Time to Roll-Up the Fine Alcohol Barrel Industry?

             I was reading about Bourbon recently and I was struck by the fact that, according to an Act of Congress (why is government always meddling in the Alcohol industry…), Bourbon must be aged in a brand new, charred oak barrel in order to be called Bourbon.  I knew there were other rules around Bourbon (needs to be made from a mash that is >= 51% corn, needs to be made in the USA), but I was pretty surprised that it needed to made in a brand new barrel.  Good work to the barrel industry lobbyist got that written in law!

              Anyway, this discovery about Bourbon got me thinking about the fine alcohol barrel industry and whether or not this little thought about, derivative industry might be a good place to invest.  On the surface, the industry seemed to have some solid characteristics à good growth driven by overarching macro trends toward more aged spirits, fine wine and craft beer; good positioning as a critical component of a set of high end products where there is literally law demanding certain specifications and origins; defensibility given long term contracts, brand name, and technical expertise.  Seemed like it could be an interesting place to run a business and so I decided to dig into it a bit.  After finding some publicly traded barrel makers, it seemed my intuitions were not exactly played out in the numbers.  Growth was relatively slow (sub 2%) and margins were relatively thin.  That said, I was struck by just how fragmented the space seemed to be with many of largest barrel players still family run and operating only a handful of mills.  This discovery got me wondering if there might be a role-up play here – buy many smaller players, build scale and negotiating ability, drive efficiency and margins, sell for a higher multiple at the end of the day?  I’ve heard crazier ideas.

              Also as a quick FYI, Bourbon barrels are not usually simply trashed after they make their first batch of Bourbon, but rather are shipped to other parts of the world with less strict regulations about Whiskey making, like Scotland.  I was told once that one of the famous Scotch distilleries (can’t remember which) makes their whiskey using only Maker’s Mark barrels saying they can make better stuff in used barrels than Maker’s can create in brand new ones!