The US Spirits Market and the Battle for ‘Craft’
The trend among US consumers to abandon large, well-established brands in favour of smaller niche brands has been well-documented and is having a profound impact on the US spirits market. Sales of micro spirits companies (MSC)—often referred to as 'craft spirits'—have seen an explosion in the number of brands in the market and are growing at mid-double-digit rates. However, while we see potential for continued growth of the sector, we continue to caution against viewing this as a replica of the craft beer phenomenon as there are various differences.
MSC challenges and opportunities vary based on sourcing model
MSC face different challenges and opportunities based on how they source their production. Those that do their own distilling (micro distillers) have greater opportunities to innovate, greater control over their own destiny and are more likely to be perceived as authentically local. But they have high investment and production costs—which lead to large pricing gaps relative to established super premium brands from established spirits companies—and long learning curves to achieve peak quality. This combination of factors holds the potential to cause a shake-out among micro distillers, similar to what the craft beer industry saw in the mid-1990s.
Many MSC are choosing to build brands by using production sources from third parties. These brands have the advantage of lower up-front investment costs and much lower cost of production, and as a result are more price competitive than brands from MSC that distil their own product and are generally seeing much faster growth rates. However, while these brands have generated the lion’s share of growth in the short-term, they need to be transparent about their sourcing model to mitigate potential consumer backlash over lack of authenticity and take measures to assure access to supply in order to permit long term growth.
Established spirits companies see growth, but greater complexity
While there have been high-profile cases of large, established brands losing ground to MSC brands in recent years, large spirits companies still appear to be driving much of the growth in the US spirits market. But the growing number of MSC brands creates a much more complex market for brand building and is forcing larger companies to re-think how they engage with consumers. There will be continued opportunities for established players to drive growth in the future, both through acquisitions and through in-house innovations (for more depth on this subject, see our report from earlier this year, Dude, Where’s My Consumer?), but it will become increasingly important for these companies to look for creative ways to establish local connections with consumers.