Top Deal: A Tech Firm That Happens to Make Premium Whiskey

Key Stats:

Summary

To date and as of July 23rd, Cleveland Whiskey has raised $266.6K

Problem

Whiskey is traditionally made in oak barrels via a process of being absorbed by the wood and then released that often takes years. Seasonal changes in pressure act as the “engine” for this process. And as inefficient as this sounds it is part of whiskey’s allure: the best things in life take time. That is, at least, until now.

An increasingly numerous global middle-class are demanding premium whiskey by the millions of cases — and that has put a strain on global supplies. Not only that but the ability to adapt to market demand is limited for whiskey distillers — there’s little incentive to experiment or innovate when you have to project demand 3-5 years minimum into the future.

Solution

After years of experimentation and refinement, Cleveland Whiskey has invented a closely-guarded, patented process that cuts the time it takes to make a barrel of whiskey from months or years down to days.

This lightning-fast patented process sounds like sacrilege to whiskey purists. It’s hard to argue with success. Cleveland Whiskey has won more than 57 medals at competition across the U.S. This includes twenty-two gold and double-gold medals — no small feat for even the most seasoned of whiskey brands.

Cleveland Whiskey sticks out as an equity crowdfunding deal for three reasons.

(1) Owning a distillery might sound fun but waiting years for your product to become marketable does not make for a great business. Cleveland Whiskey isn’t so much a distillery as it is a tech firm that’s taken it upon itself to vastly improve the process of making quality American whiskey. Its patented-process and fast-turnaround makes for an incredibly competitive enterprise.

Whiskey made the old-fashioned way takes years to make because it is the product of the whiskey’s interaction with the wood barrels. Pressure and atmospheric changes that occur as seasons change act as a natural engine.

Though it’s exact process is a secret, Cleveland Whiskey focuses on variations in oxygen, temperature, and pressure to speed up the process.

(2) Cleveland Whiskey’s quality is something to be admired. In a recent blind-taste test performed on 3,600 whiskey enthusiasts CW’s Cleveland Black Reserve was pitted up against famed premium brand Knob Creek. Black Reserve emerged as the winner 54%-to-46%. Not bad for a distillery founded just four years ago.

And (3) it’s rare to find a management team with a proven ability to grow a business that also has a stated exit strategy in mind. That is precisely what crowd-investors have in Cleveland Whiskey. Management has a firm grasp of who they are and what they’re about and has made good on past growth-promises to date.

Market size

Last year, according to the Distilled Spirits Council, over 23 million 9-liter cases of American Whiskey were sold generating $3.4 billion in distiller sales (up 8.1% from 2016). Also in 2017 national Rye Whiskey sales rose 16% to approximately $175 million.

It’s also worth noting the “Great Whiskey Shortage” of recent years. Surging demand here (fueled by consumers in search of the next “hot thing” following the craft beer trend) and growing demand from an increasingly wealthy global middle-class has led to shortages at practically all the major producers.

Fortune recently reported that an Irish Whiskey Shortage is likely in 2018 thanks in no small part to a government mandate that whiskey be aged for at least three years. On the other side of the world Fortune has also reported that the “Japanese Whiskey Shortage is Getting Serious.”

With whiskey on trend with consumers the Cleveland Whiskey team doesn’t see many viable solutions to increase supply quickly outside of their tech-enabled production process.

The reality is, “The industry can’t seem to move fast enough with investments in new production facilities, with almost every major player building new capacity. The problem is that these investments will take years, if not a full decade, to begin making an appreciable impact on supply relative to demand,” says the Cleveland Whiskey team.

With the demand for whiskey making a comeback and with production processes still stuck in the 20th century, Cleveland Whiskey has an opportunity to meet growing consumer demand and become a solution to the supply shortage in this market.

Competitors

Cleveland Whiskey is a uniquely differentiated technology company that happens to produce whiskey. But it isn’t just whiskey — it’s high-quality award-winning whiskey made with a production process that can be tailored almost instantly to market demand.

The reality is the whiskey market is largely owned by a handful of multi-billion dollar conglomerates including the likes of Beam Suntory (a subsidiary of Japanese Suntory Holdings), Constellation brands and Sazerac Company.

You would think these multi-billion dollar beverage conglomerates like Constellation Brands would make their own investments in building-out new production methods, but you have to remember that it is hard to completely change a brand image.

Think about Jim Beam that spends millions every year to convince you that aged whiskey is the answer to the perfect glass now trying to reverse its messaging to say that it’s all about speedy production.

It’s like the large CPG companies that struggle to suddenly reverse course and brand as a natural brands company. What this creates is a pressure to acquire brands that are representative of changing consumer demand that can act independently of the larger organizations messaging.

You need only look at the craft beer movement to see what is likely to occur in the distilled spirits space. For instance, companies like Anheuser Busch have been incredibly active acquiring or taking majority equity stakes in brands like Goose Island in order to partake in the outpaced growth of craft beer over traditional beer.

Another example is Heineken, which has been actively acquiring or investing in brands like Lagunitas. You can see an extensive timeline of acquisitions and investments from larger brewers on vinepair.com. We are now starting to see a similar trend of acquisition in the distilled spirits market, which we will discuss below.

Cleveland Whiskey also comes with another valuable element outside of just its craft brand. When you think about the technology the team has built, which allows you to change the quantity of supply being produced in days or weeks rather than years can substantially help organizations in the space with demand planning / correction. This gives Cleveland Whiskey two acquisition paths, both as a new up and coming whiskey brand and as an answer to being able to more efficiently manage supply production for larger brands.

Business model

Cleveland Whiskey has been cost-efficient in growing its footprint. One way they have accomplished this is by leaning on their investor base from the 2016 RegCF raise they completed. This round led investors to push distributors, and bars to adopt Cleveland Whiskey in their communities.

To date, it’s product is in 3,100 retail locations nationwide as well as select bars and restaurants. To continue expanding its reach, the team partners with promotional organizations that manage large-scale events (think whiskey festivals), in order to meet enthusiastic customers “where they live” driving lower customer acquisition costs.

Building its brand presence in a space with many age-old, household names requires getting to know the customer intimately, which is something the team has done well to date.

The team has also been methodical in building out its distribution footprint internationally in Asia and Europe where demand for American-made whiskey is particularly robust. This also enables Cleveland Whiskey the ability to compete more aggressively in a space where all Whiskey brands are just gaining a foothold.

China alone saw 20% growth in whiskey consumption in 2017 with growing consumer demand especially from the younger generation. This makes distribution into Asia, an especially attractive opportunity for Cleveland Whiskey.

To continue to find ways to grow the top line, the team is expanding its product line beyond just whiskey. The team is now selling the wood from its whiskey barrels as wood for barbecuing. Marketed as “Smoker Bricx” it is quickly becoming a big source of revenue with $750K in sales expected of the company’s estimated $2.6 million top line.

More importantly, this will allow the team to sell into more retailers and get the Cleveland Whiskey brand in front of consumers. Top of mind is key to growing spend with its current and future customer base.

By selling a variety of whiskey flavors, specialty flavors and now a line of grilling products, Cleveland Whiskey is finding ways to diversify its product offering and distribute on an international basis, which are all positive steps to selling at scale.

Financials

Already founder Tom Lix has built a fast-growing, viable business. Last year CW generated $1.5 million in sales and projects $2.6 million for 2018 – a 73% increase. The business is operationally profitable as measured by its gross profit margins currently tracking just below 60%.

Cleveland Whiskey’s priority is customer acquisition. In addition to a modern e-marketing plan focused on Facebook, email, Instagram, and other portals CW is taking a two-pronged approach: (1) building relationships with distributors that act as gatekeepers for local liquor stores and (2) engaging with customers at festivals and events.

This “lean and mean” approach to growth is leading to robust gross margins. For the first half of 2018 unaudited results featured gross margins of 58% representing margin-expansion of 400 basis points. This is a sign that early investments in PP&E (plant, property and equipment) are starting to pay off. As the team scales the business, utilization of its plant capacity will support growth in profitability.

As the company has rushed to grab margin share it has spent the marketing dollars required of any fast-growing business. This has led to GAAP losses for most of the company’s history but according to the company’s internal projections’ profitability is fast approaching:

Source: Cleveland Whiskey Investor Presentation.

The capital provided by the funding-round currently underway at Wefunder will provide further runway for the organization to build its customer base and sales. The company is projecting break-even status sometime late this year and profitability in FY 2019 on revenues of $4.5 million.

This kind of growth might seem overly optimistic. But if the grilling line of products continue to gain foothold, and a few more distribution channels are opened this expansion curve is within reason. The team has already shown an ability to execute on scaling and when the time is right, marketing cost can be throttled back to support profitability. For now, there is enough investor appetite and growth to support a loss producing growth strategy.

Successes to date

Cleveland Whiskey has already attracted many investors. As of the time of this writing, it has attracted $3.6 million in funding including $700,000 from its first equity crowdfunding raise. These early investors have already been rewarded — and we believe rightly so.

The current Wefunder round values the business at $14.8 million, up from the $9.5M valuation in 2016 during its last round. As you will see below, this is a reasonable valuation based on past acquisitions in this space.

Source: Cleveland Whiskey Investor Presentation. *Estimated.

Liquidity Opportunities

The craft-liquor market is ripe for acquisition. And I’m not just referring to George Clooney’s $1 billion tequila payday.

There has been a slew of deals in recent years for quality liquor brands just like CW including Campari’s acquisition of Forty Creek Distillery and Constellation Brands’ major investment in Virginia-based Catoctin Creek. The former transaction is noteworthy — Forty Creek was bought out for a whopping $167 million which translates to 14.5 trailing earnings. Were Cleveland Whiskey to sell at such a valuation by year-end 2018 investors would be looking at a $50 million price tag. That makes the $14.8M valuation an attractive entry point for currently investors.

An eventual buyout is the end-goal. In a recent investor presentation, it was stated for the record that a “liquidity event” in the next 3-5 years is the target.

Founder experience

Cleveland Whiskey was founded by Tom Lix to fill a gap in the market for premium whiskey made efficiently. The company has the right man at the helm.

His resume includes acting as the President and Chairman of Public Interactive (which he founded in 1995) as well as serving as President of Market Pulse — a database software company that’s part of the Computer Corporation of America.

Mr. Lix also served as the President and COO of Yankelovich Partners where he helped food, beverage, and hospitality companies streamline their own operations. With executive leadership and a mix of tech / food & beverage experience, he is well positioned to lead Cleveland Whiskey.

He has also shown an ability to grow Cleveland Whiskey, a market completely averse to change with a controversial product into a multi-million dollar business over the past handful of years. For these reasons, we think the leadership is right to continue its path to acquisition.

Rating

Executive Summary

Cleveland Whiskey is a forward-thinking organization blazing new trails in the premium whiskey revolution. It’s patented process is a closely guarded secre t for a reason — it can produce mass quantities of its popular whiskeys in a matter of days. The company is as efficient as it gets throughout every stage of the process, even reselling the wood-barrels to BBQ aficionados as fuel.

Cleveland Whiskey’s $1 million Wefunder campaign will provide it with valuable capital to bring its disruptive distilling process nationwide and reach consistent profitability.

With the top line growing at over 60%, per-year crowdfunding investors had better climb aboard fast. Management plans on a liquidity event in the next 3-5 years. And if recent liquor-brand acquisitions are any indication, we here at KingsCrowd think that will be a very happy day for Cleveland Whiskey’s early believers. They don’t call it “Believeland” for nothing.