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December 7, 2012
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Booming Bourbon Building an Even Brighter Future

Production expansions, new distillers, waves of tourists – all in a down economy – bode well for a signature Kentucky industry

By Lorie Hailey

Kentucky bourbon makes $2 billion in gross state product every year.

It’s an exciting time for Kentucky bourbon makers.

The commonwealth’s signature spirit is at new heights of popularity. Sales are up across the board, premium brands are flying off the shelf, and the industry is in its largest expansion phase since Prohibition ended. More than $225 million in capital projects have been announced or completed in the past year.

Interest in bourbon heritage is drawing thousands of visitors from all over the world to Kentucky distilleries, where they learn the history and tradition of bourbon-making – and spend a lot of money along the way.

“Bourbon has become not just a drink but a lifestyle,” said Eric Gregory, president of the Kentucky Distillers’ Association. “There’s cooking with bourbon. There are these fantastic tours you can take. There are bourbon magazines. Bourbon is everywhere, and it’s an exciting time.”

Kentucky benefits greatly from the industry, from the taxes it pays (“seven different taxes on every bottle of bourbon before it ever hits your lips,” Gregory said), to the jobs it creates, directly and indirectly. But the interest it creates in the commonwealth is quickly becoming one of the biggest feathers in its cap.

“I think being able to have the bourbon industry showcased the way it is probably is the best thing that has happened to the Kentucky tourism industry since the development of the state park system,” said Marcheta Sparrow, secretary of the Kentucky Tourism, Arts and Heritage Cabinet. “It’s a signature industry.”

Growth bringing unprecedented investment

There’s a lot of bourbon in Kentucky. Since 1999, when bourbon inventories were at a historic low, the number of barrels in stock has grown 115 percent. Right now, there are 4.9 million barrels aging in Kentucky, more than the number of people residing here (4.3 million).

In some sectors, a higher inventory is not something to celebrate, but when it comes to bourbon, inventory is a “predictor for the future that we expect strong future sales and continued growth,” Gregory said.

Forecasting future sales can be challenging, said Amy Preske, public relations and events manager at Buffalo Trace in Frankfort. Even more difficult is managing the inventory of a premium bourbon like Buffalo Trace’s Pappy Van Winkle, which ages for 15, 20 and 23 years and is currently one of the most sought-after bourbons.

“It is a tricky game to try to forecast consumer’s drinking habits more than 20 years out,” she said. “You have to remember that bourbon evaporates in the barrel at a rate of 8 to 9 percent the first year, and 2 to 3 percent every year thereafter. It’s considered a good day when a barrel of 23-year-old Pappy is dumped and gives you five gallons. Sometimes you dump them and they are completely empty.”

At Buffalo Trace, barrels are forecast through 2035, Prekse said. Every production run is planned, and adjustments are made along the way, depending on sales and yields.

The KDA tracks barrel inventories at each distillery, but does not share that information outside of the organization. None of the distilleries The Lane Report asked would share inventories or sales figures. All claimed growth, but few gave details.

The 2012 Liquor Handbook from the Beverage Information Group lists the Jack Daniel’s brand (made in Tennessee) as the top-selling bourbon in 2011. (Note: Although it meets the regulatory criteria to be classified as bourbon, Jack Daniels says it is not bourbon and markets the spirit simply as Tennessee Whiskey.) Jim Beam was second and third was Evan Williams, which is made at Heaven Hill Distilleries. Rounding out the Top 10 are Maker’s Mark, Early Times, Wild Turkey, Ten High, Old Crow, Ancient Age and Heaven Hill Bourbon.

No. 18 was Woodford Reserve, which had a 15.7 percent increase in sales over 2010. Jim Beam had two of its other bourbons in the Top 20 sellers: Red Stag by Jim Beam and Jim Beam Small Batch.

More than 4.6 million 9-liter cases of Jack Daniel’s were sold in 2011. Nearly 3.2 million cases of Jim Beam were sold, a 4.3 percent increase over 2010. Heaven Hill sold 1.3 million cases of Evan Williams, up 1.2 percent over 2010.

Maker’s Mark by far had the biggest increase of the Top 10 brands. Its sales of 1.03 million cases were up 13.2 percent in 2011.

But all of Kentucky’s 19 major distilleries have seen tremendous growth in the past year, Gregory said. That success has translated into investments into their properties and brands.

“Just in the last year, either completed or under way, there has been more than $225 million in investment in Kentucky in the bourbon industry – during a down economy. That’s the amazing thing,” he said.

Beam built American Stillhouse, a new visitors center at its Clermont, Ky., Jim Beam distillery this year, and opened its doors to the public for the first time. It also opened a state-of-the-art Global Innovation Center. The two projects cost $30 million.

Buffalo Trace in Frankfort, Ky., is the oldest continually operating distillery in the country. There has been distillation there since 1775. It even distilled bourbon during Prohibition, when a special permit was granted for Buffalo Trace to produce bourbon for “medicinal purposes.”

In November, Beam announced plans to locate its Global Business Services Center on Fourth Street in downtown Louisville, creating 60 jobs and investing $1.7 million in building materials and equipment to retrofit the office. Construction is expected to begin early next year.

Other recent developments:

• Gruppo Campari is spending $44 million on a 125,000-s.f. packaging facility at its Wild Turkey site in Lawrenceburg. Construction also has begun on a $4 million, 8,500-s.f. visitor center at Wild Turkey. In the past year, a $50 million new distillery also was constructed at Wild Turkey.

Barton 1792 Distillery in Bardstown recently purchased a 300,000-s.f. building to be used as a distribution center. The distillery also expanded its processing area with additional bottling tanks and bulk storage, and added new equipment to each line.

Four Roses opened its 5,000-s.f. visitors center and gift shop in September, part of a $2.4 million expansion of the Lawrenceburg distillery property.

• In September, Alltech opened a new $9.2 million, 200,000-s.f. distillery, the first in Lexington in more than 100 years. Already, CEO Dr. Pearse Lyons has announced a $40 million expansion of Town Branch Distillery.

• Heaven Hill Distilleries in Bardstown is building a multimillion-dollar tourist attraction in downtown Louisville called the Evan Williams Experience. Located on historic Whiskey Row, the new attraction will celebrate the legacy of Evan Williams, Kentucky’s first distiller and namesake of Heaven Hill’s flagship bourbon brand.

• In 2010, Maker’s Mark began a $110 million distillery expansion project in Loretto to increase capacity by 50 percent and double bottling capacity and warehouse storage.

Distillery developments have come with new jobs for Kentucky workers. The state’s distilleries employ more than 3,000 workers, but “spin-off” jobs at related industries, such as cooperages, bourbon transportation and tourism, employ another 6,000, according to a University of Louisville study commissioned by the KDA. The annual payroll from those 9,000 jobs is about $413 million.

“In past 10 years, while the majority of Kentucky’s industries have lost jobs, the bourbon industry has added 4 percent in jobs, we’ve invested hundreds of millions of dollars in facilities and manufacturing equipment, and had this successful tourism component,” Gregory said.

Tourism riding bourbon’s popularity

The industry began to focus on tourism in 1999, Gregory said, after several decades of market ambivalence toward bourbon. The strategy is working.

The KDA has been keeping records since 1880 and began tracking barrel inventories in the 1960s. In 1967, bourbon was booming, and there were 8 million barrels aging in Kentucky. But in the 1970s and ’80s, consumers discovered so-called neutral spirits, clear liquors such as vodka, gin, rum and tequila, and started using them in mixed drinks like daiquiris and margaritas.

“Bourbon was your father’s drink or even your grandfather’s drink, and it just wasn’t cool anymore,” Gregory said, “so it really took a nosedive.”

An artist’€™s rendering of Heaven Hill’€™s Evan Williams Experience depicts the multi-million dollar artisanal distillery that will be part of the downtown Louisville tourist attraction. It will open in September 2013.

The resurgence of bourbon began in the 1980s and ’90s, when single-barrel and small-batch bourbons picked up steam in America and around the globe.

“One great thing about this industry, it is always reinventing itself,” Gregory said. “Booker Noe with Jim Beam is a great example. He used to carry around a flask and it was barrel-strength bourbon, and somebody said, ‘Why don’t we bottle that and sell it?’ So you had Booker’s (Small Batch) come on the market and then some other single-barrel bourbons.”

As premium bourbons took off, Kentucky distillers jumped at the opportunity to ride, and perhaps extend, bourbon’s still ongoing wave of popularity.

Inspired by the success of California wine country tours and Scottish whiskey trails, KDA members joined forces and created the Kentucky Bourbon Trail in 1999 and haven’t looked back. The tour currently features Four Roses and Wild Turkey in Lawrenceburg; Heaven Hill in Bardstown; Jim Beam in Clermont; Maker’s Mark in Loretto; Woodford Reserve in Versailles; and, as of Nov. 1, Town Branch in Lexington.

In 2007, the trail began a Passport program to reward visitors who toured all of the participating distilleries with a complimentary T-shirt. That year, 189 people turned in fully stamped Passports. This year, as of Nov. 20, more than 16,000 completed trail Passports had been cashed in.

Visitors are “literally beating a path to (Kentucky distilleries’) doors,” said Larry Kass, Heaven Hill director of corporate communications.

Bourbon tourism has been so successful that a complementary tour of artisan distillers across the state was added in October. In testament to the passion of bourbon lovers, several had already completed the new Kentucky Bourbon Trail Craft Tour in its first month, according to Director Adam Johnson.

“The craft distilleries, that’s the next step in telling our story about bourbon,” Sparrow said. “People are fascinated by the story of bourbon. They also are very interested in our moonshine history, and that’s something that we have talked about for years and years. Now, with these craft distilleries, we can get a little closer to that process and really explain what happens when you distill the grain spirits.”

The auxiliary tour is likely to bring tourism dollars and growth to the seven communities where the artisan distilleries are located, and create even more buzz about bourbon making. The participants are: Barrel House, Lexington; Corsair Artisan Distillery, Bowling Green; Limestone Branch Distillery, Lebanon; MB Roland Distillery, Pembroke; Old Pogue Distillery, Maysville; Silver Trail Distillery, Hardin; and Willett Distillery, Bardstown.

Bourbon tourists come from all 50 states and several foreign countries; only 18 percent of completed Passport holders live in Kentucky. On average, tourists who visit all the distilleries spend $737 each, according to the UofL study. From 2007 to 2011, that’s an economic impact of $18.4 million.

And the Kentucky Bourbon Trail distilleries aren’t the only ones open for tours. Visits to Buffalo Trace in Frankfort, for example, are up 30 percent this year, Preske said.

Bourbon lovers are lured to Kentucky by the heritage of the United States’ only native distilled spirit, according to Sparrow. (See The History of Bourbon, at the bottom of this page.)

Pop culture lifts its glass … of bourbon

Jim Beam in Clermont, Ky., recently opened American Stillhouse, a new visitors center. The distillery is part of the Kentucky Bourbon Trail.

Bourbon’s move back into the mainstream has been slow but steady over the past 10 to 15 years. The rise of single-barrel and small-batch bourbons, a burgeoning cocktail culture and the ingenuity of bourbon distillers combined to create what Gregory calls the Bourbon Revolution.

“People are enjoying all of the old cocktails again, the Old-Fashioned, the Manhattan, the Sidecar, the Julep. Those are all very classic bourbon drinks,” he said.

Bourbon has made its way into pop culture, which has only added to its popularity.

“I’m sure (AMC network’s popular TV show) ‘Mad Men’ didn’t hurt, because they’re always drinking bourbon on there,” Gregory said. “The lead character, Don Draper, drinks an Old Fashioned, and you go to your bar and you say, ‘I want what Don Draper is drinking.’ ”

The fictional advertising man isn’t the only TV character ordering up Kentucky’s signature spirit. Bourbon makes regular appearances on television and in movies.

“The bourbon category is very hot. American straight whiskey in general is hot, which includes rye and bourbon,” Kass said. “At the upper end of the category, the very ultra-premium, super-premium end of things, there is a lot of activity. A lot of us are introducing very special, rare, limited edition, high-priced bottlings and generally selling them all out.”

The typical premium bourbon consumer is an affluent, young adult male, a very desirable demographic, he said.

Another factor driving high-end bourbon’s rise is the local foods, or slow foods, movement. Bourbon is tightly regulated and is made only with natural ingredients.

“Bourbon kind of fits very nicely with the modern trends toward things like slow food, the local foods movement, the whole interest in eating and putting things in your body that are better, high quality, well made, those types of things,” Kass said.

In the past 10 to 15 years, the distillers have done a great job marketing their products, Gregory said, using social media and customer loyalty programs, such as the Maker’s Mark Ambassadors, the Woodford Reserve Stable and the Four Roses Mellow Moments Club. Bourbon tastings at events all over the country also are helping reach new drinkers.

New products have driven interest, too. For example, Heaven Hill is trying to reach a different demographic, mainly women, with its flavored bourbons, Kass said.

Another decade of 100 percent growth

Bourbon makes $2 billion in gross state product every year, Gregory said, “and that has doubled in the past 10 years. We think it is only going to double again in the next 10 years, if not sooner.”

As the KDA and distillers look to the future, managing that growth is one of their biggest challenges.

In late 2010, KDA slowed its Bourbon Trail marketing campaign to assess its growth and allow distillers to catch up on infrastructure improvements, Gregory said. The idea was inspired, in part, by Bill Samuels, then-president of Maker’s Mark.

Maker’€™s Mark bottles are transported down an assembly line at the distillery in Loretto, Ky. The brand was the 18th best-selling bourbon last year; sales of it were up 13.2 percent.

“We were at the Alltech FEI World Equestrian Games (at the Kentucky Horse Park) and I went into the Maker’s Mark Lounge and there was Bill Samuels,” Gregory said. “He said, ‘Get over here.’ He took one of the big World Equestrian Games programs and rolled it up and started hitting me on the head. And I was like, ‘What did I do?’ and he said, ‘Slow down; we’ve got to figure out a way to get a hold of the Kentucky Bourbon Trail before it gets out of control because we don’t want visitors to have a negative experience.’”

Gregory took to heart the advice from Samuels – he is, after all, the godson of “the” Jim Beam. KDA hired a consultant who studied other successful industries and came up with ideas to continue trail growth in a responsible way, “so we’re not just herding visitors in,” Gregory said. The KDA also hired Johnson to work with trail members to make sure visitors still had an intimate experience at each distillery.

Figuring out how to handle success is a good problem to have, Gregory said, but other industry stumbling blocks, Kentucky’s annual barrel tax chief among them, require a little more work.

The barrel tax is an ad valorem levy on every barrel of product aging in Kentucky. The industry has been fighting it for nearly a century, he said. Kentucky bourbon distilling is the only alcohol manufacturing industry in the world that pays such a tax, which costs them $12 to $15 billion a year. About 60 percent of every bottle’s retail cost goes to taxes, according to the KDA.

“Our friends in Tennessee at Jack Daniels do not pay such a tax,” Gregory said. “That puts us at a competitive disadvantage in the global marketplace.”

The tax discriminates against the state’s signature bourbon industry, said Dave Adkisson, president/CEO of the Kentucky Chamber of Commerce. Earlier this year, he urged lawmakers to give serious consideration to finding a solution.

The KDA has worked with state legislators to draft bills and legislative amendments relating to the barrel tax. They have passed the Senate twice, but gotten nowhere in the House.

Barrel tax revenue is used at the state and local levels to fund education, fire departments and public safety, among other community needs. The distillers would “never want to do anything to hurt those,” Gregory said.

To avoid a hole in the budget, distillers and the KDA have come up with a plan to provide relief without doing away with the tax: Distillers would continue paying ad valorem tax on each aging barrel but get a credit toward their state corporate income taxes and be required to reinvest that amount into their Kentucky operations.

“So you’re expanding and creating jobs,” Gregory said. “It is an incentive really. It is not a handout by any means, shape or form, so it is a win-win.”

A bill is likely to be drafted for the 2013 General Assembly short session to keep the issue on lawmakers’ radar. The KDA also hopes the Governor’s Blue Ribbon Commission on Tax Reform will include the issue among its recommendations.

With the national economy struggling the past few years, another industry concern is a possible increase in federal alcohol excise taxes, Gregory said. An increase in the early ’90s was devastating.

A worker empties bourbon from aged barrels at Heaven Hill Distilleries in Bardstown, Ky.

“It took our industry 10 years to get back to the (income) numbers it had before that tax,” he said.

The KDA maintains contact with Kentucky’s congressional delegation, encouraging opposition to raising federal alcohol taxes.

On the bright side, the challenges the industry faces currently pale in comparison to the recent success and its optimism, Gregory said.

“We’re in a down economy, the worst economy the nation has seen in generations. We have an industry that is growing, that has just scratched the surface of its potential from a sales and tourism standpoint, that gets along and has broad support from elected leaders,” he said. “We couldn’t be more happy with where we are.”

Lorie Hailey is associate editor of The Lane Report. She can be reached at lorie@lanereport.com.

Fun Fact

It is a myth that bourbon can only be called bourbon if it is made in Kentucky, according to Eric Gregory, director of the Kentucky Distillers Association. The “native spirit” can be made anywhere in the U.S.

“My predecessor used to say, ‘You don’t have to make bourbon in Kentucky, but if you want to sell it, it better have Kentucky on the bottle,’” Gregory said.

Tourism Secretary Marcheta Sparrow echoes that sentiment. She and Gov. Steve Beshear joke that Kentucky makes 95 percent of the world’s bourbon and the other 5 percent is counterfeit.

So what makes it bourbon? It must be made in the U.S. from a grain mixture that is a minimum 51 percent corn, according to the federal standards issued by Congress in 1964. Only yeast and water can be added to the grain mixture, and it must be aged in new, charred-oak barrels.

The History of Bourbon

Heaven Hill Distilleries in Bardstown

What became bourbon-making began in the 1700s with the first settlers of Kentucky, who distilled corn and other grains not needed for sustenance into spirits that made them easily transportable and prevented excess production from rotting – plus it provided some welcome diversion from frontier life.

Kentucky farmers shipped their corn whiskey in oak barrels stamped Old Bourbon, then one of the state’s large original counties, down the Ohio and Mississippi rivers to New Orleans. The long trip aged the whiskey, with the charred oak giving it a distinct mellow flavor and amber color. Well received in the Louisiana port, it became known as bourbon whiskey.

Since then, generations of Kentuckians have continued the heritage and time-honored tradition of making bourbon, unchanged from the process used by their ancestors centuries before.

Source: The Kentucky Distillers’ Association

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