Louisville to profit from bourbon's golden age

FRANKFORT, Ky. – In just over the two-year minimum it takes to age straight bourbon, the number of Kentucky distilleries has tripled, according to a economic impact survey released Tuesday.

That's just one of the major findings of the survey that puts more analysis behind what's obvious to anyone outside of a temperance league — the bourbon business is booming in Kentucky.

"Honestly, we're blown away by these results," said Eric Gregory, the president of the Kentucky Distillers' Association, which commissioned the University of Louisville to perform the third such study in the last five years — following one almost three years ago.

The study reports and predicts more than $1 billion in industry capital projects since 2008 and through the next five years.

The industry's growth is so rapid that the study — initially done about a month ago — had to be revised, Gregory said.

"Literally within that month we had ... five new distilleries open up (and) Brown-Forman (Corp.) announces a $30 million project downtown," he said. "It's hard to actually put this thing to bed because every day there was a different huge bourbon announcement that changed the numbers. I mean, $30 million investment in downtown Louisville changed all of our numbers."

Gregory said the future spending is a conservative estimate.

"We think it's probably going to be a lot closer to $700 (million) or $800 million in the next five years," he said.

Among the highlights in the 65-page document by U of L's Urban Studies Institute:

• The 31 distillery licenses are more than triple the 10 found in the previous survey. Five of those have yet to begin — or only just began — production.

• Those license holders had at least 42 locations 26 cities and 23 counties, up from 19 in nine cities and eight counties in the prior study.

• The $91.54 million paid in production-related taxes was a 51 percent increase from the $60.64 million in the prior study. The taxes paid, including consumption-related levies, increased almost a third to $166.5 million from $125.9 million.

• Distilling employs about 3,800 people, up 23 percent from 2010 data in the prior study, with an average wage that is $91,188 — because of the many executives and long-time employees in the industry.

• Distilling employment is up 20.8 percent since 2000 according to quarterly census data, compared to a 23 percent drop in manufacturing employment generally.

"Kentucky's been through a fairly difficult recession," Kentucky Chamber of Commerce President Dave Adkisson said. "The bourbon industry provided a fantastic cushion during that time."

"We're entering the golden age of bourbon," Gregory said. "... It's not just a fad. This is a legitimate trend that's great for the commonwealth."

Gregory said the distillers hope to use the latest study to change laws that he says limit the potentially even greater growth of the industry.

State government leaders pledged to work with the industry to make it more competitive.

"I don't know what they would be looking for in tax relief," Senate President Robert Stivers, R-Manchester, said after the study was unveiled at a news conference in an under-construction Jim Beam distribution center in Frankfort that, at the size of 13 football fields, Stivers joked is bigger than his hometown. "I could see more in the realm of regulatory-type of relief."

Gov. Steve Beshear and Stivers both said the industry already is benefitting from a bill that became law this year phasing out a tax on aging barrels.

"We'll continue to look at other ways to help the industry," Beshear said. "At the same time we have revenue that we need to produce to educate our kids and provide public safety for our people ... so we'll be judicious about it."

Beyond the direct employment in the industry, study documents distilling's benefit to related industries, such as barrel and pallet makers, plastic bottles, trucking, farming and distillery equipment makers like Vendome Copper & Brass Works Inc. in Louisville. With those related businesses included, the study estimates bourbon and whiskey are responsible for 15,400 jobs in the state with a $707 million payroll yearly.

The study's findings are no surprise to Vendome Vice President Mike Sherman, who has been part of the family-owned still-making business for 20 years and has never seen a backlog at the firm like there is now.

"Right now, if you called and placed an order with us, we're about 10 months out on new craft distilleries," Sherman said.

Along with the related industries, the study pegs bourbon's tourism impact — resulting in part from the distillers' association's Kentucky Bourbon Trail passport program — at $7.5 million a year in economic activity. That program recently added its second Louisville location — as is expected to add more in the city as planned distilleries come online in and near downtown.

Surveys of passport participants over the last three years show 37 percent spend a night in more than one Kentucky city, including more than 30 percent who said they spent a night in Louisville or Shepherdsville.

"The potential economic impact of the enhanced tourism business is real and seems to just be beginning," the study said.

The results in Kentucky come from a powerful mash of growing worldwide popularity for bourbon and American whiskey and investments by distillers — a mix that is expected to continue.

Kentucky whiskey export sales have increased 55 percent in terms of the dollar value of sales since 2010, topping $300 million in each of the last two years. Major importers include Australia, Japan, Spain, Germany, Canada, New Zealand, Netherlands and the United Kingdom.

Some bigger players in the liquor industry generally are struggling, said Joe Fraser, the chairman of the distillers' association board and a Heaven Hill vice president. "But bourbon is strong, strong across the board. So all of the major players including the craft players are doing very well."

While most of the news is unabashedly good, the study sounds some cautionary notes, particularly with taxes and craft distilleries.

The study says Kentucky's distilled spirits taxes are the fifth highest among 33 states where sales aren't owned or controlled by the government and are fourth behind Illinois and controlled states Ohio and Virginia.

Gregory said other states still are using Kentucky's "archaic laws from Prohibition on sampling and sales and other rights and privileges at the distilleries that are mostly tourism based" to encourage distilleries to set up there — something his association hopes to have changed in the upcoming General Assembly session.

While Kentucky produces about 95 percent of the world's bourbon, the study finds that Kentucky "is behind the curve in craft distilling."

In that growing subset of the distilling industry, Kentucky has seen about $30 million invested since 2008 among 18 craft license holders, representing 127 jobs, with another $25 million or more expected in the next five years.

"While Kentucky continues to have about a third of all distilleries employing 20 or more people, it now has just 2 percent of all distilleries employing less than 20 people, down from 10 percent in 2006," the study said.

That gap will be bridged in part by new laws — effectively rebating taxes on aging barrels, worth as much as $15 million a year, and creating a craft distiller's license that costs a third of the $3,090 regular license fee — but "Kentucky's new system is not as generous with regard to production limits, lowered fees, distribution channels, sampling laws or visitor center purchasing limits as the five leading (craft distillery) states," which are Washington, New York, Colorado, Oregon and Texas.

Tourists "don't understand why you can't go to a distillery and get a cocktail or that you can't go and buy two or three bottles," Gregory said.

Beshear said attitudes about alcoholic beverages — that spurred provisions like Gregory mentioned — in Kentucky have changed over the last 15 years.

The study says Kentucky's heritage and recent craft growth means the state "may now be on the verge of the boom experienced elsewhere."

Stivers said he expects craft distilleries to be an area legislators focus on next.

Vendome's Sherman said his company saw the craft trend coming about five years ago when it got calls from potential distillers in other states where laws had changed.

"Right now we've probably got five or six projects that we're working on in Kentucky but I bet you we have over 40 or 50 craft distillery projects (total) on our books," Sherman said.

"For whatever reason it seemed like other states were quick to move before Kentucky on the craft side," Sherman said. "... It's picking up definitely."

Reporter Gregory A. Hall can be reached at (502) 582-4087. Follow him on Twitter at @gregoryahall.

Straight Bourbon whiskey: A whiskey made from a mash containing at least 51 percent corn, distilled out at a maximum of 160° proof, aged at no more than 125° proof for a minimum of two years in new charred oak barrels. If the whiskey is aged for less than four years, its age must be stated on the bottle. No coloring or flavoring may be added to any straight whiskey.

Source: Kentucky Distillers' Association.