Local gin distillers set sights on China

Now that New Year celebrations have concluded in China, Philadelphia Distilling is hoping the world's most populous country shifts its focus to gin. Particularly, the company's gin.

A marketing push for Philadelphia Distilling's Bluecoat American Dry Gin begins this week in and around Shanghai, where 150,000 bottles shipped late last year await buyers.

"If we only get 2 percent of a billion people, it's a pretty decent market," said Sandy Lipstein of Malvern, an investor in the Northeast Philadelphia craft distiller.

More than a year ago, Lipstein introduced company officials to a friend and business partner now leading Philadelphia Distilling's effort to expand into a difficult-to-penetrate Chinese alcoholic-beverage market.

"Time will tell," he said.

Founded in 2005 as the first craft distiller in Pennsylvania since Prohibition, its gin made in a hand-hammered copper still at a converted warehouse on McNulty Road, Philadelphia Distilling has discovered this about gin drinkers: They are brand-loyal.

Tanqueray. Bombay Sapphire. Beefeater. To their fans, they have been the spirit of choice, in many cases for decades.

"Not every gin consumer is willing to try new brands," said Andrew Auwerda, a founder and president of Philadelphia Distilling. Yet he and two partners decided to start the business to "show there's another wonderful brand."

Just as craft beers have wooed onetime loyalists away from big-name brewers, Auwerda, formerly in the cosmetics business, noticed craft spirits were gaining a following.

He moved from New York to Philadelphia to tap into that trend with Philadelphia Distilling's other founders, Timothy Yarnall, formerly a sales manager at Bloomberg L.P.; and Auwerda's nephew Robert Cassell, who left the company in 2013.

Annual sales growth in Pennsylvania has been in double digits for several years, outperforming premium gin's 3.4 percent statewide growth rate, Auwerda said. Sales in the 41 other states where Bluecoat is offered are a constant slog in a competitive industry requiring substantial promotion "to get liquor to lips," he said.

"We'd like to grow faster," Auwerda, 46, of Center City, said last week in the company's showroom. With him was the man he's hoping will be the key to that in China.

In 2009, Joel Flachs, 63, a commercial real estate investor from Elverson, Chester County, married a woman he met on his first trip to China two years earlier. On countless flights during their courtship, he often heard about how difficult it was for Americans to do business in China.

Aiming to make it easier, Flachs started the East West Advisors Group in 2010. Lipstein, his friend and partner in real estate investment, introduced him to Auwerda, figuring that China's 1.3 billion residents represented promising potential for a start-up distillery 7,400 miles away. Gin is not manufactured in China; the closest product is baijiu, a rice wine.

Thanks in part to the connections of his wife, LaFang, Flachs said he had lined up "the right guy to get [Bluecoat] into the right places." The target market includes high-end hotels and restaurants and affluent Chinese.

"We want it to become a status symbol to drink this," Flachs said of Bluecoat, billed on the company's website as distinctive for its citrus finish and made with 100 percent organic botanicals. (Its cobalt blue bottles are made, coincidentally, in China.)

Auwerda tried to gain a foothold in China for two fruitless years. Familiar with how rigorous that process can be is John Bennett, founder and chairman of Devon International Group, a multinational company based in King of Prussia with substantial dealings in China, primarily in IT and health-care products.

A separate venture to bring American wines there "right now is hardly a business," said Bennett, a board member at the World Trade Center of Greater Philadelphia (WTCGP), which helps companies export. Sales of Devon Wines, started three years ago, have fallen from about $750,000 a year to $100,000, largely because of time-consuming regulations and taxes of as much as 80 percent on goods brought in, he said.

A crackdown on government spending by President Xi Jinping since taking office in November 2012 put an end to many lavish dinners where wine was served, even forcing restaurant closings, Bennett said.

"A fellow trying to bring his alcohol in, if he had to go through what I did, it would be a very daunting task," he said.

Total 2014 export sales to China from Pennsylvania and New Jersey companies were $2.3 billion and $1.4 billion, respectively, according to WTCGP.

At not-yet-profitable Philadelphia Distilling, annual sales are $2.5 million, 65 percent from Bluecoat. The company of nine full-time employees also makes Penn 1681 vodka, Vieux Carre absinthe, and the Bay, vodka infused with sea salt and other Bloody Mary-compatible ingredients.

Counting China, Bluecoat is now available in 12 countries. To finance more marketing, Philadelphia Distilling is trying to raise $2.5 million, Auwerda said. He expects annual sales growth of 30 percent for each of the next five years.

Plans boldly include exports to gin's headwaters, the United Kingdom.

"They're the Redcoats," Auwerda said. "So the Bluecoats have to go over there and beat them down in their own country."

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