Importer Nicolas Palazzi on the Artisanal Spirits Boom

Each day it seems like there is another new cool cocktail bar open for business, a new small batch local distillate offered, or a new wholesale spirits portfolio launched. Rittenhouse Rye 100 is an allocated item. Maker's Mark considered diluting their product to meet sales numbers. Drinkers taunt each other on Instagram with pictures of Pappy Van Winkle bottles. Could this be the great boom era for craft spirits? Eater checked in with importer Nicolas Palazzi, of PM Spirits, to get a sense of where the bar has been set for artisanal spirits.

What has been the level of growth for artisanal spirits sales in the last few years? Nicolas Palazzi: Huge. All the spirits categories are on fire, from cake flavored vodkas to Cognac to whiskey. It seems to be a steady upward trend with frequent double digit growth in volume or in dollars. Brands are reorganizing their product offerings to meet the demand. Bulk prices are soaring (the bulk Cognac market would be only one example). And prices are rising because of short supply in the whiskey market, even while more and more distilleries are opening up.

What is the situation for artisanal spirits at the wholesale market level? Everybody and their brother has a spirits portfolio now, or is trying very hard to. Wine-centric distributors who in the past happened to have a couple higher proof items in the book are building whole portfolios to have a more complete offering. There is a race to sign brands and to get market share. Four years ago, a rep for one of those companies would go to a restaurant to show some wines, would overhear someone on the staff saying, "Damn, we're out of calvados." Then they'd be like, "Hmm...I think we've got one in the book...hold on..." But now it's a different game. Now you find trade tastings that are 100 percent dedicated to spirits portfolios, and there are dedicated spirits salespeople out there schlepping booze around all day. In the US in January 2010, you had like 70 to 80 operating distilleries out there that were "craft," meaning that they were putting out less than 100,000 gallons a year. And by mid 2012 there were 180 of them. So the number of American craft distilleries basically more than doubled in a year and a half. That gives you an idea of how popular the craft movement is.

How much has the rise in Scotch Whisky prices encouraged small distillers making whiskies in other parts of the world, like America? Is there increased room for them to raise their own prices now that the price ceiling has gone up so much for Scotch? The rising prices have had an effect. You see bottles that a couple of years ago were $80 and now they are $150. Looking at that, you might have customers who want to diversify a little bit and get into new products. Perhaps go for what the smaller distillers are putting out on the market. Maybe they are gaining market share as a result. And perhaps more people are opening distilleries as a result also.

What is in the pipeline in terms of new craft projects that are ageing stock in this country or in other countries? Stock we don't see released for sale yet. When you talk craft projects, it is mostly an American phenomenon. Craft distilling is very hot in the US, but less so elsewhere. In other countries, there are distilleries opening up, but not at the pace of what's going on in the States. Distilleries are being challenged to manage the amount of product they put out on the market now to build their brand and make some revenue, versus the amount of product they are aging for future releases. The sweet spot for whiskey is six to nine years old for a release to really blossom. But demand is pretty high right now, so it is hard to really know what quantity you should be ageing. There are definitely stocks out there. But the problem we see right now is that it seems many brands did not foresee six, eight, or 10 years ago how the market would grow. Last year the rye category grew by 50 percent and there is a shortage in the market for rye. We are talking about products that are sold at four, six, or eight years old. The guys whose job it was to forecast that five or 10 years ago, it seems they didn't see the growth coming.

Does this mean that there is an opportunity for artisanal brands to build market share, as the big brands don't have enough bottled stock to fill orders? I think they are two different markets, and one is not really competing with the other. The big brands have very loyal customers who just want to drink that brand, oftentimes. What is going to happen for the bigger brands is, either the price is going to increase, or they will dilute product to make more volume and meet the demand. But I doubt the customer from a major brand is going to switch to a craft distiller right away. Those are two different kinds of drinkers. Where there is an interest in trying new products is where what is put out by the craft distillers is getting attention.

Are cocktails recipes serving as introductions to craft liquor brands? Are people who wouldn't order a particular craft spirit actually drinking it anyway, as an ingredient in a specialty cocktail that they feel more comfortable ordering? I think cocktails are a way to introduce a brand to a consumer, or at least to get some consumer recognition. But that sort of introduction only works for those products that are designed to be mixed in cocktails. White spirits like vodka, gin, and a few others. Producers of those spirits definitely use the cocktail scene to become better known. But I don't think the brown spirits really benefit from the cocktail boom in the same way.

Another aspect to consider is that bars are faced with a price ceiling from consumers of specialty drinks, and they have to reflect that in the ingredients used. New York City, San Francisco, Chicago, those are places where you can sell a $16-$18 cocktail, but in other cities the prices can only go so high before customers get pissed off. That means that the ingredients used in the cocktails are often on the cheaper side. And big brands, because of the scale of their operations, always manage to have products that are much less expensive than what the small players can put on the market. The big brands also have the marketing money to dedicate towards organizing cocktail competitions, or flying bartenders out to visit a distillery. Those are activities the smaller guys can't really afford. Some top cocktail places feature artisanal brands in cocktails because they are forward thinking and willing to support the small guys, but the market is still dominated by major houses.

Where artisanal brands really benefit is from small tastings – for the trade or for consumers – where the people who know have time to interact with their audience and explain what they and their product are about. In a busy bar, the staff doesn't have much time to explain. And providing knowledge is the key to raising awareness about artisanal brands.

Are big brands in the process of rebranding or extending their brands to reach the craft market? Sure. They have the marketing dollars, they have the distribution networks, and they have the large sales staff. This is a growing market segment. Why would they skip on that revenue? But it is difficult when one makes a product that is super cheap and in every store in the galaxy to at the same time create a line of products that looks boutique. So the big brands acquire smaller companies that have developed a following. Then they usually expand production capacity and surf the wave. It's a business model. I can't blame them. You see big distributors creating smaller divisions dedicated to artisanal spirits. You see big brands putting out a lot of single cask releases, also unfiltered offerings. They are trying to surf the wave.

Are consumers "buying the back label" when it comes to artisanal spirits in the same way that they might buy a wine imported by the likes of Neal Rosenthal or Louis/Dressner? It's coming, but there is a lack of knowledge as to who makes what or how. Consumers tend to support local producers: "I live in Brooklyn, I'll drink Brooklyn booze." That type of deal. There are geeks out there who try to get the most esoteric stuff, but the general public is not there yet. In a way, the trade is "buying the back label": if said spirit is a part of said portfolio or has been selected by so and so who seems to know what they are doing, then the trade buyer expects that the stuff should be good. Eventually this sort of buying may trickle down to the end consumer. We are also often talking about American made products here. So there is no "imported by" label on the bottle, because it is not imported. That means the trade can often see the whole portfolio, but the consumer buying from the shop can't.

Is purchasing an artisanal spirit a way for consumers to treat themselves to a "best" that they can still afford, in the way that coffee also allows for and maybe wine no longer does?? Yeah, it's not like Burgundy or Bordeaux where the top stuff is untouchable. Okay, there is a "premiumisation" — which curiously tends to come from big companies which often times package not so stellar spirits in fancy bottles and then sell them at crazy prices — but if one want to really drink great booze, one doesn't have to own a Gulfstream G6. If you really want to get the best of the best, you would need to spend a few hundred dollars, but we aren't talking thousands. People can experiment without spending a lot of money. And that plays a big part in the growth of the category.

Has there been growth in artisanal cocktail bars outside of areas like New York City? It's spreading fast. Places are catching up pretty quickly. Three years ago I didn't see a New York or San Francisco style cocktail bar in Denver, Colorado. Now that city has several speakeasies, and Boulder has a very cool bar scene as well. The trends are being set in NYC, in San Francisco, in LA, and then they are very quickly spreading into other states.

At the operator level, are low liquor inventory costs making cocktail bars an attractive alternative to wine bars? There is no doubt that at equal rent, and only considering the liquid side of things, if the choice is between starting a restaurant and having to build a full wine list and starting a bar and having to stock liquors, I'd go for option number two. The base products are not very expensive, and you can easily get a very cool selection by buying one bottle of this and one bottle of that. Bottles which you can sell over time, without spoilage. And those bottles are nowhere near the price of a Harlan or a Petrus. $1,000 in liquor can get you much further then the same amount spent on wine.

What is the reception to artisanal spirits at the fine dining level? When you see wine guys getting interested in spirits that's where you know something is happening. People know that great food, amazing service, and a superb wine list, those are awesome. But if you combine those with the same spirits selection that you would find at some random JFK spot, then something is not right. Now people are thinking, "Hey, the food menu lists the name of the farm where the chicken comes from, I buy small grower Champagne, and I choose cheese from upstate New York. Why exactly should I stock my spirits cart with the entire line of this brand that sells 10 million bottles a year?" The next step would be restaurant reviews that take the spirits selection into account when attributing stars, just the way that they consider the wine list.

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