Monday, January 16, 2017

What's on the shelf? - Hudson, Baby Bourbon and Manhattan Rye

You’d be hard pressed to find a whisk(e)y whose price hasn’t gone up in the last 10 years. While some have risen up a little, others have gone up a lot. Many have crept upward incrementally over several years, but some have leapt dramatically overnight. When a whisk(e)y price goes down in the current environment, that’s something which certainly catches my attention.

Scanning the shelves of some of the New Hampshire state liquor stores during the latter months of 2016, I noticed an interesting price disparity. Sitting right next to each other were two bottles of Hudson Manhattan Rye; at $45 was the 375 ml sized bottle that the brand has been known for since its inception, and at $50 was a recently introduced 750 ml sized bottle. They also had both sizes / prices for Hudson Baby Bourbon.

In an ideal world these two bottles of whiskey would not have been sitting on the shelf next to each other, but there is only so much influence that producers can exert in the retail space. When a distiller doubles the size of their whiskey bottles and the price only comes up by 10%, they are clearly serious about selling a lot more whiskey. Let’s take a look at some background and see what’s going on here.

Tuthilltown Spirits was established in 2004, but it was born out of a failed business venture that dated back to 2001. That was when Ralph Erenzo purchased the Tuthilltown Grist Mill property in upstate New York with a vision of turning it into ranch for visiting rock climbers. Three years of legal challenges from neighbors who opposed his plans crushed that dream.

Looking for an alternative business use for the place, he came across some state regulations that could work to his benefit as a distiller. Right-to-farm laws that protected agricultural concerns would beep the pesky neighbors at bay and a new class of state distilling license introduced two years prior meant that the fee to start the business would be $1500 instead of $60,000, as long as he made less than 35,000 gallons of spirit each year.

Erenzo partnered with Brian Lee, an engineer and technical designer, and they spent the next two years building the distillery, figuring out how to distill and experimenting with aging in small barrels. By 2006 they were selling the first bottles of Hudson Baby Bourbon. Eventually three other aged whiskeys joined the lineup; Hudson Single Malt Whiskey, Hudson Four Grain Bourbon and Hudson Manhattan Rye Whiskey.

Tuthilltown Spirits was noteworthy for being the first distillery to open in New York since Prohibition and for being the first producer of Bourbon in the state, ever. The brand caught on in the New York City craft cocktail scene, and they quickly built a small but strong following. Then in 2010 they sold the Hudson Whiskey brand, along with the rights to its distribution, to William Grant & Sons (yes, the one that owns Glenfiddich and Balvenie). Erenzo and Lee still own and operate the distillery.

I did a little digging and found some interesting information about their maturation regime. An article from 2011 stated that the Baby Bourbon was aged for four months in three gallon barrels. A 2014 article noted that the barrel size used for these whiskeys ranges from two to 14 gallons. A comment on a blog post from someone who had visited the distillery in 2014 mentioned that the whiskeys were being aged for about a year.

I do take issue with the fact that the Hudson Whiskeys have carried (and still do) age statements of “aged less than four years”. They may be honest about their short aging times in interviews or on distillery tours, but the label is misleading at best. It’s also illegal. TTB regulations for most American whiskey styles (and certainly the ones made by Hudson) state that they must carry an age statement if they are aged less than four years and that the age shown on the label must be that of the youngest whiskey contained in the bottle. Quite honestly, I’m shocked that the TTB approves labels with such flagrant violations of their rules.

Digressions aside, an article from 2013 stated that the Hudson brand had sold 6500 bottles in 2012 and was on track to sell 60,000 bottles in 2013. While that’s a big increase, it’s still not that much whiskey. Remember, those were 375 ml bottles, which translates into 2500 9-litre cases (the industry standard for measuring sales volume). Just to put that into perspective, Glenfiddich sold 1 million cases in a year for the first time in 2011.

William Grant & Sons obviously would want to grow the brand, increase sales and see a good return on their investment. Aging the whiskey for a longer time in bigger barrels will help them do that.

Smaller barrels have a greater surface area of wood for a given volume of liquid compared to larger barrels, allowing them to age the whiskey much more quickly (many would argue that oak flavors are imparted more quickly, but that maturity can only come with time). But that greater surface area means there will be more loss to evaporation, even when aging times are taken into account. I don’t have exact numbers, but I’ll make some up to give you an idea of what I mean. Let’s say a three gallon barrel requires four months of aging. Its total loss to evaporation might be 40%. If you scale up to a 10 gallon barrel it will have to age for a full year to get the same effect on flavor, but it might only lose 30% of its content.

Since labor is a big part of the cost of a barrel, small ones cost much more, proportionally. A four gallon barrel might be around $75 where a traditional 53 gallon barrel can be had for less than $200. Small barrels will get a new distiller’s product to market more quickly, but their cost effectiveness in the long term is terrible.

Once a producer grows their operation to a certain point, everything gets less expensive. Buying grain by the truckload rather than is 50 lb bags costs a lot less. Buying barrels, bottles, labels, packaging, etc in larger quantities will get you volume price breaks. Shipping rates are going to be much better on all of these items if you can take a whole cargo container of them at once rather than paying to ship one palette at a time. The fixed costs of a distillery’s overhead (property taxes, heating the building, etc) all take a smaller percentage out of the bottom line when you start dealing with bigger sales volumes.

Once they had grown to the point that they could reduce the cost of making the Hudson whiskeys significantly, it was time to drop the price, which would fuel further sales growth. In Tuthilltown’s early years, consumers were much more likely to try the product if it was in a small bottle that didn’t break the bank. With a much lower price, it makes sense to shift to bigger bottles which means twice as much whiskey going out the door with each sale.

It will be interesting to see where they go with barrel size and aging time over the coming years.