CPG Week: Do Tariffs Spell Impending Doom For Craft Distillers?

[00:00:05] Monica Watrous: Welcome to the CPG Week podcast by BevNET and Nosh, your source for the latest food and beverage industry news. I'm Monica Watrous, Managing Editor of Nosh, here with my co-hosts, Brad Avery and Lukas Southard. If you're enjoying the show, please subscribe on your listening platform of choice. On the podcast today, we're discussing what a trade war could mean for craft distillers. But first, espresso turkey teeny anyone? This Thanksgiving, Reynolds Wrap, the foil brand, is presenting a seasonal take on the popular espresso martini, which involves a turkey brushed with coffee liqueur, stuffed with oranges and herbs, and coated with a savory espresso rub. Would you eat, Brad? That doesn't sound bad at all.

[00:00:53] Ferron Salniker: That sounds nice. See, I was envisioning it the other way around, that it was going to be turkey-flavored espresso, and now it's just like, oh, it's an espresso rub for a turkey? That's probably fine. You got me all worried. I thought it was like, oh, this is going to be like the Jones turkey and gravy soda. This is my turkey-flavored latte.

[00:01:10] Brad Avery: I'm still out. I'm still out on this. I'm a firm believer in brining your turkey. I like to grill mine, but like, what are we doing here, folks? What are we doing? We're brushing it with espresso martini with coffee liqueur. I can't imagine that's good. I challenge anyone to tell me that that actually tastes good.

[00:01:28] Monica Watrous: You saw the picture that I sent you, right? It looks like a burnt turkey.

[00:01:31] Brad Avery: Yeah, it looks like they forgot it in the oven for like four hours too long.

[00:01:35] Ferron Salniker: You need the caffeine for all the tryptophan in the turkey that makes you sleepy after. So it needs to pick you up. A functional turkey.

[00:01:43] Brad Avery: That's actually a legitimate point, but I still don't. I do coffee rubs on like a pork or something. That makes sense. Turkey, I just, no, I'm out. Sorry.

[00:01:57] Monica Watrous: Well, speaking of martinis, today we are joined by Ferron Salniker, spirits editor at BevNET, who recently wrote about the effects of potential tariffs on the craft spirits industry. Hey Faryn, thanks for joining us. Hi, y'all. Thanks for having me.

[00:02:14] Lukas Southard: So what's going on here? So my article focused on the fact that, you know, tariffs, there's like talk of tariffs right now in both campaigns. And so regardless of who wins and their proposals, the Harris team is talks about a Trump tequila tax because he's mentioned that he would tax 10 to 20 percent on Mexican imported goods. Regardless of whether that happens, there are these tariffs that have really impacted whiskey distillers, but in particular, craft distillers.

[00:02:53] Monica Watrous: And this has been going on since 2018. Can you tell us a little bit of the backstory?

[00:02:59] Lukas Southard: Yes, absolutely. So these terrorists were a result of a dispute that has absolutely nothing to do with whiskey or spirits. Essentially, there's a dispute between the EU and the states on steel and aluminum. And that was started in 2018 by the Trump administration in response that you put tariffs on American goods like signature American goods, motorcycles, cranberries apparently are very American. And whiskey American whiskey and so those were enacted in 2018, and we saw a big dip about 20% in terms of whiskey exports overall after those tariffs were enacted. But we saw a bigger dip among craft spirits. So overall, whiskey was hit, but craft spirits was hit. Exports were cut basically in half the following year and have continued mostly downward. They rose by 5% last year, but are still about a third of export, craft spirit exports before the tariffs came to be. The tariffs have been since suspended twice. And so the Biden administration suspended the tariffs originally in 2022, and then again last year. And so that's why they're slated to, the dispute will reemerge in March of next year.

[00:04:40] Brad Avery: So Farron, when will these tariffs possibly go back into effect? And how are the craft distillers here in the US preparing for that possible inevitability?

[00:04:54] Lukas Southard: So they're scheduled to come back March 31st, 2025, and they'll come back at 50%, which is huge. And so what we've seen is that craft distillers have already had to deal with the impact of those tariffs. So not only did exports drop off, just the anxiety of the tariffs returning was enough to cause doubt among European distributors that craft spirits could weather not only like present tariffs and say 2018, but then any back and forth that might happen later on. And so a lot of craft distillers pulled out. I will mention that it's hard to disentangle the pandemic from these export numbers in a way like craft spirits overall was pretty hit by the pandemic and last year had its first dip in sales as like a industry and so obviously there was more things going on for craft distillers than just increased costs with exports but basically craft spirits have had to kind of prove to distributors that they're in it for the long haul And that can be really hard when you have limited budgets. And so craft distillers have had to decide, are they going to continue to make this investment in this foreign market when that investment is likely higher than making an investment in a home market or a regional market? It's already impacted craft distillers. And I think, you know, it's the possibility of them returning is just adding to the anxiety about whether or not it's a worthwhile investment.

[00:06:56] Ferron Salniker: Right, and looking to the election, Donald Trump has made imposing new tariffs on all goods coming into the country, more or less, as a pillar of his economic platform. I believe his plan may essentially halt trade with China, and he's talks about at least 10% tariffs on Europe for cross industries. Now, honing in, we saw this week he spoke at the Economic Club of Chicago, and on Tuesday, where he was talks about wanting 100%, 200%, 2,000% tariffs on goods coming into the country. I think he may have been a little hyperbolic in that moment, but the point is that this is someone whose pillar of his economic plan is tariffs. So how would that affect this situation where you already have some tariffs that are looking to go back into effect?

[00:07:46] Lukas Southard: It's hard to say what the impact of these hyperbolic tariffs might be. And especially because if we look at Mexico, we don't know how they're going to interact with the updated NAFTA. If we look at Europe, we can see that what happens is these retaliatory tariffs occur, and they've occurred by the EU, also by China. We just saw, for example, that the EU imposed some, I think, anti-dumping regulations on Chinese electric vehicles. And China, in response, made retaliatory tariffs on cognac. And cognac is an industry that's already been hurting. And so that's going to hurt cognac producers in the EU. So the big question is then, if there are these big tariffs on these imported goods, how does that impact craft distillers exporting to these countries? We don't know, but what we've seen in the past is that it amounts to retaliatory tariffs anywhere from like 25 percent to 50 percent. There was an additional dispute that happened during the Trump administration that also, again, didn't involve spirits. It was totally unrelated also with the EU, but the response by the EU was to impose tariffs on U.S. rum, vodka, and other spirits. That was, again, suspended, I think, for a year, and then they were removed. Basically, what we see is that spirits, whether they're craft or not, get thrown into these disputes that don't involve them, but really penalize the most vulnerable, smaller distillers who can't afford to weather these tariffs.

[00:09:50] Ferron Salniker: Yeah, and your article also brought up how some of the current tariffs are already impacting international business. You spoke with the CEO of Cedar Ridge Distillery in Iowa. And there's a good quote here where he talks about how they've been producing at a high level, but we're not going to get out of that oversupply unless you can make inroads into export markets. And so there's already this issue with local distillers having to shut off business and dealing with overstock as a result.

[00:10:18] Lukas Southard: Absolutely, and what he was referring to is that we've been in high production of bourbon for years now, and there's talks about a bourbon bust. How real that is, I don't know, but we do have quite a huge supply of bourbon, and by international treaty, we're the only country that can produce bourbon. And so there has been this high demand for American whiskeys, That's what one of the distillers I talked to spoke about, Koval Distillery in Chicago, and how they started exporting because there is such this high demand and love for American-made spirits. And so these tariffs are happening at such a bummer time when, you know, these craft spirits not only could have an awaiting audience, but have a place to put what might be an oversupply of particularly whiskey spirits.

[00:11:17] Brad Avery: So what you're trying to tell me is that bourbon is going to be a lot cheaper and I can go and get really good bourbon for cheap is what you're saying. That's what I gained from that whole thing.

[00:11:27] Lukas Southard: That has been the word on the street. Great.

[00:11:29] Brad Avery: That's all I need to know. You don't need to tell me anymore. I'm going to the liquor store later this afternoon. I mean, it's interesting because I would imagine bourbon, like you said, is something that is in high demand abroad because it is only able to be produced here. But it seems like this is impacting more than just whiskey. Whiskey would be kind of the main focus, but there's all kinds of different spirits that are going to be impacted. And there is a huge market, it seems like, especially in Europe, for some of these American-made spirits.

[00:12:02] Lukas Southard: Definitely. And what I would add is that as much as there is an interest in American-made spirits, these products, these craft distillers or just American distillers are competing with the rest of the world on those shelves in, say, Europe, which is the largest foreign market for them. So it's not just that they're these craft distillers, for example, are competing with larger distilleries that are well funded, can weather the tariffs, can also have big budgets for marketing, but they're competing with brands from all over the world. And so it's really like these tariffs really are stacked against these craft distillers that in a time in which spirit sales are dipping all over the world, but they need to find more markets to get into.

[00:12:58] Brad Avery: This demand is not only can be difficult to to weather when you're dealing with tariffs, but also if if you do lose some of that market share, then it's hard to you know, it's hard to really come back from that or reenter that market. And that was a point that was brought up by the president of Koval Distillery in your story, Farron, when they said. If you're off, someone else is on, and then it's going to be a hundred times more difficult to get back on. And I think that's pretty true across CPG. If you lose your spot on the shelf, it can be really, really hard to find your way back into that market, especially when you're dealing with international business and possible tariffs that are going to make your product a lot more expensive.

[00:13:40] Lukas Southard: Definitely. And I think in the case of say, Coval, you know, they have been making strides for years. And that's part of the reason why they stayed in it. They had a long tenure in a lot of these European markets. Whereas if you're a smaller brand, and if you're recently started to make an investment, you might not be able to weather these expenses, these extra expenses, but then you're faced with the fact that you won't be able to get back on the shelves and distributors might not take you on. And that this is a very saturated spirits market and there's so much competition. And if it's not your American whiskey, it's going to be someone else's.

[00:14:31] Monica Watrous: Insiders can read more. The story on BevNET is called, What Could a Trade War Mean for Craft Distillers? Thanks for joining us today, Farron. Thanks for having me. Here are some other notable bits of news from the week. Vendor Says Better Brand Social Media Claims Are False, The Era of the Empanada, Inside Maspinada's New Production Gains, and Keychain Unlocks New Opportunities with Hershey's Investment. For these stories and more, become an insider at BevNET and Nosh. That wraps up this edition of CPG Week by BevNET and Nosh. Thank you to our audio engineer, Joshua Pratt, our director is Mike Schneider, and our designer is Aaron Willette. If you enjoyed the podcast, please subscribe on your listening platform of choice, and we will see you next time.