Contract Distillers Split Over Tariffs and Slowing Demand

Third-party distillers are facing one of the most uneven periods in recent memory as tariffs, higher production costs, inventory backlogs and softer consumer spending reshape the business of making spirits for other brands.

Some companies are cutting back sharply. Others are expanding. The split has left contract distilling, a segment that supplies bulk spirits to many labels, under pressure to prove that flexibility and innovation can offset a market that is still being hit by inflation, geopolitical uncertainty and moderation in drinking habits.

The contrast is visible in recent results from two major U.S. producers. Lofted Spirits, based in Kentucky, is expanding its main facility in Bardstown, doubling its footprint and tripling capacity to 35 million bottles a year. MGP Ingredients, based in Kansas, reported a 24% drop in full-year sales and a 23% decline in the fourth quarter. Its Distilling Solutions segment fell 45% in 2025, while brown goods sales dropped 52% after many large customers paused purchases.

That divergence reflects how dependent contract distillers are on the health of the categories they serve and on the timing of their customers’ buying decisions. When brands slow orders or shift inventory plans, the effect can be immediate.

Middle West Spirits, one of the largest contract distillers in the United States, says business remains strong. Founded in 2008 and based in Ohio, the company produces its own brands, including Middle West Bourbon, rye whiskey, Bourbon Cream, OYO Vodka, Vim & Petal Gin and Lux & Umbra. It has also expanded through the acquisition of Old Elk Distillery in Colorado.

Luis Gonzalez, who moved from Old Elk to become chief commercial officer at Middle West after the purchase, said the company’s contract-distillation program was “rapidly scaling.” He said the company had tried to make itself as flexible as possible for partners by adapting manufacturing contracts to customer cash flow needs and by bringing in outside financing partners such as barrel brokers and banks to reduce costs.

“We all know the data about what’s happening in the industry today,” Gonzalez said. “But with every slowdown on one side of the business, there’s always an opportunity on the other side.”

He said some customers were shifting away from buying new make for aged inventory and toward spirit that could be sold sooner. Others were slowing down. But he said many were still looking for ways to grow without overextending themselves.

American Custom Distilling is seeing a different kind of momentum. The contract arm of Virginia Distillery Company, which specializes in American single malt, launched only a few years ago as interest in that category became more concrete. In January 2025, American single malt was officially ratified by the Alcohol and Tobacco Tax and Trade Bureau, helping push demand higher.

Jerry Heddy, chief operating officer at American Custom Distilling, said revenue rose 150% from 2024 to 2025. He said the company’s early investment in laying down casks and building stock had paid off as more brands entered the category.

The company now has aged stock up to 10 years old and says it has become one of the largest privately owned suppliers of American single malt whisky. Heddy said its position outside bourbon has helped it stand apart from competitors that rely on column stills and bourbon-style production methods.

“We’re never going to be the cheapest producer,” he said. “But we’re going to win with quality.”

Even so, he said flexibility remains essential because demand can change quickly. He said customers are still interested in single malt, but not every producer is seeing the same level of growth.

Cream liqueurs are another area where contract producers say they are finding room to grow despite broader market strain. Creamy Creation, which makes cream liqueurs globally from facilities in the Netherlands and New York, says low-alcohol products and dessert-style flavors are helping attract younger consumers.

Matthew Benny, chief commercial officer at Creamy Creation, said tariffs had created “quite a few headaches” for customers. He said companies now tend to respond to market pressure in one of two ways: cut costs and narrow their portfolios, or lean into innovation with new products aimed at different consumer groups.

He said that strategy matters more now because consumers are less likely to respond to routine launches. He also pointed to a shift toward wine- and malt-based products that can reach more retail channels in some states than spirits can.

“We’re finding that we have to work a little bit harder to gain that momentum,” Benny said. “But it’s still there.”

Across the sector, producers say they are being pushed to rethink how they work with customers. Some are offering more tailored contracts. Others are helping finance barrels or adjusting production schedules so brands can manage cash flow while keeping inventory plans intact.

For Gonzalez at Middle West, that means avoiding rigid terms that can strain smaller brands during a difficult period. For Heddy at American Custom Distilling, it means staying focused on quality and category positioning rather than chasing volume at any cost. For Benny at Creamy Creation, it means treating innovation as a necessity rather than an option.

The common thread is clear: contract distillers that can adapt quickly may be better positioned than those waiting for conditions to improve on their own.