What's Behind This Whiskey Rebellion?


When already hot markets get really competitive, unusual fights break out and drag on. In technology, they are often over patents. In beer, they're over taxes and how large a brewer can become and still be considered "craft."

The latest battle happens to be in whiskey and what distillers have to do to earn the right to call their product "Tennesee whiskey," which along with close compatriot bourbon, notched 10% growth in the U.S. last year, and nearly 7% worldwide, according to the Distilled Spirits Council. The players are Brown-Forman and Diageo , the two distilling heavyweights that have the biggest stakes in the Tennessee whiskey game.

Source: Foodbeast.com

Tennessee whiskey and bourbon have something in common: strict rules governing how they can be produced. As it now stands, by law, a whiskey can be called "Tennessee whiskey" only if it's fermented in Tennessee, made from a mash of at least 51% corn, aged in charred-oak barrels, filtered through maple charcoal, and bottled with an alcohol content of at least 80 proof. As it so happens, that's conveniently all in the recipe of Brown-Forman's Jack Daniel's Tennessee Whiskey.

That's no coincidence. Jack Daniel's is big business in Tennessee. Its clout with legislators helped shape that law. But it may soon be about to change, and there's another big distiller behind the action: London-based Diageo, the maker of the No. 2 Tennessee whiskey, George Dickel.

Source: GeorgeDickel.com

Loosening the restrictions is not for craft distillers
One of the requirements that may be cut is the need to use new oak barrels, rather than reused, sanded-down, and recharred wooden casks that save money. Another change would allow the unaged whiskey to be hauled out of Tennessee for its aging.

Legislators who support a change in the law have cited the need for Tennessee to nurture its craft distilling industry, and laws that help small businesses are almost always popular. Most people love the story of upstart entrepreneurs making a go of their passion, and distilling is no different.

So, Brown-Forman's opposition to loosening the restrictions can easily be mistaken for a big corporation using its clout to keep the little guy from stealing away just a small piece of its ample pie. But the legislator who introduced the changes says he did so at Diageo's request.

Diageo is the biggest distiller on the planet. Best-known for its Johnnie Walker scotch whiskeys, it's been pushing deeper into American whiskey, challenging Brown-Forman and Beam and other American Distillers both with the Dickel brand and with its Bulleit bourbon and rye whiskey, among others.

Few players, and for good reason
The barriers to entry in the whiskey market are very high - one of the reasons why it's so dominated by a few players like Diageo, Brown-Forman, Beam, Buffalo Trace, and Heaven Hill.

Whiskeys take years to age and longer to perfect. And these distillers have time-honored recipes. They also have the know-how and research and development budgets to successfully develop new spirits.

Diageo may provide the best example of this, as it's rolled out the Bulleit bourbon and rye whiskey varieties to growing success - Bulleit sales were up 60% in the six months reported in January. Since just 2011, it introduced Bulleit rye and Dickel rye and corn whiskeys. The company spent nearly $35 million on research and development in the year ended last July. That's as large as the entire annual budget of some of America's smaller, but still well-established, independent whiskey distilleries.

So the real threat here is not from the upstarts who may look to brand their products as Tennessee whiskey, but from Diageo's continuing expansion into territory long owned by distillers from Tennessee and Kentucky.

With its American spirits sales climbing, Diageo is a threat to American distilleries, even at a time when they're scrambling to keep up with demand for some of their products. Diageo has deep resources to develop and put new products on the market, even if that's done through acquisition, as it did with the Dickel and Bulleit brands, or by sourcing whiskey from other distilleries, as it's done with its Orphan Barrel top-shelf labels.

And with sales nearly four times that of Brown-Forman, Diageo also also has unmatched distributing muscle and advertising resources.

The Foolish bottom line
Brown-Forman may have recorded a win when it convinced Tennessee legislators to regulate the labeling of Tennessee whiskey to benefit its iconic Jack Daniel's brand. But it now has a fight on its hands with a distilling giant. With more people interested in American whiskeys than ever before, the stakes have never been higher in the battle to win over loyal customers.

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The article What's Behind This Whiskey Rebellion? originally appeared on Fool.com.

John-Erik Koslosky has no position in any stocks mentioned. The Motley Fool recommends Diageo (ADR). Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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Originally published