Distilled Spirits

INDUSTRIAL CODES

NAICS: 31-2140 Distilleries

SIC: 2085 Distilled and Blended Liquors

NAICS-Based Product Codes: 31-21401 through 31-214049B1

PRODUCT OVERVIEW

Spirits are beverages that contain purified ethyl alcohol—purified and potable ethanol. They are made from a fermented mash of grains, fruits, or vegetables. Such beverages are low in sugar and contain at least 35 percent alcohol by volume. Examples of distilled spirits include brandy, gin, tequila, vodka, and whiskey. Such drinks are referred to by a number of terms, including distilled beverages, liquor, hard liquor, mixed drinks, and alcoholic beverages. Distilled beverages do not include wine or beer.

All forms of alcoholic beverages—beers, wines, and liquors—are based on fermentation, the breakdown of carbohydrates into alcohol. Yeast is the catalyst in the process. Liquor production involves the extra step of distillation. Distillation involves the boiling off of alcoholic vapors from the fermented mash through intense heat and collecting them as condensed liquid. Alcoholic beverages are made from carbohydrates, in essence, sugars. The most common sugars used to distill liquor come from grapes, sugarcane, molasses, corn, rye, barley, wheat, and potatoes. A variety of additional products are used in the distillation process to flavor the resulting alcoholic beverage.

A still is needed for distillation. Stills consist of three parts: a vessel, in which the substance to be distilled is heated; a condenser, in which the vapor is liquefied; and a receiver, in which the product is collected. Most commercial producers use stills made from copper or stainless steel with copper interiors. The copper removes sulfur-based compounds from the liquid. Copper piping also reduces the level of copper in the wastewater by-product, which is often used in animal feed at large distilleries. Copper is also used in stills because it is an excellent conductor of heat and resists corrosion. Nonetheless, some corrosion is unavoidable, and stills typically undergo repairs every eight years.

Commercial distilleries generally use a column still, often called a continuous still or coffey still. Robert Stein invented the first such still in 1826; however, Aeneas Coffey improved upon Stein's design. Column stills have two columns or chambers. The columns are designed with a series of graduated levels through which the liquid passes as it is heated. The vapors rise through the levels and become more concentrated as they progress upward. Cooling begins in the higher levels of the second column.

Column stills are a more efficient means of production than pot stills. A pot still is a single chamber still in which heat is applied directly to the pot. Alcohol has a boiling point of 173 degrees Fahrenheit, lower than that of water, which reaches its boiling point at 212 degrees Fahrenheit. Consequently, when the liquid is heated, the alcoholic portion boils off as vapors and is separated from the initial liquid. The vapor is sent through a condensing coil and in the process is cooled and becomes liquid again. The first distillation results in a liquid with an alcohol strength of 25 to 35 percent by volume. The alcoholic liquid is then concentrated further in a second distillation which brings its alcohol level to approximately 70 percent. The measure of alcohol by volume should not be confused with another measure of alcoholic level used for spirits: proof. Proof is a measurement of the alcohol content in a beverage. Each degree of proof equals a half percent of alcohol, so a beverage labeled as 100 proof contains 50 percent alcohol by volume.

The alcohol level of distilled spirits is much higher than that of beer or wine. Beer averages 2 to 8 percent alcohol content by volume and wine averages from 8 to 14 percent. The alcohol levels in both beer and wine are limited to a maximum of 15 percent by volume, beyond which yeast is adversely affected and cannot ferment. Liquors achieve a higher percent of alcohol by volume because of the distillation process, which concentrates the alcohol and separates it from the original liquid.

The Manufacturing Process

The production of alcoholic beverages is complex. Grains or vegetables high in carbohydrates are placed into an automatic mash tub. The tub is fitted with agitators to break down the fibers of the raw material. The mash is heated to a boiling point to eliminate the growth of harmful bacteria. The mash is then poured into stainless steel vats. Yeast is added and the fermentation process begins. The sugar in the mash is converted into ethyl alcohol.

The liquid, known at this point in the process as wash, is transferred into a column still. The wash is heated in the analyzing column. The wash enters the top of the analyzing column and steam is injected at the bottom of the column. The vapor travels through a number of perforated plates and then travels through a tub connecting the two columns. The second column is called the rectifying column, and it holds the condenser. This is where the liquid is cooled and condensed. The liquid is distilled a second time. Various factors influence the level of the final alcohol content of distilled liquor: temperature, water, and any flavoring substances that have been added, also known as cogeners. If the liquid is more than 95 percent alcohol it will be flavorless because the cogeners have been boiled away.

The production process varies based on the distiller and the liquor being produced. Some distillers use a column still while others use pot stills. Some ingredients require an extra production step. For example, Scotch whiskey is produced with barley and barley must go through a several week process of germination before the fermentation process can begin. This makes the starches in the barley more soluble. Most whiskey is distilled twice, although single malt whiskies are only distilled once. Some vodka is distilled as many as six times. The wood of the cask in which a liquor is stored can affect the color and taste of that product. The place of origin can affect taste also, with malt whiskies made near the coast having a briny taste. The length of the aging process is another element that varies in the production of different spirits.

A Brief History of Distillation and Liquor

Fermented beverages and crude forms of distillation were known in Babylonia, ancient China, and other early cultures. Alcoholic beverages were a regular part of life, playing vital roles in celebrations, oaths of allegiances, religious ceremonies, and trips into battle. Beer and wine were also known to early societies.

The Arabs and Persians refined the distillation process. Arab Alchemist Jabir ibn Hayyan is credited with inventing early stills, known as alembics. An alembic is a still consisting of two chambers, called retorts, connected by a tub. These stills were typically glassware with long, angled necks. Al-ambiq is the Arabic word for still, which ultimately comes from the Greek word ambix, or cup. Early alembics were designed to cool the distillate, making the collection of the alcohol more efficient. These early alchemists began to understand the connection between alcohol and its possible use in medicine and science. Tenth century Persian physician Rhazes and Arab surgeon Abulcais, for example, wrote of using alcohol as anaesthetic and as a solvent in drugs.

The origin of the word alcohol is not known with certainty. Some sources credit alchemist Paracelsus with inventing the word. Historians believe the word to be Arabic in origin, for al- is a common Arabic prefix. The root word most likely comes from the original kohl, which was a fine powder produced by grinding and used by women to paint the eyes. Arab alchemists, however, used the word to refer to any powder or substance produced in a number of ways. The use of the word alcohol to refer to a powder produced by heating a substance into a gaseous state and then cooling it was first used in 1543, according to the American Heritage Dictionary. The word alcohol was used to refer to any substance that had gone through the distillation process by 1672.

Because of the association between alcohol and the sciences, alcohol was believed to have medicinal properties. Alcoholic beverages have been used to treat colds, fevers, frostbite, snakebites, and many other ailments. By the Middle Ages alcoholic beverages were known as the "water of life"—in the Gaelic uisge beatha or in Latin aqua vitae.

By the twelfth century, Irish whisky, German brandy, and French cognac were found on the European continent. Catholic monks performed much of the early distilling and winemaking in Europe. As they set out to establish new monasteries they took their distilling practices with them. Irish clergy, for example, are believed to have introduced the distillation process to nearby Scotland somewhere between the twelfth and fourteenth centuries. As the process became better known it was improved upon. The earliest distillery in Scotland dates from 1494. This pattern took place on the European continent as well, and stills in rural homes became common.

Naval exploration, war, and trade would further stimulate the development of distilleries. Christopher Columbus brought sugarcane from the Canary Islands to the Caribbean. The sugarcane, used in rum production, prospered in the region's warm climate. The local plantations began manufacturing rum in large quantities. The Caribbean region was popular with ships from Colonial America as part of the growing slave trade. The ships brought the drink back to New England; a rum production industry was established in this region by the 1660s. British soldiers may have first encountered gin in Holland in the late 1580s. Protestant William of Orange of England promoted the production of distilled beverages—grain spirits as they were known at the time—after restricting the importation of wine from Catholic countries in the late seventeenth century. As the British Empire began its expansion in the eighteenth century, it brought gin and other grain spirits along with it.

During the exploration of the American continent, European settlers poured into the middle of the country and began to plant corn, wheat, and other grain products. However, the transportation of such goods was difficult. Without the benefit of roads and rail, it could cost more to ship the grain to commercial centers than the grain was actually worth. Farmers began to distill their excess corn into whisky. This was one way to generate income. The distilling of the corn into whisky made it portable and easier to sell in surrounding areas. Kentucky's first commercial distillery began in 1789.

In 1791 Secretary of the Treasury Alexander Hamilton prompted Congress to levy a tax on liquor. A major reason for this tax was to help pay down the national debt. In 1794 farmers rebelled against the tax in what has come to be called the Whiskey Rebellion. The tax was later repealed, and the Whiskey Rebellion has been given some credit for the development of the whisky industry in Kentucky and Tennessee.

The term moonshine was first used in the late eighteenth century to refer to illegally produced whisky. The term comes from the fact that whisky smuggling usually took place late at night and away from the eyes of law enforcement—under the shine of the moon. Moonshine soon came to refer to all forms of liquor produced in the home or produced where it is illegal to do so. The government often tried to collect excise taxes on this illegal liquor. The brutality of the encounters between moon-shiners and law enforcement helped fuel a temperance movement in the United States.

The United States passed the Eighteenth Amendment on January 16, 1920. This constitutional amendment prohibited the sale, manufacture, and transport of alcohol; an exception was made for medicinal products. In 1933 the Twenty-first Amendment to the U.S. Constitution repealed the nationwide prohibition. The amendment gave individual states the right to restrict or ban the sale of alcohol, leading to a patchwork of state and local laws designed to regulate the sale and consumption of alcohol. Many states continued to enforce prohibition after the Twenty-first Amendment was passed. In 1966 Mississippi became the last state to repeal prohibition. The passage of the Twenty-first Amendment also paved the way for federal and state authorities to tax wine, spirits, and beer, which generate billions of tax dollars annually for local, state, and federal authorities. Other countries also went through periods of Prohibition, including the Soviet Union (1914–1925), Iceland (1915–1922) and Norway (1916–1927).

The home production of wine was permitted after Prohibition ended. In 1978 President Jimmy Carter signed legislation permitting the home brewing of beer. This legislation has been given some credit for the rise in microbreweries and small craft brewers that was to follow. The production of liquor in the home, however, is not legal in the United States without a license. Periodic attempts to legalize spirit production for personal use have failed. A major reason is that alcohol is one of the most heavily taxed of consumer goods; approximately one-third of the retail price of a bottle of liquor goes to state and federal authorities.

Bourbon

Bourbon is an American form of whiskey named for Bourbon County, Kentucky. Most bourbon is distilled there, but bourbon may be manufactured anywhere in the United States where it is legal to do so. Elijah Craig, a Baptist minister, is credited with inventing bourbon. Fifty-one percent of the grains used in bourbon production must be corn, although most distillers use 70 percent corn. Bourbon must also be distilled to no more than 160 proof, and aged in new charred oak barrels for at least two years. After aging, it is diluted with water and bottled. Bourbon must be put into the barrels at no more than 125 proof. Bottling proof for whiskey must be at least 80 proof.

Gin

Gin is believed to have been first produced in Holland in the early seventeenth century. The first step in gin manufacturing is to distill the neutral spirit alcohol. Gin makers seldom make their own neutral spirit. They typically purchase it from a distiller who manufactures neutral spirits for a variety of uses. The second step involves distilling the spirit again, this time adding various botanicals for flavorings. Gin usually requires juniper berries, but other flavorings may be added, such as citrus peel, ginger, or caraway seeds. Distilled water is added to bring the alcohol content to 80 to 95 proof. Dry gin is the most popular type of gin. It is produced in a column still. Dutch gin, however, is produced in a pot still. Other types of gin include Plymouth Gin, Old Tom gin, and Golden gin. Contrary to popular belief, sloe gin (flavored with fresh sloe berries) is actually a liqueur, not a gin.

Liqueurs

Distilled beverages with added flavorings and a relatively high sugar content such as Grand Marnier, Frangelico, and American style schnapps are generally referred to as liqueurs. They are flavored with fruits, herbs, spices, flowers, seeds, roots, plants, and barks. They appeared by the thirteenth century and may have been invented by the Dutch. As with wine and other liquor, monks were the major distillers of such beverages in Europe. In fact, some types of liqueurs still carry names that originated with the monks who once distilled them, Chartreuse liqueur, for example.

Rum

Rum is produced from fermented molasses or sugar cane. Most countries within the Caribbean get their molasses from Brazil. There are three main categories of rum: Cuban, Jamaican, and Dutch East Indian. There are also various grades of rum: light rum, gold rum, spiced rum, dark rum, flavored rum, overproof rum, and premium rum. There is no preferred distillation method for making rum. Some producers use pot stills while others use column stills, but most rum is aged in bourbon flasks. Because of the warm climate of the Caribbean region, rum ages more quickly than scotch or cognac, which are made in cooler climates.

Spanish speaking countries such as Cuba and Panama typically produce light rums with a clean taste. English speaking countries produce darker rums with heavier tastes. Jamaica is considered by many to be the best maker of rum. French speaking countries such as Haiti and Martinique produce their rum from sugarcane as opposed to molasses and they typically grow their own sugarcane.

Tequila

Tequila is made by fermenting and distilling the sweet sap of the agave plant. It may be colorless or be a pale gold color. Tequila is made in and around the small town of Tequila, in Mexico's Jalisco province. In order to be classified as tequila, the liquor must be produced from blue agave plants grown in a precisely delineated area covering five Mexican states: Guanajuato, Jalisco, Michoacan, Mayarit, and Tamaulipas. Mexican law states that tequila must be made with at least 51 percent blue agave; the remaining 49 percent of the input material is usually sugarcane. Tequilas labeled 100 percent Blue Agave are considered the best. Tequila has 40 to 50 percent alcohol by weight. There are four categories of tequila: blanco, joven abocado, reposado, and añjo. Tequila is mixed with lime juice and orange liqueur to make the margarita cocktail.

Vodka

Vodka is both odorless and colorless. Its exact origins are unknown, but it likely had its start in Poland or Russia. The word vodka comes from the Slavic word voda (or woda), meaning water. The drink was first made from distilled potatoes and then from corn. However, most vodkas are made from cereal grain products such as wheat. Distillers may own fields and produce the grain themselves or purchase it from suppliers.

Vodka has a particularly high alcohol content. Vodka can have a proof as high as 145, but water is added to bring the proof down to a range between 80 and 100. Vodka is often mixed with other beverages and is a main ingredient in such popular drinks as Screwdrivers and Bloody Marys.

Whiskey

This liquor, which is spelled either whiskey or whisky, is a shortened form of usquebaugh, a word the English took from the Irish Gaelic language meaning water of life: uisge means water; baugh, or beada, means of life. Whiskey is a broad category of distilled spirits, covering a number of types of spirit. Each type has a unique production method that varies by amount of water used, ingredients, type of oak cask in which the whiskey is stored, and the manner of distillation. These methods have an effect on color and flavor.

Straight whiskey includes bourbon, Tennessee whiskey, and rye whiskey. It is made from at least 51 percent of a particular grain, must not exceed 160 proof (80 percent alcohol), and must be aged in oak barrels for 2 years. Blended whiskey is a combination of two or more 100 proof straight whiskeys blended with neutral spirits, grain spirits, or light whiskeys. The malt in malt whiskey is allowed to germinate to a certain extent and then distilled two to three times. Light whiskey has been distilled to a high alcohol level, typically more than 160 proof, and then diluted with water to a greater extent than harder whiskeys. It gets its distinctive character from being stored in charred oak containers. Such whiskies are generally used for blending. Single-malt whiskey is made only from malted barley and from a single distillation.

In order for a whiskey to be considered Scotch whisky it must conform to standards laid out under Scottish law. It must be produced with Scottish water and barley. Its alcohol strength must not exceed 94.8 percent by volume; a higher level would compromise its flavor. It must be aged for at least three years in Scotland, although most are aged 5 to 10 years. After aging, Scotch whisky may be bottled elsewhere.

MARKET

The alcoholic beverage market consists of wine, beer, and liquor. According to the U.S. Census Bureau, U.S. manufacturers shipped $20.7 billion worth of beer in 2005, $10.4 billion worth of wine, and $5.3 billion worth of distilled beverages.

The U.S. distilleries industry saw its shipments generally increase in the 1990s and early 2000s. Figure 81 presents Census Bureau shipment data for the industry from 1992 through 2005. While there was steady growth during most of the 1990s, the pace of growth increased sharply in the first decade of the 2000s. With an exception in 2002, which saw reduced shipments, the industry saw steady growth in the period from 2000 to 2005 during which it grew a total of 27 percent, equal to a healthy 5.4 percent annual rate of growth.

Some of this increase can be attributed to demographics. The population of those in their thirties and forties increased during this decade. Many people in these age groups consume alcohol and are more likely than younger consumers to be able to afford liquor. Younger consumers tend to select beer as a preferred alcoholic beverage when making purchasing decisions.

Besides growth in the population of key age groups segments, the United States was experiencing a strong economy during the 1990s. This period is often called the technology or Internet boom. The stock market was strong. Consumers could afford to purchase liquor, which is more expensive than beer and wine. As well, the industry was more visible. In 1996 the industry lifted the self-imposed ban on advertising that had been in place since 1936 for radio and 1948 for television. The ending of this ban generated some protests by the public. Former President Clinton urged the liquor industry to reconsider and some members of Congress considered enacting legislation to make the ban on such advertising formal law. Some states moved to ban such advertising on their local airwaves.

The liquor industry voluntarily agreed to certain standards. For example, the two major alcohol industry trade groups, the Distilled Spirits Council of the United States and the Beer Council, agreed only to advertise on broadcasts and in publications in which 70 percent of the audience is above the legal drinking age and advertisements must encourage responsible drinking habits.

While the major networks shun liquor advertising, cable channels and satellite radio are more receptive to the alcoholic beverage industries advertising dollars. The industry made a major push into the cable market and according to the Center on Alcohol Marketing and Youth at Georgetown University, the number of liquor commercials on cable networks increased from 645 in 2001 to more than 37,000 in 2004.

Shipments of alcoholic beverages by U.S. brewers and distillers slipped in the period from 2001 to 2002. A recession in early 2001 caused a decline in discretionary purchases, and high priced liquor sales dropped. The terrorist attacks against the United States on September 11, 2001, further depressed the sale of high priced liquor as many bars and restaurants saw sales decline as consumers stayed close to home. From 2002 through 2005, the value of shipments grew steadily.

According to the Census Bureau there were 45 firms in the United States devoted to distilling alcoholic beverages in 1998. These establishments provided employment for 9,900 people. The industry saw a noticeable increase in number of participating firms in 2001, when the number of establishments increased to 75. In 2003 and 2004 the number of participating firms fell slightly to 65.

The major players in this industry are both large and small. In 2002, 35 percent of U.S. establishments in this industry had 1 to 4 employees, 16 percent had 20 to 49 employees, 23 percent had 100 to 249 employees, and 26 percent had 250 or more employees.

Consumption Trends

U.S. per capita consumption of alcoholic beverages declined in the 1980s and 1990s. Figure 82 presents per capita consumption data showing a decline from a high of 28.8 gallons per capita in 1981 to a low of 24.7 gallons per capita in 1995. The consumption of distilled beverages during the period fell from 2 gallons per person per year to 1.2 gallons. It rose again thereafter to reach 1.4 gallons per capita in 2005.

Faced with declining consumer demand, the major distilleries began to consolidate. The top twelve liquor firms in the United States in 1984 controlled 67 percent of liquor sales. In 1988 they had increased their share of the market to 72 percent. Guinness plc and Louis Vuitton Moet Hennessey, a distiller of cognac and champagne, formed a joint marketing agreement in 1987. Guinness also purchased its distributor, Schenley Industries, that same year. Grand Metropolitan acquired distributor Liggett Group in 1980. Grand Metropolitan acquired Heublein Inc., which markets more than 100 brands of spirits, wines, and beer.

Retail Sales

For a long period in the liquor industry, the dark spirits such as whiskey, scotch, and bourbon were the most popular types of liquor. According to industry tracker Impact Databank, the top three selling brands of spirits in the 1960s and 1970s were Seagram's 7 Crown American blended whiskey, Seagram's VO Canadian whisky, and Canadian Club whisky. But during the following decades, Americans began searching for lighter liquors and became interested in vodka, gin, and other white spirits.

Figure 83 presents U.S. consumption of hard liquors by type and shows that vodka is the most popular form of distilled spirit in the United States. Vodka's share of total consumption was 23.4 percent in 1995; by 2005 it had an estimated market share of 27.1 percent. Rum also increased over this period as a percent of liquor consumption by type, representing 12.8 percent of consumption by 2005, up 45 percent from 1995 share. Meanwhile straight liquor (bourbon and whiskey) fell from 10.1 percent to 8.3 percent of consumption.

In 2006 a total of 176.6 million 9-liter cases of distilled spirits were sold at the retail level in the United States. Sales were up 3.7 percent from 170.2 million in 2005. Bacardi rum was the best selling brand, selling 9 million 9-liter cases. Smirnoff vodka was second with 8.5 million cases. Captain Morgan was third with 5.5 million cases.

Liquor has also reclaimed market share in the overall alcoholic beverage category. In the 1970s liquor represented 44 percent of all alcoholic beverages consumed. As alcohol consumption declined, liquor's share of overall consumption fell to 29 percent in 1995. The improved sales and visibility of the liquor industry in the early twenty-first century have helped liquor reclaim share of the retail alcohol market. According to the Distilled Spirits Council of America and Adams Beverage Group, in 2006 the liquor industry accounted for 32.8 percent of gross alcoholic beverage sales. That same year, beer accounted for 50.7 percent and wine accounted for the remaining 16.6 percent.

Global Sales

Diageo plc, based in the United Kingdom, Suntory Ltd, based in Japan, and Allied Domecq, also based in the United Kingdom, were the top producers of liquor in 2004 based on dollar sales. According to estimates by market research group Euromonitor retail sales of liquor worldwide totaled $254 billion in 2004. This was expected to increase to $263 billion in 2005. Whiskey was the best-selling liquor worldwide. In 2005 it was expected to generate $61.7 billion in retail sales, or 23.4 percent of industry sales. India is the top market for whiskey. Irish whisky has had a presence in the Indian market since the nineteenth century when the British set out to establish its presence in that part of the world. The industry tracking firm just-drinks.com expected Asia to represent 60 percent of spirits consumption worldwide during the period from 2006 to 2008.

KEY PRODUCERS/MANUFACTURERS

Diageo plc

Diageo was formed in 1997 by the merger of Guinness plc and Grand Metropolitan plc. The company produces many of the best-known brands in the market: Johnnie Walker Scotch whiskey, J&B Scotch whiskey, Smirnoff vodka, Popov vodka, Baileys Irish Cream, Captain Morgan rum, and Gordon's gin. It also distributes Jose Cuervo tequila. It was a leading company in the United States, the United Kingdom, Ireland, Russia, Brazil, India, Korea and Australia. According to estimates by Deutsche Bank and Euromonitor the company had 22.1 percent of the U.S. spirits market in 2006.

Fortune Brands Inc.

Fortune Brands is a holding company that acts as a distributor of distilled spirits, golf equipment, and numerous products for the home, including Moen faucets, MasterBrand cabinets, Master Lock padlocks, and Therma-Tru doors. Its popular liquor brands include Jim Beam, DeKuyper, Knob Creek, and Maker's Mark. Fortune Brands is located in Deerfield, Illinois. It employed 33,000 people and earned revenues of $8.7 billion for the fiscal year ended December 2006. The company had a 12 percent share of the U.S. spirits market in 2006.

Bacardi & Company Limited

Bacardi is another major company in the industry. The company's origins can be traced to 1862 when Don Facundo Bacardi Massó purchased his first distillery in Cuba. The company expanded into Spain, Mexico, Puerto Rico, and the United States at the turn of the twentieth century. Bacardi produces more than 200 different brands including: Bombay Sapphire gin, Martini & Rossi vermouth, Dewar's Scotch whisky, DiSaronno Amaretto, Grey Goose vodka, Blue Agave tequila, and B&B and Benedictine liqueurs. The company had 11.1 percent of the U.S. spirits market in 2006.

Constellation Brands

The company was founded by Marvin Sands in 1945. The company's spirit brands include Black Velvet Reserve, Effen vodka, Caravella, 99 Schnapps, and Paul Masson. The company markets more than 250 alcohol brands in nearly 150 countries. It markets itself as the largest wine producer by volume. The company reported sales of $5.2 billion for the fiscal year ended February 2007. It operates more than 50 production facilities and has 9,200 employees worldwide. The company had a 10.2 percent share of the U.S. spirits market in 2006.

MATERIALS & SUPPLY CHAIN LOGISTICS

In 2002 U.S. distilleries spent $1.3 billion on material inputs to their operations. They spent $70.5 million on wooden casks, barrels, and similar types of products. Whisky is aged in new or used charred barrels for several years before it is shipped to market. Producers purchased $22.7 million in grain such as corn, rye, and barley. Approximately $155 million was spent on neutral spirits used in the production of vodka, gin, and other liquor. Approximately $256 million was spent on glass and plastic containers. Other expenditures included spending on grapes, flavorings, malt, and packaging materials.

Liquor production involves water, yeast, and grain products. The corn industry received increased attention from the media in the early twenty-first century because of the possibility of using corn in the production of ethanol fuel, an alternative to petroleum products of which the United States is heavily dependent on imports. According to the Department of Agriculture, corn production increased from 8.9 billion bushels in 2002 to 11.1 billion in 2005. The value of the corn increased as well, from $20.8 billion in 2002 to $24.4 billion in 2003 and then fell to $22.1 billion in 2005. In 2006 the value of corn production increased noticeably to $33.8 billion. The increased interest in corn is reflected in the increased harvest between 2006 and 2007. In 2006 an estimated 10.6 billion bushels were produced; by 2007 this figure was expected to climb to 13.3 billion. Iowa was the top state for corn production in 2006.

Barley is used primarily in whiskey production. According to the Department of Agriculture, the value of barley production fell from 2003 to 2006. In 2003 total production was valued at $755.1 million; in 2006 production was estimated to be worth $497.5 million. As with corn, estimates for 2007 show an increase in barley production. Total harvest area increased from 2.9 million acres in 2006 to 3.5 million acres in 2007. Total production was estimated to climb from 180 million bushels to 223.4 million bushels. Idaho was the top state for barley production in 2006.

Rye is another grain used in liquor production. According to the Department of Agriculture, the value of production fell from $26.5 million in 2004 to $23.5 million in 2006. Production of rye was expected to increase in 2007. Oklahoma was the top state for rye production in 2006.

Water is an important material used by distillers. The amount of water and its overall character—the amount and type of minerals in the water—will influence the taste of liquors. The responsible use of water by distillers is an important issue in the twenty-first century. Many distillers are implementing sustainable production practices as they deal with rising prices for water and increased pressure on the national aquifers.

DISTRIBUTION CHANNEL

Liquor is sold in the United States through a three-tier system of producer-wholesaler-retailer. This means distilled spirits (like beer and wine) move from the producer to a designated distributor at the state level and then on to a legally licensed retail establishment, restaurant, or bar. This chain is highly regulated. Distillers, vintners, and brewers are collectively known as the first tier; wholesalers and distributors are the second tier; and the retailer, restaurant, and bar are characterized as the third tier.

In 2006, the largest company based on sales was Southern Wine & Spirits of America Inc. Other major distributors include Glazer's Distributors, National Distributing Company, and Young's Market Company. Most distributors are privately owned. Approximately half of industry revenue comes from the sale of beer, 30 percent from liquor, and 20 percent from wine. Distributors tend to specialize in either beer or a combined list of wine and liquor, but some handle all three.

According to the Census Bureau's Annual Survey of Manufactures, there were an estimated 1,800 wine and liquor distributors in the United States in 2004. In 1987 there were 1,900 establishments in this industry—the highest number of establishments reported between 1984 and 2004. The distribution industry, like the liquor industry, saw a number of consolidations take place in the 1990s as large national distributors acquired the small, local companies in the market. Many state laws prohibit alcoholic beverage manufacturers from owning retailers, but producers are allowed to own distributors, and some distributors are allowed to own retailers.

In 2004 the liquor distribution industry employed more than 57,000 people. Sales in 2004 were estimated to be $39.3 billion. Sales per establishment were approximately $21.7 million. The wine and liquor distribution industry is fragmented largely because each state has different laws and regulations surrounding the distribution of alcohol. In 2006 the top 50 wine and liquor distributors held more than 70 percent of the U.S. market.

Retail Sales

In 1978 many states deregulated liquor prices that had previously been set by the government. Deregulation allowed supermarkets and convenience stores to enter the business of selling alcoholic beverages. Some feared that the corner retail liquor store—generally a small, independent operation—would become extinct. While the industry did experience some economic hardships in the 1990s, by the start of the twenty-first century the industry saw its fortunes reverse. The number of beer, wine, and liquor stores increased from 24,830 in 1998 to 26,037 in 2004, according to the Census Bureau. Employment increased from 129,129 to 142,294. Retail sales in beer, wine and liquor stores were approximately $13.4 billion in 2004. The average beer, wine, and liquor store generated $400,000 in sales and employed approximately four people. California, Colorado, Connecticut, Florida, Illinois, Massachusetts, Michigan, New Jersey, New York, Ohio, Pennsylvania, and Texas represented nearly two-thirds of the market based on value.

Wal-Mart has also helped shape the retail liquor market. The retail giant represents a significant portion of retail sales of many consumer products, from cookies to diapers. Much of their success comes from the fact that Wal-Mart purchases directly from manufacturers. This allows them to offer products at low prices. While the company had always had small amounts of alcohol available on its shelves, in 2003 the company quietly started a push into the liquor market. This was perceived as a risky move for them. The company does not permit alcohol at its headquarters and is very proud of its family friendly image. In 2005, it teamed up with liquor firm Diageo to develop new merchandising and products. In addition to new products Wal-Mart would stock some of Diageo's best-known brands, such as Johnnie Walker Scotch and Smirnoff vodka.

Wal-Mart sold $1 billion worth of alcohol in 2004, representing a small portion of the $285 billion it generated in the 2004 fiscal year. The company's new alcohol policies were met with some resistance. However, by 2005 the company appeared to be staking its claim in the market. It adopted a common liquor store policy of establishing an outlet just across the county line of dry counties (dry counties do not permit alcohol sales). Glazer's Wholesale Distributors, the third largest alcohol distributor in the United States, invested in new management software in 2005. The software—which manages sales and inventory and helps Glazer restock shelves more efficiently—is more compatible with Wal-Mart's systems.

Dry Regions

There are 415 dry counties in United States. An estimated 18 million people live in such dry counties. Alcohol sales are not permitted in these regions, although many enjoy a lucrative trade in illegal liquor. From 2002 to 2006 grocery stores, real estate developers, restaurant groups, and Wal-Mart have spent $15 million on local campaigns to legalize the sale of alcoholic beverages in stores and restaurants where their sale is currently prohib-ited. The reversal of such policies has caused controversy; however, many residents of these areas have been persuaded by arguments regarding the economic development and increased tax revenues that would be generated by the legal sale of alcoholic beverages.

KEY USERS

According to the National Survey on Drug Use and Health 2004, approximately half of Americans over 12 years of age claimed to be current consumers of alcohol.

The Adams Liquor Handbook 2005 offers some insight into drinking preferences by age group. As can be seen in Figure 84, liquor became the preferred alcoholic beverage for those aged 20 to 49 years during the 1990s and early 2000s. The table presents these alcoholic beverage preferences by age group and type of alcoholic beverage for three time periods. The growing rate of consumption by a young segment of the population is important to the distilled spirits industry. While gaining new customers in the younger demographic, liquor appears to be on the decline with older drinkers. Those aged fifty and older moved away from liquor in favor of both beer and wine.

Liquor and Cultural Trends

Alcohol consumption increased in the 1990s. With a strong economy consumer confidence was high and spending on luxuries grew. Men started smoking cigars in greater numbers, for example. A brief cigar craze occurred and cigar imports reached an all time high point of 417.8 million units in 1997. The circulation of Cigar Aficionado magazine rose from 141,000 in 1994 to nearly 400,000 in 1996. In 1998 the television show Sex and the City began its run on cable television. The show featured four young female friends living in New York City and one of the activities that they were depicted doing frequently was drinking cocktails during their nights out on the town. Social observers of the time used the term Cocktail Nation to describe the sudden increase in cigar clubs and martini bars.

Many men favor dark spirits such as whiskey or scotch. Women tend to favor white spirits such as gin or vodka. While many older drinkers have established drinking habits, younger drinkers are seen as being more willing to experiment. Liquor companies actively market to younger drinkers in an attempt to take advantage of their perceived willingness to try new things. Liquor companies have also introduced low calorie and flavored products, which they market primarily to women.

Binge and Moderate Drinking

Research continues on the effects of drinking on consumer health and behavior. Binge drinking, defined as five drinks or more in one sitting, continues to be a problem in the United States. The consumption of excessive alcohol plays a role in car accidents, violence, and other traumatic injuries. Approximately 64,000 deaths in 2000 were attributed to heavy drinking according to the Center for Disease Control and Prevention (CDC). A CDC report released in 2007 showed that 15 percent of the U.S. population were binge drinkers. Approximately three-quarters favored beer, 17 percent favored liquor, and 9 percent favored wine. Teenage binge drinkers were much more likely to binge on liquor. The CDC theorized that adult binge drinkers favor wine or beer because it is less expensive than liquor. Teenagers, who by definition are drinking illegally, are not hampered by considerations of cost since they are obtaining the alcoholic beverages they binge drink from others, often their parents' liquor cabinet.

Unlike binge drinking, moderate drinking offers some health benefits. For example, the Harvard School of Public Health tracked 11,711 men diagnosed with hypertension from 1986 through 2002. The study, published in January 2007 in the Annals of Internal Medicine, found that men who consumed 15 to 29.9 grams of alcohol per day—the equivalent of one to two drinks—reduced their risk for a fatal heart attack by 30 percent. Nonetheless, excessive drinking, defined as more than 3 drinks per day, was not encouraged by the researchers.

ADJACENT MARKETS

Wine

The development of wine occurred in the region of Mesopotamia and around the Caspian Sea. The early civilizations made important discoveries about pruning, irrigation, soil, and vine harvesting to ensure the best grape production possible. Manufacturer shipments of wine were worth $10.4 billion in 2005. California dominates the industry in the United States, making 90 percent of the wine produced in the country. Exports of California wine increased from $641 million and 282 million liters in 2003 to $672 million and 382 million liters in 2005. However, major wineries are found in other states, and small wineries are beginning to proliferate throughout the United States. According to WineAmerica, the national association of American wineries, there were wineries in all 50 states in 2006. Approximately 45 percent of the nation's 4,280 wineries were in California, Washington, Oregon, New York, Virginia, Texas, Pennsylvania, and Michigan, with each of these states having more than 100 wineries.

Beginning in 1970, wine sales in the United States surged. During the 1980s sales were flat or falling. Beginning in 1994 sales began to climb steadily again and continued to grow in early 2007. This growth was attributable to a number of factors: new reports stating that moderate wine drinking is healthy, increased and improved marketing campaigns, and those in their twenties and early thirties adopted wine drinking at a younger age than earlier generations.

Beer

Manufacturers shipped $20.7 billion worth of beer in 2005. A total of 1,367 brewers operated in the United States in 2005. The Beer Institute characterized twenty-one of these brewers as traditional brewers and the remaining 1,346 as specialty brewers. The traditional brewers are large, industry leaders by volume, while the specialty brewers include microbreweries and brewpubs, most of which produce specialty and craft beers. The large number of specialty brewers highlights the dramatic changes that have taken place in the U.S. beer brewing market during the last quarter of the twentieth century. In 1960 there were only 175 brewers in the United States.

The U.S. craft brewing renaissance has had a significant affect on the market. Craft brewing is the fastest growing segment of the alcoholic beverage industry. While 2004 proved to be a difficult year for the industry as a whole, the craft beer segment grew at a rate of 7 percent. Moreover, craft brewers have been able to grow despite the proliferation of importers during the 2000 to 2004 period.

RESEARCH & DEVELOPMENT

Manufacturers are following the work of craft distillers and putting an emphasis on fresh ingredients, new flavors, and unique production methods. The Empire Winery and Distillery produces the award winning V6 vodka brand, which is distilled six times in copper pots from malted rye and distilled water. The vodka is then filtered through oak and maple hardwood charcoal until it is essentially pure. The Silver Creek Distillery filters its vodka five times through charcoal and lava rock garnet. Bendistillery manufactures vodka with hazelnuts and espresso beans. Some luxury vodka brands are manufactured using arctic or deep-sea water. Ocean Vodka, based on the island of Maui, produces vodka with water taken from 3,000 feet below the Pacific Ocean.

In 2006 and 2007 consumers began to demand products that were produced locally; such products are preferred for two reasons. First, they are environmentally friendly since less energy is required to move them to market. Second, they are beneficial to the local economy. Distillers have responded to this increased demand for local products. Silver Creek Distillery, based in Idaho, for example, manufactures its quadruple-distilled potato vodka entirely from Idaho Russet Burbank potatoes.

R&D efforts have also been expended on liquor packaging. At the end of 2006 Allied Glass Containers celebrated what it claimed was an industry first, the manufacturing of a tall, elegant 700 milliliter (ml), spirit bottle weighing just 295 grams (g). Produced at its Knottingley, England, facility, the container is the culmination of a project that started in 1999, when the company's working weight for a 700ml bottle was 435g. Allied reported that the lowest average weight achieved for this size bottle is approximately 340g.

CURRENT TRENDS

Healthier Drinks

In a battle against their expanding waistlines, many Americans embraced healthier lifestyles in the 1990s and early 2000s. Food and beverage marketers capitalized on this trend by releasing more foods grown organically, as well as products low in sugar, in carbohydrates, and in trans fats. The food industry produced healthier versions of cookies, potato chips, bread, ice cream, and beer.

For the health conscious, the cocktail was just empty calories, potentially high in sugar and high in carbohydrates. In 2007 the liquor industry promoted drinks with more nutritious additives: pomegranates, green tea, berries, and fresh juices.

Premium Categories

The spirits industry constantly looks for ways to innovate. From 2004 to 2005 the industry introduced 283 new types of spirits. Offering premium and super premium brands are another way the industry stimulates sales. The market for high-end spirits came into being in 1997, when the Sidney Frank Importing Company launched the Grey Goose brand. This brand was intended to create a sense of luxury, a brand that could unseat vodka market leader Absolut. In 2005 economy class vodka brands, those priced at less than $10 per bottle, witnessed a sales decline, while premium brands, costing between $15 and $30 per bottle, grew by 7 percent. Super premium varieties, those costing in excess of $30 per bottle, saw growth of 12 percent between 2004 and 2005. Other spirits are seeing strong sales in their premium segments as well. Sales of premium tequila, those costing $40 or more, increased more than 20 percent from 2002 to 2006.

TARGET MARKETS & SEGMENTATION

The spirits market in the United States performed well in the first decade of the twenty-first century. Markets being targeted are those associated with premium products and flavored liquors. Young customers are the targets for many of these flavored beverages and in particular, young women. Liquor companies have targeted drinkers between 21 and 29 years of age and the results of this targeted marketing are tangible. Between the early 1990s and the middle of the first decade of the twenty-first century, the alcoholic drink preferences of those aged 21 to 29 shifted strongly in favor of liquors at the expense of beer of and wine. In the period from 1992 to 1994, these drinkers preferred beer to liquor at a rate of 5.4 to 1. Twelve years later, in the period from 2004 to 2005, their preference was still in favor of beer but at a substantially reduced rate of 1.5 to 1.

A growing Hispanic population in the United States offered liquor companies another growing market to target with products designed to appeal to the Hispanic taste sensibility. Distillers are also producing and marketing products that appeal to the wealthy and health conscious Baby Boom market.

RELATED ASSOCIATIONS & ORGANIZATIONS

American Distilling Institute, http://www.distilling.com

Association of Canadian Distillers, http://www.canadian distillers.com

Distilled Spirits Council of the United States, http://www.discus.org

Kentucky Distillers Association, http://www.kybourbon.com

BIBLIOGRAPHY

"Adult Binge Drinkers Prefer Beer, While Teens Opt for Liquor." CNN. 8 August 2007. Available from 〈http://www.cnn.com/2007/HEALTH/08/07/binge.drinking.ap/index.html〉.

Bakalar, Nicholas. "Vital Signs: Heart Health, Study Links Alcohol Level to Lower Risk of Coronary." New York Times. 9 January 2007.

Ball, Deborah and Ann Zimmerman. "Hard Stuff." Wall Street Journal. 17 August 2005.

Barrionuevo, Alexi. "At $300 a Bottle Do You Have to Tip? The Allure of Expensive Liquors in Pretty Packages." New York Times. 16 December 2006.

"A Billion Dollar Gamble in Whisky." Time. 12 April 1971.

"Distilleries: 2002." 2002 Economic Census. U.S. Department of Commerce, Bureau of the Census. December 2004, 1-8.

"The Global Spirits Market." Just-drinks.com. March 2006, 19. Availalble from 〈http://www.just-drinks.com/store/product.aspx?id=52174&lk=rotw_arch〉.

Greenberg, Marc. "Beverage Industry. A Cup Half Full: Gulping the U.S. Profit Pool." Deutsche Bank. 17 May 2007, 14.

Hanson, David J. Ph.D. "History of Alcohol and Drinking Around the World." D.H. Handson. Available from 〈http://www2.potsdam.edu/hansondj/controversies/1114796842.html〉.

Levy, Clifford J. "Drink, Don't Drink. Drink, Don't Drink." New York Times. 9 October 2005.

Nagle, James. "Vodka Gains on Bourbon as Favorite Liquor in U.S." New York Times. 13 January 1975.

Plotkin, Robert. "Vodka Booming." Beverage Dynamics. May-June 2007, 12.

Seelye, Katherine Q. "Trickle of Television Ads Releases Torrent of Regulatory Uncertainty." New York Times. 12 January 1997.

Spiegler, Marc. "The Cocktail Nation." American Demographics. 1 July 1998.

"Top 20 Distilled Spirits Brands 2005–2006." Wine Handbook Annual 2007. Adams Beverage Group. 2007, 187.

Warner, Melanie. "With Business Leading a Push, Liquor Comes to Dry Bible Belt." New York Times. 12 August 2006.

Williams, Alex. "Alcohol Goes on a Health Kick." New York Times. 15 July 2007.

see also Beer, Wine