Beyond barrels & bottles: A Spirited Guide for On Farm Distilling Virginia FAIRS Foundation for Agriculture Innovation & Rural Sustainability Prepared By: Matson Consulting January 2015 AGRIBUSINESS SOLUTIONS Prototypical Farm Distillery Study INTRODUCTION Matson Consulting was hired by the Virginia Foundation for Agriculture Innovation & Rural Sustainability (VA FAIRS) to conduct a study that provides an in-depth analysis of the possibility of establishing a prototypical micro-distillery (referred to as “the distillery”) in Virginia. Through analysis of the current spirits industry and examination of existing businesses, the study presents a prototypical micro-distillery comprised of a broad range of industry factors and components. This document presents basic direction and thought processes that can better increase chances of success when starting a micro-distillery. Using a study format to assess the components affecting the feasibility of a distillery allows an objective exploration of the business venture and provides valuable lessons for those interested in such a venture. The goal of the study is to create a document that is as adaptable to as many similar ventures as possible, and every attempt was made to be as realistic as possible while still permitting ease of interpretation and application. While there are a wide variety of distillery businesses in existence today, they share similar costs, no matter the unique aspects of individual entities. This study has been organized into three main sections: General Business & Industry Information, Thinking Through Your Business, and Distillery Financial Study & Scenario Analysis. The United States is in the midst of a small-distillery revolution as evidenced in the increasing number of entrepreneurs and consumers becoming involved in the alcohol industry. According to a 2013 Annual Report by the Virginia Department of Alcoholic Beverage Control (VABC), “Craft distillers are popping up across the country, and Virginia is no exception.” Unlike farm-based wineries, there is no specific licensure for “craft distillers” or “farm distilleries.” The VABC lists two divisions under the distillery license category based on the volume of production; distilleries are either categorized as producing 5,000 gallons or less annually or more than 5,000 gallons annually. A newsletter published by the VABC1 states that of the 17 licensed distilleries in the state, six operate under an unlimited license that allows them to produce more than 5,000 gallons annually. Of the total, ten self-identify as “craft” or “artisan” distilleries. The 2013 VABC Annual Report also highlights two legislative changes that seek to promote these entities. • House Bill 2300 allows exceptions for distilleries in cross-ownership of manufacturing and retailing establishments. Wineries and breweries have similar exemptions, and the bill adds the ability of distilleries to participate as well. The VABC currently has contracts with several Virginia distillers that allow them to operate an on-site ABC store. • Senate Bill 1235 allows distilleries operating an on-site ABC store to charge for tasting events on the premises, when previously these tastings had to be conducted at no charge. 1 “Craft Distilleries on the Rise.” (Spring 2013). Licensee. Virginia Department of Alcoholic Beverage Control. Matson Consulting II January 2015 Prototypical Farm Distillery Study The Code of Virginia § 4.1-119 “Operation of government stores” states that alcoholic beverages are to be sold by employees of the Board, “except that the Board may appoint the holder of a distiller's license or its officers and employees as agents of the Board for the sale of spirits, manufactured by or for, or blended by such licensee on the licensed premises, at government stores established by the Board on the distiller's licensed premises” subject to the following five requirements: • At least 51 percent of the agricultural products used by the distillery for the manufacturing of the spirits are grown on a farm or land in Virginia leased by the licensee, and no more than 25 percent of the agricultural products are grown or produced outside of Virginia. • The licensee is an organized nonprofit organization possessing real property, together with improvements that are significant in American history, under a charter to preserve such property, and which organization accepts no federal, state, or local funds. • The licensee is a museum whose licensed premises are located on the grounds of a local historic building or site. • They are an independently certified organic distillery, with such certification by a USDA- accredited certification agency. • The licensee uses traditional distilling techniques, including the use of authentic copper pot stills to blend or produce spirits in any county with a population of less than 20,000. It is clear that this type of entity can be both technically and economically viable given certain circumstances. Subject to approval, meeting one of the five exemption criteria listed above will allow a distillery to establish its own on-site ABC store at which the distillery may sell its products and conduct tastings. From an operational point of view, the general technology for distilling is well established and has been in use for centuries. Once the business is able to obtain the necessary legal permits and passes any applicable inspections, such a business will be in the position to produce un-aged, aged, and flavored liquor for sale to the public. Matson Consulting III January 2015 Prototypical Farm Distillery Study Tasks & Activities Plan Interview Analyze Develop Guide Collaborate Research Feasibility Assess Study Coordinate Estimate Report Over the course of the document’s creation, the consultants undertook many tasks and activities, including research and data collection, interviews, and financial modeling. This study evaluates the conditions under which such a distillery can become commercially viable and profitable. To make the study as realistic as possible, Matson Consulting worked with VA FAIRS to: • Determine critical factors for success • Assess management and operation options • Estimate operating costs for distillery and tasting room for spirits marketing operation • Estimate what equipment levels are required to equate with production as the business expands • Estimate the scale of labor and other operations activities necessary to maintain efficient operations • Develop financial model for sensitivity studies • Determine at what level the prototypical distillery would need to operate to be profitable • Create objective study report Research and Data Collection To conduct an analysis of the venture from a market and operations standpoint, both the current market and industry standards for distilling operations were researched. The study relies on public data and other resources possessed by the consultants, as well as information gathered through a literature and database search. Additional data has been has been used to support different claims, including market structures, government statistics, market information, and the knowledge of the consultants. Matson Consulting IV January 2015 Prototypical Farm Distillery Study Interviews In an attempt to gain information and understanding regarding the industry as a whole, Matson Consulting staff contacted experts within various fields related to distilling and those familiar with the industry. Financial Model A financial model for the prototypical business venture was developed, which includes sensitivity scenario assessments that can be used in the business decision process. The model reports monthly data for the first year of operation and quarterly thereafter, and contains a detailed sales breakdown, labor, profit and loss statement, depreciation schedule, cash flows, and balance sheet. It is important to note that while every effort was made to reflect reality in the description of a typical micro-distillery, the model is not intended to reflect any existing business, but is a reflection of the industry and is meant to be purely prototypical in nature. As a prototype, the study represents a micro-distillery with moderate financial resources. This consultancy’s goal is to create a study that is as adaptable to as many similar ventures as possible. Year one of the study is not considered to be the startup of the project; the three year segment is intended to represent a snapshot of operations for a typical period during the early development of a prototypical micro-distillery located in Virginia. Matson Consulting V January 2015 Prototypical Farm Distillery Study TABLE OF CONTENTS INTRODUCTION.......................................................................................................................... I TASKS & ACTIVITIES ................................................................................................................. IV TABLE OF CONTENTS ............................................................................................................ VI TERMINOLOGY ............................................................................................................................. 8 GENERAL BUSINESS & INDUSTRY INFORMATION...…………………………………..9 ORGANIZING STEPS .................................................................................................................... 10 BUSINESS STRUCTURE ............................................................................................................... 11 LEGAL CONSIDERATIONS