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Published in Food/Agribusiness
Long Road Distillers LLC co-owner Jon O’Connor says manufacturers of craft spirits are struggling through the pandemic, but would benefit from state legislation granting the ability to self-distribute. Long Road Distillers LLC co-owner Jon O’Connor says manufacturers of craft spirits are struggling through the pandemic, but would benefit from state legislation granting the ability to self-distribute. COURTESY PHOTO

‘WE NEED SOME HELP:’ Michigan’s craft spirits industry seeks relief to weather pandemic, stay competitive

BY Sunday, August 30, 2020 03:40pm

When the COVID-19 pandemic hit and the supply of hand sanitizer dried up, nearly every member organization of the Michigan Craft Distillers Association rolled up their sleeves to pivot from producing spirits to making hand sanitizer.

Now, the local distillers that were quick to lend a helping hand could use some help of their own.

“I think there was definitely a lot of kudos and appreciation expressed to our industry and thank yous for stepping up to the plate to help in the time of need, but now we’re all back to trying to do what we really want to do on a daily basis, which is make booze,” said Jon O’Connor, president of the MCDA and co-owner of Long Road Distillers LLC in Grand Rapids. “We’re back to doing that, but at the same time, there is a mountain of uncertainty staring us in the face.”

Not unlike adjacent industries — craft beer and wine, restaurants and hospitality — local craft distillers have felt the crush of the COVID-19 pandemic and subsequent shutdowns. However, maneuvering an industry with heavy-handed regulation has made it tough for these businesses to find creative solutions to keep revenue flowing, which has left the $1.8 billion dollar industry shaken and stirred. 

Dire straits

In an early spring report just as COVID-19 was tightening its grip on the country, the American Craft Spirits Association painted a grim picture for the roughly 2,000 small craft distillers around the United States.

Without government stimulus, 67 percent of distilleries polled by the organization said they would be forced to close within three months; 32 percent of those respondents claimed they would only last a month or less.

The financial crunch is especially understandable for distillers that don’t distribute and rely on their own tasting rooms to reach customers. The ACSA revealed that 87 percent of craft distillery tasting rooms have closed for a period of time as a direct result of COVID-19 — 38 percent did so proactively while 47 percent of the closures were government-mandated.

A more recent study released by the Distilled Spirits Council of the United States, which examined fresh data more reflective of the marathon nature of the pandemic, didn’t offer much more reason for optimism.

The report stated craft distillers nationwide had seen a loss of 41 percent of their sales, representing more than $700 million, while 31 percent of their employees have been furloughed.

“We need some help,” O’Connor said. “We all want the industry to see the other side of this.”

Providing parity

A bit of relief for the state’s craft distillers could potentially come via a piece of legislation the MCDA helped introduce before the COVID-19 pandemic. The bill, which has not yet been scheduled for a hearing, deals with limited self-distribution.

With its status as a control state, the state of Michigan controls all sales and distribution of spirits through the Michigan Liquor Control Commission (MLCC), putting craft distillers at the mercy of a long, arduous process that the beer and wine industries are able to bypass.

The three-pronged legislation looks to grant craft distillers the ability to self-distribute, ship and deliver spirits directly to retailers and customers on a limited basis. Both the beer and wine industries already have similar privileges.

“As an industry, one of the things we continue to say is that we are not advocating to be treated differently or be given a favorable regulatory environment compared to our peer industries,” O’Connor said. “We just really want some parity.”

While beer and wine makers are able to benefit from bringing new products to market quickly, distillers find themselves wrapped up in a process that requires them to apply to the federal government, get their label approved by both the federal and state governments, wait for the state’s vote on approval and then finally be listed in the state’s liquor price book that is published once every quarter.

If these products require an aging process, it could be months, if not years, to reach the market.

“We need some additional tools to get our products to market or you’re going to see a significant amount of people in this industry no longer be able to be sustainable,” O’Connor said.

Self-distribution would be especially beneficial to the companies that don’t already distribute. Even small distillers could realistically forge relationships with retailers, restaurants and bars in their region to generate needed revenue through self-distribution.

“That’s probably the difference between them staying in business and going out of business,” O’Connor said.

Other states act

Relaxing the ban on self-distribution — at the very least during the pandemic — could be key to survival for distilleries. It’s also a step other states have taken during the unprecedented public health event.

In Virginia, one of the strictest control states in the country, the state relaxed its self-distribution regulations as the pandemic hit, allowing distilleries to fulfill orders through third-party carriers. New York, California, Oregon and Pennsylvania took similar measures. Data presented by the ASCA revealed that distillers in those states replaced most, if not all, of the money lost through tasting rooms while stimulating the greater economy through their sales.

Michigan has worked to ease the effects of the pandemic on bars, restaurants and beverage producers through measures like social districts and outdoor seating/alcohol consumption. O’Connor admitted that those measures have certainly helped, but that they are merely a Band-Aid — one that will no longer be an option as winter approaches.

Joel Bierling, owner of Comstock Park-based Bier Distillery, called the ability to self-distribute a “game-changing event” and said a hybrid of self-distribution and selling product via one of the state’s three authorized distribution agents would provide maximum benefits.

“Ideally, we would be able to self-distribute in addition to distribution through a distributor,” Bierling said. “We have strengths that they lack — product knowledge, passion — and they have strengths that we lack — distribution network. We’d never be able to properly service the far-flung parts of Michigan ourselves, but at least in our local areas, being able to hand a bottle to a liquor licensee or customer directly would greatly help our ability to sell our craft spirits.”

Cramp in cash flow

In Michigan, the state serves as the industry’s only liquor wholesaler. As such, craft distilleries get paid for sales of products by the state. Unfortunately for the cash-strapped distilleries, those payments have not arrived quickly this year.

O’Connor said that he normally gets paid in 30 to 45 days, but even before COVID-19 hit, those payments started to linger. At its worst, O’Connor said that he would see payments 50 to 60 days out.

Bierling faced similar circumstances, saying that his last payment was June 10 and the MLCC consistently took six weeks to deliver payments. Bierling did point out that the MLCC let distillers defer their payments, but he didn’t know if that was a contributing factor to the delays.

For producers, the late payments raise a red flag for a couple reasons.

The state gets paid right when a case of spirits is delivered. Furthermore, the state has seen an increase in gross liquor sales, up $68 million in the first quarter of the year. That doesn’t paint a picture of a state department struggling to scrape together cash.

MiBiz reached out to the MLCC and was provided with the following statement: “With regard to delayed payments to vendors (including craft distillers), the commission was running slightly over the customary 45-day processing time (at 50 to 51 days). This delay occurred about three weeks ago and lasted for a little over a week. This was due to staff taking one layoff day each week as required, during the 10-week Work Share program that the State of Michigan participated in. 

“The commission has promptly resumed processing vendor payments within 39 to 45 days. The Michigan Department of Treasury issues warrants on behalf of the commission within a 39 to 45 day timeframe, which is not uncommon. The commission recognizes the extraordinarily difficult time its vendors are experiencing during this pandemic and is working diligently to ensure timely payment.”

In regard to the self-distribution issue, the MLCC said it does not comment on pending legislation.

Despite the MLCC’s claims of returning to a normal timeline on payments, O’Connor reported that many of his member organizations continue to see payments that are two weeks later than usual.

“I don’t understand why it even has to be that long,” he said. “The state has the money — they collected it the day the product got delivered. My tax payments are due when they’re due and if not, I get a pretty hefty fine.”

Lead or lag?

For Richard Anderson, co-owner of Iron Fish Distillery LLC in Thompsonville in northern Manistee County, COVID-19 not only amplified the lack of parity between the spirits and craft beer industries, but it raises the larger question about whether the state of Michigan wants to elevate the industry as a nationwide leader, and if so, what steps it will take to do it.

“Whether it’s intentional or not, Michigan is making either an implicit or explicit decision about the leadership of this industry compared to other states,” said Anderson, whose distillery distributes in Michigan through Imperial Beverage and also ships to Illinois and Nebraska. “Does Michigan want to be a leader in the craft spirits industry or does it want to lag behind other states?”

“There is a combination of policy and regulations that literally influence our ability to be one of the national leading craft spirit industries,” he added. “(Self-distribution) is one that is right at the doorstep, and while I think COVID amplifies the need for parity with beer and wine for sure, why wouldn’t the state want to take steps to grow an industry that is one of the most striking examples of how a sector is able to create employment in inner cities and unbelievably remote rural communities?”

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