Why bourbon is getting more expensive

[Richnimrod]

6 hours ago, flahute said:

I'd say that modernization allows some of the steps to go faster, but only by a little bit, and results in savings in the form of reduced labor.

Fermentation takes as long as it takes. You can speed it up by fermenting at a warmer temperature, BUT, you effect the flavor so you aren't going to do that (unless you're Four Roses). But that's not expansion.

A still can only output according to it's size. Perhaps a new one can go faster.

Aging is aging and new rick houses don't speed that up.

A new bottling line can go faster and output more volume.

Either way, all the steps are interrelated. They need to be up to a certain volume level to support increased speed and/or capacity in another. All the material costs stay the same (according to day by day market forces of course).

A little less labor can reduce the per bottle cost by a small amount. At their level of output though it can add up.

 

 

And, there ya' go!   Steve explained my thinking better than I did!    The 'modernization' being a small-but-significant piece of cost ratio improvement for the majors (mainly in labor reduction and digitally-driven repeatable accuracy). 

...And, as Steve points out: even tiny incremental improvements add up when a distillery is putting out thousands of proof-gallons per day.   

[EarthQuake]

Even considering that basic material/storage costs are roughly fixed, aren't there other cost savings that would come from increased production?

 

Let's say, that instead of trying to send one case of OWA to every store in the country, BT can send multiple cases, because they have the stock due to increased production. Wouldn't this be a significant logistical savings? Or is this a cost that is generally passed on to the distributor?

Edited March 3, 2018 by EarthQuake

[Richnimrod]

1 minute ago, EarthQuake said:

Even considering that basic material/storage costs are roughly fixed, aren't there other cost savings that would come from increased production?

 

Let's say, that instead of trying to send one case of OWA to every store in the country, BT can send multiple cases, because they have the stock due to increased production. Wouldn't this be a significant logistical savings? Or is this a cost that is generally passed on to the distributor?

Sure.   Economies of scale; however the majors are already HUGE.   So these kinds of scale benefits accrue to the small producers in a much more impactful way as they add capacity.

[EarthQuake]

20 minutes ago, Richnimrod said:

Sure.   Economies of scale; however the majors are already HUGE.   So these kinds of scale benefits accrue to the small producers in a much more impactful way as they add capacity.

I mean yeah of course. Though it works both ways, they're huge, so even a small gain in efficiency or profit percentage can mean significant gains in absolute profit.

 

For a craft distiller, a more significant gain in efficiency is going to mean a lot less absolute profit, because they're so small. They can increase efficiency/per unit profit 200% and still be making essentially nothing compared to the big players.

 

So there is still a very real benefit to leveraging economies of scale, even if you're already huge, no?

 

But yes in any case I think it's reasonable to say the primary reason for expansion is to sell more product so you can meet demand, not necessarily to operate more efficiently. If you're operating with reasonable efficiency, and the demand is there, the most sensible thing to do is simply sell more product even at a fixed efficiency level. Gains in efficiency due to modernization or economies of scale are more like a nice side effect in this case.

Edited March 3, 2018 by EarthQuake

[flahute]

50 minutes ago, EarthQuake said:

Even considering that basic material/storage costs are roughly fixed, aren't there other cost savings that would come from increased production?

 

Let's say, that instead of trying to send one case of OWA to every store in the country, BT can send multiple cases, because they have the stock due to increased production. Wouldn't this be a significant logistical savings? Or is this a cost that is generally passed on to the distributor?

That’s a distributor issue I’d think.  

BT sends it off distillery grounds by the truckload no matter how it gets parceled out by the distributors. 

[musekatcher]

On 3/2/2018 at 2:39 PM, flahute said:

I don't really follow. Does expansion reduce costs? Unless you're counting on bulk/quantity discounts, all the material costs that go into the product is the same. They expand so they can sell more and make more profit.

Two things.  When you expand, you only scale up the factors that directly generate production - raw materials, operational floor space, vats, trucks, maitenance etc.  But several factors don't increase such as management (unless you add labor), accounting, office space, etc.  Second, any expansion has to include cost savings if you plan to out-price your competitor and hold or gain market share.  The current boom bourbon market may provide additional market for everybody right now, but eventually it will stabilize, and those that didn't reduce costs will loose market share.  The small producers often get this wrong when they expand. 

Edited March 4, 2018 by musekatcher