With craft distilling on the rise, some are cashing in without even making their own product.

By Pat Evans and Jesse O’Brien for the Grand Rapids Business Journal

The story behind a bottle of spirits sitting on the shelf might be murkier than its contents.

Look closely at that bottle and the label can be confusing — and misleading.

There are a variety of descriptions that can be slapped on a label, including, “Distilled in,” “Bottled In,” “Manufactured In,” “Produced In,” “Aged In” and any combination of those.

Just because a label reads “Bottled in Michigan” does not mean the spirits were made in Michigan, said Kent Rabish, owner of Grand Traverse Distillery in Traverse City. If it reads anything other than “distilled,” at least in whiskey, it wasn’t made by the company.

Rabish said the distilling industry is mostly split in two camps, with producers and merchant producers.

Producers, like Grand Traverse Distillery and Long Road Distillers, are involved with nearly the entire process of distilling, from grain to bottle. Merchant producers purchase their spirits from a larger distillery, often in bulk quantities and sell it under their own label.

This shouldn’t be a problem, Rabish said, unless the “craft” distiller is intentionally deceiving the consumer. In some cases, he said, distillers are buying their spirits from industrial factories that churn out whiskey, and then sell it under a “craft” label.

“I think that’s kind of the tragedy of non-distillers,” Rabish said. “They’re clogging the shelves. It looks like craft, like they bring raw grain in, like they have product they’re making. (Craft) costs more, but it’s a better product.

“I try to point out to people, why do most vodkas taste alike? Because most are made by the same handful of companies.”

Rabish anticipates that soon enough, consumers will begin to notice the difference in taste, and the divide between distillers and merchant producers will become clearer.

“It’s getting out there and I do think the customers of craft spirits will start hearing rumblings and start hearing more and more about who’s making it and who are the merchant distillers,” Rabish said. “There’s no reason you can’t set up a company and be a merchant distiller, you’ve just got to be straightforward with what you’re doing.

“And I think over time it’s going to pan out. I think long term, the ones who are going to succeed in this industry are the ones who are honest about their product.”

There is some gray area as producers are often limited by the type of still they have and might only be able to produce a whiskey or vodka or gin, and would like to package and sell the others, said Jon O’Connor, co-owner of Long Road.

“There are layers. There are legit distillers making all their own whiskies but they buy vodka,” O’Connor said. “At least they’re trying to make some stuff — that’s good.”

Still, many distilleries opening up across the country perform zero distillations because the rebranding of already distilled spirits makes financial sense as starting a distillery is a capital-intensive business.

A distiller hoping to enter the market and create an authentic product with an authentic brand would first need to spend approximately $1 million on necessary equipment, thousands of pounds of grain, labor and utility costs to run a still three times, mash for eight hours and hand bottle and label the finished product. Distillers hoping to sell authentic aged whiskey must sit on inventory for years before it’s ready to sell.

“We’re not playing the short game; it’s capital intensive,” O’Connor said. “That’s why people take the short cut. To get whiskey takes a while. To make vodka is not cheap.”

Rabish said some new distillers might choose to buy their whiskey from an industrial manufacturer, with the intention of selling their own whiskey after it’s been aged. In theory, a distiller could build its brand this way, selling bottled whiskey until it is ready to bring its own aged whiskey to the market. However, that’s not always the case.

“There’s a number of brands out there that have been on the market for four or five years and still not selling their own whiskey,” Rabish said. “They’re selling product, they’re making a profit, but I think five years from now, customers will figure it out and it’ll catch up to them.”

That’s where “clogging the shelves” comes into play. Nondistillers are selling bulk-produced spirits under the guise of being handcrafted at a significant advantage, due to the large disparity in manufacturing costs.

A $14 bottle of “craft” vodka on a liquor store shelf is relatively impossible, O’Connor said.

“You can’t do it without buying vodka for $1.50 a gallon,” he said.

Antiquated state liquor laws have a big effect on the end shelf price, said Kyle Van Strien, O’Connor’s partner at Long Road.

At the federal level, producers are taxed by gallons produced. So small distilleries like Long Road and larger ones such as Smirnoff are taxed at the same rate based on how much they produce. Michigan, however, taxes based on how much a distiller can sell its product to the state, creating a huge disadvantage for smaller producers.

“For us, a bottle of vodka, maybe we’re paying more than $8 in state taxes,” Van Strien said. “Popov pays about $2.50 for the same quantity of vodka because it’s cheap and they produce on such a (large) scale that they can.”

The mass-produced quantity is where it becomes an issue as some “craft” distillers can buy from those massive producers and bottle it and label it as their own and sell it for a “craft” markup of $30 or more a bottle.

“It costs eight to 10 times more to start with grain,” O’Connor said. “You can buy a gallon of high proof vodka for two bucks a gallon, and the margins are exceptional if you can throw a craft brand on it and sell it for $30 bucks.”

Several major brands have been caught in the transparency issue, including Tito’s Handmade Vodka and Templeton Rye Whiskey.

In 2014, following an article in Forbes magazine detailing the process of Tito’s handmade process, several lawyers sued Tito’s over that key word in the name: “handmade.” While Tito’s has an elaborate story, the reality is the vodka starts as a neutral grain spirit shipped from a factory in Iowa and redistilled as Tito’s vodka.

Judges in various courts have been torn in the decision on Tito’s, including in New York and California where judges ruled consumers can be confused by the term, while in Florida the judge dismissed five of six charges.

Templeton settled three class action lawsuits last year in cases questioning the whiskey’s “Made in Iowa” claim, as the whiskey is really made by a company in Lawrenceburg, Indiana. Templeton also had produced a branding story suggesting it was using a pre-Prohibition recipe for “small batch rye whiskey.”

Both Tito’s and Templeton have turned into national brands, with similar stories happening at a more local level, and it doesn’t help the distillers trying to build an authentic brand from scratch, Van Strien said.

“It’s not bad whiskey or vodka,” O’Connor added. “Everyone picks the way they do business. For us, the authenticity thing has been so paramount to what we want to do. Do you want to lie to people to make a fast buck? (If) that’s your business model, go ahead.

“But I don’t want to be compared to someone else because I’ve chosen to do something in an authentic manner.”

Full story available here.