Whiskey Economics & How Fin-Tech Is Transforming The Next Generation Of Fine Spirits
Whiskey Economics & How Fin-Tech Is Transforming The Next Generation Of Fine Spirits When it comes to whiskey, there are many pictures that come to mind. There are images of
jmiller Whiskey Economics & How Fin-Tech Is Transforming The Next Generation Of Fine Spirits
When it comes to whiskey, there are many pictures that come to mind. There are images of the Prohibition period where distillers worked under the shadow of moonlight while law enforcement closed in. There are images of barrels aging in the rickhouse. There are images of the stills and the amber liquid that is poured into a glass.
It’s an industry that is filled with tradition and cultural significance around the world. In the United States, Bourbon Whiskey is considered “America’s Native Spirit.” In Scotland, Scotch Whisky is arguably the most iconic symbol associated with the region. Whiskey is more than just a drink, it is a symbol of friendship and conversation. From milestones to celebrations and everything in-between, whiskey is a drink that has taken center stage in many of life’s most important memories.
With all of these nostalgic images and warm thoughts that might be associated with whiskey, there is one thing that likely did not come to your mind: finance.
While the reason to love whiskey might be the passion behind it, as with any industry it takes financial prudence to make it all happen. There is a very unique economics dilemma to whiskey, and this is an area where whiskey has faced some tough challenges. It’s an industry that will make an accountant squirm. The reason goes back to what makes whiskey whiskey … and that’s time.
For those who might not be versed on the basics of whiskey production, the biggest constraint is time. When the spirit that will become whiskey is distilled, it comes off the still as a clear liquid called white dog. The taste is harsh, the aroma is overpowering and the signature color has not yet taken shape.
It’s only when that clear liquid is placed inside of a charred oak barrel that the magic happens. The interaction between the spirit and the wood over the course of years is what develops the complex flavors, beautiful color and signature aromas that has attracted fans in every corner of the globe. There is simply no substitute for time. And, the old saying that “time is money” is very true when it comes to whiskey.
Today, distilleries must invest tens of millions of dollars before they can even distill the first drop. After that initial investment, the outlays don’t stop as the distillery must invest in barrels, energy, grain, yeast and labor. For most companies, the marketing team could take over at this point, but in whiskey, the time still has not come for the first sale of a bottled product. At this point, the accountants have worn out their checkbooks while a single dollar of revenue has not yet been generated.
It’s a tough business that isn’t for the faint of heart. This has led many distilleries to try to monetize their operations sooner. This is typically done by releasing younger whiskey that has not been aged for long, or by releasing distilled spirits that don’t require aging like Vodka or Gin. The problem with the first option is that the initial exposure that consumers have to the distillery’s product is not a favorable experience, tasting a product that was not yet ready for market.
In summary: The economics of whiskey aren’t favorable. Whiskey requires a large investment and a long period of time before revenue can be earned. Booker Noe, the legendary Jim Beam master distiller, drove home this point when he said, “Starting a distillery is a good way to make a small fortune — if you start with a large one.”
That was until the spirit of innovation came to carry the whiskey industry into the future. Modern fin-tech platforms like CaskX are transforming the whiskey industry by connecting distilleries with capital in a unique way. Rather than forcing distilleries to sell lesser aged products or other types of spirits, these platforms have enabled distilleries to sell full barrels of un-aged spirit to individual investors.
Those individual investors purchase the full barrels of spirit that are then stored in the distillery warehouses while they age. The distillery gets immediate cash flow from the sale of the barrels, while the investors have the potential to benefit from the appreciation of the barrels as they age with time.
When it comes time to exit their investment holdings, investors will typically sell the barrels to Non-Distiller Producers (NDPs) which are brands that do not distill their own products. There are many such products on the shelf, companies that specialize in blending and marketing instead of distilling. The options available to these brands have traditionally been very limited, but the involvement of individual investors is shifting this dynamic and giving NDPs more options than ever to choose from. This will continue to shift even more as platforms facilitate an even greater number of barreled investments.
These dynamics have created one other party that benefits from fin-tech innovation in whiskey: consumers. Instead of browsing shelves filled with lesser-aged products that have been rushed to market by the bean counters in the back office, the future of bourbon looks much brighter. Whiskey can be allowed to age until it is just right for bottling.
Additionally, more distilleries and the craftsmen behind them are able to bring innovative whiskey to life as a result of this fin-tech revolution. All these factors are creating a renaissance of great whiskey that has been produced in the same manner as what the distillers of old had intended. Look on the shelf today and you’ll find few American Whiskey expressions that even have an age stated on the bottle. You can expect this to change over the coming years. In years to come, when you see a plethora of age statement American Whiskies on the shelf, you can thank fin-tech and investors who have brought them to life.
Fin-tech whiskey platforms have created a win-win-win. A trifecta of parties that are each benefitting. The distilleries. The investors. The consumers.
How Investors Benefit From Whiskey Fin-Tech:
- Tangible asset un-correlated to traditional financial markets
- Potential to profit from aging process
- Hedge against inflation & economic uncertainty
How Distilleries Benefit From Whiskey Fin-Tech:
- Immediate cash flow from barrel sales
- Avoid selling less aged, inferior products
- Avoid producing alternative spirits like Vodka and Gin
How Consumers Benefit From Whiskey Fin-Tech:
- More selection of well-aged products
- More selection from new distilleries
- More quality products
Fin-tech whiskey platforms have brought innovation to the industry by enabling distilleries to offer whiskey barrels as an investment product. While this might seem like an easy dynamic, there are a lot of pieces to making the puzzle. The first is the fact that, in the United States, most whiskey barrels sold as an investment product are considered securities. That’s right, a whiskey barrel can be considered to be a security and under the oversight of the SEC. This comes down to the “Howey Test,” which has been the basis of many cryptocurrency and NFT products being classified as securities.
The second piece of the puzzle is that whiskey is alcohol, which is highly regulated by the Alcohol and Tobacco Tax and Trade Bureau (TTB). This means that whiskey barrels must remain stored at a distillery carrying the necessary federal and state licenses. This is where fin-tech platforms have helped pioneer the processes by streamlining the manner in which transactions take place to comply with SEC and TTB requirements.
This starts with connecting distilleries and investors, facilitating the flow of information between the parties in a fully compliant manner. Fin-tech whiskey platforms offer online portals and apps that enable investors to monitor the holdings that are stored at distillery warehouses, and even initiate the sale of assets when the time is right. An environment that would have been nearly impossible for an individual to navigate on their own has been simplified by fin-tech that has made whiskey investment nearly as simple as investing in a stock or bond.
A fin-tech whiskey platform works by facilitating the purchase of whiskey barrels from a distillery by individual investors. The distillery sells barrels in bulk to the platform, or lists barrels for sale on the platform. Those barrels are then offered in smaller parcels to individual investors. Those individual investors purchase the barrels. The barrels are stored in the distillery warehouse while they age, or could be moved to a centralized storage facility.
If an investor chooses, they can relocate the casks to a different facility, so long as that facility meets federal requirements for bulk spirits storage. Investors are given access to an online management portal where they can view and monitor their holdings. When the time is right to sell, the investor lists the barrels for sale on an online marketplace. Within the marketplace, brands and non-distiller producers can purchase those barrels, which will either be bottled or aged further. After the sale, the investor is paid the proceeds from the sale.
The process is pretty straight-forward, buy and hold whiskey while it ages. Sell when the time is right. Fin-tech has offloaded all the paperwork and heavy lifting to make barrel investment easy for individuals, opening a completely new investment product.
As with many major disruptions, it is amazing to see the role that fin-tech is playing in pushing the future of whiskey forward. For investors, this means the ability to diversify with a tangible asset that has the potential to generate consistent growth. For distilleries, this means a lifeline in the form of immediate cash flow. For consumers, this means more selection of great products on the shelves.
Fin-tech platforms might operate silently, similar to a barrel aging in a rickhouse, but the impact they are having on the industry cannot be understated. It’s truly investors and fin-tech that are driving the future of the whiskey industry and completely changing the dynamics of whiskey economics.
