Small batch spirits have become very popular over the past 20 years with the continued demand for other craft-based alcohol products. Distilleries are able to generate strong gross margins from their product sales and this is one of their key strengths. Additionally, most distilleries do have readily available access to capital given the fact that these businesses have a substantial amount of furniture, fixtures, and equipment. The gross margins for the sales of alcohol typically range anywhere from 40% to 60% depending on the type of product being produced and the way it is positioned in the market. Higher-end spirits typically carry a higher gross margin. One of the other nice things about distilleries is that they are able to keep their inventory production costs relatively low as it is relatively inexpensive to produce small batch spirits.
As it relates to weaknesses, one of the ongoing issues with the distilled spirits market is that it is highly competitive. There are numerous brands that have established. As such, any new competitor within this field is going to need to develop a very high impact marketing campaign in order to drive sales. Most distilleries typically generate a loss for their first two years of operation while they are establishing a foothold in their respective market. Additionally, one of the other weaknesses faced by the these businesses is that there is a very large amount of regulatory issues that needs to be dealt with on an ongoing basis. Improperly produced distilled spirits can cause substantial sickness to a consumer.
For opportunities, these businesses often expand by simply expanding their marketing campaigns. Once these businesses establish a strong brand name for their product line, they are typically able to remain profitable and cash flow positive at all times. Many distilleries, especially once I have established a brand name, will seek to develop a number of different types of spirits in order to. This is typically the way that most of these businesses expand.
As it relates the threats, these companies can face ongoing issues from competition as discussed above. During times of economic recession, the sales of distilled spirits typically rate remains flat. Some studies have indicated that liquor sales actually increase during times of economic recession given the stresses of people and their out consumption of alcohol increases. Beyond competitive issues, they’re really not too many major threats that are faced by distilleries.