Craft distilleries wage uphill battle in Mich.

By Garret Ellison The Grand Rapids Press GRAND RAPIDS (AP) - Belly up to most Michigan bars and ask what craft beers are stocked, and you're likely to either be handed a list or given a handful of options. The same question about craft spirits is generally met with "Um ." Or, "let me check," followed by - maybe - a suggestion or two, assuming the bar stocks any. Rifino Valentine wants to change that, The Grand Rapids Press reported. The founder and owner of Valentine Distilling of Ferndale likes to say he won't rest until there is "no more Grey Goose vodka sold in Michigan." It's a boisterous and catchy claim. Unfortunately for Valentine and the expanding Michigan spirits industry, it seems far-fetched. In a beer-thirsty state, distillers and experts say the tide in Michigan alcohol production is not lifting all ships equally. "When you look us from an industry-wide perspective, micro-distilling is kind of like where the micro-brewers were 20 or 30 years ago," said Valentine. "The industry is following the same pattern, but we're just at the beginning." ------- By some estimates, the nascent spirits industry in Michigan could be worth $400 million to the state's economy once it starts firing on all cylinders. The ranks are growing at an escalating clip and owners project a sense of tempered optimism, although the market share they represent is still minuscule. "We have some loyal customers up our way," said Kent Rabish, president of Grand Traverse Distillery, which recently announced its sixth tasting room will open in Grand Rapids' Downtown Market this December. "I just need more people to try it." Around the state, in cities large and small, entrepreneurs such as Valentine and Rabish are encouraged by the tide of beer drinkers turning away from big brands like Bud Light and Coors in favor of micro-brewed beer made in their own backyard Distillers hope to cash in on shifting consumer tastes by offering a different alcohol product that matches quality with the likes of Grey Goose, Ketel One and Jack Daniels. In Grand Rapids, Long Road Distillery plans to open a bar, restaurant and manufacturing facility soon on Leonard Street NW. Next year, Gray Skies Distillery plans to rehabilitate a storage facility in the city's North Monroe industrial district. In southeastern Michigan, Two James Distillery became the first since Prohibition to start making liquor legally in Detroit when it opened last year in Corktown. In Lansing, American Fifth Spirits marked that city's first distillery upon opening this fall. Other cities or towns with successful distilleries include Holland, Three Rivers, Sparta, Chelsea and Lake Leelanau. Those are just a few of the growing number of distilleries either open or planned around Michigan. Nationally, the American Distilling Institute says there are currently about 800 operating distilleries with another 200-some under construction. Michigan's surge is widely credited to a batch of 2008 state regulatory relaxations that, among other things, dropped licensing costs and allowed small distillers to sell bottles directly to customers at tasting rooms. "We're approving more distillery licenses now than there has ever been," said Andy Deloney, chair of the Michigan Liquor Control Commission. The agency, which regulates alcohol manufacture, sale and distribution, records 37 distillery licenses approved statewide. "That's dozens more than just three, four years ago," Deloney said. ------- Although the upward trend is clear, many feel the industry outlook could improve. Michigan distillers face a confusing tangle of state and federal regulations that trace their origins to the Prohibition era, and a heavier tax burden than beer and wine. On top of that, craft liquor faces stiff competition from international conglomerates with deep pockets, which think nothing of dropping millions on advertising and marketing gimmicks such as sending attractive women into bars with discount offers. Lately, many of the "buy local" folks, a core craft spirits demographic, have glommed onto the fact certain craft distillers, including some in Michigan, have been using bulk-purchased industrial spirits to jump-start operations - a controversial move. The flap over use of rectified, or neutral-grain spirits (NGS) - over which large brands such as Tito's Vodka and Templeton Rye Whiskey are battling false advertising lawsuits - was part of the discussion about quality standards during formation of the new Michigan Craft Distillers Association. "If you are going to be part of this association, you're going to be held to a standard that you must actually produce your product and not just be a rectifier or bottler," said Valentine, president of the MCDA. "There is room for using some NGS, but your primary business has to be making your own stuff." ------- The new MCDA, roughly equivalent to the Michigan Brewers Guild, was created this year to help Michigan distillers lobby for their interests in Lansing. That need became apparent earlier this year, when liquor code revisions heavily favored the state's craft breweries without doing much to help the distilleries. The revisions came from a 2012 state Office of Regulatory Reinvention report that issued 82 formal recommendations on ways to upgrade Michigan liquor control rules. Instead of passing into law a handful of expanded sales privileges for small distillers - such as creating a license for wine and spirits festivals, for example - lawmakers choose to focus on relaxing brewery rules, leaving spirits for another day. "The brewers needed these reforms for some of them to expand," said Scott Ellis, director of the Michigan Licensed Beverage Association. "I think the next step is to look at the distilleries." Internally, Deloney said the MLCC has been looking for ways to aid distillers on the administrative end. One change just hitting the books is the addition of a Michigan-made section to the pricing booklet that bar and restaurant owners use to order liquor from one of the three state-controlled warehouses. Of the roughly 5,500 products listed in the state distribution system, several dozen of them will now bear the mark of Michigan-made. The MLCC also is phasing out the booklet's paper edition in January, which Deloney said would allow liquor manufacturers to adjust their product prices without having to notify the state three months or more in advance. ------- Bureaucratic upgrades are nice, but distillers say it's peanuts compared to the potential benefits of taxation parity with beer and wine makers. Because Michigan is a "control" state, the government sets the minimum retail price of liquor sold through the state's partially-privatized distribution system. By comparison, the price of beer and wine is determined by the market. In Michigan, warehouses called Authorized Distribution Agents (ADAs) handle the mechanics of distribution while the state buys the booze, authorizes distribution, and collects taxes - including a 65 percent markup of the wholesale price. The complicated process traces its roots to post-Prohibition and the three-tiered system developed by John. D. Rockefeller in the 1930s. It represents significant tax revenues for control states like Michigan, but is a heavy burden on producers. "You're seeing people exporting to other states because they don't have that markup," said Kris Berglund, a Michigan State University professor who runs the school's Artisan Distilling Program, which produces Red Cedar Spirits. "People will sell in Illinois and Indiana because of that," he said. "Others just bite the bullet and take their chances." At Grand Traverse Distillery, Rabish said a 750-milliliter bottle of his True North Vodka, which retails for $29.99, is sold to the state for $15.97. The state takes $14.02 out of the shelf price, giving between 12 and 14 percent of that to the retailer. Out of his $15.97, Rabish pays more than $2 per bottle in federal tax, plus other distribution fees and commissions. Operation and production costs further crimp profits. Rabish said he makes the most profit on bottles shipped overseas to Japan, Germany and Sweden, where there are no taxes on consumption. Valentine Distilling also exports, selling in seven U.S. states and several countries in Europe. "All this rhetoric and talk about being pro-business and especially pro-Michigan business - at this point with distilleries, it's exactly that: Just talk," Valentine said. "Over the next couple of years, the Michigan Legislature really has to look at classifying a local small distiller at a different tax rate than Bacardi International." ------- The battle for Michigan liquor, though, is ultimately won at the cash register. On the restaurant and bar side, getting bartenders to push craft spirits is hard. With little incentive to adjust, most pour brands they know and trained on. "There's a lot more risk from the standpoint of the bar owner to try something that might not be well known," said Christopher Baker, a Southfield Varnum firm attorney who specializes in beverage law. "Because the price is fixed, if you can't sell that bottle, you're going to be stuck with the product." On the retail side, some craft bottles compete with the big brands - Valentine prices his vodka $2 under Grey Goose, for example. But economies of scale dictate that aged and labor intensive liquors like whiskey and bourbon will cost more from the little guy. To overcome the brand loyalty hump, distillers rely on tasting rooms. State law allows an unlimited number of tasting rooms where a distillery can stock product and let customers try a single 1-ounce sample in a shot glass, a cocktail or a mixed drink. If the customer likes their sample, a distiller like Rabish hopes to sell them a fifth or pint of his Old George Rye Whiskey at $54 or $32 a bottle, respectively. In addition to the tasting room Rabish is opening in Grand Rapids, he operates several others around the Traverse City area and one in Frankenmuth. The expansion goal, he said, is one or two more per year. "I can't advertise my way into people's hearts. I just can't," he said. "Most people don't want to spent $30 to $40 on something they haven't tried." The physical presence makes a big difference, say industry advocates. "What counts is that gift shop - where people can come in, have a taste and you sell them a case," said Bill Owens, president of the American Distilling Institute. "They go home and become a brand ambassador who visited this cool place." Hopefully, says Rabish, those customers go back to their neighborhood store and ask the owner to begin stocking Grand Traverse Distillery. In an industry operating at thin margins in a high-tax state, the word-of-mouth advertising among a primed populace is enough of a lifeline for now. "For me, that's the only reason we're still in business," he said. Published: Tue, Dec 09, 2014