INDUSTRY SNAPSHOT
According to the Distilled Spirits Council, this industry was valued
at approximately $95 billion each year. In 2004, American consumption
of distilled spirits totaled 164 million cases. This was an increase of
3.1 percent from 2003, marking the seventh consecutive year of gains
for the distilled spirit industry. Adult beverages were driven by
desirable high-end premium products and consumers' growing thirst for
fruit-infused vodkas, rums, and other flavored alcoholic beverages.
These flavored beverages, combined with mixability, were key factors in
the spirit industry's growth.
Whiskey was the nation's overall best seller in 2003, followed by
vodka, cordials, rum, brandy, tequila, and gin. The top brands in the
country were Bacardi rum, Smirnoff vodka, Absolut vodka, Captain Morgan
rum, and Jack Daniel's whiskey. Other top sellers were Crown Royal
whiskey, Jose Cuervo tequila, Jim Beam whiskey, and Seagram's gin.
All of the major liquor companies watched the international arena,
especially the Asian market. Japan already was at the top of the U.S.
export list and had been a favorite home for American whiskey. Latin
America also was noted for its tremendous growth opportunity,
especially for premium-priced products. In 2005 industry players were
expecting gains of $655 million in exports.
ORGANIZATION AND STRUCTURE
A few large companies that offer a variety of alcoholic beverages
dominated the distilled spirits industry. Most started with a flagship
brand, such as Jim Beam Bourbon, and diversified into a family of
products that included whiskey and non-whiskey items, such as gin,
vodka, rum, tequila, cordials, mixed cocktails, and even fruit juices
and other nonalcoholic or low-alcohol beverages. Many, such as
Seagram's, Diageo, and Allied Domecq, were subsidiaries of large
multinational conglomerates with diverse portfolios.
This category includes only those companies that produce distilled
spirits. All distillers have to sell their products through wholesalers
and retailers in order to accommodate various federal, state, and local
regulations regarding the sale of alcoholic beverages. The Federal
Alcohol Administration Act (FAA) was established at the end of the
13-year Prohibition Era in 1933. The FAA, which is enforced by the
Bureau of Alcohol, Tobacco, and Firearms (ATF), qualifies distillers,
collects producer and wholesaler occupational taxes, and regulates
trade practices, advertising, and labeling. Beyond the uniformity of
the FAA, regulations vary greatly among the 50 states.
States can sell distilled spirits either with an "open," licensed
method or in a controlled environment. Open states have licensed
retailers and wholesalers that handle the distribution and sale of
alcoholic beverages. Thirty-two states and the District of Columbia use
the open method. The other 18 states operate under the control method,
in which each state government buys and sells alcoholic beverages at
the wholesale and retail levels.
In addition to federal regulations, some states have set up their
own independent agencies that are responsible for the administration,
licensing, and enforcement of state laws and the collection of state
revenues. Some state legislatures have created their own Alcoholic
Beverage Control (ABC) agencies with rule-making power, and 32 states
allow their citizens to vote for or against the sale of liquor on a
city or county-wide basis.
BACKGROUND AND DEVELOPMENT
All forms of alcoholic beverages—beer, wine, and liquor—are based on
fermentation, the natural process of decomposition of organic materials
containing carbohydrates. Liquor production involves the extra step of
distillation, which reduces the original water content and greatly
increases the alcoholic strength. Whereas beer averages 2 to 8 percent
alcohol content, and wine averages from 8 to 14 percent, distilled
spirits range from 35 to 50 percent alcohol. Two types of raw materials
are used to make a distilled spirit: sugar and carbohydrates. Sugary
materials include grapes, sugarcane, agave, molasses, and sugar.
Materials with high levels of carbohydrates are corn, rye, rice,
barley, wheat, and potatoes.
Civilizations in almost every part of the world developed some type
of alcoholic beverage. The Chinese distilled a beer from rice before
800 B.C. The Arabs developed a method used to produce a distilled
beverage. A reference to distillation appears in the writings of the
Greek philosopher Aristotle, and the Romans produced distilled
beverages, although no written references have been found prior to 100
A.D. Liquor production was reported in Britain before the Roman
conquest. However, production of distilled spirits in Western Europe
was limited until the eighth century, after contact with the Arabs.
Distilled spirits can be classified into two categories: brown goods
and white goods. Brown goods include all whiskies, bourbons, and
scotches. White goods include vodka, gin, rum, and tequila. Other major
segments in the distilled spirits market are the cordial or liquor
category and the assortment of ready-to-drink cocktails.
Whiskey
Whiskey is an all-encompassing term for any distilled liquor made
from a fermented mash of grain. Although all whiskey is distilled in a
similar manner, each can taste quite different. The four primary steps
to make whiskey are mashing, fermenting, distilling, and aging. The
grains of corn, barley, rye, and/or wheat are ground into a fine meal,
mixed with water, and cooked until the starches have been converted
into sugars. This process creates a "mash" that is mixed with yeast,
converting the sugars into alcohol. The fermented mixture is then
pumped into a still where steam condensation allows the alcohol to
separate from the water and byproducts. Fresh from the still, the
whiskey is colorless, harsh, and in need of aging. The aging process
enhances the spirit and refines the whiskey, giving it an amber color.
Federal regulations specify that whiskey must be "produced at less
than 190 proof and bottled at not less than 80 proof."
American-distilled whiskeys include Tennessee, rye, and blended.
Tennessee whiskey, such as Jack Daniel's and George Dickel, is a
distinct product due to the filtering of the whiskey through charcoal
prior to aging. Rye whiskey is made from at least 51 percent rye and
distilled at no more than 160 proof. The whiskey then is stored at no
more than 125 proof in new oak barrels. Blended whiskey, such as
Seagram's Seven Crown, comes from at least 20 percent straight whiskey
mixed with other whiskey grain neutral spirits. Blended whiskey became
popular during World War II when whiskey was in short supply and
distillers stretched its availability by adding grain neutral spirits.
Scotland remains the international leader in high-quality whiskey
making. Blessed with natural resources and the ideal climate for making
whiskey, Scotland boasts a long and rich history of distillation and a
devotion to creating distinctly individual malts. By law, all scotch
whiskey must be aged at least three years, although few brands enter
the United States without being aged at least four. Scotch can be
bottled in the country of origin or it can be shipped in bulk to the
United States for bottling, which can be more cost effective.
More than 95 percent of scotch consumed worldwide is blended
whiskey. Blends are the result of mixing both single malts and grain
whiskies and are created to "soften" the harsher characteristics of
individual malt whiskies. Although they are still a small percentage of
the overall scotch consumption in the United States, single-malt
whiskies have been made by Scottish distillers for more than 500 years.
Single malts, the original scotch whiskies, are derived from sprouted
barley that has been dried in kilns fired by peat and coal, which
imparts a distinctive smoky character to the spirit. Produced by more
than 100 scotch distilleries, each single malt has a style and flavor
all its own.
Canadian whiskey is a blend of mostly rye with corn, wheat, and
barley malt. By Canadian law, no more than 9.09 percent of a Canadian
label may include whiskey from other countries. It must be blended from
cereal grains, and it has to age in wood at least three years. As a
rule, Canadian whiskies are light-bodied and slightly pale, with a
reputation for having a mellow quality.
Irish whiskey is made from a fermented mash of malted and unmalted
barley, corn, rye, and lesser amounts of other cereal grains. Unlike
the Scots, who dry malt over an open peat fire to give it a smoky
flavor, the Irish dry malt in closed kilns. Irish whiskies are
full-bodied and possess a smooth malt flavor. All Irish whiskies are
triple-distilled in copper pot stills and are aged three to nine years
in reused sherry, brandy, bourbon, or rum oak casks. Irish whiskey
remains the smallest of all the distilled spirits categories in the
United States, accounting for less than 1 percent of all distilled
spirits consumption.
Bourbon
Part of the whiskey group, bourbon is a uniquely American product,
as corn is its main raw material. The drink was created unintentionally
in 1789 when a Bourbon County, Kentucky, farmer sealed his whiskey in a
charred barrel. This aging process picked up the mellow smoky flavor of
the wood, giving bourbon its distinctive taste. In 1964, the U.S.
Congress officially named bourbon America's "Native Spirit" and has
tightly regulated bourbon's production to ensure a consistent, quality
product. Straight bourbon whiskey is required by law to contain at
least 51 percent corn, to be distilled at no more than 160 proof, and
to be aged a minimum of two years in new, charred oak containers. Jim
Beam Kentucky Straight Bourbon Whiskey continues to be the best-selling
bourbon in the United States.
Vodka
Vodka continues to be the most popular liquor in the United States,
accounting for more than one out of every five bottles of distilled
spirits sold. According to U.S. federal regulations, vodka lacks aroma,
taste, and color. It is distilled at a high proof, extracting all of
the congeners, or the natural compounds in the distillate that give the
product its taste and aroma. Because vodka is highly neutral, it is
possible to make it from a mash of the cheapest and most readily
available raw ingredients. Although traditionally made from potatoes,
vodka is now generally produced from cereal grains, including rye,
wheat, and barley, but mostly corn.
Vodka originated in Russia during the fourteenth century and has
remained commonplace in Russia, Poland, and the Baltic States. It
became popular in the United States after World War II with the
introduction of a drink called the Moscow Mule. In the land of its
origin, vodka is usually consumed chilled, straight up in small glasses
and accompanied by appetizers. In the United States, vodka is the base
ingredient in a variety of popular cocktails.
Gin
Gin is the distilled product of juniper berries mixed with a clear
grain-based spirit. First distilled by a seventeenth-century professor
of medicine in Holland to produce an inexpensive medicine, gin quickly
became a popular drink in Britain and later in the United States.
Government regulations require that gin be bottled at 80 proof or
higher, have a juniper berry flavor, and be made either by distillation
or compounding. Compound gin, made by a less costly method, is the
combination of neutral spirits with the oil and extracts of the
botanicals.
Aging is not a factor with gin, although U.S. producers sometimes
age their gins, imparting a pale, golden color. Instead, each gin
achieves its distinct taste through the distiller's specific
combination of gin botanicals, such as cassia, anise, coriander,
angelica, and juniper. Gin is a flavored spirit. Without the flavoring,
it would be vodka.
Rum
A favorite American spirit long before bourbon whiskey, rum is a
sweet, distilled spirit made from sugar cane. Although debate continues
as to where rum was first produced, by the late seventeenth century the
liquor was being distilled in the American colonies using molasses from
the West Indies. In fact, the first distillery in what is now called
the United States was built on Staten Island and was already producing
rum when the English seized the Dutch colony in 1664.
By federal law, rum must be distilled from the fermented juice of
sugar cane, sugar cane syrup, sugar cane molasses, or other sugar cane
byproducts at less than 190 proof. It can be made anywhere, although
more than 80 percent of rum is produced in Puerto Rico. The two main
types of rum are light-bodied rums, which have a dry, subtle flavor,
and full-bodied rums, a more aromatic variety.
Tequila
Made from the heart of the agave plant, Tequila is produced in its
namesake town located in the central Mexican state of Jalisco. The core
of the plant, which resembles a large pineapple, is harvested, cut into
chunks, and baked in steam ovens. The juice is extracted by steaming
and compressing the core. After fermenting for several days, the juice
is distilled at a low proof. The tequila then is double distilled to a
powerful 110 proof and reduced to 80 proof with water before bottling.
Although tequila can be bottled as a clear product, the gold and
"anejo" products are aged in wood. Gold tequila is kept in large oak
vats for about nine months to a year, acquiring its pale gold color. By
law, tequila designated anejo must be aged in a wood container for at
least one year, although most anejo products are aged for three to
seven years.
Cordial
The cordial or liqueur category is the largest and most diverse in
terms of the number of brands, flavors, and alcohol content. It also is
one of the largest in total case sales. Products in this category
encompass all flavors and are used as after-dinner drinks, aperitifs,
components of classic cocktails or popular shooters, or flavorful
enhancements to foods.
Originating in Europe, cordials and liqueurs are alcoholic beverages
that are prepared by mixing or compounding various spirits with
flavorings. The cordial category includes schnapps, liqueurs, cremes,
and brandies. Cordials must contain at least 2.5 percent sugar by
weight, although most are considerably higher in their sugar content
and may contain up to 35 percent of a sweetening agent.
Cordials are produced by one of three methods: percolation,
maceration, or distillation. The percolation process starts with
pouring the spirits in the bottom of a large tank with a basket-like
container filled with fruit and spices near the top. The sprits then
are "percolated" up through the basket, extracting the flavors of the
fruit. With maceration, the fruit and other ingredients are mixed with
the spirit and allowed to steep until all the flavors have been
extracted. In the distillation process, all the ingredients are placed
in the still with grain neutral spirits and gently heated.
Industry Regulations
After a peak consumption year in 1981, the industry saw consumption
decrease slowly nearly every year. Seagram Americas became the first
spirits marketer to break the 48-year-old voluntary ban on television
advertising in June 1996 with its ad for Crown Royal Canadian whiskey
on KRIS-TV in Corpus Christi, Texas. Major TV networks, however,
refused to take liquor ads, and cable and local stations were left as
the only outlet for spirits advertising.
The issue of liquor advertising opened a floodgate of controversy,
including admonishments from President Clinton, Mothers Against Drunk
Drivers, and Reed Hundt, chairman of the Federal Trade Commission. All
of these parties said the ban should remain to protect children. George
Hacker, of the advocacy group Center for Science in the Public
Interest, said the repeal of the broadcast ad ban "marks the beginning
of an open liquor-marketing season on America's children and teens."
The Federal Communications Commission (FCC) began a formal inquiry
into the placement and content of Seagram's ads, while the Federal
Trade Commission (FTC) followed with its own investigation. Congress
took up this issue with the Senate Commerce Committee
telecommunications subcommittee hearings in March 1997. Witnesses
included the FTC Chairman Robert Pitofsky, FCC Chairman Reed Hundt,
industry critics including former Senator George McGovern, and
representatives of the beer, liquor, broadcast, and cable industries.
In September of 1999, the FTC released its report on industry
efforts to avoid promoting alcohol to underage consumers. The report,
"Self-Regulation in the Alcohol Industry," recommended that industry
improve enforcement of its "Code of Good Practice" by adopting a
third-party review of compliance and reduce underage exposure to
alcohol ads by changing the current placement standards. The report
recommended that all industry members adopt and build upon the
industry's current best practices and go beyond the minimum code
requirements. The report also urged companies to give special attention
to restricting access to Web sites that advertise alcohol. It noted
that some companies had already made an attempt to address concerns by
discontinuing the use of content that would appeal to underage users.
Dr. Peter H. Cressy, president and CEO of the Distilled Spirits Council
of the United States (DISCUS), issued a statement confirming that the
distillers were willing to review the "Best Practices" identified in
the report and consider any new provisions recommended.
