Australia's Flourishing Craft Industry

According to the IWSR, one of the most trusted and widely used sources for beverage alcohol trends in the world, the total Gin volume in Australia in 2020 was over 973,000 nine-litre cases. 

In laymen’s terms that’s the equivalent of around 12.5 million bottles and represents an increase more than +36% over 2019 volumes.

Go beyond the headline numbers and the data reveals a complex set of trends unfolding too. It shows that despite all the buzz, domestically made spirits remain quite a small percentage of the overall consumption.

While we are not permitted to share exact numbers, multinationals dominate sales with the three big brands (Gordon’s, Tanqueray, Bombay) estimated to account for almost 50% of all gin sales in Australia. Add in the other best-selling international names such as Hendrick’s, Beefeater and Roku and it’s clear the vast majority of gin consumed in Australia is made elsewhere. 

While at first glance this may seem frustrating for domestic producers, the situation is anything but. 

Namely, look at how much their share has grown. For years, the percentage of domestic gin consumed vs international imports was less than 5%. It’s a statistic that has been often banded about at trade conferences and routinely used by papers and commentators since 2016. Today, if one combines even a conservative estimate of the total output of a dozen of the country’s larger producers (Four Pillars, Archie Rose, Ink Gin etc)- it’s clear to see that’s now well over 15%. 

In a short space of time, the growth of local producers has changed the landscape as well as shifted the expectations of a new generation of drinkers going forward. This is reflected in the data, where in 2020, domestically made spirits' volume grew faster than imports (or indeed overall growth).

According to the IWSR, local gin volume increased by +40.7%, while imported gin volume grew by +35.6% in 2020. Given overall growth of gin in Australia is around 36%, this split is also another indicator of where the real volume lies in the category, the respective size of their starting points and just how influential international brands are in the Australian market. 

Viewed more holistically however, it is a visceral indicator of the acceleration towards local distilleries. Despite having no international tourism coming to their cellar doors, less effective routes to market and less marketing spend in general – small producers managed to outperform the big players in a pandemic year. 

Follow the industry predictions and by the end of 2021, it is likely that 1 in every 5 bottles of gin consumed in Australia will be made there, up from 1 in every 70 just a few years ago. 

Even if the “Gin Boom” stopped overnight, which it won’t, the trend towards local shows that there is a huge opportunity to cannibalise sales away from Diageo, Pernod Ricard and Bacardi. The dual growth opportunity (local spirit producers gaining more of the share of the market and the market itself also growing) has created a perfect storm that’s encouraging new brands to launch at an astonishing rate.

Speaking with The Gin Queen’s Caroline Ashford and basing our assumptions off her Gin Directory – we estimate there being a minimum of around 280-300 gin brands active in the Australian market today.

On her last round up of domestically made gins in August last year there were 210 active gin brands. Less than a year on, there are now over 245 and despite the pandemic, they are being joined by even more imports keen to break into the market. The combination means it’s growing at a rate of around 50 new gin brands a year, equivalent to a 22% increase.  

With very few having the one flagship offering and some boasting up to five or six gins in their range, a conservative estimate would mean there are 900 hundred different gins competing for shelf space. Based on our experience doing the listings, guides and stock take for Junipalooza in Melbourne, we are confident that the number is north of a thousand. 

Many of these are nano operations. While we are not at liberty to share sensitive commercial information – based on what we have seen and what we have been informed about, if you take the overall value of the market and subtract just a dozen of the bigger and best-known brands, it’s clear that there are 260 different producers who share around 20% of the value of Australian Gin between them.

Put in different context – once all 260 brands are combined, they make up the same value as Gordon’s Gin. 

In numerical terms, this translates to a majority of Australian producers reaching sales of less than ten thousand bottles a year, a hundred or so between 20,000-40,000 bottles a year, a dozen domestic producers achieving sales of over one hundred thousand bottles a year, and less than half a handful pushing past the quarter million mark. 

It may be a thriving industry, but it’s made up of many for whom income and sales are hard earned and where margins are negligible. Tax swallows the lion’s share of the average $90AUS bottle price and once you factor in overheads and other hard costs involved in production, as well as the need to leave a decent margin for the wholesaler and retailer- a producer making ten thousand bottles a year is making a margin of $50-65K AUS. That’s not much when there’s still salaries left outstanding (and income tax) and it’s little wonder why distilleries there predominantly consist of fewer than two people who to do everything… 

For the hundreds of characters and companies that make up the Australian gin industry, the economics clearly demonstrate that being a craft distiller is a long way from being a lucrative profession and only a fool would think there is a gold rush underway. It is a domestic industry where hearts rule heads and that’s fuelled by passion rather than profits. 

Will we see more Australian producers in the years to come? Probably, but not at the kind of breakneck pace we’re seeing today. Some categories such as Gin will veer towards contract distilling and use existing distillers to produce their liquid. 

According to Ashford, it’s already a notable area of growth and many of the new entries she has seen enter the market in 2020 have come from third party produced products. While this means more brands, more brand owners, more diversity in the market and more competing for attention – it does not mean more copper stills flowing. 

As with the 'Gin Boom' in other countries and those who have more established craft distilling industries, only the few contract brands that are successful go onto building their own premises, while there will be countless others that in time will just stop being made. 

A broader “shake-out” is also inevitable too. Any industry that enjoys staggering growth eventually regulates itself and the weaker offerings don’t survive. Quality is paramount.

Look at the US, South Africa and the UK’s respective craft sectors and the implosion isn’t a boom-and-bust affair though. It’s mainly one of consolidation and of readjusted expectations. Not everyone can become a recognised name and grow their volumes to a significant size. Australia isn’t big enough for more than a few dozen players pushing serious volume in any given category, meaning the rest – some 260 or so in this case currently – will have to settle for being a permanently small producer. 

Micro distilleries with strong local sales, small overheads and loyal followings are an entirely sustainable business model. The distilleries who don’t grow to become big names don’t have to actually shut their doors. The question becomes more about whether an owner wants to accept that scale, or if their ego and expectations demand something bigger.

From experience tracking hundreds of gin businesses over a decade, it’s only those caught in that growth phase that collapse spectacularly. Namely, it is those who are too big to be sustainable on the small sales return they are making that once the funds run out from the investment they have made (or received) in order to grow - they fold.

Moreover, even if they can remunerate where needed to continue existing, many don’t quite reach a position in the market that allows them to consolidate the operation and make bulk savings, develop exports and build brand equity, meaning they cannot continue to spend the required amount to maintain an established position or grow further. Their slow decline is inevitable until further funds can be found or a buy-out and integration strategy is implemented.

Sustaining your place in the upper echelons of any category requires money to fuel it, you can’t just “make it” sit back and rake-in the rewards. 

Despite more digital routes to market where gin lists can reach the hundreds, for the bulk of bricks and mortar retailers, as well as bars and restaurants, shelves are not getting bigger. If anything, curation is now paramount for retailers and bars looking to push their own identity.

This will be an unmovable obstacle for the new crop of gin makers and one that gets progressively harder as the domestic industry matures. Displacing a multinational brand is hard enough, but it possible because a local craft offering and an international brand name are completely different propositions. 

When the big brand name is also a local craft producer however, let alone the fact that they sit alongside the multinationals – the challenge is substantially harder. You’ve lost the unique addition to a shelf that the trailblazers had when they joined the category’s big names, but don’t have the clout or knowhow to replace the first generation of domestic producers either.

What we have observed in the UK, the USA and South Africa is once a category matures, shelves have an established pecking order. They tend to be made up of a few multinationals (with deep pockets to invest in their presence there), established and much-loved marquee craft names (that can offer quality, credibility and good margins) and some hyper local additions (that have local advocacy and therefore a good rate of sale). 

For a country like Australia where the distances are vast and each state has very unique circumstances around it, this ‘shelf entrenchment’ will be a big obstacle for those looking to build a presence nationwide. 

For those more focussed on Whisky and where Gin is merely a means to an end, there are signs of caution creeping in. The current state of that category doesn’t reflect the reality of the investments that have already been made by domestic producers.

Scan the distilleries in production today and cast your eyes over their warehouses and you’ll see there are hundreds waiting until more of their raw spirit has turned into delicious amber nectar before launching. Their money has been laid down and continues to be shelled out behind closed doors, the scale of which is not possible to fully see yet. 

No investment or growth strategy can fast forward the time needed to mature a spirit – meaning that by the time a 2021 newcomer will be ready to disgorge a cask the landscape will have completely changed. If it is based on what they see on sale today, the economics and shelf competition everyone is modelling off is worthless as it’s already in the past. The growth of domestic Australian whisky consumption is harder to accurately forecast than any other spirit. 

Whisky may be a known category that distillers are pursuing, but as with other countries, it’s unlikely to be the cause of great migration away from Gin overnight, and just as it has for the dual producers elsewhere, will create boom and bust situations of its own.

We think the other categories such as Vodka, Vermouth, Liqueurs and other aperitifs which are largely underdeveloped could become the defining factor influencing the long term size of the domestic distilling industry in Australia. 

Making your own vodka from scratch is hard, but as with many European brands, buying in Neutral Spirit, filtering it (and flavouring it if desired), requires very little infrastructure or knowhow. The wealth of wine suppliers and famed growing regions, easy to access bulk made grape spirit and interesting native botanicals makes tackling Vodka or Vermouth a big opportunity. 

Combine this with the gin production knowhow gained by producers and the interest in botanical spirits from drinkers - it’s an area where we feel most distillers could find easy wins to help rapidly build production volumes in the short term.

A word of caution…

All of the above assumes that every single distillery that has opened is performing at its peak and has a robust strategy, which is not necessarily the case. Many start-up distilleries lack drinks industry experience and have varied levels of business acumen. 

Australia also has three further factors that present an issue and will impede future industry growth. First, the tax rate on spirits is one of the highest in the world and hugely prohibitive to those without sizeable cashflow behind them. 

Secondly, there is a lack of distributor and wholesaler options compared to the amount of demand. Few of these facilitators have both the infrastructure and the ability to cope with the needs of start-up distilleries, or the patience to deal with their developmental teething issues and budget constraints. 

Lastly, Australia’s geography is vast and over three quarters of craft distilleries are based in relatively isolated locations, where the local economies are delicate and the job opportunities are limited. Attracting top tier talent needed to grow, being reliant on fluctuating tourism and having to find ways to connect with audiences far away are real impediments to overcome especially, as we mentioned above, when the broader landscape is so saturated with other domestic competitors. 

If this deep dive sets the scene and explains why so many entrepreneurs see the possibility to create a thriving business, why are Australian spirits generating so much hype with drinkers?

In part, it is because global drinking trends such as premiumisation, growing health-consciousness, digitisation and provenance, all of which are expected to continue for years ahead, are all evident in Australia.

To the latter for example; from the odd ball ideas, the unique flavour combinations and the extraordinary natural resources they have around them – Australian Distillers are able to evoke a sense of place in the liquids they create. 

Gin producers in particular have gravitated to the weird and wonderful world of native botanicals. Wattle seed, lemon myrtle, all the eucalyptus subspecies under the sun, pepperberry, endless citrus varietals, the likes of macadamia and sandalwood and many more create a distinct point of difference and allow for a strong regional accent. That’s before you even go into innovative hybrids like Shiraz or other grape infused gins, which went from a single producer to an entire genre and is now as common as Rhubarb Gin is to the British Isles. 

Meanwhile the use of wine casks and very distinct mash-bills are starting to shape up Australian Whisky. For Rum, interesting ways of processing local sugarcane and the unique climate barrels mature in are creating exiting results too. Across the spectrum, Australian craft spirits are rooted in authentic ideas and terroir.

The distillers themselves and the access to them via social media and events have been one of the driving factors for why drinkers “buy into” local craft brands too. In a world of personality the faceless multinationals no longer hold as much sticking power as they once did. Drinkers are opting for real stories, small businesses and journeys they can identify with. They want to support local and they want to support someone.

Last but not least the pandemic forced a fast forward of e-commerce and direct to consumer routes. It’s not just the events or distillery door that allow brands to increase their exposure – drinkers are now used to shopping online and the hesitancy of old is changing quickly. Subscription models for test products, repeat refill pouches and exclusive members access are now part of a craft distiller’s arsenal. 

Changing consumer patterns doesn’t necessarily favour big or small, local or multinational – they favour those who embrace them fastest and implement them well and in relevant ways to their audience. Australian Craft distilling is growing and maturing each and every year because it is embracing the new frontiers of the industry. 

It’s becoming more dynamic than ever and as it finds its stride, drinkers are becoming ever more impassioned. The journey, it seems, has only just begun.