At a beverage-industry conference in Phoenix in May, presenters were advised to avoid a buzzy but divisive term.
“An edict went out to speakers saying, ‘Don’t mention the C word,’ ” said Nomura analyst Ian Shackleton, who spoke at the gathering.
And that C word?: “craft.”
Craft-spirits distilleries have mushroomed in the U.S. to 588 from 51 over the past decade, according to data from the American Distilling Institute. The trade group predicts craft-spirits makers’ share of the U.S. spirits market could rise to as much as 8% by 2020 from the current 1%, posing a threat to liquor conglomerates such as Diageo PLC and Pernod Ricard SA .
“There’s a renaissance in America now with a craft movement happening in coffee, bread, beer and now spirits,” said Bill Owens, president of the institute. Behind small brands-many of which blend and bottle their products by hand-is “a story that the big boys can’t tell,” he said.
The big boys beg to differ. And they haven’t let definitions stop them from climbing on the bandwagon with what they describe as craft bourbons, whiskeys and vodkas.
According to the American Distilling Institute’s circuitous interpretation of the term, a craft distillery must be no more than 25% owned by an alcoholic beverage company that isn’t a craft distiller. It also says the production process needs to be “hands-on” and that maximum annual sales must be less than 100,000 proof gallons, an alcohol-industry volume measure.
Large spirits makers say craft isn’t about the size of a brand but rather about delivering quality. “Craft is just a label,” said Ivan Menezes, chief executive officer of Diageo, the world’s largest spirits maker, in an interview. “The real question is, how do you engage with consumers around authenticity, craftsmanship and stories that resonate?”
It is clear that “craft” comes with a certain cachet, said Tom Mooney, president of the American Craft Spirits Association, a nonprofit. “The brand equity of the word craft is spectacular,” he said. “It implies more care, greater quality, that you’re supporting something from within your community.”
Kings County Distillery in Brooklyn, N.Y., sells bourbon made with New York state corn and a whiskey flavored with cacao-bean husks from a nearby chocolate factory. The company, which sold about 1,000 cases last year, is small enough to let drinkers enjoy tours and cocktail-evening chats with its young co-founders.
“The advantage of being a craft distillery is you can communicate with your customers directly,” said one owner, 36-year-old Colin Spoelman.
Not to be outdone by such upstarts, Diageo-whose mass-market brands include Smirnoff, Crown Royal and Captain Morgan-last year began selling Barterhouse Whiskey, which it describes as having notes of roasted grain and charred oak with a brown-sugar finish, for about $75. And its $150 a bottle Old Blowhard Whiskey, which Diageo markets as having undertones of smoke and honey, is “hand-bottled” in Tullahoma, Tenn. This year Diageo also launched a bourbon called Blade & Bow, marketed as a tribute to the craftsmanship of a former Louisville distillery.
Diageo wouldn’t disclose exactly how much Barterhouse and Old Blowhard it produces, but said it is way less than 100,000 proof gallons annually.
In November 2013, Diageo’s North America head, Larry Schwartz said the company wanted to become the No. 1 craft distiller in North American whiskeys in the U.S. That same year, Diageo launched a project called Distill Ventures, through which it mentors and invests in small spirits brands.
Diageo is particularly vulnerable to the rise of smaller distillers, said Eamonn Ferry, beverage analyst at Exane BNP Paribas. Diageo’s U.S. market share has declined every year between 2011 and 2014 as its mass-market brands have struggled, and Mr. Ferry estimates that 72% of the company’s U.S. business-everything except its tequila and Scotch whisky brands-is exposed to craft distillers.
The beer industry knows craft newcomers can be formidable rivals. Craft’s share of the U.S. beer market rose to 9% last year from 3% in 2003, while share for mainstream beers like Budweiser and Miller Lite collectively fell to 77% from 86% over the same period, according to industry tracker Beer Marketer’s Insights.
The big distillers vow not to be caught similarly flat-footed.
Sales of Diageo’s craft-style Bulleit bourbon-inherited in 2001 when it bought Seagram Co.’s wine-and-spirits portfolio-rose 35%, stripping out currency fluctuations, in the year ended June 30, making it the company’s fastest-growing unflavored North American whiskey. Mr. Menezes has said Diageo aimed to build Bulleit through word-of-mouth, creating “a lot of experiential stuff” and working with bartenders rather than doing large-scale TV advertising.
“I want to make sure Bulleit stays with the hipsters in Williamsburg and does not become a mass brand,” Mr. Menezes said on a January conference call.
Pernod, maker of Absolut vodka, is scrambling to get with the trend. The world’s second-largest liquor maker on Thursday said it had written down its Absolut vodka brand on weakness in the U.S. The company, which lost 1.4 percentage points of market share in the U.S. between 2008 and 2014, according to Exane, has launched a premium Canadian whisky called Pike Creek and has also joined with entrepreneurs in Detroit and Seattle to open small distilleries to make city-branded vodka. The vodka is made with a uniform recipe but as many local ingredients as possible.
Another approach involves line extensions. Brown-Forman Corp. has launched variants of Woodford Reserve bourbon, which costs about $80, and Jack Daniel’s Single Barrel, which costs about $50, to compete. Beam Suntory Inc. in 2013 launched “signature craft” editions of its Jim Beam bourbon brand.
Some analysts said the distillery trade group’s growth estimate for craft is overly optimistic. For one thing, the spirits industry has a bigger range of flavors and offerings than the lager-heavy beer industry did when craft brewers got ahead. For another, small distillers have flourished through a prolonged period of low interest rates, and when financing costs rise, their growth could slow.
The small distillers in turn say large distillers currently have an important edge: Whiskey requires an aging process. That keeps a natural lid on growth rates for craft distilleries, the average age of which is just three years in the U.S., according to Exane. But as these small distilleries age and new distilleries open, the firm predicts increased competition.
Kings County’s Mr. Spoelman thinks the real battle between the newer distilleries and the big guys in whiskey is yet to take shape. “The advantage that the Diageos and Brown-Formans have right now is inventories of well-aged whiskeys,” he said. “It’ll be interesting to see in five or 10 years where things stand.”