Craft Distilleries Fight for Survival Amid Crushing Regulations

Once booming, the industry now faces closures and stifling market access due to outdated laws and burdensome middlemen.

In 2012, Time magazine ran a piece titled "A Booze of One's Own: The Micro Distillery Boom," which heralded the coming rise of locally sourced, handcrafted, small-batch distilleries that were popping up across America. At the time, there were 250 craft distilleries in the country—up from around 50 in 2005—and the article boldly asserted that in just 10 years' time, there could be over a thousand. 

A decade later, there were well over 2,600 craft distilleries in America, and industry observers thought this was only the beginning. Outlets like Imbibe magazine ran headlines as recently as 2022 proclaiming: "Craft Distilling is Booming and Just Getting Started," with some analysts predicting a 29 percent compound annual growth in the coming decade.

Recent headlines have told a different story: reports of scores of distilleries closing in New York, D.C., and across the South. Over 20 distilleries have closed in the past few years in New York—the No. 2 state in America for most craft distilleries—and 50 percent of distillery owners in the Empire State either foresee closing by the end of 2025 or are unsure if they would continue beyond then. 

Things are far from hunky-dory in the world of craft distilling. The COVID-19 pandemic unsurprisingly knocked the industry back on its heels, as distillers were forced to close for a time, delay or cancel expansion plans, and furlough large swaths of their work force. Many also nobly transitioned to making hand sanitizer to help with the national shortage, and for their sacrifice, they received years of harassment from the Food and Drug Administration.

Like a boxer staggering in the ring, the craft distillery industry at first appeared to weather the blow—and even continue growing—post-COVID. Now it faces another potential knockout. Not only are alcohol sales declining generally in America as younger generations show increased interest in low-alcohol and nonalcoholic drinks, but the growth rate in the number of craft distilleries fell to 2.4 percent in 2023—down from over 17 percent growth the year prior.

While some blame market saturation for the sudden shift, a closer look reveals burdensome laws and regulations are the predominant culprits. As competition grows fiercer, many alcohol wholesalers are showing less interest in carrying craft spirits as part of their portfolio. Given that nearly every state operates under a three-tier system of alcohol distribution, distillers are legally mandated to work with these government-imposed middlemen in order to get their products stocked on retail shelves.

In control states, where the government operates as the wholesaler and sometimes also the retailer of all distilled spirits, distilleries have to submit their spirits to selection committees that make the final decision on whether to allow the state-run stores to carry them. If they say no, a distillery can be locked out of its entire home-state market in one fell swoop.

One promising avenue is the hard seltzer craze which could potentially provide a lifeline to craft distilleries interested in making canned cocktails. But exorbitant tax rates and grocery store sales bans in many states make spirit-based canned cocktails both expensive to produce and hard to sell through normal access channels. 

Another impediment is laws in many states that strictly limit the amount of spirits that distilleries can serve to customers on premise—sometimes as little as 3 ounces per visit.

It is clear that the craft distilling industry's real issue is a basic market access problem. It's hard for a business to survive long-term when it is prevented from getting its products in front of consumers and into their hands. 

An immediately available solution is to allow distilleries to sell their products directly to consumers via mail-order shipments, known as direct-to-consumer shipping. If you make jewelry by hand and cannot get your products carried by the local jeweler, you can set up an Etsy account and immediately unlock a new market access channel; the same goes for a local baker, jam maker, or nearly any other craft producer.

But distillers are prohibited from engaging in direct-to-consumer sales in all but a small handful of states. By contrast, direct-to-consumer wine shipping is legal in nearly every state—in many for well over a decade. The main opposition expectedly comes from alcohol wholesalers who appear determined to guard their government-mandated middlemen role at all costs. 

Although many wholesalers have little interest in carrying craft products in the first place, they actively push to kill direct-to-consumer reform efforts by peddling concerns about it leading to a spike in youth drinking—despite the existence of empirical research to the contrary.

Craft distillers are being arbitrarily cut off from large parts of their customer base by a host of outdated and protectionist government policies. No wonder they are starting to go bust.