Trade Lessons Distilled
There are millions of people in the People’s Republic of China who need a good, stiff drink right about now, and Tom Lix, chief executive officer of Cleveland Whiskey, aims to give it to them.
The question is when.
With Black Monday’s rout on the Shanghai Composite Index erasing all of 2015’s gains and wiping out or severely damaging the portfolios of numerous mom-and-pop investors, Lix’s new black cherry wood-finished bourbon could help them drown their sorrows. But the market drama and a related development—the surprise devaluation of the Yuan—has the 64-year-old Cleveland entrepreneur rewriting his China playbook.
“It’s got to have an influence,” says Lix of the devaluation. Originally hoping to introduce product into one or more Far Eastern markets by year’s end, “We might sell more in Europe than in Asia for the time being,” he concedes.
Yet Cleveland Whiskey presses on.
Lix, a genial bear of a man who relishes the role of industry heretic and who produces his growing line of fast-to-market bourbons in a business incubator, has no intention of dropping his interest in Asia and is now seeking advice on how best to thread the pricing needle.
The six-year-old company shook up purists when it began speed-aging bourbon by sending a formula for “white dog” whiskey to producers in Kentucky and Indiana, having them age the distillate for a couple of weeks at most and then ship it to Ohio, where it is placed in one of three stainless-steel vats to be pressure-aged along with cut-up staves from the shipping barrels.
“It’s about a 24-hour process,” Lix says over a repetitive churning noise that fills his production area. For newer flavors like black cherry and honey locust, “we use air-dried sustainable hardwoods,” he notes.
The bourbons that Cleveland Whiskey is now producing appeal to the Asian palate, says Frank Coleman, senior vice president at the Distilled Spirits Council of the United States (DISCUS). “The appetite is there for American products,” Coleman says, noting that exports of spirits to the People’s Republic increased by 1,330 percent from 2000 to 2014 and by 1,332 percent to Singapore, a key transshipment center.
Pre-devaluation, Lix helped whet the Chinese whistle by putting samples of his products up for 2015 China Wine and Spirits Awards, with one entry winning a Double Gold Medal and another capturing a Gold.
As for post-devaluation pricing, Lix is being told to target the luxury end of the mainland’s market.
“What they told me was, I was looking at it wrong,” Lix says of advice he recently received from trade experts at Cleveland State University (CSU), just blocks away from his office. “Then (going upmarket), the devaluation probably wouldn’t matter.”
China is a bifurcated market, observes Nate Ward, director of CSU’s International Trade Assistance Center (ITAC).
“The consumers there in the wealthiest class have brand loyalty,” he says. “To go after the ‘highest’ consumers is probably the way to go.” As for the middle class and below, “They’re incredibly price-sensitive” and take a commodity approach to buying decisions, he says.
While surprises in China have rattled the entire supply chain, “It’s a long-term process anyway,” Ward says of entering the mainland.
“Use a period of uncertainty like now to engage in business development. It’s probably a very good time to be laying the groundwork.” Over time, he says, “The purchasing power will definitely go up” as the economy rebounds in the world’s largest consumer market.
FALSE STARTS, GROWING SUCCESS IN GERMANY
Devaluation is just one of several export-related challenges that Lix has had to face in his quest to build a brand overseas.
With Cleveland Whiskey getting a positive reception domestically, Lix began exploring global markets in 2014. By that time, U.S. spirits exports had exceeded the billion-dollar mark for seven consecutive years, according to DISCUS. Lix understood that strong global demand coupled with a weeks-long versus years-long aging process could net strong profits.
To get started, he tapped into the Ohio Export Internship Program, which provides companies with up to $3,600 reimbursement for intern wages.
Lix’s first intern identified viable markets, researched regulations and developed a basic “how-to” guide for the company. The firm also explored shipping by air versus sea but ruled out the former. “Quite frankly, it was simply too expensive. Remember that bottles are pretty heavy,” Lix notes.
Next, Lix recruited a broker with strong contacts in Germany, his first target market.
Peter de la Porte, an immigrant from the Netherlands, serves as consul for his native land in Cleveland and also runs Hexon International, a manufacturer’s representative. De la Porte had heard good things about Whiskymax, a German spirits distributor, and held several meetings with them, preselling Cleveland Whiskey with samples.
By the time Lix joined the DISCUS delegation last fall at Bar Convent Berlin, a trade show, Whiskymax was sold on the new speed-aged import and was a prepaid customer. “Knowing that I was coming over maybe helped me sign that distributor,” Lix says. “A lot of it is mutual trust,” adds de la Porte.
In Berlin, Lix also had time to hobnob with potential buyers from other countries. “A lot of buyers gravitate to Berlin because it is, in fact, a tastemaker for less developed economies,” Coleman of DISCUS explains.
Flying back home, Lix was optimistic. Then, problems surfaced. First came the fine print.
In the U.S., spirits are generally sold in 750-millileter bottles; in Germany, 700-millileter bottles are used. “Not every country has that regulation,” de la Porte says. “That was really one of the surprises.”
“No one produces that sized bottle in the U.S.,” adds Lix, who had to rush-order a shipment of the smaller-sized bottles from French manufacturer Saverglass to fulfill his new distributor’s needs. “The 700-ml bottles cost considerably more.”
Branding also proved an issue, as German regulations forbid calling something a “whiskey” if it hasn’t been aged in a barrel for at least three years. Pouring through the rules, Lix found that Germany deemed his product a bourbon.
Placing a 700-millileter bottle for export labeled “American Bourbon” alongside a 750-millileter domestic bottle labeled “Bourbon Whiskey,” the difference in size seems almost imperceptible. But the labels are as strong as bad moonshine and by going the extra step, Lix avoided running afoul of foreign bureaucrats.
With regulations addressed, Lix and de la Porte began preparing for Cleveland Whiskey’s maiden voyage. The two originally settled on using the Cleveland-Europe Express, a creation of the Cleveland-Cuyahoga County Port Authority.
Introduced in April 2014, the all-water route between Cleveland and Antwerp, Belgium, offers a sailing time of 13 days, weather permitting—five to 10 days faster in total transit time than using an East Coast port, the port authority states. It is the only scheduled liner service for containerized and breakbulk cargo between Europe and a Great Lakes port.
But Cleveland Whiskey’s plans to be an early adopter of the service were scuttled. “The only problem was, it was the middle of the winter” and the locks on the St. Lawrence Seaway were closed, de la Porte explains.
Working with Whiskymax, it was agreed that Lix’s shipment of “American Bourbon” would be trucked to New York. But instead of being loaded onto a ship there, the cargo sat on the dock for a month.
Conflicting accounts of what caused the delay persist. While Lix expected a 20-foot container of his product to be loaded, “It was not a 20-foot dedicated container when it got to New York” but rather breakbulk cargo, de la Porte says. Word came back through the supply chain that a Material Safety Sheet involving alcohol content had been completed incorrectly multiple times, but not everyone believed that version of events.
Fortunately, the snafu in shipping had a silver lining. Because of the delay, Whiskymax was getting “a lot of pressure” from its buyers to deliver Lix’s product. “People suddenly really wanted to buy this Cleveland whiskey,” de la Porte recalls. “The whole shipment was sold out in less than a week” and a second shipment was ordered soon after, he says.
To Ward of CSU’s International Trade Assistance Center, the incident recalls a lesson learned by another exporter during the recent West Coast work stoppage.
“It only takes one instance of experiencing a major slowdown” to make a new exporter more vigilant, Ward says, remembering how an unnamed company finally asked its freight forwarder to quote a shipment out of another port. “That company was so used to listening to the directions of their forwarder,” Ward says.
“We know much more now,” Lix says. “I must admit that we were pretty naïve about the entire process.”
Cleveland Whiskey expects to use the Cleveland-Europe Express for its shipment to Germany this fall and will now have the option to ship twice a month if needed. The Port of Cleveland and Amsterdam-based Spliethoff Group recently added a second monthly vessel to the route, which has seen tonnage more than double, says David Gutheil, the port’s vice president of maritime and logistics.
SAFETY NETS ALONG THE WAY
Having navigated the vagaries of shipping and gotten a repeat order from Germany, Lix was ready to expand his horizons.
In addition to planning his third shipment to Europe, he spent the first half of 2015 pinpointing China, Singapore, Hong Kong and Japan as appropriate markets and began strengthening his export tool kit by developing more robust relationships with a variety of public and private agencies.
Besides DISCUS, his trade organization, one that Lix sought out early was Food Export Association of the Midwest USA, a nonprofit that promotes the export of food and agricultural products.
Lix latched onto the group’s Branded Program, which operates across 12 Midwestern states and reimburses applicants for 50 percent of the costs associated with product demonstrations, fees for exhibiting at foreign trade shows, freight costs for samples and other activities that support exports. The program is open to businesses defined as small companies by the U.S. Small Business Administration and carries a $250 application fee, with an administrative fee of 6 percent of the approved program allocation.
While Lix believes that the Branded Program has merit, he suggests that users study their calendar before participating. “We did it a little too soon. … You have a year’s worth of time to use those monies.”
“Funds cannot be rolled over so it is very important that companies plan their year in advance to the best of their ability,” confirms John Belmont, a spokesman for the Chicago-based organization. “They do have the opportunity to amend their requests and ask for more funds if available later in the year.”
As Lix grew more serious about Asia, he also took advantage of a Food Export Association Buyers Mission, held in Cleveland at mid-summer. Lix had the opportunity to meet potential customers from China and Hong Kong as well as 15 other countries, all of them prequalified by the Chicago team. The group also conducted one-on-one assessments of companies’ export potential.
Nate Ward of ITAC, who also attended the session, calls the program a “no-brainer.”
“Half the work involved (for an exporter) is just verifying who they are is what they say they are,” he says. “How much time, energy and cost would that have been?”
Lix continues to tap into some of ITAC’s services, which include export readiness, export financing, compliance, documentation, logistics, and cultural assistance as well as pairing a fledgling exporter with a more seasoned mentor.
Ward is also happy to refer exporters to third parties for credit risk insurance.
Although Cleveland Whiskey’s first overseas relationship was a prepaid one, future prospects may only be agreeable to paying a percentage upfront.
As congressional wrangling over the future of the U.S. Export-Import Bank (Ex-Im) continued through the summer, a number of private insurers expressed a willingness to fill the void left by the impasse. International Risk Consultants, a longtime partner of Ex-Im Bank, devised an arrangement for its clients with a private-sector insurer capable of writing receivables coverage that “hews as closely as possible to Ex-Im Bank parameters,” a notice from the firm said.
Ward suggests additional options. He says “too many exporters” are not taking advantage of letters of credit and might also consider payment against documents, in which the buyer has to settle with the clearing bank before shipping documents are released and the buyer can take delivery. If the buyer refuses, the exporter has the right to recover the goods and resell.
At Cleveland Whiskey, Lix knows that prepayment issues loom. “When that time comes that will suddenly jump to the forefront,” he says.
With snafus during his first year of exports behind him—and with successful entry into his first foreign market—Tom Lix believes that Cleveland Whiskey is poised to play a larger role on the world spirits stage.
In 2015, three domestic spirits competitions and one in Asia handed him the Gold, turning the adage that “Age in the industry is a correlation of quality” on its head, the CEO says. He’s now consulting with a variety of export experts on a more regular basis. With about $2 million in funding supporting the company, 2014 sales came in at around $1 million, and Lix projects this year’s sales to weigh in at around $1.5 million.
Lix heads back to Bar Convent Berlin this fall to close more deals, and at the Distilled Spirits Council of America, Frank Coleman thinks he’ll do just fine.
“There is increasing interest around the globe in American whiskey,” Coleman says. “There are huge cocktail hours and a booming cocktail culture … Europe, Asia. It’s cocktails.”
Overseeing the export promotion program at DISCUS since 2005, Coleman remains upbeat. An associate, Rob Maron, describes India—a country poised to surpass China in population by 2022—as the largest whiskey market in the world. And although regulatory and distribution challenges can crop up, Coleman believes that Asia, despite recent market free-falls and currency concerns, can be counted on to produce sales. “There’s been strong growth in these countries in spite of the barriers,” Coleman says.
As for the upstart CEO in Cleveland who’s helping to reinvent his industry’s formula for success, Coleman says, “He’s gaining traction in the world markets.”