Distilleries Navigate Solvency Issues Following Covid Sales Boom

The alcoholic beverage industry has faced increased financial distress amid declining demand, consumer preference changes, and tariffs, pushing some distilleries toward insolvency despite a pandemic-era boom in sales and spirits tourism.

The Covid-19 pandemic led to higher consumption, but an August Gallup poll found that the percentage of adults who report drinking alcohol has since dropped to 54%, a record low.

As consumer habits shift, craft distillers specializing in whiskey and bourbon that came onto the scene in the past decade have been hit hard, prompting some to seek bankruptcy, Article 9 foreclosures, and receiverships.

One of the more high-profile cases is Uncle Nearest Inc., which was placed into receivership in August after a lender convinced a Tennessee federal court that the whiskey company, which had more than $108 million in outstanding loans, needed oversight.

Other drinkmakers have also been affected by reduced consumer appetites. Some wineries are turning to private equity firms for funding while certain breweries are marketing nonalcoholic alternatives to stay afloat.

The influx of craft distillers has led to market saturation and made it harder for brands to stand out, according to industry professionals.

Without innovation and a strong brand story, it’s harder to survive, said Rachel Schaffer Lawson, a Dickinson Wright PLLC attorney specializing in alcohol and hospitality.

“If there’s no story and the branding is off, it’s just not going to work,” she said.

But there’s more to it. Bourbon takes seven years, on average, to age before it’s sold. With decreased consumption, companies have unfinished product aging in barrels that might not have demand in coming years, industry professionals said.

The government shutdown, which began Oct. 1, has also delayed licensing and other permits by the Alcohol and Tobacco Tax and Trade Bureau. Brewers have new labeling requirements from the US Food and Drug Administration that are also in limbo until the shutdown ends.

Still, alcohol makers must still pay excise taxes on time.

Owners aren’t necessarily trying to evade paying taxes, but “once interest starts running away, penalties start running right away,” said Steve Montgomery, a bankruptcy attorney at Dickinson Wright PLLC. “It’s difficult to get out from under that.”

Barrel Valuations

Barrels and equipment are valuable assets for alcohol companies looking to shed inventory or raise cash. But depreciation of product in barrels happens constantly, making an oversupply harder on certain companies, said Ellen Arvin Kennedy, a Dinsmore & Shohl LLP partner and bankruptcy law professor at the University of Kentucky.

Product value is a key factor in the bankruptcy of Stoli Group’s US arm and bourbon affiliate Kentucky Owl LLC—their proposed bankruptcy exit plan was rejected Oct. 3 by a judge. The judge’s decision, nearly a year after the companies filed Chapter 11, cited the “dismal state of the barrel market.”

Westward Whiskey parent House Spirits Distillery in September had more than 80 prospective buyers for its 7,000 barrels, but only one made a qualified offer, company CEO Thomas Mooney told Bloomberg Law.

A bidder needs to understand the business to “put money behind a small spirits venture,” he said.

The Portland, Ore.-based distillery ended up selling its assets to a former board member and is working to wrap up its bankruptcy to take care of lease obligations and distribution agreements, Mooney said.

Tennessee-based Uncle Nearest faced questions regarding its solvency in August and its barrels valuation. Its lender said in court records that the barrels were likely worth less than the company’s estimate and that its loans didn’t have adequate security.

The company could be reorganized as a going concern by the end of the first quarter of 2026, according to an Oct. 1 report by its receiver. The report is a positive sign that bankruptcy is probably unnecessary and that Uncle Nearest may survive its cash flow struggles, industry professionals said.

Uncle Nearest “will be better for it at the end of the day, hopefully,” Lawson said.

Cash Management

Lenders are less willing to take on risks in the current market, meaning barrel valuation issues are making it particularly difficult for distilleries to recover, said Greg Jones, a Stradling Yocca Carlson & Rauth LLP bankruptcy partner.

But some have found ways to keep business alive.

Black Button Distilling, purchased by Blackstar Co. through Article 9 proceedings in September, couldn’t afford the costs of a formal bankruptcy, its founder and CEO Jason Barrett told Bloomberg Law.

Borrowing against barrel stock was beneficial from the 1990s until 2023 when “the fall hit hard,” Barrett said. What was once an insatiable scarcity led some companies to overproject future sales, which is now causing issues, he said.

Even Brown-Forman Corp., parent of Jack Daniel’s and Woodford Reserve, and beverage giant Constellation Brands Inc. have experienced distress, as both reported lower-than-projected sales and earnings this summer. On Oct. 2, Brown-Forman approved a $400 million share repurchase program.

Constellation Brands, meanwhile, is being sued by investors who say they were misled about prospective growth in its wine and spirits segment.

Challenges

Taxes and loan obligations also pressure the industry. Merchant cash advances and unsettled tax obligations have helped push some alcohol makers into bankruptcy, Montgomery said.

Kentucky, where nearly all bourbon is made, is the only state that charges taxes on aging barrels of spirits, the Kentucky Distillers’ Association said in an Oct. 8 press release.

“Kentucky distillers are footing a crushing $75 million tab in aging barrel taxes this year,” a 27% increase from 2024 and an “astronomical” 163% increase over the last five years, the association said.

President Donald Trump’s trade war and tariffs have caused uncertainty for importers across industries. Retaliatory tariffs also decreased wine and spirit exports.

As companies navigate consumer preferences and regulatory challenges, there is “likely going to be a spate” of future collapses, Kennedy said.