Marketing Craft Bourbon in Eastern Europe
Episode 24: This episode of the Bellarmine on Business podcast explores the journey of marketing craft bourbon in Eastern Europe, focusing on the experiences of Eddie and Steve Smith, founders of Kentucky Exports LLC and Bourbon Kings UAB. They discuss the challenges and opportunities in introducing Kentucky bourbon to markets like Lithuania and Poland, the importance of building relationships with distillers, navigating export regulations, and the unique marketing strategies required in a vodka-dominated region.
The conversation highlights the entrepreneurial spirit and the support from trade organizations that aid in their mission to expand the reach of craft bourbon. They delve into the complexities of exporting bourbon to Europe, focusing on the logistics of bottling, labeling, and navigating tariffs. The group discusses the impact of tariffs on pricing and demand, strategies for dealing with potential tariffs, and the importance of building trust wi th international partners. They also explore market expansion opportunities in various European countries and emphasize the significance of authenticity in branding and consumer relationships.
CHAPTERS
00:00 Welcome and Guest Introduction
03:20 Introducing to Craft Bourbon in Europe
05:44 Building Relationships with Distillers
10:00 Marketing Craft Bourbon in Vodka Country
13:06 Navigating Export Regulations and Standards
14:58 Leveraging Support from Trade Organizations
19.06 Navigating International Bottling and Labeling
22:33 Understanding Tariffs and Their Impact
29:19 Strategies for Dealing with Tariffs
35:29 Expanding into European Markets
37:57 Building Trust and Authenticity in Business
40:19 Conclusion
Welcome and Guest Introduction
Jim Ray
Welcome to this episode of the Bellarmine on Business podcast sponsored by the Rubel School of Business at Bellarmine University. Today, we're going to talk about marketing craft bourbon in Eastern Europe. I'm Jim Ray. I'm a 2008 Executive MBA alumnus of Bellarmine University. I've got a regional small business consulting firm in Louisville. I'd like to introduce you to three guests, one you've heard many, many times before. So Dr. Frank Raymond, Professor of Economics. Welcome back. How are you?
Dr. Frank Raymond
I'm doing well Jim, thanks for having me.
Jim Ray
It's always a pleasure to have you here. We’re joined by Mr. Eddie Smith and his brother Steve Smith. They are the founders and the owners of Kentucky Exports LLC. And they've also started over in Europe a different organization, a sister organization, called Bourbon Kings UAB. We're going to talk about that in just a moment. But before we jump into it, I would like to highlight the fact that Steve is the proprietor of the Bourbon Barrel Tavern in E-Town, Kentucky. So we're going to talk a little bit about that as well. With that being said, why don't we jump into it?
Eddie, Steve, welcome to the studio guys. Glad to have you here.
Eddie Smith
Yeah, thanks, Jim. Thanks for having us back and yeah, nice to meet you, Dr. Raymond. Thank you.
Steve Smith
Yeah, very good. Thank you. I'm excited about the opportunity to discuss bourbon.
Jim Ray
This is going to be a lot of fun. Actually, now, Eddie, you and I previously met. We did a we did an episode actually for the World Trade Center Kentucky. They have a podcast called This Global Trade Adventure Podcast. Dr. Raymond and I were talking about different topics and different types of guests we could bring in. That’s when the idea of tariffs came up. So obviously I said, “Hey, wait a minute, I've know some guys doing some importing and exporting over in Europe. Why don't we see if we can get you guys on?” So that led to a couple of conversations and here we are today. So I appreciate that. Eddie, give me a little bit about your background.
Eddie Smith
Yeah, so I'm from Kentucky originally and grew up around here down in Elizabethtown, Kentucky. And then I worked here and primarily my career was in the IT space. So I worked at Humana here. I worked at Papa John's for a while and a couple of other places around town. About five and a half years ago, I took a banking job in Europe. I worked for Danske Bank and they're based in Copenhagen, but I led a development team that was in Vilnius, Lithuania. I've been living in Europe for around five and a half years now.
Jim Ray
And actually, so you're based out of Lithuania. You actually flew in from Paris just a couple of days ago, right?
Eddie Smith
Yeah, I flew in last week. Sunday I flew in back to Kentucky, but last week we were at the Wine Expo Paris, which is a huge wine show there primarily, but they have one hall that's dedicated to spirits. And so we were there just exhibiting and talking to other distributors and trying to get our introduce our products into that French market.
Jim Ray
Makes perfect sense. So Steve, tell me about yourself.
Steve Smith
Well, I can't hold a job very long. I'm a serial entrepreneur. I've been involved in a lot of different industries, a lot of different things. I've been in local government in Hardin County, Kentucky. I was deputy judge executive there for several years. I've been in the garbage business. I was vice president of a waste company out of Austin, Texas. I've been in alternative energy. I've been in warehousing distribution. I've been in retail spirit sales. We have the Bourbon Barrel Tavern, as you mentioned, down in Elizabethtown. And I’ve been in some other industries. I do some consulting work as well.
I've got a lot of different experiences that all have prepared me uniquely to be what we're getting ready to talk about.
Introducing to Craft Bourbon in Europe
Jim Ray
I was going to say, small business owners, strap on. So here we go, get the helmet on and let's go. Well, guys, let me tee-up with this. How did this business opportunity develop for you all? I’m talking about taking Kentucky craft bourbon to Lithuania, to Poland and the rest of Europe. I where do you come up with an idea like that?
Eddie Smith
Yeah, I don't know, lot of sleep deprivation maybe, I don't know. Yeah, I tell the story this way. When I moved to Lithuania, like I said, I went there for an IT job. But when I went into the store there, we had exactly nine different kinds of bourbon that were available to me in Lithuania. And just for contrast, Steve's bar, how many bourbons do you guys have in that bar? Yeah, 400 plus bourbons there in the bar, right?
Jim Ray
We'll put a link to the tavern in the show notes if anybody's interested.
Eddie Smith
Great. So I saw this big disparity between you know how much bourbon was available to me as a Kentuckian and nine was painful for me and one of those was Jack Daniel's, incidentally, so it's questionable. Shots fired right?
So, you know, having this kind of disparity, whenever I would come home, I would talk to Steve about it. Then as I traveled across Europe, I would see always the same kind of bourbons. There would be Jim Beam, Jack Daniels, the big guys. Makers and Bulleit and some others. But primarily it was the same kind of thing.
So, whenever I would come home, we had a good friend that we went to school with and Steve knows him from Boundary Oak Distillery in Radcliff, Kentucky. Brent Gooden is his name and I would go into Brent's distillery and I would lament over my situation. We kind of as more of an intellectual pursuit, we kind of started trying to dig into some of the reasons why this might be. And then we found out some of the market forces that were at play there around economies of scale, around distribution and all these different things. Then we started talking about some of these problems we might be able to solve.
We also found craft bourbon was underrepresented. It represents, depending on how it's measured, double digits percentage of markets and the domestic market but it's less than two percent of exports. A lot of upside there and it's very underrepresented in Europe. We saw all this together were like, “Hey, this might make a good business and something we could get into and really make a splash,” pun intended.
Building Relationships with Distillers
Jim Ray
Well Steve, now when Eddie starts talking about this, obviously you guys roped in Brent to this conversation, and he's a distiller, actually. As it comes to cultivating those distillery relationships, you guys are off and running. If you guys are up in Europe, you guys are moving forward. You guys are importing into a number of countries over there. But how does it work on the domestic side? When you're approaching these smaller distributors and saying, “Hey, we'd like to make you global.” How is that received? What's that conversation like?
Steve Smith
So, I'll give Brent Gooden a lot of credit for that at Boundary Oak Distillery. He was the president or the chairperson for the Kentucky Distillers Association before. He's got a lot of street credibility with the producers and he's given us a lot of legitimacy because of his reference, right?
We started talking with him on what are some challenges that we would run into. And the first one is all of these smaller craft distilleries aren't big enough to do it on their own. They don't have the manpower. They're busy making, you know, doing their craft. They're making bourbon and whiskey and other products.
They’re worried about distribution domestically. They're worried about different things that they've got going on. They don't have the time or the resources to vote for somebody to go and market their product overseas or to even get ready to ship overseas. So we started down that road of what does it take to get a craft distiller export ready? Okay, we have a fill standard that's different.
We have bottles that are different size, right? (700 milliliters versus 750s.) We've got labeling, we've got translation, we've got a lot of different things and testing is a lot different. So they're a lot more strenuous going into the European countries than we have here domestically. So getting all those things lined up and educating ourselves on what does it take to get a producer ready to export? And it's a longer list than we anticipated.
Jim Ray
You actually got some training through the World Trade Center, right? I mean you went through the International Trade Certification Program. That's where you met Dr. Omar Ayyash, who's a friend of mine and a client of mine. But that kind of started that whole thought process, right?
Steve Smith
Yeah, correct. And I can't say enough about those folks at the World Trade Center of Kentucky because they've introduced us to a lot of different people that have helped us along the way. Yeah, starting that checklist of what do; what we have to do to make these products and these producers ready.
Jim Ray
That makes sense. Now, Frank, you've actually been involved with some of the bourbon groups in terms of advising and working on some projects, correct?
Dr. Frank Raymond
Well, primarily through a course I developed and also I'm on the Kentucky Spirits Collaborative, which is a collaborative effort between various representatives from the bourbon industry, and various companies that produce bourbon in the state and elsewhere and universities.
It's a group of probably 40 or 50 representatives from various institutions and firms to get together and talk about things that are impacting the bourbon industry.
Jim Ray
The more I speak with the professors at the Rubel School of Business, I find that they're very involved in different organizations. It's not just all theory. They're actually hands-on with a lot of commercial enterprises. Maybe it's an advisory capacity. Maybe it's a, let's talk about this. Or maybe it's just, “Hey, we might be able to offer some guidance.” I've seen the Rubel School of Business actually step in and really take some of those smaller companies under their wings and really try to help them out. It's nice to have that local brain trust that people sometimes just don't even think about tapping into.
Dr. Frank Raymond
Well, I think certainly academia has changed and there's a more collaborative effort taking place between schools and the business community, partly because people that are teaching at universities like myself want to become more involved. And also it's being stressed more even through requirements for accreditation and whatnot. So we are double ACSB accredited at Bellarmine and these are kinds of things that we have to do.
Marketing Craft Bourbon in Vodka Country
Jim Ray
So as this gets off the ground, you've gone through and you've kind of looked at some of the industry standards, you've kind of looked at some of the requirements, you're thinking, geez, we've got to actually ship stuff over, so you've got to talk to either freight forwarders or some other people that handle the logistics for you. Eddie, let's talk a little bit about the actual journey. Now you've got to kind of warm up the market to say, “Hey, guys, we've got an interesting new product for you.” Let's start from there.
Eddie Smith
Yeah, so where I live in Eastern Europe is primarily vodka country. They like the clear alcohols there and you told it exactly right. It’s how we tell the story, as well. I mean getting the bourbon over there was a huge task. But then once you're getting over there, that's maybe not even half the battle because then you have to change the hearts and minds and the tastes and preferences of people. And we do that through education, right? Which we know is expensive. You know, it's a lot of boots on the ground, a lot of face to face, you know, and we're doing it in groups of 10, 15, 20 at time to do that.
That's a lot of what our effort is now, it’s even getting the liquid there, the next step is getting it into distribution in those countries. But then there's also this creating this pull, this demand for the product there. So, it's a cascading kind of effect, I guess.
Jim Ray
In Europe, they're familiar with whiskey and they're starting to become more familiar with bourbon per se. But a craft bourbon product is, from a pricing standpoint, from a product positioning standpoint, it's a little bit different game. It's kind of new to them, isn't it?
Eddie Smith
Yeah, it is. You know, the people we talked about, the big guys in bourbon, before the ones that got that into distribution, especially in my part of the world, you know, Lithuania gained its independence in 1992 from the USSR. So incidentally, they were the first country to break away from the USSR and they're very proud of that fact. That's when Jim Beam came in there and the guys that did that were maybe a generation ago.
Then by and large, when they think of bourbon, that's what they think of, you know. They’ll say, “Oh yeah, I know bourbon. That's not a premium thing.” And typically, this is no slight to them it's just how it's been into the market there. It's like that what I hear all the time is, “That's what students use to get drunk, right?” And even then, having to distinguish what craft bourbon is, why it's different and why it justifies a price that's higher than this commodity bourbon, I will say that's a big education piece there.
Jim Ray
Well, I've heard you talk about when they don't really get that and you point out, well, you've got some very expensive scotch on the shelf. You want to kind of relate that?
Eddie Smith
Yeah, that's exactly right.
I'll talk to distributors and that exact same conversation comes out there like, “Oh, there's no market for premium bourbon here.” And I was like, “Well, there's a 400 euro bottle of scotch I see on your shelf right there.” That's what goes back to that point. They don't really see it. They see it as a commodity product. They don't see it as something that commands a premium or ultra-premium price. And so I always start that story out by explaining craft bourbon is more expensive in the United States generally as well. You know, if you compare it to the readily available bourbons on the shelf and then that really gives you a good segue into why. You have to create that value proposition for the consumer; why they should spend money on that bottle versus, you know, a bottle of readily available bourbon.
Navigating Export Regulations and Standards
Jim Ray
Well, I've heard you tell a story about when that first shipment coming over and they're used to dealing with, let's say, a large batch distiller. It's kind of a homogenous blend, you know. But because these are small craft distilleries, there might be some variation. How did that cause a stutter step at the outset?
Eddie Smith
Yeah, so the very first ship that came over, well the process kind of goes like this. We have to take random samples before it's shipped over there. We have to do this testing and things. That's part of our export certification. Part of that and getting them on board with that. So we have all this documentation that has to go with the product when it comes over. And then when it clears customs in the European Union, they take random samples of these things. So because of the nature of small batch bourbon, you know, we could have some bottles that come from one barrel or there's some not necessarily blended.
There can be some small variations within the chemical consistency of those different barrels and things and this is what happened. We had the chemical test from the batch in the United States didn't match exactly the batch that they took the sample from in the EU. It wasn't out of standard anywhere, but because they were different, they held up the shipment and seized basically seized the shipment. They weren't going to release it because we had to come back and explain why there were these variations in there, because to your point, they had dealt with this homogenized bourbon where they do it in 25,000 liter batches and all these different things. So how these statistics works there, it's the chemical analysis is the same on both ends.
So that issue got escalated to the European Union actually. I had to get the embassy involved in all these different things to release my load and all this mess. So yeah, even if people were importing whiskey or bourbon into the European Union, certainly nobody's been doing it through Lithuania. A lot of the times we're creating the wheel fresh over there.
Leveraging Support from Trade Organizations
Jim Ray
Which is really kind of interesting because domestically, you're on the exporting side and then overseas in Europe you're on the importing side. So you're actually really in control and it's not a huge operation. I mean, it's interesting that you guys have said, “You know what? I think there's a market here and let's pursue it.”
So from an entrepreneurial standpoint, congratulations. I mean, that's just outstanding. Now you all were able to rely on the help of a number of different organizations here, right? So we talked about World Trade Center Kentucky, which was part of Steve’s initial exposure, but also the U.S. Commercial Services and the USDA FAS program, right?
Steve Smith
Yes, through the World Trade Center of Kentucky, we were introduced probably to the US Commercial Service. They've been in the episode when we just talked about our loads being seized and that kind of thing. They were instrumental in getting that done by proving the fact that single barrel bourbon is different than commodity bourbon and that kind of thing. But they've introduced us through different trade missions and different meetings to the Foreign Ag Service, the US Department of Agriculture, different embassies and Eddie's been very involved in having tastings and meetings with those folks.
Jim Ray
Yeah, and that's how you're going to market, right? You'd mentioned you're getting small groups of 10, 15, maybe 20 people. So this is really almost a face-to-face, not quite one-on-one, but one to a small group, small batch, whatever we want to call them. But how does that journey roll out? I mean, how do you begin to do that? Because it's a little different than what we think over here. Hey, it's on a billboard, or there's all sorts of other kind of marketing that the industry does. But in Europe for this product, you've got to take it differently.
Eddie Smith
Well, yeah, that's the biggest problem because even the laws for advertising are different between European countries. So, the country that I'm in, Lithuania, and Poland is roughly the same. Basically, you can't advertise at all. It's kind of like how we treat tobacco here in the United States, right? So any kind of advertising is forbidden and you can be fined for that kind of thing. We rely on a lot of different kinds of things. So these tastings or degustations, as we call them, we've kind of branded internally as a Taste of Kentucky.
We get into a lot of the history of bourbon and we talk about the story that goes behind it because that builds into our authenticity with Kentucky and the craft producers and all these other things. It's more of a journey into the history of bourbon. Then along the way you do get to taste some bourbons during that thing and connect with the brands and those kind of things. That's the secret sauce to those things, I guess.
Jim Ray
And you're also looking for co-branding opportunities, right? With certain types of restaurants. You're not just going into any place. You'll find a Michelin-level restaurants. And you try to, again, take that premium approach, right? Which is perfectly on brand from what you guys are doing.
Eddie Smith
Yeah, and that goes back to what you're talking about, earlier. We have a really lean approach and a really agile approach to how we approach things. So what you're talking about was an experiment that we did, that we learned from in Hungary. Through the U.S. Commercial Service, their Gold Key Service, we were able to connect with some key individuals in that market. And they introduced us to some Michelin restaurants, to the top chefs, bartenders and influencers in that region which drove the adoption of our products there.
Jim Ray
Outstanding. That Gold Key Service, if people are not familiar with that, they can find that on the U.S. Commercial Services website, but basically for a nominal fee, they will go out, use their contacts abroad in the target markets that you're looking to get into, and they will actually set up one-on-one meetings so that you actually not only go over there and say, “I don't even know which door to start knocking on.” They'll arrange those meetings and they'll facilitate that discussion and give you guys a faster start into the market. So, I mean, again, U.S. Commercial Services does a lot for us, that as a smaller distiller, we may not even think about, right? As a small business operator, you may not even think about doing it, but they love that stuff.
Steve Smith
And it immediately legitimizes you when you when you go through an organization like that. You know you've been vetted. You know that you’re a viable business and that you’re accredited, if you will.
Navigating International Bottling and Labeling
Jim Ray
Yeah, you got the bonafides right there with you. That makes a lot of sense. Guys, let's transition a little bit into some of the challenges. We talked a little bit about the opportunities, but let's talk a little bit about the challenges as we go. We talked about the customs and getting the logistics worked out, so you've got that part of it. But what about distribution and supply chain? How is that handled?
We know Kentucky's big for distribution. We've got the UPS World Hub here. We've got a lot of other stuff. And if you're driving between Louisville and E-Town, you see all the distribution centers popping up and all of that. But when we're talking about foreign countries and distribution and supply chain there, how are you guys managing that? Because you don't just have one client, right? You've got a number of distillers who are all taking their products over through you guys.
Eddie Smith
Yeah, that's right. So Steve can talk to you about on the US side, we aggregate loads here. We have a consolidation point so we can take very small loads from an individual producer and then aggregate those and then get some economies of scale, fill up a container and spread that cost across a lot more bottles.
Jim Ray
Yeah, it'd cost prohibitive if you were just trying to take a few cases over.
Eddie Smith
Yeah, so and then on the other side that you mentioned Bourbon Kings UAB earlier, so we have an excise warehouse with Bourbon King's, so we take that there and they do the opposite we can break those out. We can serve very small minimum order quantities. So which we found was a barrier to entry into the market because distributors there they didn't want to buy a whole container of an unproven product. We can do as little as a pallet, but we could technically do smaller than that, right? But so that's how we reduce one of those barriers to entry there.
One of the objections that we heard before because we can do these small things. We're in Europe. They've already cleared customs, so we can get them out to the distributors. I can get them anywhere in Europe in two to three days.
Steve Smith
And to piggyback on what you're saying too, one of the things that Eddie does at his warehouse that gives him an opportunity is tailoring that to one specific market because it has to be in the native language of that country, so we can take out small order quantities and translate that to Polish or Lithuanian or German or whatever.
Jim Ray
So how is the liquid itself transported? Is it already in just clear bottles or how do you do that?
Eddie Smith
Yeah, so we bottle them. Right now the we're in the kind of a transition point because now we mentioned this bottling line earlier. So now we can bottle there in the European Union. We can get even more economy from that so we can we've bulk ship it in thousand liter containers and then bottle it in Europe.
I think I shared with you last time the glass actually most of it comes from Europe anyway. It comes here and we fill it with bourbon and proof it with water down to the proof and then we ship it back across the pond. So by eliminating that trip and sourcing that glass in the European Union and different things, it really helps.
And then as we mentioned the bottle format earlier. The European standard is the 700 milliliter format and the United States is 750 milliliter. So you can imagine for small producers, it's very hard and expensive to have two bottling lines or bottle formats and especially it's our custom bottles. Being able to source those things locally there is another barrier that we were able to kind of knock out.
Jim Ray
Steve to your point, are you doing labeling overseas? I mean, are you doing labeling in country because of the different language?
Steve Smith
We will. Currently the shipments are labeled in English and US format, although it was in the European fill standard. And then Eddie's people on the other side put the auxiliary label on them.
Understanding Tariffs and Their Impact
Jim Ray
Okay. Let me transition into some of the economics of this. Frank's a hockey player, so I see him over here. He wants to say “put me in coach” so here we go. You know, one of the big topics that's on a lot of people's minds right now are the possibilities of tariffs. And Steve, as we were prepping for this, you also mentioned the fear of potential tariffs. How are you dealing with that? Frank, do us a favor. Talk us through tariffs just in general and what you think.
But then I want to talk to you guys of how, from a distribution standpoint, from a sales standpoint, from an entrepreneur standpoint, how it's really already impacting you. You want to kind give us just kind of an overview of tariffs?
Dr. Frank Raymond
- Generally speaking, a tariff is taxed on an imported good. A lot of the tariffs apply to goods that are made or part of goods that are assembled or final goods that are created here in the United States. So as a result, if there is a tariff, that will cause the price of goods abroad to go up, obviously, as those producers try to pass the tariff onto the consumers; those in the US that are buying those goods. So naturally, that will increase the price of those goods in the United States or any goods made or assembled in the United States that are using foreign goods.
It doesn't necessarily and probably, and historically has not worked out that increasing tariffs on foreign goods will shift production back to the U.S. Typically you find cheaper production in other countries that don't have the tariffs. In many cases you don't have an industry in the U.S. that exists or is developed sufficiently to be able to support an increased demand from domestic, U.S. residents.
So tariffs can be extremely problematic. The other thing is when it comes to bourbon specifically, is that not to get too technical, but there's something called the elasticity of demand. All it does is describe how sensitive demand is to changes in price. If you're trying to sell a product like bourbon, which is by and large a luxury item, then that demand is going to be very, very elastic. And that simply means that small changes in price could decrease the quantity purchase quite a bit.
If you have a tariff applied to something like bourbon, then that would raise the price fairly significantly and could actually kill a market. So and now, to be clear here, we're not talking about US tariffs on US bourbon. We're talking about the potential for retaliatory tariffs by, Europe or whoever else we impose tariffs on in other industries.
But that's one of the problems associated with what these guys are describing. It's extremely interesting describing the process of getting craft bourbon over to Europe and then navigating the rules, regulations, and so on in the EU and in specific countries. That's quite a heavy lift. But then you're really not talking about high margins here either.
So any sort of disruption, whether it be from supply chains, supply chain disruptions in particular, or if it has to do with policies like quotas or tariffs in this case, it can be extremely disruptive.
I teach a course at Bellarmine, the MBA program called the Global Economy of Bourbon, and we have visitors from all over the industry here. We had Eric Gregory who's President of Kentucky Distillers Association.
Europe was about ready to hit the US with another set of retaliatory tariffs during Trump's first term. And they were waiting with bated breath because they understood that if Europe upped the tariff by another 25%, that would essentially kill business in Europe. They were targeting Kentucky and Kentucky Bourbon primarily because Mitch McConnell was Senate leader the time.
Yeah, so maybe if there are retaliatory tariffs, they won't be targeted on the bourbon industry. But tariffs generally, and historically, by the way, this is not just theory, have shown to be much more disruptive and harmful than any of the perceived benefits that might come from them.
Jim Ray
Is that increase in cost, not price, but increase in cost, is that borne by the manufacturer or is it borne really by the consumer?
Dr. Frank Raymond
It's depends upon the elasticity of demand. Generally, the burden of any tax is split between consumers and producers. Now, what's also interesting here is that you might say, all right, let's say you have a tariff imposed on a foreign good and then you have a competing US good that's maybe priced 10 % lower.
Jim Ray
Are we talking domestically or are we talking overseas?
Dr. Frank Raymond
Well, let's say there's a foreign spirit and a domestic spirit, right? And they are substitutes in some way, right? So that people would buy maybe some of each or whatnot. So let's say the foreign spirit is hit with a tariff that causes that price of that particular spirit to be 10 % higher than the US spirit. Well, what you're doing with the tariff is you're also eliminating competition, which gives the domestic manufacturer free reign to raise the price of their spirit because why? They can.
So generally speaking, tariffs not only increase prices of domestic goods that include foreign produced items, but they also increase the prices of other competing goods simply because there's less competition.
Jim Ray
So if the imported good is higher because it's had this arbitrary tariff placed on it, that would slow or possibly inhibit sales there. So that should be good for the domestic producer, but it would also allow the domestic producer to inch up pricing, which pads their margin. So in the back of this, is the US domestic market kind of thinking, “Hey, let’s go because this might actually be good for us from a profitability and margin generation standpoint?”
Dr. Frank Raymond
Absolutely not. The reason is that fewer people are drinking bourbon as a result. Yes, all right, there’s a higher price, but a lot fewer customers. So no, it's not a good thing. And I just want to emphasize, we've seen this throughout history. This is not a new playbook here, right? So we know how this stuff works out in the end.
Strategies for Dealing with Tariffs
Jim Ray
Well, let me transition back over to you guys. So now you're on the European side and you're importing this and you've got both the United States talking about tariffs, but you've also got now the Europeans market talking about tariffs. How do you guys begin to deal with this? Because even the fear of tariffs could slow down somebody's willingness to say, I'll take that because I think it'll slot here at this price point. And maybe I can get a little bit more than what I'm getting for the large, large brand bourbons, if you will. You guys are premium.
But now all of sudden you're going to be ultra-premium. I'm just not quite sure. I mean, that's real. That's real to you guys, isn't it?
Eddie Smith
Yeah, that's every day. Since we last talked, we met last in December, but January was our best month ever as far as orders go. And then February has been the worst. It's, you know, because of these tariffs and everybody, all of our distributors and our importers, are in a wait and see kind of mode right now. So because it takes so long to get things, you know, it takes us six to eight weeks to get things over when we put it on the ship and then that tariff could come and then they'll be stuck with liquid they can't sell. Right. So that's what they're looking at. That’s the mental exercise that they go through to do that.
Back to your point about strategy, there's a couple of different ways we're looking at that. We're looking at kind of some parallel markets that are close to Europe where we can move things through our excise warehouse there in transit and get them to other markets that don't have tariffs or if they do have tariffs, they're more tariff friendly, lower tariffs.
Jim Ray
Now, your excise warehouse, does that operate as a foreign trade zone? Is that kind of how you're doing it, or is it different?
Eddie Smith
It's not formally a foreign trade zone, but it kind of acts the same way, I guess. The goods as well, they're suspended from duty while they're in the excise warehouse. So you don't pay the duty on it until it's extracted from the warehouse. So, we can pass them. For example, we're working with a distributor in Ukraine. We can pass them through our excise warehouse and they don't pay the duty or excise until it gets to the foreign destination when they pull it out there. Right. So it's under bond essentially the whole time. Okay. So, yeah.
Steve Smith
To put Eddie on the spot, as Dr. Raymond had mentioned, the margins are pretty tight and I don't think the average person realizes the difference in cost domestically versus internationally and what costs are added to that once it leaves here.
Eddie Smith
Yeah, Europe's not bound by the three tier system like it is here, but you're adding that trip over there and then there's getting that export ready and the expenses we bear on that kind of thing. Yeah, generally even if you look at a bottle of Jim Beam white label, for example, it's going to be 10 euros more in Europe than it is here generally. That accounts for a lot of it. Yeah, but the margin is the same.
Steve Smith
You have the trip, the ride, the excise tax, the VAT tax. You've got all the other things that are added after the fact too, and all adds to the cost. To Dr. Raymond’s point, a few dollars makes a great big difference because it's almost exponential what's added on to that $2 or $4.
Eddie Smith
Yeah, the shelf price in Europe, you know, it includes the sales tax, essentially, this VAT we were talking about. So when it's on the shelf, if it's 70 euros on the shelf, that's including this, Hungary's got the highest, but in Lithuania it's 21 % of this VAT. So that's reflected in the shelf price. So you have to back that out. And we have a pretty rich modeling tool that we use where we built this model to back into the price both ways. So our suppliers use this model to figure out what their shelf price, our target price will be when we introduce our product into the market. Then you know vice versa if we start at a known a shelf price, we can see what we have to buy it for to be able to get it there.
Jim Ray
Good thing you've got a CIS background. You want to talk a little bit about how VAT works Dr. Raymond?
Dr. Frank Raymond
Well, I mean, there are different stages of production. A VAT simply means that you're taxed at every stage of production. And then they have some, I almost said convoluted, probably shouldn't say that. But then they have some way in which you can write off some of the tax that you end up paying, say, on the retail price. Yeah, it's something which I understand intellectually. But from a practical standpoint, maybe it's because I grew up in America, I'm just not real familiar with it and I don't understand why that supposedly would be any better than what we do.
Jim Ray
I mean, when I lived over there, I kind of looked at it as it's just sales tax. I mean, it was all just I was going to have to pay it anyway.
Dr. Frank Raymond
But at every level. Why not just tax the final product, right? And then everything will work its way down in terms of the effect of the tax because burden is shared no matter what, no matter how many stages, burden gets shared, right? So it seems unduly complex and it certainly makes their taxes at the end of the year much more complex than what we have to deal with.
Jim Ray
Yeah, and you guys are seeing that. Are you prepping your distillers here domestically or do they really care at that point? They just want to get it out of their warehouse, onto your boats, and over.
Eddie Smith
Yeah, so part of that, guess we insulate them from that quite a bit through the Kentucky Exports, because we're the exporter. So essentially, we take ownership of that and we negotiate a price with our producers and yeah, so they're insulated from a lot of that. But it's part of the calculation that goes into what we negotiate the price with them for, because if they charge us too high, then it's going to be on the shelf too high. We have full transparency across that and they have access to our calculations and what we use there.
We're very transparent about that. So because at the end of the day, we want to sell more bourbon. So yeah, they know what the price is going be on the shelf through this model.
Jim Ray
But as the exporter then at that point, since you're taking ownership of it, I mean, you could get squeezed in the middle if you're not real careful with some of these things. Hey, we bought it at this price and then suddenly the tariff comes on out of left field sometimes, right? Or the threat of it. And then now you're recalculating and you already own the product. So at that point, your margins just get really skinny.
Eddie Smith
- I don't sleep much at night now these days. Exactly that.
Expanding into European Markets
Jim Ray
No, that's outstanding.
So as we begin to wrap up the discussion here, so you guys primarily began in Lithuania because I mean, you're already over there and you mentioned Poland and you mentioned a little bit about France through this trade show. Where else is Bourbon Kings UAB looking at this point? Hungary, I think you mentioned.
Eddie Smith
Yeah, Hungary. We do self-distribution in the Baltics, basically, Lithuania, Latvia, and Estonia. So when you're thinking about that, that's only around six million people in those three countries. And that's primarily just because I'm based there. Yeah, it's easy to get things in those three countries. Then I'm about 40 miles north of the Polish border there. So Poland is in close proximity. I'm a four hour drive from Warsaw. So, and we have really deep connections with the Foreign Ag Service there and the U.S. Commercial Service. So that was kind of the next logical place to go. And that's a huge market. So that was kind of the next springboard.
Then so we go to a lot of trade shows and things like you mentioned. ProWein is the biggest one in Europe, but it's in Düsseldorf, Germany every year. It comes up in March. And so we've met some people. I've met a contact there through to Hungary and that's how we kind of got in contact with them.
There's another American that's based in Paris and we're working with them. They own a marketing company. And so we're working with them. We have formed kind of a loose coalition, because they're really good at the marketing piece. We're better at the logistics piece, so we paired up as kind of an experiment to how to introduce a product into the French market, which is also huge. And then, we'll be hopefully by the end of the year, knock on wood done with tariffs and things. Germany will probably be our next stop, and the United Kingdom.
Jim Ray
Any opportunity in, Bosnia or someplace like that?
Eddie Smith
Not specifically Bosnia so much, down in that area, I mean, there's a lot of demand in the Czech Republic and Slovenia, which is a small market, and Romania is a big market and things like that. And I went on a trade mission in Istanbul, in Turkey. Turkey's got a big tourist industry there. So they're interested in things like that as well.
Jim Ray
Now, would you guys ever transition to look at the Middle East? I mean, is there a market for you there?
Steve Smith
We've looked into that and through the World Trade Center of Kentucky, Dr. Ayyash, that you mentioned before. We just had to focus, right? There were too many plants to water. Eddie’s in Europe. That's where we focused. But if these things come to fruition, we're looking at other products in other markets.
Building Trust and Authenticity in Business
Jim Ray
Absolutely outstanding. Gentlemen, I’ve got to thank you for your time. I mean, this is a heck of a journey you guys are riding right now And it's awesome to see some guys right here in Kentucky who came up with an idea. You put the pencil on paper and just try to figure it out. The next thing you know, you're over there and you're going now. How long have you guys been importing into Europe?
Eddie Smith
Well, we started this journey a little over two years ago, but that's with the licensing and all this thing. Our first pallets, the ones that got seized, landed in May of last year in 2024. And then we had 12 skews from four producers that landed in September. So we've really only had this for now. We have distribution in four countries. So that was kind of our proof of concept. And now we're at the point where we're wanting to scale that up through education and brand ambassadorships and really get out and be in front of and create that pull for the products there.
Steve Smith
We found that through our producers, one of the major barriers was trust. Trust in a foreign entity with your product and your money. Us having not just Kentuckians on both ends, but brothers on both ends. There's no way that we cannot trust each other. That goes a long way with our producers who are small business, family owned, mostly.
Eddie Smith
It translates. Quite honestly, that's what resonates with our customers as well. And that's why we've been very, very laser focused on Kentucky products. We get a lot of questions from other producers in other states and to the degree where we can keep that kind of true to our roots. That's kind of one of our pillars; our guiding principles. We want to be Kentucky. When I look my customers in the face, I'm from Kentucky, I can speak about Kentucky with a great deal of authenticity and authority. And that really resonates with them as well.
Jim Ray
Well, and the relationship you're forming with the individual smaller distilleries, you know, there's a story there. Each one of them have a unique story. It's not just, well, let's talk about the macro. No, these are great stories to tell. That's got to resonate. That's got to help the brand positioning, I would think.
Eddie Smith
Yeah, exactly that.
Steve Smith
And on the consumer side, they see that too, the authenticity all the way through the process. It's not just a commodity product that was, you know, barreled and bottled in a big warehouse with no craftsmanship and that kind of thing. So the story resonates with the customer at that premium and ultra-premium price. They expect that.
Conclusion
Jim Ray
I love that they expect it and that's a good way to kind of wrap that up. Dr. Frank Raymond, I appreciate your time, guy. It's always good to see you. The Bellarmine on Business Podcast has been a fun initiative. We were on a little bit of a pause, but we're starting to get back into this season. It's just great to have you in the studio.
Dr. Frank Raymond
Well, thanks for having me again Jim. Yeah, and I appreciate all the work you've done to keep this thing afloat.
Jim Ray
It's always fun. With that being said, if you've been listening to this episode, I hope you found it interesting. I hope you found it very insightful. If you are a fan of craft bourbon, let me definitely encourage you to head down to E-Town and check out the Bourbon Barrel Tavern, with over 400 bottles of bourbon. So that's a nice running start. So we'll see where that goes from there.
Steve Smith
We've made the top 99 bourbon bars in the country for 9 years in a row.
Jim Ray
You’ve got to be kidding me. Congratulations!
But once again, I hope you found some interesting insights. If we could ask you to do one thing, that would be to take this episode and share it out on your social media so that other people can learn about it. Let other people hear about what we're doing at the Rubel School of Business and also what they're doing at Kentucky Exports and Bourbon Kings. Just a fantastic initiative, guys. And I wish all of you just a tremendous runway there and lot of success going forward.
From all of us here at the Bellarmine on Business Podcast. Until next time, Swords Up and Let's Go Knights!
To Learn More:
Website: https://www.kentuckyexports.com
Website: https://bourbonkings.eu
Website: https://bourbonbarreltavern.com/
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