktail culture and to the “premiumization” of the entire drinks category. Both wine and spirits gained market share in 2007, at the expense of beer.

Whiskey (American, Canadian, Scotch and Irish) was the largest segment, representing 29 percent of industry sales. Whiskey sales grew 3.8 percent to $5.2 billion. The vodka segment was second, at 24 percent It grew 7.65 percent, to $4.3 billion.

The report did not break-out American-made whiskey’s share of the overall whiskey segment.

However, the Council did report on 2007 exports of spirits by U.S. makers, and most of that is American whiskey. For the first time, spirits exports topped $1 billion, a 15 percent increase over 2006.

American whiskey is now sold in more than 100 different countries. The leading markets are the United Kingdom, Canada, Germany, Australia and Japan. Key emerging markets are China, Vietnam, Brazil, Chile, Romania and Bulgaria.