An employee dispense a glass of Kavalan whisky in the tasting room at the Kavalan Single Malt Whisky distillery in Yilan County. (Photographer: Billy H.C. Kwok/Bloomberg)

Boutique Whiskey Makers Fret Over How Hard EU Tariffs Will Bite

(Bloomberg) -- In tiny Purcellville, Virginia—the state some consider the birthplace of American whiskey—Becky and Scott Harris just spent $100,000 to build up their business in Europe.

Now the owners of Catoctin Creek Distilling Co. fear an escalating trade war means that investment could go bottoms up.

The Harrises, who already sell their signature rye whiskey and other spirits in about half of U.S. states as well as Germany, Italy and Singapore, had been planning to expand sales to Holland and the U.K. by the end of this year. But when the European Union slapped 25 percent tariffs on American whiskey in response to the Trump administration's own duties, the distillery was left scrambling for a new game plan.

Boutique Whiskey Makers Fret Over How Hard EU Tariffs Will Bite

"This year we launched into these countries with redistribution, and we’re really ready to just go, go, go, and then—almost right away—these tariffs come on," said co-founder and general manager Scott Harris. "If the tariffs hold up for a longer time, we’re going to have to refocus our growth objectives, sell more in the U.S. and basically wait on anything going into Europe—which is really a shame."

Across America, the EU tariffs—plus similar measures from Mexico and Canada—are shaking up the whiskey industry. For well-known brands, like Brown-Forman Corp.'s Jack Daniel's, name recognition may be strong enough that European buyers will swallow a price hike. The company has said a 25-percent tariff on its whiskey will translate to about a 10 percent increase at the customer level.

“We believe that we are positioned fairly well to withstand the tariffs, but only time will tell how consumers will react in the EU,” Phil Lynch, a spokesman for Brown-Forman, said last week in an email.

But the ability to raise prices while keeping a steady hold on an existing customer base is not something every distiller can enjoy. For closely held companies that operate on a much smaller scale, a 10 percent price increase on European liquor-store shelves could spell disaster.

Boutique Whiskey Makers Fret Over How Hard EU Tariffs Will Bite

"It’s a huge disappointment," said Matt Hofmann, co-founder of single-malt whiskey producer Westland Distillery in Seattle. "It’s just the U.S. feeling the effect of the tariffs, so when we go out there and put our single malts next to other single malts from around the world, we are going to be feeling that."

Buffalo Trace Distillery, a family-owned whiskey maker based in Frankfort, Kentucky, doesn't think it can pass on tariff-related price hikes to its European buyers, so it's cutting the price of spirits it sells to some if its overseas distributors by about 10 percent. That should help keep its whiskey prices stable—but means a slice off its own profits.

“It’s hard to tell what the consumer impact will be because American whiskey is a particular flavor profile, so I don’t know if someone’s prices go up by 10 percent, whether or not people will suddenly flood out of whiskey,” Chief Executive Officer Mark Brown said.

For a company like Buffalo Trace that’s making whiskey now to be sold in seven to eight years after aging, the uncertainty surrounding the tariffs is particularly challenging. The company is currently preparing about 203,000 barrels of bourbon for domestic and global distribution in 2025. It had been aiming to sell as much as 5 percent of that abroad, up from less than 1 percent of sales today, with a focus on China, India and Europe, among others.

"I sincerely hope that the trade war hasn’t escalated into some sort of huge problem with 100 percent tariffs by the time we get to 2025,” Brown said.

That uncertainty has some family-owned distillers playing the waiting game. Westland Distillery has been exploring expansion plans to Europe, Japan and Australia within the next 24 months, but those plans could be in flux, co-founder Hofmann said. "It has injected quite a lot of instability into the whiskey world," he said.

For the Harris family in Purcellville, the European market was supposed to represent 25 percent revenue this year—a significant share for a company of just 20 employees. It started spending the $100,000 in 2013 with a focus on Germany and Italy, with the expansion into its new markets expected to take off this year.  Now, Catoctin Creek won’t be sending another shipment to the continent until either tariffs are lifted or a European customer places an order where they're swallowing the tariff cost.

"The only option that we’re really left with,” Scott Harris said, “is to tread water and see how long this will check out."

©2018 Bloomberg L.P.