Jim Beam

The new United States of Booze

February 19, 2013: 12:50 PM ET

Nearly a century after prohibition, the alcohol industry is turning a new corner on U.S. soil, and it is responding to American calls for variety, choice, and transparency.

1931_alcohol_map_small

A look at U.S. liquor industry activity from 1931. Click to enlarge.

FORTUNE -- In the private room at New York's Michelin three-star restaurant Daniel, a group of about 20 gathered not for a meal, but to sample a new blend of whisky. No lowbrow hooch, this Scotch whisky was the concoction of chef Daniel Boulud and a visiting master mixer named Richard Paterson from a Scottish distillery called the Dalmore.

"When you meet a master chef, you are intimidated. But with a little more whisky, you are maybe not that intimidated," Patterson explained to the crowd. Patterson is a stout fireball of a man with a full head of gray hair, dressed in a suit and bright green tie. In one hand, he has a glass of the good stuff.

"Out there," he said, sweeping his free hand to indicate New York, maybe the world beyond the window, "are a bunch of pussies without a blinking clue how to drink real whisky."

But out there also -- and Patterson appreciates this more than most -- is a booming population of whiskey lovers who understand everything about the spirit, from barrel to bar.

MORE: Big Beer dresses up in craft brewers' clothing

They are passionate, and they drive business decisions. Just look at what happened to Maker's Mark. Earlier in February, the popular Beam brand said it would cut the alcohol volume of its product from 45% to 42% to meet demand for its whiskey. Maker's Mark lovers were appalled, expressing their discontent on various social media outlets so vehemently that, on February 17, the company caved. The spirit will remain at full strength.

drink_stereotypesEven Americans, it seems, appreciate quality. "Consumers are ready to spend more on the spirits, especially since the economy seems to be a little bit better," says Claire Moulin, a lead analyst with Euromonitor International.

"When you look at consumer drinking habits, there are three main stages," she continues, offering a throwback to art history class. Those stages are traditional, modern, and post-modern. "Customers are reaching a post-modern stage where they really want something different."

But does different mean better? Are we not living in the United States of Jager bombs and -- albeit now declawed -- Four Loko? The nation of, heaven help us, diet beer? It seems like low-calorie drinks and crazy booze combinations wouldn't sell in a country that's refining its alcoholic palette.

But in another light, these drinking patterns are part of the same cultural trend. The U.S. alcohol industry has faced singular challenges. It pushes a product that's both dangerous and politically loaded, so much so that it was once banned. Now that the industry is turning a new corner on U.S. soil, it is responding to American consumer values any marketing student could rattle off -- variety, choice, and transparency.

We want to drink everything, but "everything" is different for different segments of the population. Why should we deprive ourselves of our favorite cocktail just because we are counting calories? Enter sugar-free mixers, a growth market. Those of us who are figuring out what we like to drink but lack disposable income opt for affordable flavored-spirits, available in droves. The seasoned drinkers among us don't need to pigeonhole ourselves either. Consumers can research and try the most interesting spirits across the spectrum. For educated buyers, quality is the determining factor, not liquor type.

Consumers have also rediscovered the best booze that's made on our own turf. Homegrown American whiskey is hot right now. Bourbon and Tennessee whiskey nets the largest sales in its category, at $2.2 billion worth of revenue in 2012, according to a recent report from the Distilled Spirits Council of the United States. This past year, the volume of bourbon and Tennessee whiskey shipped to suppliers increased by 5.2% compared to the previous year, and supplier revenues increased by 7.3%. While craft distillers do not make up a major part of the market, they are influencing the big guys. Major international distillers and brewers are designing brands to look like they were home-brewed, because it plays well with consumers.

MORE: Can wine become an American habit? (Fortune, 1934)

Whiskey may be growing market share at a faster rate, but vodka reigns supreme among hard liquors in the U.S. The clear spirit spirits_revenues_chartaccounted for 32% of the volume of supply shipped to wholesalers and 26% of the revenue of supplier sales in 2012, according to DISCUS. The vodka market is growing, mostly thanks to flavored varieties. DISCUS counts 171 new vodka products introduced this past year, countrywide; 122 of them were flavored.

Americans now drink more of everything, it seems. According to a June 26 Bank of America analyst report, U.S. per capita consumption increased from 29.7 liters in 1997 to 35.2 liters in 2011. Our old American standby, light, watered-down beer is losing ground. Though beer from big companies still makes up about 50% of the alcohol consumed in this country, growth has flat-lined except among craft and microbreweries.

Whiskey is blowing up, vodka remains dominant, and beer has hit a plateau. To understand how we got here, it's important to look at the history of the industry. Unlike other American industries, the liquor industry was derailed for 14 years. Imagine, for example, if cars were banned for more than a decade. We would still drive, of course, but anything available with four wheels would become a hot commodity. Once legal again, the car making and marketing machine would take a while to recalibrate from the blip. During prohibition, the boozy slice of the free market went black.

"Made for impact"

"The U.S. liquor industry ranks, in finances invested and in volume of goods produced and consumed, with other great industries ... and should, rationally, be considered as one." So said a Fortune story on the liquor industry from 1931, two years before the 21st Amendment was ratified, repealing prohibition. While illegal, this "great" industry broke from traditional marketing. Sellers sold what they made and consumers drank what they could get.

Back then, whiskey was king. "Wine and beer will presently be fitted into the picture," said the 1931 Fortune story, "but by and large the national preference is for a beverage mellowed with a charcoal stick and made for impact."

Beer gained popularity after prohibition ended, in part because it was one of the first alcoholic beverages legalized following the repeal. In 1933, the Cullen-Harrison Act declared that beer with an alcohol content of 3.2% or lower was not legally "intoxicating," so it was fair game to sell and consume across the nation. Hence the glory of what is now known, internationally, as watery American beer.

States then fended for themselves to determine laws for other kinds of alcohol. Some left their prohibition laws intact for quite some time. Others pushed the decision to the counties, hundreds of which remain dry to this day. The moral undertones surrounding spirits stayed strong. Alcohol companies were cautious about promoting their products, even years after prohibition ended.

"No one writes happily about liquor," observed John McDonald in a 1961 Fortune story called "The Perplexed Liquor Industry." "Only recently have a few bold distillers in their advertising set forth pictures of men and women in pleasant social settings having drinks. And even now the advertisement almost never shows the women holding drinks in their hands. The drinks just sit on the table in front of them."

MORE: Whiskey and America: A post-prohibition reunion (Fortune, 1933)

jim_beam_smirnoffBy the 1950s, most spirit-drinkers still chose whiskey, but vodka had begun to gain market share. At the time, vodka was less intimidating to new liquor drinkers because it blended well with other ingredients in mixed drinks. Then, in the 1970s, vodka-marketers saw the spirit's potential. Companies like ABSOLUT changed the game, introducing a svelte product in containers shaped like Swedish apothecary bottles. Thus began a series of brilliant marketing efforts to convince customers that one brand of vodka -- an essentially flavorless liquid -- was better than another. Packaging became key, since origins hadn't yet become a major selling point. Few people were sticklers for fresh ingredients when they ordered a sex on the beach or a fuzzy navel in the 80s and 90s.

But then the slow food movement made its way to the bar about 10 years ago. Consumers grew more conscious of what they were buying, and they wanted stories.  They looked warmly at prohibition-era spirits and the cocktails people drank during the 50s economic boom.

Bourbon and other old American whiskeys play exceptionally well on this terrain. Customers love to feel a sense of kinship to a brand, says Kevin George, senior vice president and CMO at Beam. "Jim Beam's great grandson works for us. You can actually meet him," he says, and that has become a business advantage. "You can't meet Mr. Suave shampoo, but you can meet Fred. All you have to do is go visit our distillery."

The recent recession put a damper on alcohol sales, especially in bars, says Euromonitor's Moulin. But now that the economy is improving, Americans want a stiff drink with a story.

Alcoholic tourism for restless drinkers

Every year, mixologist Junior Merino makes the official drink for New York Mayor Bloomberg's "Taste of New York" event at the historic Gracie Mansion. The drink is called the Big Apple and it's made with rye whiskey from the Hudson Valley, grilled apple juice, and Mayan anise liquor, among other ingredients. Merino has his own line of mixology products, one of which is a pocket-sized version of the Big Apple that looks like a blue highlighter and works like Binaca, except it's 30% alcohol. "It's not really for getting drunk, it's the experience," Merino says.

Merino argues that more consumers are becoming experimental with their alcohol choices. He works with Celebrity Cruises, which is trying to rework the poor gastronomic reputation of the cruise ship industry. Along with good food, passengers now expect interesting drinks, Merino says. "When we put the bars on the ships in 2009, people were not as adventurous as they are now."

The daring drinking spirit is somewhat generational. In the same way that members of the younger generation don't plan to stick with one employer for a long time, they don't want to resign themselves to one type of alcohol.

But Americans of all generations have been influenced by pop culture to try new drinks. "I'm trying to think of the last cocktail thatdon_draper_animal_house_small really made an impact on bartending, and I would say that was the cosmopolitan," says Chris Patino, manager of trade education for Pernod Ricard. That drink was much less popular before Sex & the City. "I live by Onieals down by Soho, and every day the bartender sets up 50 cosmos, the tour bus gets off, and they all go and drink one." Then, of course, came Mad Men, which gave credence to a nostalgic whiskey movement already in progress.

MORE: Maker's Mark won't water down whiskey, after all

Not that Americans are automatons, guzzling whatever drink is featured on the latest sitcom. Consumers today are more informed than they've ever been. Like every other industry, alcohol makers have seen a rush of demand for transparency. Distillers now go to festivals all over the world, where brand loyalists often know more about the products than the sales reps. "I've had seven or eight grown men in my sample room with tears coming down their eyes," says the Dalmore's Paterson. "That's the honest truth. They just love the whiskey."

It's not just grown men, either. Kate Pomeroy, Pernod Ricard's vice president of consumer planning and insights, says that she remembers meeting a 24 year-old woman at an event who was an expert on Glenlivet. "She was speaking knowledgeably about single malt scotch. I can't imagine that was happening 50 years ago. Single malt then was more of an old man's drink." Beverage companies are scrambling to market it and other previously niche liquors in a more accessible way.

Most drinkers are trading up, but consumers on every level crave choice. While we may demand a world of booze to choose from, bar shelves aren't any roomier. Companies must fight to satisfy a growing number of consumers hungry for information and thirsty for good products.

It's game on. Especially since after nearly 100 years since we'd drink anything, we've re-learned how to enjoy a good drink. And now we want to drink everything.

Editor's note: A previous version of this story indiscriminately used the word "whiskey" (with an "e") to refer to both Scotch and American varieties of this particular liquor. Whisky from Scotland lacks an "e." Whiskey from the United States (and elsewhere) contains an "e."

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