Threat of craft distilling boom ‘overblown’

While the craft spirits sector in the US continues its rapid growth, the threat small distillers pose to large multinationals has been “greatly exaggerated”, analysts have claimed.

The threat “craft” distillers pose to big brands has been “overblown”, a new report by Rabobank has claimed

According the Rabobank’s Spirits Quarterly report, 51 of the largest 100 spirits brands sold in US control states declined in the year to July 2015.

Sales of “craft” American whiskey and Bourbon brands grew 41.6% in 2014, versus a mere 2.8% overall growth for the big distillers.

Rabobank analysts have argued that while this has prompted discussion over the apparent “threat” craft distillers pose to large organisations, market growth has been predominantly driven by established brands.

Figures show that major distillers generated 88% of the category’s growth in 2014, and so-called “craft” suppliers contributed 12% of growth.

As such, Rabobank analysts have argued that craft players are “growing their share more by expanding the category than by stealing share” and are not currently a “meaningful threat” to large distillers.

The report cites Hendrick’s Gin, Kraken rum and New Amsterdam vodka as successful non-craft brands which “disrupted” their respective categories upon launching.

According to NABCA data, the market share of the top 17 spirits companies in the US grew from 83.95% in 2012 to 86.4% in 2014, even though the market share of the top five slipped from 52.56% to 50.65%.

‘Tier two’ threat

Rabobank therefore claims that large brands are not losing share to “craft” distillers, but instead to large “tier two” companies.

These companies are bringing new products to the market – either through new product innovations or through acquisitions – that allow them to deliver “outsized growth”, analysts claimed.

“Craft distillers are enjoying exceptional growth rates – a trend we expect will continue – but their threat to major distillers has been overblown,” said Rabobank’s senior wine and spirits industry analyst Stephen Rannekleiv.

“The top 17 largest spirits companies in the US actually gained share over the past few years.

“Craft distillers are generating excitement and helping to expand the spirits market, but it is the innovative second tier companies (by size), such as Proximo, Gallo, Brown-Forman and Luxco, that are really gaining market share.”

The report continued to say that large spirits companies can regain market share by stepping up their product innovations, or by acquiring new brands. However, such companies may need to be willing to let these new brands cannibalise some of their existing flagship labels “or else risk losing that market share to a competitor”.

Analysts also argued that craft brands create a number of benefits for large producers, by generating “excitement” around their respective categories, and creating a pool of acquisition targets.

In recent months, debate over the definition of “craft” spirits has exploded – take a look at some insightful descriptions offered by industry leaders here.