If you didn’t watch it happen first hand, you’ve probably already read about Facebook shutting down buying, selling, and trading groups dealing in items such as guns, cigars, and more specifically bourbon. Fast forward a few days after the incident and at least a few of the groups were back up along with apologies from Facebook for removing them in the first place, an accident apparently.

While the illicit secondary fills a natural gap in the market for bourbon and is no more than willing buyers connecting with willing sellers, it does open the door to a number of problems.

But that’s not what this article is about.

The simple fact is, consumers want the ability to exchange goods with one another; bourbon, or any alcohol for that matter, is no different. While the secondary market may include only a minimal number of active participants, it meets a very real demand in the marketplace and seems to be growing. Moreover, if I want to sell a bottle of my own bourbon to another person, why shouldn’t I be able to?

I’m not going to answer that question, but I think it’s fair to say that no one will ever be able to completely purge the illegal secondary market, not with brute force anyway. Where laws exist that prevent willing parties from transacting, they will find a way to make it happen. Just look at marijuana’s history in the U.S.

Rather than trying to squash the sellers with brute force, wouldn’t it make more sense to modify laws to accommodate consumers’ demands when it comes to buying and selling alcohol?

One solution I’ve thought about, in a similar sense, was laid out much more eloquently by Brian Haara on his blog, Sipp’n Corn. The essence of the solution would be an option for end consumers to sell rare bottles to a licensed third party clearinghouse who would then sell or trade them on the open market, removing a number of the problems now plaguing the secondary market. The potential downside: one more “tier” adding cost, complexity, and a whole new set of problems.

I’d like to think that some form of his concept could work, and with the right controls in place I would be all for it. Maybe if consumers’ identities were verified and the option to sell was limited to natural persons only, coupled with a cap on the number of sales allowed per person per year. Would controls such as these eliminate the potential for this to become a fourth tier? Or would this open up the door for more “flippers” than we see today, giving random, otherwise uninterested opportunists a now legal means to make quick cash making it even more difficult to find rare bottles at good prices?

Building off Sipp’n Corn’s idea, I propose the concept of a regulated marketplace where consumers could buy, sell, or trade bottles of alcohol with one another, retailers could fulfill orders in limited instances where the need presented itself, and all of this would be handled by a legally authorized third party. This third party would be responsible for handling the transactions, collecting transaction and per bottle based fees (no sharing in the value of the bottles, and this is important), ensuring the parties to the transactions are of age, and verifying authenticity of consumer supplied bottles. Consumer supplied bottles would pass through the third party’s facility and they would hold them in escrow until everything cleared, finally remitting the bottles to the end consumers in the transaction. Retailer supplied bottles would be shipped directly to consumers in order to minimize cost.

This would require a credit based system where the value of bottles-in and dollars-in effectively become trade-value or cash-value credits held in trust by the third party handling these transactions. Each party would have a very limited and defined role to keep things in check.

The Consumers' Role

Consumers would be authorized to fund purchases with cash or bottle trades, but would only be allowed to take out bottles from the system, never cash (by cash, I mean monetary payment of any kind). Consumers would receive trade-value credits for bottles (to be used immediately when making trades) or cash-value credits for cash put into the system (which could be used immediately or be held in trust for future transactions), or some combination thereof. They would use trade-value and cash-value credits to acquire bottles from other consumers, and cash-value credits to acquire bottles directly from authorized retailers. So while consumers could “sell” bottles, they could only realize profit in the form of other bottles.

The Retailers’ Role

Retailers would be authorized to sell bottles to consumers (shipping directly to consumers to avoid additional costs or even holding for local pickup), and would be authorized to take cash-value credit payments in, of which an actual cash payment would be distributed from the third party to the retailer. Retailers would not be authorized to trade with or purchase bottles from consumers or other retailers, leaving the three tier system intact. The main purpose of the retailers’ involvement would be to provide a means for consumers to sell more rare bottles, such as Pappy Van Winkle, and subsequently use their cash-value credits to purchase an assortment of common bottles from a retailer that would not be cost effective to be offered up for trade by another consumer… in other words, the concept would not transfer the role of existing retailers to consumers when it comes to supplying readily available bottles.

About New Riff Distilling

Breaking Bourbon: I know that a lot of the crew does not come from necessarily a whiskey background. Was that accidental, or was that deliberate for some reason?

Mostly that was deliberate. Talking to Larry Ebersold, because first of all we needed a consultant, a master distiller to teach us what to do, and I had a lifetime of knowledge and learning about alcoholic beverages and spirits, but I’d never made them before. I wish I could tell you, yeah, I had a still in my dorm room, man, you know, I never did that. I never owned an illicit still. And so when we opened New Riff, all of us put together had made zero whiskey, zero spirits of any kind. Larry’s advice was...and Ken and I felt this way too...we didn’t necessarily want to just recruit someone out of the Kentucky industry who would come in with a lot of perhaps good preconceptions and foreknowledge and assumptions and practices. That might have been just fine.

But it was Larry’s advice that said, you might just think about hiring a brewer. Hire someone who knows fermentation, because that’s where the flavor is made. You don’t make flavor in a still. Stills don’t make flavor. Stills can...depending on the use of them and everything...they can shape flavor, but they don’t create the flavor. And the flavor is all made in the fermenter. And so we were looking, in fact, to hire a brewer, and we wound up with Brian Sprance our head distiller and production manager. Brilliant guy, came to us out of the craft beer industry. He was probably a master level brewer, more or less, at Boston Beer, and came to work for us, and he had not distilled a lick of whiskey in his life. He didn’t know anything about making whiskey, but he knew all about fermentation. And having him then trained to run the distillery by Larry, that was very much a deliberate act that we didn’t just hire someone…we wanted to find our whiskey, find it ourselves, so to speak.

Breaking Bourbon: How integral was the O.K.I. brand both from a learning side...and development in bringing New Riff to be? Did that inspire [the New Riff concept], or was it always the idea to get into the distillation side?

Yeah, good question, and particularly to the point of education or our experience. So the story of O.K.I. was as Ken Lewis and I were spinning up this distillery in the formative days, we were starting the process, I guess. I said to Ken, you know, we should go and buy a few barrels so that we have an aged whiskey to work with now, you know, to work with not in 10 years or 4, 5, 6 years, but to sell now. And it can be a standard bearer. We didn’t make it, but we did bottle it and we put it together and we vat it together, and moreover we made quality decisions that govern how it plays out, namely to be un-chill filtered and to say, this is how we think whiskey ought to be bottled. And it was a standard bearer. It was a little bit of a placeholder, certainly to the point of meeting people in the industry, bars and retailers and restaurants, and stuff like that.

We did a few picks with various stores and stuff. It was a way to get to know those people. But internally, I don’t think I appreciated when I proposed it to Ken how much of a huge learning platform it would be for us. We did some barrel-finishes...now we haven’t done that at New Riff, and we’re not likely to do that anytime soon...but we did it, and we learned how to do those. We made a sherry-cask finish, that for me, a lover of single malt scotch since the age of teen years old, I loved sherry-cask stuff. So that was just a tremendous learning platform for us both in the vatting and the selecting, but very much in the bottling, packaging, bartending…we had great material to work with. And finally, it was not just any old whiskey. To most people, oh, that’s an Indiana whiskey. Ok, another one of those. I get that. But for us, they are sort of our big brother neighbor distillery. They’re right here in greater Cincinnati. They are a high rye distillate, you know 35% rye with O.K.I., and we were going to be that as well.

And furthermore, we were trained by their emeritus master distiller, Larry Ebersold, he was the master distiller many years there at the Seagram’s plant in Lawrenceburg, IN, and he was serving as New Riff’s consultant, and so we were trained and taught the black arts of how he made whiskey. The 95% rye, his precept, his quality goals, and tricks of the trade and stuff like that. So, we were taught to make a whiskey like that, sort of. I wouldn’t have wanted barrels of wheated whiskey from [another distillery], for example. It was something right here that attracted us to the Indiana stuff.

So O.K.I. was always meant to die. It was not intended to persist as a brand. Perhaps if the supply of aged whiskey had been available later in our careers, we would have continued it, but the fact is it was not available. That whole market dried up. You couldn’t go and get 5, 6, 8, 10 year old whiskey anymore, and we always intended for O.K.I. to die. What we were not going to do is this switcheroo where Indiana juice is in the bottle and suddenly Kentucky juice is in the bottle. We wanted it to be a clean break and a different design.

Breaking Bourbon: And thinking about your size...I know you guys position yourself really mid...I mean you’re a big craft facility...but you’re a small, large producer...a mid-range producer. So tell me about that.

Some people call it the mid-major. We’re the biggest of the small but the smallest of the big. Frankly, I don’t even know if...we probably don’t really consider ourselves a “craft distillery.” We were definitely inspired by that movement, and we’re friends with all those people and we know them well and love them, but we are sour mash whiskey producers in full size barrels for 4 years. Most of what we have done is not the business practices of the small craft distilleries, for better or for worse, I think we can agree, sometimes for the better.

When you have whiskey in a six gallon barrel that’s six months old and they’re pushing it out for 50 bucks a half bottle, we’re not part of that milieu. That said, we are…yeah, a mid-major. We make whiskey just like the big boys, but we make a lot less of it. But we’re cognizant of how much we do make. We make 80,000 barrels a year, and that’s not small potatoes, you know?

Another reason why we want people to come here and see in person what we’re about. I do underline a little bit the commitment to Bottled-in-Bond, why we do it. We had not… what’s the word… agreed, or… we didn’t plan to do that in the early days. We kicked it around, should we do Bottled-in-Bond? And we thought, well maybe, we could do a Bottled-in-Bond, maybe we should do that, I don’t know. We were going to be un-chilled filtered for a certainly. That went without saying. And that was at least one early quality commitment. And we promised ourselves we would go at least four years. If the whiskey wasn’t ready at four, I had to explain to Ken Lewis we got to go to five. Happily, it’s pretty good at four.

So we were always going to be un-chill filtered, but we weren’t settled in the early days on Bottled-in-Bond. And then internally, we started asking ourselves, and we realized, hold on a minute. Bottled-in-Bond is not just a category for old men and bartenders. It is the world’s highest quality standard for an aged brown spirit, full stock, the highest quality standard. Higher than the standards in scotch. Higher than the standards in Cognac.

You know that they add caramel color to those spirits, but also in the case of Cognac, you can add sugar, you can add oak flavoring, you know this? Look at Canadian whiskey, you can add any damn thing you want, practically. Japanese whiskey doesn’t even have to be distilled in Japan to be called Japanese whiskey. A lot of what’s in the bottle of Japanese whiskey...I’m speaking very broadly here...comes from [Scotland]. Sometimes it comes from America. Anyway, it’s the highest standard in the world for any aged brown spirit and since 1897. So when we realized that and we say to ourselves, if we really are putting our heart on our soul about being quality-first...and every single drinks company in the world would tell you they’re quality-first...and you and I know that’s really not the case. At some point, the piper gets paid, and the shareholders put out their hand and a decision gets made.

Breaking Bourbon: You don’t have many with “poor quality” in their advertising. That doesn’t come off so well...

That’s a good way to put it. Anyway, we really, really, mean that, and we do. It is really our goal to be...and this is our goal, Ken and I...and we reiterate it to each other all the time. If our goal truly is to be one of the world’s great small distilleries, than how can we not not only Bottled-in-Bond, but make everything peg to that highest standard in the world.

On top of that, by being un-chill filtered, we don’t even do the one thing that the federal government allows that you could do. If you read part of the Bottled-in-Bond regulations very closely, the only thing you can do to change the whiskey from its native state is to filter it, what they call chill-proofing. Because you have chill-filtered...to make a long story short...we don’t even do that. So we are taking the world’s highest standard and putting a New Riff on that and taking it to an even higher restriction. And with all this kerfuffle about the private barrels and the single barrels, and oh my gosh, this is so amazing, we love your barrels. For me the much bigger import is the fact that we bottle everything in bond. Nobody else does that.

Some Additional Details:

  • The third party intermediary would be limited to per bottle and/or per transaction based fees only. They would be explicitly prohibited from charging any value based fees or acting in the capacity of a retailer.
  • The bottle values would be agreed upon by the consumers, such that the third party would have no control or participation in value other than to relay information between the consumers. Retailers would offer bottles at their own set pricing.
  • Handled within the confines of the third party website, the consumers would be restricted to communicating within the set parameters of the website so that they would not have access to one another’s personal contact information or be presented with an easy opportunity to make deals on the side.
  • The third party would send prepaid authorized shipping labels (and possibly standard packaging) to the consumers for shipment to their processing facility for authentication, passing along their volume discount and ensuring the packages were shipped safely and legally between any and all parties to the transaction.

By removing the ability of average consumers to make profit in a monetary sense, this concept could meet the needs of many of the real “buyers” in the secondary while eliminating those seeking to merely flip bottles for a quick monetary profit. Rather than detracting from retailers’ businesses, this might even serve to protect them.

As for fakes, the possibility will never be completely eliminated, but by removing the opportunity for consumers to realize monetary profit along with an evolving and concerted effort to identify fakes, we can only hope the idea of a fake becomes a tale of the past.

Since the third party handling the transaction would be limited to compensation based on trade volume and not bottle values, their incentive would be to minimize costs while maximizing efficiency. They would work with retailers as opposed to against them.

Keep in mind this is a concept only. Laws would have to change in order to create this opportunity and shipping of spirits would have to be allowed [read our related article: The Confusing State of Shipping Bourbon].

And yes, maybe you could call this a fourth tier… but maybe we need something like this to work in harmony with the already established system. There is a real and growing demand here, and it’s going to be satisfied one way or another. Why not work towards a system that protects consumers and retailers alike?

What do you think? Sound off in the comments below.

Breaking Bourbon: And you don’t have any plans to become, or ideas to become, larger on a scale of say...let’s open another distillation location or something of that nature? I know there’s another warehouse that’s in the works, at least, as we toured the warehouses, and were speaking about that, from a distillation and production standpoint. Or would you grow into demand, do you think...or do you think you’d want to keep it in the tighter kind of way you have it right now?

One thing I can say with certainty is, we’re going to remain independent. As we’re in this business now and I start to work inside the bourbon industry in a totally different way than we did when we were retailers, you can start to see people’s business models. And these are all good...no criticism of anybody...they’re all viable ways to do your business, what have you...but I can see places making decisions for an eventful outcome. And sometimes that outcome is to remain independent and often that outcome is to someday be bought up. Sell it to someone.

I can look at someone now and see that they’re making decisions to do one or the other. Nothing wrong with that, but if Ken Lewis’s intention is to get bought up someday, he’s doing it wrong. We are not doing the kind of things...you know, putting the money where the mouth is...that would lead us to be bought up. We are making decisions that are for long-term independence and quality. So that I can say with a certainly is what you will see in 10 or 20 years. Will we be owned in 10 or 20 years by, take your pick of Diageo, Sazerac, William Grant, Brown-Foreman? No. We’re not going to be sold. I don’t know that we would ever expand with another distillery. It’s doubtful. We think that you are not wanting to get too big.

One thing that we are not really concerned about is the very thing that all these big companies are concerned about, which is two words - the words are market share. Market share. What’s our market share in San Francisco? How we doing in London? What’s our market share? We don’t really care about that. We don’t have stockholders. We don’t have shares out there. We have one brilliant owner who’s a fantastic guy to work with.

You know how you hear of such and so entrepreneur is just the most amazing boss to work for, but it’s never your boss.

Well, Nick, it is my boss.

Working with Ken Lewis is tremendous. And I think that’s not going to go away, so. We don’t need to get really big. Our goal here is not to get rich. We’ll have nice lives and we’ll make our money, and we’ll be successful, but the point is not to gain market share. The point is to be a great small distillery. Which if you think about it, is an amorphous goal. How do you know if you’ve made it? What do you do every day to get there? If your goal is market share, it’s simple. You need to make and sell more booze. But that’s not the case when your goal, your stated goal, that you remind yourselves in every meeting every week, is to become a great small distillery of the world and to do it in sour mash Kentucky whiskey. If that’s the goal, how do you go about it? How do you know that you do it?

You just have to keep putting one foot in front of the other with confidence and skill and commitment to quality. That’s what will go on. I’m sorry that sounds corny but its the truth.

Written By: Nick

May 12, 2016
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