By: Donald Snyder, Donald@TimeAndTasks.com
August/September 2016 Issue – Beverage Master Magazine
What do apple pie moonshine, birthday cake vodka, blueberry liqueur, absinthe, spiced rum, and cinnamon whiskey have in common? All are distilled spirit flavors, and they make up one the fastest growing segments in the industry.
The growth of these flavored varieties isn’t necessarily indicative of market expansion. Vodka, with entries that include pumpkin pie, marshmallow and cookie dough, has seen stagnant sales in the U.S. since 2003. Sales of vodka’s flavored varieties experienced steady growth for the same period, according to market research firm Euromonitor International, but not enough to grow volume overall, and new flavor releases started to decline in 2013. Around the same time, flavored moonshine hit it big and a surge of new brands began vying for a piece of the Mason jar craze. Now moonshine growth has slowed and flavored whiskey is on the rise, led by cinnamon whiskey and the new fruit and honey-flavored bourbons.
The bottom line is the flavored spirit market offers opportunity, as consumers are always looking for something new. But, this also makes it volatile and risky, rewarding the producer who can innovate and move to market quickly to benefit from the success of a new trend or flavor. The good news is that small craft distilleries have a significant advantage over the larger producers in their ability to just that.
But, before considering an entry into the flavored market, let’s review some basic concepts that will improve your chances of success: flavor development, avoiding shelf-life problems, complying with the TTB, and leveraging a lower effective tax rate.
Many distilleries begin by mixing their spirits with flavors, juices, fruits, or any other unique and natural mixers they have on hand, and then market test with their friends, neighbors, and local bartenders. It’s not an easy or quick process, but many distilleries find success using this method. Several regional craft coffee-flavored liqueurs and vodkas were developed in-house by mixing two beverages their distillers were passionate about: coffee and alcohol.
Another option is to utilize the services an experienced flavor house like Flavorman, Wild Flavors, or Mother Murphy. These flavor blenders and producers have decades of experience in testing and developing new flavored spirits, and they have it down to a science. Ask for a specific flavor and their teams of scientists and researchers will give you exactly what you are looking for.
For example, the creators of cookie dough-flavored vodka didn’t soak vodka in freshly mixed cookie batter. The flavor essences were developed by an experienced flavoring company, and then shipped to the distillery to be blended and bottled. They can assist you in creating a blending procedure, or provide you with distillery finished flavorings ready to blend. And, they can conduct shelf stability testing as a way to help ensure your product looks good on the shelf, or after being exposed to extreme temperatures.
A third flavor development option involves partnering with an established craft distillery with experience launching a few of their own flavored offerings. They can bring expertise in blending sugar, flavorings and colors with distilled spirits, and can help you develop your recipe. They may also be able to source the blending ingredients, manage the government compliance and application process, and even bottle for you to help get your product out to market as fast as possible. Once you have the capacity and expertise to do it yourself, you can bring the process in-house.
Avoiding Shelf-Life Problems
Introducing foreign objects like whole cherries, strawberries, cinnamon sticks, or other non-liquids has the potential for serious shelf-life issues. Before shipping anything with a foreign object, make sure the bottle sits in sunlight and in extreme temperatures for at least a month before you manufacture a large batch. You need to see what the product looks like over time, as fruit may oxidize and other ingredients can change in color.
The same foreign objects that give your flavored spirit its unique qualities may also be visible in the bottle. Many consumers are not used to sediment or objects floating in their bottles, as many large distilleries use chill-filtration to remove every last bit of sediment, barrel char, and haze from their spirits. Educating consumers on the role of residual sediment in full-flavored spirits may be challenging, but your continued success could depend on it. Consider addressing the subject on your packaging or display, as well as in your other consumer communications.
And, finally, do your blended fruits or juices have an expiration date, requiring bottling within a short period of time? This is a shelf-life issue as well, albeit an internal one, and it is an important issue to address with purchasing, storage and quality control procedures before going into full production.
Tax and Trade Bureau
Next on the agenda is ensuring compliance with the TTB. Your formula must be submitted for approval, along with the detailed list of ingredients, blending steps, and batch details. TTB approval may take 20-40 days and the agent may ask for a sample to evaluate, although this is not common. After the formula is approved, you can then apply for approval of the bottle label which may take another 30-50 days. The bottom line is that earning TTB approval is not a quick process, so be sure to allow for it in any product launch timeline.
Compliance requirements continue beyond the approval of your formula and label, as each batch must be made within tolerance of the approved formula. Meticulous batching records must be kept and should include the DSP/Plant Number, the TTB Formula Approval Number, the ingredients used, blending tank name, proofing notes, and other batch details.
Each batch must also be proofed to ensure it is within tolerance before being bottled. The TTB requires that, if a flavored spirit contains solids in excess of 600 mg per 100 ml, the true bottle proof can be no higher than the stated label proof, and no lower than 0.5 Proof (or 0.25% ABV) below the label proof. For flavored spirits, this may not be as easy as just measuring with a traditional hydrometer, as the spirits can be “obscured”.
Spirits are considered obscured due to the change in density from the sugar and other solids, requiring an obscuration test utilizing a small desktop still to distill off the liquid from the sample, leaving only the syrups and solids behind. After the recovered distilled spirits are collected, water is added to make up for the original solids left behind, and it can then be proofed accurately with a hydrometer or density meter. The entire process can take anywhere from 2-4 hours per batch.
An alternative is to send a finished sample to a TTB-approved lab to do the proofing, but it can take a few days to get the results. And there are some desktop density meters that can do obscuration testing, but these can be very expensive.
It is crucial that a craft distillery proofs their flavored spirits correctly and in full compliance with regulations. TTB agents randomly pull spirits off liquor shelves across the country, and then test for proof and fill tolerance, and to ensure the approved formula was followed. If a bottle is found to be out of tolerance, the TTB will ask for the distiller’s batching and proofing records, and may issue fines, penalties, or additional taxes.
Leveraging a Lower Effective Tax Rate
The final and most important consideration for flavored spirits is the opportunity to pay a lower effective tax rate. Distilled spirits are taxed at a standard federal excise tax rate of $13.50/proof gallon. However, with flavored or blended spirits, there are methods a distillery can use to lower that tax rate.
The most common example is OTS (Other Than Standard) wine. This high proof wine can be transferred into a distillery and blended with spirits. The portion of the alcohol contributed from the OTS wine is taxed at the much lower rate of $1.57 per gallon. Another option is to use tax-paid flavorings that contain some alcohol, where up to 2.5% of the total proof gallons in the batch contributed by the tax-paid alcohol are taxed at 0%.
An important warning: these calculations are not simple and managing a lower effective tax rate can be challenging. A craft distillery interested in developing a flavored spirit with a lower effective tax rate would be wise to consult with an experienced flavor house or supplier for guidance.
In summary, the flavored spirits market continues to expand and innovate, but the same demand for innovation also introduces volatility and risk. A distiller looking to compete in the category should spend time in research and preparation, so that its sour pitfalls can be avoided, and the sweet rewards can be enjoyed.