Boom in craft spirits lifts Sonoma County distillers

Growing up, twin brothers Chris and Brandon Matthies not surprisingly tried making homemade wine and crafting their own beer, given the abundance of both in Sonoma County.

But when it came time to turn their hobby into a business, they instead turned to something that isn’t as ubiquitous locally: spirits. In 2012, they cobbled together savings and borrowed against retirement accounts to start Sonoma Brothers Distilling Co. in Windsor. A crash course at Michigan State University also provided crucial education.

“It’s a little more up and coming. ... There’s not a lot of craft in the market,” said Chris Matthies, 32, who is a firefighter for the Santa Rosa Fire Department while his brother, Brandon, works as an officer for the Santa Rosa Police Department.

The two brothers teamed up to make their own non-GMO three-grain vodka and a four-botanical gin, while their whiskey aging in barrels will be ready by next month. They produce about 400 bottles a month that can be bought in stores such as Oliver’s Markets and Bottle Barn and is served in restaurants.

“We just wanted to do something unique,” Brandon Matthies said.

A lot more people are joining the two El Molino High School graduates in that pursuit in Sonoma County, where the number of craft distillers has climbed from a single producer in 2008 to roughly a dozen today who are operating or are in the planning process, according to statistics from the Sonoma County Economic Development Board.

Like wine in 1970s and 1980s and beer in the 1990s, the spirits industry is experiencing a craft boom among small providers looking to take a slice of the ?$23.1 billion of revenue generated by distillers last year, up 4 percent from the previous year, according to the Distilled Spirits Council of the United States.

The industry is dominated by large multinational companies such Diageo, Constellation Brands and Brown-Forman. California’s market, which represents about 11 percent of the shipments in the U.S. spirits marketplace, provides a telling example.

In the Golden State, less than a third of the shipments in 2014 came from major California providers that have recognizable names such as E&J Gallo, which produces New Amsterdam gin and vodka and Familia Camarena tequila, and Guerneville’s F. Korbel and Brothers, which makes its own brandy, according to an analysis of state Board of Equalization tax records by industry consultant Jon Moramarco.

The other two-thirds came from big national and international firms. Craft distillers accounted for just 0.53 percent of shipments in California last year. Though just a fraction of the market, it represented a 40 percent increase over 2013 shipments.

The growth can be seen locally. In Sebastopol, Spirits Works Distillery doubled its shipments last year to 968 cases, each consisting of nine liters of alcohol, according to state tax records.

For comparison’s sake: California craft brewers produced ?9 percent of the beer sold in the state last year, while 52 percent of wine shipments in the Golden State came from non-major wine companies, according to Moramarco’s analysis.

“It’s very, very small,” Moramarco said of the craft spirits industry. “People are trying to equate spirits with craft beer, but craft beer has been around so much longer.”

The growth in craft spirits is not only coming from up-by-the-bootstraps entrepreneurs like the Matthies brothers but also from more well-established local businesses, such as Bear Republic Brewing Co. in Cloverdale and Graton-based Purple Wine + Spirits.

Bear Republic is planning to open a spirits unit making whiskey and rum and is currently looking to either Cloverdale, Healdsburg or Santa Rosa to house the 500-gallon still it purchased from a Scottish manufacturer, said Richard G. Norgrove, who owns the company with his family and is its brewmaster.

Bear Republic has already collaborated with Charbay Family Distillery and Winery in Napa to make high-end whiskey (think $150 a bottle) that will be released in 2017.

“That’s my next creative venture,” said Norgrove, who added that he could eventually see a time in the future when “I stop being the master brewer and become the distiller.”

Meanwhile, Purple Wine + Spirits - which is the nation’s 30th largest wine company, according to a ranking by Wine Business Monthly - changed its name this year to reference its new spirits business. The new venture is a passion of owner Derek Benham, who first became intrigued by witnessing the gin culture in Barcelona. It hopes to produce its first bottles by the year’s end.

“Derek’s always looking for what’s next on the horizon,” said Lisa Erlich, executive vice president at Purple Wine + Spirits, who oversees the new spirits division after a long career mostly devoted to the wine industry. “I think there’s a lot of experimenting and a lot of creativity.”

Laws hamper growth

Surprisingly, California has lagged behind other states in the craft spirits industry such as New York, Michigan and Texas. In Austin, Bert Butler “Tito” Beveridge II has turned his Tito’s Handmade Vodka into the second-fastest-growing vodka brand last year, increasing volume by 50 percent to 2 million cases, according to Impact Databank.

California’s antiquated laws have hampered the industry’s growth. California distillers only recently got the right to serve tasting samples, but they still cannot sell on-site like wineries or brewpubs.

They are banking on passage of legislation by Assemblyman Marc Levine, D-San Rafael, that would create a new craft distillers license for companies that produce less than 100,000 gallons annually. It would allow them to sell up to three bottles per person per day on site and permit up to three restaurants or pubs as well, allowing them to make mixed drinks on site to show how such spirits can be used in cocktails.

“The law would help,” said Chris Matthies, who said it would allow the brothers to hire another person at the distillery as they work their other full-time jobs. Chris is the owner of the business, while Brandon is the operator because of a state law prohibiting police officers from having a liquor license because of a conflict of interest in enforcing liquor laws.

Returns come slowly

“I don’t think it will be the end-all be-all for us. ... It would help in getting people excited about our product,” he added.

There are also other differences for the industry, especially financially, where start-up costs can range from $200,000 to $1 million depending on the still that one buys. Craft distillers will not see an immediate return on some products like whiskeys and bourbons, which take years to age. “Over five years of investing we have not made a dime on this,” noted Norgrove.

Other hurdles exist, especially working with local governments that are not accustomed to such licensing requirements. For example, Purple had some zoning challenges in working with Sonoma County for its new distillery because it was one of the newer ones in an unincorporated area. Compared to wineries and breweries, distilleries require extra safety features, given the flammability of the product, Erlich said. “We are pretty confident we have the most fire-safe distillery in the nation,” she said. Purple also will have some extra hoops to go through on where it may house an eventual tasting room, she said.

“It has the feel of the wine industry from 20 years ago,” Erlich noted, with more collegiality and sharing compared to the increasingly consolidated wine industry. She did concede “it’s been harder than we thought.”

Taxes also can be burdensome, especially for smaller players who don’t have much cash reserves. The federal excise tax levied on those spirits, $13.50 per proof gallon, equals about 21 cents per ounce of alcohol, compared to 10 cents for beer and 8 cents for wine, according to the Congressional Budget Office. “It’s a higher barrier to entry with spirits,” said Moramarco.

One other notable difference is the larger amount of time distillers must devote to bars and restaurants as opposed to shadowing distributors in the retail market. On-premise sales represent 30 percent of the volume for the spirits market compared to 25 percent for beer and 20 percent wine, according to Moramarco.

That’s especially the case in Sonoma County given its strong farm-to-table dining culture, where a premium is put on locally-grown products with fresh and organic ingredients. That combines with a booming cocktail culture, where mixologists are becoming culinary rock stars like the “celebrity chef” boom of past years. They practice their craft at such places like Spoonbar in Healdsburg and K&L Bistro in Sebastopol, using ingredients that range from lemon verbena to jalapeño.

It’s infectious even in unlikely places. Erlich noted a recent dinner she had with fellow wine executives. Most beforehand were drinking a “Moscow mule,” a popular drink of vodka, ginger beer and lime juice served in a copper mug, instead of the glass of wine they would typically imbibe.

“Your brand is really built in bars and restaurants,” said Chris Matthies.

As the industry matures, it will also have to deal with growing pains, including over what constitutes craft spirits, similar to a parallel debate the craft beer industry is experiencing. Both Maker’s Mark bourbon and Tito’s Handmade Vodka have been sued over whether they are actually “handmade” or not, though a federal judge in San Diego recently threw out the claim against Maker’s Mark.

Wide-open market

But even with the unique challenges, spirits producers are optimistic. Fred Groth, who with his wife, Amy, owns HelloCello, which makes a well-regarded limoncello, and Prohibition Spirits in Sonoma, said a growing millennial market that is looking for unique and new drinks and has no brand loyalty offers up tremendous opportunities, especially as small distillers can act more quickly to respond to trends than larger ones such as Brown-Forman’s Jack Daniel’s brand.

Numerous examples abound. Groth, who started in 2008, noted the local abundance of high-quality grapes. That fruit can be used to make brandy, which is distilled from wine or fermented grape juice, and offers up a ripe market.

“The spectrum is almost infinite,” he said. “With spirits you can be all over the place on what you want to do.”

You can reach Staff Writer Bill Swindell at 521-5223 or bill.swindell@pressdemocrat.com.