Bourbon Makers Face a Major Problem: Tariffs

The US state of Kentucky became famous around the world with two things: Kentucky Fried Chicken and bourbon. Curiously, despite the Covid-19 crisis, both the fast-food chain and the corn-whiskey makers have done quite well this year.

To be more precise, for the second quarter, Yum! Brands Inc (YUM), which operates the KFC, Taco Bell and Pizza Hut brands, registered a net income of US$391 million, or $1.29 per share, compared with $206 million, or 67 cents per share, a year earlier.

Worldwide same-store sales, on the other hand, increased 23%. Along with that, Yum opened 603 net new locations during the quarter. On top of that, the company plans to accelerate the pace of its expansion by resetting its long-term growth targets.

In the case of bourbon producers, for the first time in Kentucky history, there are more than 10 million barrels of whiskey aging in warehouses across that state. On top of that, Kentucky distilleries produced nearly 2.5 million barrels of the spirit in 2020 alone.

The problem is that, in a couple of months, the industry could face a significant increase in tariffs in Europe. According to CNBC, Kentucky distilleries are expected to pay more than $33 million in aging-barrel taxes in 2021 alone. That figure is 140% higher than it was 10 years ago. On top of that, Kentucky distillers are set to pay about $300 million in state and local taxes and another $1.8 billion in federal excise taxes on alcohol.

However, the main problem for distillers is not so much taxes but the tariffs imposed by China, Mexico, Canada, the European Union, and the United Kingdom in 2018. I believe this is in response to the tariffs imposed by the United States on steel and aluminum.

After imposing 25% tariffs on American whiskey, shipments to the EU, the largest export market for spirits, fell 37% from $702 million in 2018 to $440 million in 2020, according to the Distilled Alcohol Council (DISCUS). Bourbon exports to the UK, the fourth-largest market for American whiskey, fell 53% from $150 million in 2018 to $71 million in 2020.