From Prohibition to Microdistilleries: Changing How America Drinks

Philadelphia Distilling's Bluecoat gin
Philadelphia Distilling's Bluecoat gin

Strong drink is as American as the Fourth of July, and dates back a few years earlier. In fact, U.S. distilleries and their potent products have been part of the national culture since long before the War of Independence and have played a major role in the country's history.

But America's troubled relationship with liquor had a huge impact on what consumers expect from their alcoholic beverages, and the devastating aftermath of the 18th Amendment left a barren landscape for liquor lovers. On the bright side, in more recent times, that loss has created a hunger for something better, contributing to a national revival of microdistilleries. Across the country, small companies are opening their doors and producing unique, handcrafted products with local or niche audiences in mind.

Today's microdistillery trend is a long way from where things stood at the time Prohibition -- the so-called Noble Experiment -- began in 1920. The passage of the eighteenth amendment forced scores of small distilleries across the U.S. to close their doors. After its repeal, what remained of the country's liquor industry was consolidated into a few large companies like Canada's Seagram.

While these behemoths profited greatly from Prohibition, they also lowered consumer expectations. At the time, America's large but then-underground drinking population wasn't picky, and many drinkers were all too ready to believe they were getting the real deal from bootleggers or speakeasy bartenders, who often rebottled homemade gin or rot-gut whiskey and sold it as top-shelf liquor.

How Blended Whiskey Got Its Start

In its online history of the era, the Distilled Spirits Council of the U.S. (DISCUS) notes that by the time Prohibition ended in 1933, the country had only 20 million gallons of real, aged whiskey -- compared to the more than 60 million gallons available before Prohibition. Newly reopened and again-legal distributors tried to fill the gap by importing whiskey from Canada and the U.K.

But, according to the site, a quick way to cater to the growing post-repeal thirst for whiskey "was to sell blended rather than straight whiskey, thereby 'stretching' the good stuff with neutral spirits and flavorings." Liquor companies at the time looked at blended whiskeys as a stopgap measure for consumers until there was enough pure, aged whiskey available. Instead, the public's tastes changed -- making blended scotch a part of the American drinking landscape.

No wonder that a few years later, after World War II, vodka -- which can be quickly produced and requires no aging -- ended up becoming the nation's most popular spirit.

Hard Liquor Inc.

Still, for its size and population, the U.S. isn't a particularly hard-drinking country. One-third of Americans reportedly don't drink any alcohol, and according to Garrett Peck's book, The Prohibition Hangover, consumption of alcoholic beverages in the U.S. didn't return to pre-Prohibition levels until 1965.

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Since then, especially in the past two decades, the liquor industry has become even more consolidated. Diageo (DEO), the world's largest alcoholic beverage company, was formed by the 1997 merger of Guinness with Grand Metropolitan. It's brands include well-known beers and wines, as well as some of the most popular and top-selling liquors, including Smirnoff vodka, Johnnie Walker scotch, Tanqueray gin, Jose Cuervo tequila and Bushmills Irish Whisky.

But two factors -- the economic downturn and changing tastes -- are drawing many Americans away from their usual drinks. "What we've learned is that while alcohol may be recession-resistant, the top brands aren't recession-resistant," says Mac Clouse, professor of finance at the University of Denver's Daniels College of Business.

One of Clouse's classes manages part of the university's endowment, which had a pretty big investment in Diageo. "Their idea with that investment was if the economy goes bad, people will still drink," he says. "The problem is people are still drinking, but they've gone down to the generic brands, the less expensive brands."

Thirsting for Something Nostalgic, but New

Despite the recession, people with a passion for hand-crafted spriits are opening microdistilleries. And, contrary to well-worn tropes about the foolishness of starting a business in a downturn, many are holding their own financially and finding audiences for their products. Clouse sees a parallel with the popularity of microbreweries in the beer industry. "For a long time the large beer companies didn't really see the craft producers as much of a competitor," he says. "But now they're taking them seriously.And a sign that they're taking them seriously is that they're trying to replicate their products. "

Even the well-established distilling companies appear to understand that Americans have a growing desire to drink something local, unique and perhaps even historic. For example, Knob Creek, a small-batch bourbon produced by liquor titan Jim Beam (itself owned by massive conglomerate Fortune Brands) has tried to tap into the microdistillery momentum on its website, where it nostalgically refers to its bourbon as being "characteristic of pre-Prohibition whiskey, with strong, rich flavors and aromas."

Analysts of the hotel and restaurant industries believe these new microdistilleries are indeed penetrating the American market by appealing to individuals with disposable income -- and who want to taste something not mass-produced. "There are examples of cocktail bars, cocktail houses where that's the concept -- to get back to the history of cocktailing in this country," says David L. Corsun, director of the Fritz Knoebel School of Hospitality Management at the University of Denver.

"There's once such place in Nashville, the owner of which is an alum of ours," says Corsun, "and this place is unbelievable. Their drink menu is phenomenal. A place like that is the venue for products like these, because these are the places where they are educating [customers] differently from how the mass market is educated."

If the data are any indication, Americans will be able to economically accommodate any new whiskeys, gins, vodkas or liqueurs that show up in their local bars, restaurants or hotels. Author Peck says Americans drank nearly $63 billion worth of distilled spirits in 2007. And according to DISCUS, about 1.3 million people in the country are employed in the manufacture, distribution and sale of distilled spirits, generating $95 billion in overall economic activity.

Let's drink to that!

See the full Special Report:

New York's Microdistillery Law Is Building a New Industry
Bringing Cheer to the Local Economy
Pennsylvania's Small Liquor Makers Bottle a Heritage
Colorado's Microdistilleries Follow an All-American Path

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