G. Chambers Williams III

cwilliams1@tennessean.com

Is there a whiskey shortage looming?

Yes, indeed, according to distillers and industry observers, who point to a worldwide boom in consumption of bourbon and whiskey, and in particular Tennessee whiskey, the fastest-growing variety.

From millennials transitioning from craft beers and wine, to baby boomers coming back into the fold — and international consumers experiencing it for the first time — American whiskey is enjoying a revival.

Annual sales rose 10.2 percent in the past year alone, according to the Washington, D.C.-based Distilled Spirits Council.

"We have seen an explosion internationally," said David Ozgo, chief economist for the DSC, the trade group representing America's distillers. Exports of bourbon and Tennessee whiskey exceeded $1 billion last year, up from $400 million just a decade ago.

Driving the growth has been the easing of tariffs on whiskeyin many international markets, including China, Australia and South Korea, opening the door to American whiskey imports.

It means big business for Tennessee, where distilled spirits — primarily Tennessee whiskey from big producers Jack Daniel and George Dickel — accounted for $1.7 billion in economic activity in 2011, the last year for which data are available, according to Ozgo.

The state now has about 25 distilleries, ranging in size from Jack Daniel in Lynchburg with nearly 500 employees to some small craft distillers with just a few, said Billy Kaufman, president of the Tennessee Distillers Guild and owner of the Short Mountain Distillery near Woodbury.

"Distilleries brand the state," Kaufman said, noting that Jack Daniel's alone has made Tennessee whiskey a household name around the world. Jack Daniel's brands account for about 95 percent of the state's whiskey exports.

The American whiskey market fell into decline for more than two decades beginning around 1980, as drinkers turned to such substitutes as vodka, rum and tequila. It began its revival in 2000, and since then has gained 6 percentage points in its share of the U.S. domestic alcohol beverage market, to 34.7 percent, Ozgo said.

And in the past couple of years, even though vodka is still growing, "whiskey has really taken off," he said.

To underscore the possibility of a shortage, gains in whiskey sales are outpacing production increases by at least 2-to-1, industry experts say.

That's prompting distillers to rush to head off a crisis, said Clayton Cutler, chief distiller at the Tenn South Distillery in Lynnville, one of the newest players.

But there's really no way to put a rush on good whiskey, he said.

"It's not like you can ramp up production today and have that whiskey on the market tomorrow," said Cutler, whose distillery specializes in Tennessee whiskey made the old-fashioned way — filtered through sugar maple charcoal, as pioneered by Jack Daniel.

"There's an aging process that requires a wait of at least a couple of years before you can start selling it," he said. "Some takes four years or more."

Tenn South has about 200 barrels of its signature Clayton James Tennessee Whiskey aging in its warehouse now, and the first batch will reach maturity sometime this fall, he said. In the meantime, the distillery is working overtime to put up more barrels.

What's driving the growth domestically is the proliferation of small craft distilleries, which have begun popping up all over in Tennessee since the state legislature relaxed rules in 2009 on where they can operate, expanding legal distilling from just three to now 41 of the state's 95 counties.

Just like what the market saw earlier with craft brewers, consumers looking for something new and different are embracing the small distilleries, whose homespun whiskey products are becoming staples at trendy bars and restaurants.

But it's not just the craft distillers benefiting from the whiskey renaissance, said Jeff Arnett, master distiller at Jack Daniel in Lynchburg, the world's largest producer of Tennessee whiskey.

"It's an exciting time to be in the whiskey business," he said. "A rising tide raises all ships, and the craft distillers have been good for all the big American whiskey brands. We've definitely seen a lift from it. They're making whiskey more exciting and bringing more people into the whiskey segment. They're popping up all over, in convenient tourist places, and they're driving more tourism business for us. It's fascinating."

Jack Daniel has been growing very well on its own, though, even before the craft distillers came onto the scene, Arnett said. While the domestic market is still growing, international sales of the brand have been rising by increasingly higher margins.

"Jack Daniel's experienced double-digit volume growth in five of its top 10 volume markets, including Germany, France, Poland, Russia and Turkey" during 2013, the company said in its annual report.

To help stave off a shortage and support the rapid growth, Jack Daniel last year announced plans for a $100 million expansion of distilling and warehouse space, which will allow it to increase production by up to 20 percent in tiny Lynchburg.

"We've been seeing this coming," Arnett said. "We have seen globally that scotch is losing its position as the go-to whiskey. The new generation appreciates American whiskey for its flavor and mixability. Jack Daniel has been fortunate that even before that shift, we have been able to grow. We've been slowly adding warehouses, as well as fermenting and distilling capacity."

Flavored whiskeys are the latest trend, something that's been embraced not only by the craft distillers, but even by the big brands such as Jack Daniel.

"These flavored whiskeys have become a whole new market, helping to drive growth in the industry," Arnett said. "Our Tennessee Honey brand is in the majority of markets where our Black Label is, and it's growing very well. We've introduced our new Tennessee Fire cinnamon whiskey in three states — Tennessee, Oregon and Pennsylvania — and it's doing very well so far."

Lincoln County distiller Phil Prichard, whose products include rum and whiskey, said the impending whiskey shortage will help his sales in two ways.

"People will buy my whiskey, of course, but when there's a shortage of whiskey, they'll be turning to rum," he said. "The demand for whiskey is huge right now, and for those of us in the rum business, we think that's absolutely marvelous. If I were only in the whiskey business, I might be crying in my glass right now.

"The big guys have a certain amount of reserves," said Prichard, who just opened his newest distillery at the Fontanel Mansion in Whites Creek. "But people like me can't keep up with the demand. We're trying to meter our Tennessee whiskey so we don't have to allocate it."

The Corsair Artisan Distillery, one of Nashville's first craft whiskey operations, is ramping up to meet the challenge, said owner-distiller Darek Bell.

"We're investing a lot into expansion to build up more stocks," he said. "We've already gotten into 25 states and eight foreign countries, but we couldn't get into any more because demand from those markets keeps us from expanding. It's a great problem to have, but I don't want people to get angry and go off to another category like rum or something else."

Making more whiskey does take time, though, even for the little guys, Bell said.

"We could buy the biggest still in the world and the market isn't going to see any impact for a while," he said. "Every year we've been in business we've been in short supply; we never have been able to keep up with demand. The stuff we're making this week was sold (to distributors) months ago, but it hasn't even aged yet. Three years ago, we were already rationing our production."

While Corsair started out with a focus on gin, "our biggest focus now is aged whiskeys," Bell said.

"We're expanding to try to keep up with the demand for aged spirits," he said. "But you never know what the market's going to want three or four years from now. We're trying to lay down as much as we can, and we haven't seen any slowing of demand."

As whiskey production ramps up, there's another concern for the distillers: a growing shortage of the white oak barrels needed for the aging of the product.

"That's becoming a big concern as well," said Cutler, whose Tenn South Distillery is scrambling to find a new supplier because its regular barrel maker has already sold out of the standard 53-gallon size "for the rest of 2014."

Jack Daniel's parent company, Louisville, Ky.-based Brown-Forman Corp., recently opened a new barrel production facility in north Alabama to serve the Lynchburg distillery, Arnett said. But those barrels aren't available to distillers outside the Brown-Forman fold.

Reach G. Chambers Williams III at 615-259-8076 and on Twitter @gchambers3.