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Explore audio transcript, further reading that will help you delve deeper into this week’s episode, and vigorous conversations in the form of our comments section below.

READER COMMENTS

Blackthorne
Oct 3 2022 at 11:45am

Great episode, I’m excited for the rest of this series. To other listeners: you may want to listen to this episode in the evening. Otherwise you might find yourself wanting a glass of whiskey at 9AM on a Monday.

Anne Krekelberg
Oct 3 2022 at 7:12pm

Having a glass of Jameson when I found this interview. I think I’ll have another dram or 2. Slainte!

Craig Miller
Oct 3 2022 at 6:06pm

Spirits are essentially distilled beer.  For a better understanding of the substance to be distilled, wort, a good and succinct source is Charlie Papazian’s The New Complete Joy of Homebrewing,  It seems to me that Ms. Birnecker Hart might want to focus more on the marketing of her product than the process of creating it.  Otherwise, it was an interesting piece.  Stories of successful entrepreneurs are always inspiring for me, and I’m sure many others.

Ben Service
Oct 3 2022 at 6:10pm

I found this interview a bit clunky and I am not 100% sure why.  Russ is a very experienced interviewer but maybe when the topic is a long way out of his knowledge he doesn’t know how to ask the questions quite the right way to get the right type of response. Sonat comes from an academic and training background so I was also surprised she didn’t pick up on what Russ was trying to get at and explain it better, how big is a “single barrel” for example, that would have been nice to know.  I feel that maybe in this particular case a journalist approach of a longer interview that was then edited would have been better, Russ could then have asked the questions a bit more directly where the answers were not as clear which is hard to do in a conversational style which normally works well.

Having said this the topic was interesting and the details they did go into were things I hadn’t thought about before.

Anne Krekelberg
Oct 3 2022 at 7:10pm

I discovered whisky (scotch) & bourbon after being transferred to TN in 2004 while active duty Navy. I’m now 72, and am absolutely enthralled with everything whiskey. What a terrific interview – oh to have the resources to begin a new adventure such as a distillery. Bravo Koval Distillery! Well done.

Anthony
Oct 4 2022 at 9:56am

Scotch gets its smoky flavor from the peat used in the malting process. Peat is not just some additive for flavor – the peat is literally the fuel they burn. In other malting processes they will keep the smoke away, so you get an “unpeated” malt. With scotch, not only will they let the smoke in but sometimes even encourage the peaty smoke with different designs. The quantity of smoke and time of exposure during malting will have a bearing on final flavor achieved.

I think a distillery tour of the Scottish Isles has to be on Russ’ bucket list!

Ian
Oct 4 2022 at 5:17pm

I’m only part way through listening, but it’s great so far.

Hannah Kirshner’s book, Water Wood and Wild Things, featuring (amongst other things) Sake drinking and brewing in the backwoods of Japan, might be a good read in parallel to this.

Ruth Fisher
Oct 5 2022 at 6:16pm

I loved the unexpected topic of the whiskey business!

Listening to the discussion gave me a flavor for how similar whiskey production is to cannabis. Cannabis has many of the same problems: achieving consistency from batch-to-batch, performing distillation appropriately, dealing with illegal activity, etc. Yet, cannabis is even more complex in many ways.

For example, as with whiskey, trying to produce consistent cannabis products is extremely difficult, since, as with whiskey, the environment shapes the outcome. But there’s an added complexity in that cannabis cannot cross state lines, which makes cross-state branding extremely difficult for whole plant products.

I was also interested to hear about how common “kick-backs” are. It must be so difficult for good guys to compete in such an environment. Theory says you don’t need much random monitoring to decrease levels of cheating. Perhaps the regulators get their own trips to France too.

Jacob B.
Oct 7 2022 at 5:51pm

It’s impossible to write this comment without sounding pedantic, but I feel professionally compelled to clarify some of the confusion/misinformation in this episode. I know it’s not necessary to enjoy the interview or whiskey, so consider this a mere “comment for the curious”.

Firstly, malt is made by germinating grains in order to trick the plant into enzymatically converting long-chain starches into more biologically-active carbohydrates. Once this conversion is completed, the water must be removed and the growing process inside the seed stopped. Nowadays this is done with natural gas-fired kilns, but they used to be fueled by wood. In Scotland, where there are no trees, they burned what they had: peat moss. As another commenter noted, allowing varying levels of peat smoke into the drying chamber creates varying levels of peat aroma in the malt itself.

Secondly, Steeping cereal grains in hot water (mashing) using malted grain or enzymes is a matter of taste. If the enzymes are present in the grain because it has been malted or are present because the masher has added them doesn’t change the chemistry: the only way to convert a raw seed into something that yeast can metabolize is through the action of several enzymes.

If a distiller wants to claim that the flavors from kilning adversely translate to a flavor in the spirit, that’s fine. If one claims that they can create a more bespoke conversion inside the grain because of their specific blend of enzymes, that’s also fine. It isn’t, however, a different process, and I could imagine an very persuasive argument claiming that distillers who add enzyme are taking shortcuts and undermining the natural capability present inside the raw ingredients.

Furthermore, the enzymes that must be added to convert unmalted grains are produced from biomass that is fed to yeast that are genetically modified to secrete enzymes. I understand why a marketing department would shy from the specifics, but you asked. (you didn’t?!)

Finally, the assertion that a heart cut contains only ethanol is absurd. The art of distilling is where the heads and tails are cut because there will always be blending of various compounds at every stage of the distillation. If Koval made the strictest heart cut possible, including only ethanol and water, it would be indiscernible from vodka, i.e. no character left over from what was fermented. I love that they make a very conservative tails cut, but that doesn’t mean that some tails never made it into their hearts cut.

I really enjoy these business-focused interviews, although this one was probably a little too up my alley.

Comments are closed.


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AUDIO TRANSCRIPT
TimePodcast Episode Highlights
0:37

Intro. [Recording date: September 6, 2022.]

Russ Roberts: Today is September 6th, 2022, and my guest is Sonat Birnecker Hart, the co-founder of the Koval Distillery in Chicago. This is one in a very occasional series where I interview someone from the world of business about what their job is like to give us a glimpse of a world we may not otherwise get a glimpse of. I've interviewed the guy who sold me my car, the woman who cuts my wife's hair, the CEO [Chief Executive Officer] of Legal Seafood, and so on to give you a window into that hidden world. Sonat, welcome to EconTalk.

Sonat Birnecker Hart: Thank you so much. It's great to be here.

1:12

Russ Roberts: You started your career as an academic, a professor.

Sonat Birnecker Hart: Yes.

Russ Roberts: What was your field and where did you teach?

Sonat Birnecker Hart: Sure. My field was cultural history. I focused on German and Austrian, in particular, Jewish cultural history from 1890 to 1938, and then from 1945 on, and I taught at Humboldt University in Berlin. I was the Walter Benjamin Chair of German Jewish cultural history for a number of years. And, I also taught at Baltimore Hebrew University as a Jewish studies professor. But, I taught at a number of other universities--German lit classes, Kafka, you name it--anything related to German culture in that period.

Russ Roberts: So, I looked at your bio and I saw the University of Berlin. Could you say the name of it again?

Sonat Birnecker Hart: Humboldt University.

Russ Roberts: I call it Humboldt, but what do I know? I've never heard of it. I wonder what it's about. And, I found that the following people who taught there, Albert Einstein, Karl Marx, Frederick Engles, Otto Van Bismark, W.B. Dubois, Arthur Schopenhauer, Hegel, Walter Benjamin--who your chair was named after--Max Weber, Max Planck. And, my favorite: the Brothers Grimm. So, it's got a pretty good heritage. Right?

Sonat Birnecker Hart: It was a wonderful place to teach. I really enjoyed my time there.

Russ Roberts: But, you stopped doing it. You stopped teaching. I understand something of that appeal, but most people, they've invested a huge amount in their academic bonafides. They love research. You probably were interested in German/Austrian cultural history with the Jewish flavor from 18-whatever to 1938 and 1945 onward. What happened?

Sonat Birnecker Hart: I feel that life has many chapters and that's okay. And, I am still interested in all of those things. But, now I'm interested in the world of business and whiskey and gin and vodka and liqueurs and brandies and doing that with my family in the city that I love. And, I feel that there are a lot of things that draw us to do what we do. And, some of it isn't just what we've spent our lives preparing to do. You know that--you go to school and you spend all of this time and you become a good researcher and that leads you down a path.

But, there are other things that can lead you down a path, which is your parents at some point start getting older. Maybe you want to be close to them. Maybe there's a city that you love that you just can't get a position teaching in that city. Or you can, but it's only as an adjunct professor and you'd been a tenured professor for years and you're not really into that.

Or, maybe you just see a moment in time where you can break away and do something completely different and maybe it will be wonderful.

And, all of those things sort of converged. My husband and I felt as if we were at a crossroads. I was pregnant with our first child. We were living in DC [Washington, D.C.] at the time, but I wanted to live in Chicago. I wanted to be close to family as my parents were getting older. I enjoyed working with my husband, but we didn't have the opportunity to do that much in our other careers. And so, we thought, well, maybe we could work together. We could start a family business; we could live where we want. We could be close to family. Maybe all those things are worth changing our path. And, they were.

Russ Roberts: So, we're going to talk about that new path in a second, but one more question about this change. Do you still read in your academic field--do you still read any of that literature? Do you still read for pleasure in turn-of-the-century Austrian, German, Jewish circles?

Sonat Birnecker Hart: Absolutely. I mean, it never gets old for me. I was just in Vienna a few weeks ago, and I was taking my children to Freud's house and explaining everything to them and making cross-references. And, it's funny--my son is taking a history class and the teacher asked him if he has any previous experience taking history classes. And, he says, 'My mom was a history professor, so wherever we go, she stops me on the corner and gives me a lecture.' So, I mean, that's sort of what happens when I go to Vienna or Berlin or any of these places; and, you know, it's wonderful.

6:05

Russ Roberts: So, I understand this urge to go to a particular city, maybe where your parents are; and the idea of starting with a business with your husband or spouse could be deeply appealing. To others less so: that's person-specific, obviously.

Sonat Birnecker Hart: True.

Russ Roberts: But, why did you decide to do something that, when I contemplate it--starting a distillery--strikes me as something that would be impossible? I could imagine opening a grocery store or a bookstore, a factory of certain kind that made some craft work. A distillery is a really specialized kind of thing. Wasn't that a big leap? Was it--or am I wrong?

Sonat Birnecker Hart: You know, it definitely at the time seemed like it could be a big leap. But, then came the research. So, we were trying to think of what we wanted to do. And, as you said, our default was to think about things that made a little bit more sense, maybe a Vini's[?] Coffeehouse. But, there actually was a Vini's-type coffee house in Chicago at the time. [?] had started one around the same time that we started KOVAL in 2008. And so, we said, 'Okay, well that's out.' So, we started--were home for the holidays and we brought some of Robert's grandfather's brandy back from Austria for the whole family to enjoy. And, we were sitting around the fireplace and my sister was there and my brother was there and my sister's kid, everyone, the whole family was together and we were drinking this brandy. And, my sister said, 'This is fabulous. I haven't had anything like this. This tastes like pears just jumping out of the glass.'

And, my husband went into a whole discussion of the merits of small-batch distilling in Austria and all of the farm-to-glass and how his grandparents make the brandy and how they don't really have that same sort of tradition in America as they do in Europe for brandy. And so, we happened--my father at the time, he used to order all of the publisher's clearinghouse magazines. So, we had maybe 30 magazines on the coffee table. And, one of them was a Time Magazine. We were leafing through some of these magazines and it was an article about a distillery in upstate New York that was a craft distillery. And, this was sort of a new concept there. I'd heard of craft brewing, but craft distilling hadn't really entered into what people thought of when one thought of alcohol, hard alcohol.

And so, we were reading it and my sister said, 'Well, these guys are doing it. Maybe this is what you guys are looking for to do. Maybe you should do this.' And, it sounded sort of wild. But, the idea of started working its way into our minds and we started researching it and looking into all the government requirements for starting a distillery, looking into all of the requirements for the state, for the federal government. We started--really just, it became a research project; and then it became a, 'Yeah, why don't we do this?'

Russ Roberts: Well, I can think of a lot of reasons. Let me raise one of them. And, I'm sure that research part was fun because you like research: it's in your wheelhouse. So, a coffee house, I can kind of understand, because a coffee house is an experience where if it's done well in terms of atmosphere and the way the ambiance that's created there, it's very nice. A distillery, in theory, competes, even though it's a local distillery, it competes with national brands. So, there's a lot--I lot happen to bourbon. I particularly like scotch. I like Irish whiskey; I like regular whiskey. It's going to be hard for you to create something that's better than those national brands, I might think.

And, then the next question would be, were you thinking you'd be able to exploit the localness of it? More specifically, is the distillery itself a destination for people as a place to hang out, the way a coffee shop is? Because it doesn't have to be. Sometimes it is. So, what were your ideas in the beginning, and did they change?

Sonat Birnecker Hart: Well, our distillery today is a place where people can come and enjoy a fabulous cocktail. We have a patio, a beautiful bar. But, when we started, it certainly was not, We were not a destination. In fact, it was illegal for us to have a bar at our distillery. And, I had to, soon after we started our business, I had to start lobbying and trying to figure out a way to change the laws in Illinois so that we could retail on site.

In fact, early on, we were not thinking of having a bar. We were thinking of just the opportunity to invite people into our distillery, let them taste what we make, show them around, and then have them leave through the gift shop, so to speak. But, that wasn't allowed. We were not allowed to do that.

And so, we're starting this business--I've got small children, and I'm driving to Springfield, Illinois trying to get a new law on the books that allows us to retail on site, do tours and tastings, which I managed to get passed. Which really, I think, changed the nature, not just of our business, but all of the distilling industry in Illinois.

So, in the very beginning, to answer your original question, we weren't thinking about our competition. In fact, we didn't care at all about our competition. We weren't thinking about creating a destination. We were only thinking about how can we afford the best still possible? How are we going to mash, since we cannot yet afford the super-special mash tanks with the glycol chillers and all of the things that--now, we have everything.

And so, what we were thinking about was really all just getting things going. And then to answer your question about: did we think we could make something as well as everybody else? Yes, we definitely did. Because, there are different advantages to being small and there are different advantages to being very large. And, we'd seen already the advantages of being a small craft distiller from a European standpoint--Robert's grandfather has a functioning distillery and cidery in Austria. We'd visited many small-scale distilleries that were doing beautiful work, creating wonderful products that we enjoyed. And, we felt that there was something about the ability of movement of a small--not just a distillery--but a small company. You're more nimble, you can do things differently that would not be financially viable or interesting for a very, very large company. And, when we started Koval in 2008, there were less than 50 distilleries in the entire United States, and many of them were under the umbrella of maybe about eight distilleries. So, we felt that there was ample room for us to make our mark--

Russ Roberts: To do something distinctive. And so, originally when you first were dreaming about it, did you have a product list in mind that was different than what you've now ended up with? Or did you plan to expand to what you are now at? Or did you say: We're just going to make the best bourbon in the United States and that's what we're going to do?

Sonat Birnecker Hart: No, actually we wanted to make a number of different products. We actually treated it sort of very academically in the beginning, which was a strategy that we realized later on was probably not the best one, because we just were so excited about the industry and about being able to make so many different things that just were not on the market. So, we were able to start out and we made a 100% rye whiskey, 100% wheat whiskey, 100% oat whiskey, 100% millet whiskey, 100% spelt whiskey. And then, we made them all, and we aged them in a toasted barrel. So, then we had two versions of all of those different whiskeys, and then we said, 'Well, what would they taste like in a charred barrel?'

So, then we had three versions of all those, and pretty soon we had more whiskeys in different versions than Starbucks has coffees. And, it was really a lot of fun. But, from a business standpoint, completely ridiculous because when you start selling to different retail stores and you present them with 20 options, everyone's going to have their favorite. And, then how is anyone going to find what they're looking for, what they want?

So, obviously in the very beginning we had a huge menu of products, which works very well in a small, middle-of-nowhere, Austrian farm distillery, but in the middle-of-the-city, Chicago distillery, it was not the best strategy. So, we've reduced it down.

Russ Roberts: Interesting.

15:59

Russ Roberts: Was there a division of labor between you and your husband initially and has that persisted? And, what's dinner like at the Birnecker Hart home? Is it all whiskey all the time?

Sonat Birnecker Hart: Well, in the very beginning it was just a lot of labor and there was no division. We just had to get it done. And so, it was really just Robert and me. We were in the distillery sometimes until three in the morning. I remember trying to get our first shipment out, and I was nursing. We had a pack-and-play in the distillery. We had a couch. It was not big enough for two people to lie on it. We worked through the night. We even had to solicit friends to come and help us because we did not realize how long it was going to take to get all of these things done. We came from academic careers. My husband was the Deputy Press Secretary for the Austrian Embassy. I'd spent a lot of time in libraries, but not a lot of time bottling, labeling, packaging, all of those types of things and figuring out how long that would take--you know, just shrink capping.

We didn't have a system where you just put it in and it does it all for you. I mean, we certainly do today, but in the very beginning, each portion of the packaging was done by hand, literally. So, put the labels on by hand, we had to then shrink cap it by hand, cork it by hand, everything. And just shrink capping alone--I mean, I'd recommend anyone to give that a try. We had this machine that looked like a industrial hair dryer and it would melt the shrink cap onto the bottle, but it wouldn't always do it beautifully. And so, then you had to rip those off and do it again.

So, it was a huge amount of work. My parents came and helped, and it was really a big, big effort. Friends and family, everybody. And, it was five in the morning and we were about to get a shipment out. We slept for maybe 15 minutes and then had to continue working again. So, in the beginning it was a lot of work and a lot of, just, physical labor doing everything.

We had to do so much by hand that today we have incredibly modern equipment and it's all fit with sensors and we can monitor it on iPads and it's really night and day. But, in the beginning it was really--there was that.

But then, you also had the fact that I was a mother and I had a baby at the time. I was nursing. So, I would be nursing, I'd be answering the phones, I'd be helping mash, I'd be shrink capping, I would strap the baby on top of me. I gave interviews on television with a baby attached to me. I mean, it was quite an amazing time.

And, it was really interesting because, when somebody called the distillery, as we started gaining a little bit of interest in the press--the Tribune wrote an article about us and other magazines and started writing about us--we would get a lot of phone calls of people wanting to do what we did. And so, when they called, they got my cell phone. And so, I'd be like answering the call. I'd have the phone on my shoulder, I'd have a baby next to me. We'd be doing the work; I'd be emailing and people would ask me to go through the whole process of setting up a distillery on the phone. And, being an educator, of course, I love helping people, teaching them.

But, it got to the point where we would field maybe 20 of these calls every few days. And, we started saying, 'Come to our workshop.' And so, this became also--in the very beginning, an element of our time was devoted to teaching other people. We set up a vertical business model, Kothe Distilling Technologies. It became our consulting arm. We worked with the TTB [Alcohol and Tobacco Tax and Trade Bureau], which is our regulating organization in the government. The TTB officer would come to the distillery and tell people how to do things: Don't keep just a spiral notebook with squiggles in it, and a few notes about how much you distilled. And, they would really show people all the forms that needed to be filled out, how to do things the right way. And, we would teach people how to actually make different products.

And, we set up lots of people. This first wave of craft distilling, many of them came through Chicago. So, in some ways we never left teaching behind. It just sort of shifted and we started teaching people how to set up craft distilleries all over the United States, Europe, Canada, Africa--people came from all over the world to Chicago to learn how to distill from us. And, that was really a wonderfully fun part of the business in the beginning.

And so then, as we had all these vertical business models, and as we were growing all the time, we did need to split up the business a little bit. Wherein I took over most of the business side of it, the marketing, the distribution, the distribution relations. And, Robert took over more of the production and managing the production and also setting up distilleries all over the world. He would go to Uganda and set up distilleries, or Sweden--everywhere.

Russ Roberts: You have one in Jerusalem that you set up?

Sonat Birnecker Hart: Yes. One in [inaudible 00:22:08] as well--

Russ Roberts: Thinkers Distillery, which is on Agripas. And, I'm ashamed to say I haven't been there yet, which is hard to believe since I like whiskey and I'm on Agripas all the time. So, we're going to--we'll remedy that soon.

22:18

Russ Roberts: You charged for the workshop, right?

Sonat Birnecker Hart: Yes.

Russ Roberts: Did--

Sonat Birnecker Hart: They helped us, we helped them. It was a wonderful situation. I mean, this was how we were able to grow our business without bringing in investors or without bringing in huge, huge debt. Because, this industry is incredibly expensive. And, that becomes a big barrier to entry for many people because it's not just the startup costs of getting the initial equipment. It's also the fact that you are playing futures with your growth. You are trying to imagine how much you're going to grow in about four or five years. And, then you need to buy all those raw materials. You need to produce all of that product, put it away, and pay taxes on it, by the way, also in advance of selling it. And, then hope for the best. So, you reach a point where that becomes prohibitively expensive for a lot of startups. And then they need capital.

And, what we did, instead, is we were very lucky, we created these vertical business models and in helping people all over the world--I mean, we've had over 3,500 people come to our workshops. We've set up over 200 distilleries, turnkey from start to finish for others. We've done consulting, we've done white labeling for brands, many you've heard of. And, we've done all of these things on the side so that we could then continue to build Koval.

Russ Roberts: What's white labeling?

Sonat Birnecker Hart: White labeling is where you make products for other brands. So, we've done some manufacturing of products for brands in--all across the United States and other places. We don't do it as much anymore; but for example, we did some white labeling for WhistlePig.

Russ Roberts: To their specifications? Or to your--

Sonat Birnecker Hart: Yes--

Russ Roberts: Whatever they asked for?

Sonat Birnecker Hart: No, theirs.

Russ Roberts: And, I think maybe you said this before: There are now 3,000 distilleries in the United States. Is that correct?

Sonat Birnecker Hart: Yes. Well, craft distilleries. There are even more than that. When we started, as I said, there were under 50 and now we've gotten close to about 4,000. But you have to understand 'distillery': it can also mean a rectifier. So, they may not do the mashing themselves: they may just bring in product and distill it with botanicals and make a gin.

So, there are different designations for different kinds of distilleries. But, craft distilleries have gone from literally a handful when we started. There might have been an actual craft distillery. There might have been maybe 10 or 15 when we started. And now you have about 3,000, I would say. So, it's pretty exciting times.

25:29

Russ Roberts: Let's talk about quality control. My wife makes really good sourdough bread; and, you know, we're in Jerusalem. She had a certain way to do that with a Dutch oven and to make it come out a certain way and get that thick, their artisanal crust. And, she's really good at it.

And, we come to Jerusalem and she brought her starter with her--because she's serious, and which is something you need to make bread: you need a starter that's alive. It's a crazy thing. And, it comes out different every time now, or at least for a while. At some point it might stabilize, but it turns out--we had a cold winter here, we didn't have much heat, so the bread over the winter was really different. It came out really differently.

The idea that she could sell--I think there were people who would pay for it, but in general, when people pay for something, they want to get the same thing the next time. Not always. Sometimes they like the variety. But, usually in a whiskey, what you're making--gin, whatever it is--people, if they liked it, they want to have the same thing again. How is that possible?

At Anheuser-Busch, the people who sell Budweiser, they're really good. One of the things they do really well--which is not straightforward--is that every can of Budweiser tastes the same. And, you might think that's because they have somebody taste it each time and if it doesn't taste the same, they don't use that one. That isn't the way they do it.

So, how do you in your business keep quality control? It's not just quality, it's essential control. It's whatever's the essence of what you're selling is the same every time. How is that possible?

Sonat Birnecker Hart: Absolutely. And it's very, very difficult in whiskey, because there are so many factors that you cannot control. For example, barrels, temperature. So, for example--especially for a craft distiller--we have a lot of modern technology that we use that might not be possible for some much smaller craft distilleries.

But, having an aging place where the temperature is always the same is going to be very difficult. And, the barrels, they get charred. And, there are different levels of charring for barrels, but that doesn't mean there aren't different sort of slight variations in the barrels themselves.

So, and as you say, crops are different. We've distilled grain. We get pretty much all of our grain from a local farmer and also a farmer co-op. So, that if for example, there's some sort of issue, with one of the farmer's grains, we get grain close by from another farmer. They work together; it's an organic co-op[?crop?]. All of our grains are organic.

Russ Roberts: The idea there being that the soil and the acidity and other aspects of the soil at least be very similar, if not the same. Right?

Sonat Birnecker Hart: Exactly. Because we've also seen, in distilling--you know, also for others: we've distilled grain from various parts of the United States and that, the grain, also is a little bit different. So, we've noticed these differences. So, we try and stick with the Midwest. We've got our grain, our corn all comes from Illinois. Our other grains all come from the Midwest, very close to where we are in Chicago, actually.

And so, with that, there's some things that you can control. But, you cannot always control how the crops are in a particular year or the minutiae of every single barrel. Or what necessarily happens all the time in a distillation. Sometimes there are things that can happen. And that's where technology comes in, to help you make sure that things are going to be as consistent as possible.

xAnd so, we have--we employ a lot of technology. We believe that this is an art and a science. So, we love the tasting aspect and trying things, but we also love the science aspect of making sure that there are sensors everywhere, that we're never flying blind, that we can monitor what's happening in our still, so that if there's a slight temperature variation that we can correct it immediately. We get an alert. If the flow rate changes, we get an alert. Immediately we can change it.

So, all of these things that we can control, are controlled.

Now, there come the things, as we've talked about already, that you can't always control. And so, what we do is that we make sure that we're tasting before we're bottling. And, that's where you can sort of notice, 'Oh, this actually tastes a little bit more in a caramel direction than our traditional products.'

It doesn't mean it's bad. It's just slightly different. And, that can be because of maybe the temperatures that year, maybe the grain. There are possibilities.

And so, if something tastes noticeably different, it does get pulled off. And, here's one of those advantages that I say of sort being a small brand, is that we can do that; and then have some unique and interesting special barrels for people. And, people love those, because they are a little bit different, or they are fun. The quality is the same: it's just the character might be slightly different. And so, then that becomes a unique and special program.

Russ Roberts: That's very cool.

31:11

Russ Roberts: When you did the first set of batches, and you tasted it, and maybe you'll tell me, but I could imagine that you didn't like it so much, you say, 'Well this isn't quite what we were aiming for.' Sometimes when I taste a craft beer, it might be extremely hoppy. And some people like that: that's fine. But sometimes it's just not that good. And, you wonder could they not make it better? Could they not afford to make it better?

So, when you think about the product that you're creating, how much control do you have over what we might call the quality, which of course is inherently subjective? But, if you're aiming for a quality that you enjoy drinking--which would be my, sort of, starting place, ideally other people, too--how do you change that if you're not happy with it? Were you happy with it when it first came out that the first few batches? Or did you go back to the drawing board? And what is that--what's on that drawing board?

Sonat Birnecker Hart: Sure. I mean we had very strict rules for ourselves. And, keep in mind, my husband grew up distilling, so this was not new to him. He wasn't just troubleshooting this. This was his chores growing up as a kid on his grandparents' farm.

And so, he had done a lot of the troubleshooting. He'd seen a lot of things that can happen. And they were distilling something that was very difficult, actuall,y to distill--a lot more difficult than grain on some levels, which is fruit. And, they also worked with berries, which is very difficult, because you know how quickly berries can have problems even in your refrigerator. So, just imagine trying to ferment those.

So, he had a lot of experience. But, what we wanted to do, which was unique in America at the time, is take a European approach--a brandy approach to distilling--and apply it to grain.

So, already from the very beginning, our approach was going to be unique and very different from what was the playbook for American whiskey at the time.

And, what I mean by taking a brandy approach, is: When you are distilling and--or mashing and distilling--an apricot, you are very conscious of each and every apricot. You cannot put one bad apricot in, because it literally will wreck everything.

If you are distilling pears, in Austria, there are different schools. But, if you really want to do it, in our opinion, the cleanest, the brightest, the right way, you will take the stems off. You know, you will make sure that--for example, with apricots you will take out the pits. So, some people do, some people don't. But, we sort of felt that we wanted to do everything as best as possible. Which always tends to mean a lot more work.

Russ Roberts: But how does that--how does apricots and pears get you to grain? What was the analogy?

Sonat Birnecker Hart: Okay. That's a good question.

It's: So, already there are a lot of things that you have to sort think about when you're working on the mashing process. But what also brandy distillers need to think about very carefully is the paying attention to the mash. Making sure that they're doing that, that they're adding the yeast properly. And, that's something that you have to do no matter what you're distilling.

But, then with the fermentation process, making sure that all the starches convert over those sugars. That you're then distilling it at the right time. And, then, the distilling process is, for brandy, is very particular. In that, when you were to distilling really anything, it comes off in three parts: Heads, they will make you go blind and crazy. You do not drink them. They're full of all sorts of chemical compounds that you might find in nail polish remover, very bad for you.

Then you have the Hearts: that's what people drink or that's the good stuff. That's pure ethanol.

And, then you have the Tails, which are a number of different compounds. They're often called the long ends. There are many names for the tails. But they have similar chemical compounds to what you might find in vinegar, for example. Not necessarily bad, just kind of interesting, sort of off flavors.

And, for a brandy distiller who's looking to let that pear shine, that pear that we were drinking on that holiday evening that my sister said, 'This is amazing,' they would never add the tails. And the reason being, it's not that the tails are bad for you, like the heads. They're not. They might also add some interesting flavors. They're also oily and they're a little bit oilier in their composition. But, if you are going for a brandy that is not aged, that needs to stand on its own and be bright and clean, you would never add the tails.

Now, in America it is very traditional when you're making whiskey and also if you think about making millions and millions and millions of gallons of whiskey, it's likely--very likely--that much of the tails will also end up in the product. Because, when you take the hearts--the pure ethanol--and you mix it with some of the tails, and then you put it in a barrel--it's heavily charred--and you age it for an extended period of time, the barrel acts as a filter. And the barrel will pull out some of those off-putting flavor notes and some of those off-putting smells--because tails by themselves sort of taste and smell like a wet dog.

Now, when you release that whiskey after four or five years, it's going to be rounded. It's going to be nice. It's going to have a flavor that I would say is very easily recognizable as an American whiskey. And, it's great; and it's loved by millions of people all over the world. It is, however, different than a whiskey that did not have any tails in it, that is aged with only the heart cut, that is then put in a barrel, where the barrel really doesn't need to filter anything. Because, you are not adding anything into the barrel that, in its own essence before the barrel is a little bit, like, off; then you're getting a very different product.

And, that's what we were going for. We wanted to create a product that was going to be unique, that was going to make good on Robert's heritage of his grandparents and their brandy tradition and apply that to grain, because we wanted the rye to shine just itself, its purest form, just as the oat, just as the millet. And, that's sort of the identity that we wanted for our distillery.

Russ Roberts: Now I could imagine--when you say classic, standard, mainstream American whiskeys, what do you have in mind? Can you mention those names? Are talking about Jack Daniels?

Sonat Birnecker Hart: I don't know their specifics, but I can imagine that large-scale distilleries are--if I were running one, I probably would not want to not use alcohol that is completely usable, and that there's nothing wrong with it. It just has very different chemical components to it than the heart cut and the pure ethanol.

39:24

Russ Roberts: So, did some of your customers initially find your flavor off-putting because it wasn't what they were used to?

Sonat Birnecker Hart: They said it was different; and it is different. Our products are very clean, they're very bright.

But, then again, what was really interesting is that a number of years into our business you started having this love and interest in Japanese whiskey. And, a lot of Japanese whiskey also uses similar approach. It's very good. Some of them are, very sort--I would imagine just having tasted them, I can tell--a lot of them use, if not mostly the heart cut, at least a tighter cut than I might imagine some American brands use. And, it creates just a different flavor profile. And so, our products, our whiskeys do very well in Japan and I can see why. We have a very clean, bright flavor profile to all of our grain whiskeys.

Russ Roberts: So, going back to my earlier question--that was fantastically interesting--I want to come back and go into a few more details. But, did your first batch taste good? Were you happy with it?

Sonat Birnecker Hart: I mean, we were happy with it, because we did not use any tails. For us, we had a different metric. We were going for very clean whiskeys. So, from a scientific standpoint, we wanted just the pure ethanol in our whiskeys; and we achieved that, and that's what we wanted. And so, we were very, very happy with it.

There were different whiskeys that we tried that--in adding things. We were purists in the beginning, so we only would use just rye. And, even today our rye is 100% rye. Whereas, many ryes on the market are only 51% rye, because that's what the U.S. government says a rye has to be--51% rye, but you still might be getting a lot of wheat or corn or something else. But, we were purists.

But, I think we started having a little bit of fun, even more fun, when we started mixing grains, as well. And, when we made our bourbon, when we made our four-grain whiskey, those were a lot of fun for us, because we realized the complexity of flavor then that would come out in these sort of mixed-grain whiskeys that we did not necessarily have in our 100% grain whiskeys. Which we also loved, but they were just very specific.

And then, making our bourbon was a lot of fun, because we were trying to create a bourbon that was also sort of unique and different than what you have on the market. And so, we did not want to use the usual suspects. We did not want to make a bourbon with rye, or wheat, or malted barley. So we said, 'Let's make our bourbon with millet.' Which is a fabulous grain. It's incredibly unique. One of the few grains that's basic as opposed to acidic. It is used in a lot of gluten-free breads. It has a completely different habit in the way that it grows. It's a fun grain. It's very popular in other parts of the world, just not in the United States.

And so, we achieved this notion of trying to create a bourbon that is very uniquely ours. And, that's part of the fun. That's what we want to do. We really wanted to have fun and make really high quality products that were unique and different.

Russ Roberts: I thought bourbon was made out of corn. It's not?

Sonat Birnecker Hart: It has to be 51% corn.

Russ Roberts: So, when you say millet, what do you mean?

Sonat Birnecker Hart: Well, our mash bill--sort of the recipe--is corn and millet. Whereas the typical bourbon mash bill is corn and malted barley, corn and rye, corn and wheat and malted barley, corn and malted barley and wheat. So, it's different combinations of those secondary grains, whereas the primary grain needs to be corn. So, 51% corn.

Russ Roberts: Let's talk about the mash, a phrase you've used a number of times. What is that?

Sonat Birnecker Hart: The mash is the--when you are making a whiskey--in fact, when you're making beer, when you're making sort of any beer or whiskey, the beginning is very similar. Brewers call it their wort or distiller's beer. We call it our mash. It's basically where you take--you're making a soup almost of grain, water, and yeast. And, that's very similar for brewers for making beer. But, for a distiller, that's what we use.

There are different approaches that one can take to the mash. Some just use the yeast and some will use malted barley in their mash. Not necessarily only for flavor, but also to help crack the starches, which is something that has been very, very traditional in America. In fact, it's so traditional there's a funny anecdote about this, if you'll indulge in me.

Russ Roberts: Please.

Sonat Birnecker Hart: So, yeah,so there was a gentleman in--a scientist in Japan--who came to America during one of the World's Fairs, I think that was in New Orleans. And, he had this science of fermentation that he'd been studying; and he came across it in looking at sake [saki] and how sake ferments. And, he was looking at the rice and I think koji was what he was focusing on.

And, he came across this realization, because the science around distilling is still full--and alcohol, for that matter--is still full of mystery and questions. There's a great book called Proof and it looks into the science behind all of the different stages of making alcohol--and including intoxication, around which there are a lot of questions. Sometimes there's so many factors that come to play in it, both environmental, as well as what you've actually ingested that it's fascinating science.

Either way, this gentleman, he came to this conclusion that there was a much better, more efficient, and cleaner way to mash whiskey than was very common in the United States at the time, and wanted to bring this new technology--in fact, it was the first biotech patent in the United States; it was actually for enzymes for distilling, from him.

So, basically, what he said is that he then brought this technology to Illinois--so this has a very Chicago and Illinois side of this story. He brought this technology to Illinois when we had the World's Fair here and had a meeting in Peoria, Illinois, which was the main distilling hub in the United States at the turn of the century [c. 1900--Econlib Ed.]. Everyone thinks it's Kentucky or Tennessee--no, no, no, no, no. It was Peoria. Unfortunately, it lost its luster and it then moved down to Kentucky. But, Peoria was producing most of the alcohol in the United States, I believe, at the time.

So, he went there to meet with all of these distillers and said, 'Look, you don't need malted barley anymore.' Which was very also time consuming. It was a big process to malt the barley. It took a lot of space. And he said, 'Look, you don't need that. You need enzymes and that will do the job and it's all natural. And, this is exactly what will make your production more efficient and better and cleaner and easier.' And so, some of the distilleries in Peoria said, 'This sounds like a great idea,' and started using it.

And then they burned down. And, then the firemen who came to put out the fires, surprisingly, had no water. They couldn't get water. And, after this happened a few times, I think they got the message.

Russ Roberts: The distilleries were burning down because the enzymes created--what?

Sonat Birnecker Hart: No, no, because of the barley mafia.

Russ Roberts: Oh. What happened?

Sonat Birnecker Hart: They didn't want the distilleries using the new technology because it would put them out of business.

Russ Roberts: Oh, this is awesome.

Sonat Birnecker Hart: See, I just assumed that was clear because I come from the Chicago, Illinois. It's like, of course there was somebody that was just sending them a message.

Russ Roberts: And, that's why there was--

Sonat Birnecker Hart: Yeah. It had nothing to do with the enzymes being dangerous.

Russ Roberts: That was why there was no water, because they switched it off and made sure they couldn't put out the fire.

Sonat Birnecker Hart: Yeah.

Russ Roberts: So, for the listeners who've been long time listeners, I haven't talked about this in a long time, but this is a great example of Bootleggers and Baptists, for those listening--in a certain sense, not exactly the Baptist part. But, bootleggers don't like competition and barley makers don't like competition, and so this is a fabulous example of how, when property rights are insecure, sometimes you don't get the best outcomes. Not really Bootlegger and Baptist, but I had to get that in somehow. Okay.

Sonat Birnecker Hart: Of course.

49:16

Russ Roberts: Let's talk about single malt, which--I think about it as a scotch thing. So, I think it's a bit of a form of snobbery. I think there are non-single-malt scotches that are quite drinkable. Johnny Walker being the most well-known by most people. Johnny Walker just makes the same kind of whiskey each time. They have different colors. They have green, black, blue, red.

But, it's not just in whiskey, right? It's--single malt is general thing? Tell me what it is; and is it a thing, and should it be?

Sonat Birnecker Hart: Well, single malt--there are a lot of things in whiskey. And if I could just quickly back up, because I hate not giving somebody credit, but the gentleman that came up with that was Jokichi Takamine, was the name of the scientist that came up with enzyme.

Russ Roberts: And, do you use enzymes now, you're saying? It is now?

Sonat Birnecker Hart: We use enzymes.

Russ Roberts: Okay.

Sonat Birnecker Hart: Yeah. Others might use malted barley, but the whole point, and of course as I digress, but the whole point was that we use enzymatic conversions of starches to sugars, so that we can have a very clean whiskey that is 100% rye without ever having seen other grains.

50:36

Russ Roberts: So, go to single malt.

Sonat Birnecker Hart: Exactly. So, with regard to single malt, there are many things in whiskey. I would say there's a lot of marketing in whiskey, too.

But, single malt is a designation, just like bourbon is a designation. And, if we're going to jump to another alcohol category, champagne is also another designation. These are all designations that are geographical in their nature. So, single malt whiskeys are primarily--although this is very topical because America is creating an American single malt right now as a category. We didn't have it before. It was primarily--it would come out of Scotland. And, really it's just using malt, a malted barley for this--

Russ Roberts: I've got to ask an embarrassing question. What is malt, exactly?

Sonat Birnecker Hart: Sure. It's where you have--you know, there are many things that can be malted. You can malt all sorts of kinds of grains. It's a process in which it's sort of smoked and it's dried and there are many different processes for malting different things. But, it's a way to change the character and flavor of a grain. But also, it changes--it breaks it down and it helps start the process. So, in a way that's why it's great to use malted barley to help crack the starch and the sugars because it gets it started: it gets it really moving, and that's why it's used.

But, I would say it's also a flavor; it's a delicious flavor. I love the malted barley. And, there are different levels that it can be malted. So, it can have more smokey-type flavors, it can have more caramel-type flavors, it can have more chocolatey-type flavors. It really just depends on the malter. And, while I'm not a malter myself, so I mean that could be an interesting thing to ask. Because one can get lots of different flavor profiles out of malt, malting different grains and also barley for that matter. But, that's what it is.

Russ Roberts: Yeah. I was going to say neither a malter or a mender be, but I'll let that go. Sorry about that. Really bad dad joke for Shakespeare fans. So, what's single malt?

Sonat Birnecker Hart: A single malt is just, you're only using the malted barley. You're just using that one malted barley. There might be different things where it's just of one harvest. There might be different marketing techniques of different things.

In America there're trying to figure out what our designation is going to be. Is it going to be distilled at a certain level? I think that they're fleshing out the details right now as to what is going to constitute an American single malt.

But it's really--has been primarily a Scottish type of whiskey. And, then you can add different things. Then there's peated whiskeys, which is also something that happens a lot in Scottish whiskeys that they're starting to do. Some distilleries in the United States are starting to use peat as well. But, it's just--

Russ Roberts: So, what does that mean?

Sonat Birnecker Hart: It's just really what the chef wants to make.

Russ Roberts: Well, what's that mean, though? Like, I'm a big fan of peated whiskies, of scotch, especially--those are my favorites. Lagavulin, Laphroaig. I'm blanking on--Ardbeg. What does that mean, 'peated'? It tastes smokey. I've mentioned this before--my favorite marketing slogan of all time, a drinker of Laphroaig, I think, won a contest. He said that, 'Drinking Laphroaig is like kissing a mermaid who has been eating barbecue.' There is, I don't think, any better expression to capture Laphroaig, although there's some less attractive ones. How is the peat--peat is something from the ground? Like dirt? How is that integrated into the process?

Sonat Birnecker Hart: Yes. Yeah. Well they use the peat, sort of similar to the fact that malted barley, first you're sprouting the grain, whether you're using barley or whether you're using some other grain and you're malting it. You're sprouting it, getting it started. And then you're using fire and different amounts to dry it or to smoke it or to make it have one sort of flavor versus another.

Peat, it's natural. It comes from the ground. It's organic substances that, I think, are pressed into certain--I guess it's like a bog. To be perfectly honest, we don't use any peat, so I'm not an expert in peat. But, I know that there are peat fields in England. I've been to them in Scotland. And, what they do is they harvest it out of the ground and then they'll smoke it or they will use either a heavy smoke or a light smoke onto it and that obviously affects the flavor and aroma of the grain. But, how they use it exactly in different minutiae, is beyond me because I do not use peat at all.

Russ Roberts: It's okay. You're spared.

56:38

Russ Roberts: But, I have to go back to inquire on something you said earlier when we were talking about the heart. And, you said it's pure ethanol.

Sonat Birnecker Hart: Yes.

Russ Roberts: Right?

Sonat Birnecker Hart: Yes.

Russ Roberts: So, ethanol is something you might use in a science experiment. It doesn't--

Sonat Birnecker Hart: Yes, you would.

Russ Roberts: In theory, it has no flavor, I would say: I'm guessing.

Sonat Birnecker Hart: Right. In theory, but that really depends.

Russ Roberts: So, my question is--

Sonat Birnecker Hart: Because--

Russ Roberts: why would you want to make something that's 100% ethanol? Is it going to have any flavor?

Sonat Birnecker Hart: Well, it depends on how you distill it. So, you can distill it very high. So, for example, you've probably seen different stills. And so, there are three different kinds of stills out there. One is a sort of a pot still that you might see in Scotland, for example. And, sometimes they have a swan helmet, which is sort of the top part. It's beautiful. And, what they would do there is they would distill it probably more than once to get the alcohol content--the ethanol--the content up to a certain percentage of alcohol--

Russ Roberts: And the distilling is to get rid of non-alcoholic pieces of it, to get it down to its essence--

Sonat Birnecker Hart: Right. And, to bring it down to its essence. But every time you distill something, you bring it up in alcohol content, so to speak. I mean that's a very big simplification. So, for example, if you have a still--we have a hybrid still, which mixes both the pot still that I mentioned that you might find in Scotland and then a more industrial still that you might find, which is just columns.

Brennerei_beschriftet-scaled.jpg
Pot- and columns-style still. 1. pot; 2. heater; 6., 8. distillation columns; 9. plate viewing ports; 12. condensor drum. Full legend and source info available at Wikimedia

So, as you can see behind me, there's a pot and there are columns. Now the benefit of that is that if we want to distill it low so that it doesn't go up to a high alcohol content--you know, 95%, 95-point-something, which is really high and that would be around a vodka where you will have stripped it of all of its flavor and aroma--to get there you need to distill it through a number of plates.

So, you need to take it, you know, different stills, depending on their technology, depending on whether they have dephlegmators attached to them, can do that with different amounts of plates. But, in general, you need two pretty large columns to get vodka.

Now, you don't want that much rectification in a bourbon for example, or in a rum or in whiskey, even. You really want the flavor of the grain to shine through. So, whether it's distilled to maybe 91%, 90%, 88%--these are all different variations that a distiller can play with and that also help determine the character of the kind of whiskey that you're making.

So, that's how one would get--really a high rectification where it would have to go through a lot of distillation so to speak, or a number of plates, because each plate is a distillation to get a really high rectification.

59:52

Russ Roberts: This is a question for my son, who is a big fan of your Four Grain--is it Four Grain Whiskey? Is that what it's called?

Sonat Birnecker Hart: Yeah. Four Grain Whiskey.

Russ Roberts: So, I didn't know he'd had it, but when I told him I was interviewing you, I asked him if he knew your distillery and he said he did. I mentioned to you before we started doing this that my wife encountered your whiskey at the duty-free section of Melbourne's airport--which is really weird--and then sending me a picture of it, for no reason, I don't think. I don't think she knew I was interviewing you.

But, what my son wants to know is: How long do you decide to age it? Because there's a trade-off--classic economics--that your money is sitting in the barrel. It could be out in the--the whiskey could be out in the store--which would in turn give you money to spend now rather than later. And, in general, the higher interest rates are, the more expensive it is to leave it in the barrel rather than having in your bank. So, how do you decide how long to age it for? And, do the lower interest rates these days make that any different for you? Economist question.

Sonat Birnecker Hart: Well, yeah, no, for sure. So, the first part of it: We always wanted to age our whiskeys. And, we did a number of experiments, and we've also done experiments with different sized barrels. Because that also affects the flavor, if you're using different size barrels, based on the surface area. And also there's a difference as to whether you char the heads of the barrels or you toast them. And also, the varying levels of firing of the barrels. So, how charred it is, whether it's an alligator characteristic, or a lighter or a darker char.

So, after we went through a number of experiments, we settled on wanting our whiskeys to be between around four and five years before they get pulled. And, for us, it's really not about the number--although the numbers are important because in certain countries you have to age your products a certain amount of time--but, for us, it was really about what you mentioned earlier: consistency.

So, consistency is incredibly important. And sometimes, as we spoke about, you will pull a rye barrel and you will notice that, 'Whoa! This has got a lot more caramel than it normally would in this amount of time.' And so, as I said, then that--it may be absolutely delicious, but we're not going to want to have it be the same as our main lines, which has a different flavor profile.

So, we want to keep our products consistent. And so, we make sure that we pull also for consistency. So, if it needs a little more time in the barrel, it'll get a little more time in the barrel. And, if it's ready at around four years, then we will pull it. But, really we're going for consistency. So, that's what affects our decisions along the aging process.

Russ Roberts: When you say, 'It came out real caramelly,' is that you or your husband's palate? Is that a subjective judgment by a taster, maybe one of you or someone else? Or is there a chemical composition of it that you measure?

Sonat Birnecker Hart: Well, we've measured chemical compositions all the time, but it's also--you can tell if something is not tasting like your main line. I mean, we also have a lot--we all taste it, you know, and sometimes we'll deliberate. But, that's--all of our barrels, all of our products are single barrels. So, for us it really is important that we try and make sure that they all taste the same.

A lot of companies, what they do to eliminate these issues is they blend a lot of barrels just together. And then you're going to have a level of consistency because those little, slight variations, in blending them all together, are not going to really come through.

Russ Roberts: So, is 'single barrel' a thing? What is 'single barrel'?

Sonat Birnecker Hart: A 'single barrel' is a thing. It is where--we can trace every single bottle back to the field on which the grain was grown. And, it's that level of transparency that we love: I mean we can really trace everything back.

And, we also have to: I mean, we're organic-certified and with our organic certification what will happen is they will come and they will ask for all of the records from the farmers that we purchased it from. And, the farmers need to be up-to-date on their organic certifications. Obviously, we need to be up-to-date on all of our organic certifications. And everything--the yeast, you name it--that is in our product, all the different grains, they need to be all organic and they need to know exactly when it was purchased, and what field it was on, and all of that.

So that's, for us, single barrel is in part the art of trying to create this level of consistency even though each barrel might have very, very minor slight variations to them.

But, it also allows us a business format in which, when those barrels do come about that are somewhat different--because they've taken on some different flavors, probably maybe it was a really hot summer or maybe it was really cold and these things might affect it, even though we have a temperature controlled warehouse. It's controlled to some degree, but when you have these extreme temperature shifts as we do in Illinois where you can have a number of days that are 110 or many, many days that it's a polar vortex, you are going to definitely have some slight variation--

Russ Roberts: But, when you say 'single barrel,' do you mean it's, the grain is coming from a similar area, or the barrel itself? What do you--explain that again?

Sonat Birnecker Hart: Yeah, everything. So, all the grain comes from--so for example, there's so many terms in whiskey.

We have a Bottled in Bond Whiskey and that has to be grain from one sort of harvest period, all made at the same time in one facility, in our facility and bottled in our facility, and it needs to then be at 55% alcohol in the bottle. So, there are a lot of these specifics that are required by law if it's going to be Bottled in Bond. And, obviously the bond--it's in our bonded warehouse. So, all of this is done to create a product that meets those specifications. So that anybody that buys a Bottled in Bond Whiskey knows that it comes from all grain from one specific time period and that it is all done in one facility, that it's traceable, that they know really where it's coming from.

And, in a world where so many things, you don't know where it's coming from necessarily, you don't know how it's made, it's nice to know exactly how certain things are made. And, I think that there are a lot of people in sort of the whiskey world that love those kinds of details.

Now when we talk about single barrel, single barrel is--for us, we have the grain, it comes from the farmer, we trace it all the way through to that specific barrel. It gets filled and it is--when we bottle it, we're not blending it. We're not adding anything. So, everything is traced, goes into that barrel; and then it comes out of that barrel into bottles that are numbered, tracing them back to not just the barrel, but also the grain and everything else. So, it's also all completely traceable.

Now, that's not necessarily true if you're getting a blended whiskey or a whiskey where they are making very, very large batches and then they stick it in a big vat and then they bottle it, which would be a much larger scale operation.

1:08:13

Russ Roberts: Let's talk about distribution.

Sonat Birnecker Hart: Sure.

Russ Roberts: A lot of times, a lot of people believe--well, I'll say it differently. The whiskey business has a history of, not dissimilar from what you were talking about earlier with the barley people who resorted to violence to keep their market share. In sort of folklore, in movies, Netflix series, people in the whiskey business kind of do things a certain way and there's a certain edginess to that business that I actually associate with Chicago to some extent. So, here you are in Chicago; you make this great product; I've never had it. I'm going to give you the benefit of the doubt for the short run and I got my son's recommendation--

Sonat Birnecker Hart: Thank you.

Russ Roberts: So, how do you get anybody to be able to buy it? I mean, was that hard? Or was that relatively easy? And, are there places where it was--it's impossible still, and it's driving you crazy? I'm thinking about both in bars as well as--which have very limited shelf space, often.

So, you have bars and you have liquor stores, and in my mind you'd go door to door and say, 'You want to buy some of this? Here, taste it.' But, of course, it's a very organized process and so I assume that's not what happened. So, what happened? How'd you deal with that?

Sonat Birnecker Hart: Well, in the very beginning, we didn't know anything about the liquor business. We knew about how to make alcohol. Robert went back to Europe and took many courses on things that he hadn't learned from his grandfather to increase his knowledge even more. We spoke with all of the manufacturers of the equipment, and so we became manufacturers' representatives of the equipment, which gave us a huge insight into that side of the business--the hardware, different stills, different helmets, different technologies of plates.

But, when it came down to the liquor business, that was a completely different situation. It was very, very, very eye-opening, from the beginning. And, it was incredibly eye-opening because we realized early on that it's a business that you can be in and not be able to sell anything if you don't have a distributor. So, you can be a distiller, but unless you have a distributor, you're not going to sell anything.

And, now laws have started to change that do allow for some self-distribution. It's not universal by any stretch throughout the United States, and some states allow it only if you're using grain from that state.

And then, how far are you going to get with just self-distribution? I mean, one has to also understand that that is a completely separate business. It's like another vertical. It's also very difficult, and you've got a lot on your plate already just making the alcohol and doing all of the work that's required for the main business.

So, when we started, we had a hard time finding a distributor. There weren't any really craft distilleries that people knew about. It wasn't common knowledge.

We had a very large distributor, who actually is now our distributor in a number of states, told us when we went and presented our product to them--they were very nice and they said, 'We think you're brave to do this. You got a lot of competition,' and of course, we looked on their wall and it was all the big brands. And they said, 'And, we actually think your product is good,' they said, 'but, we're not going to be right for you. You're not going to be able to compete. We can't do anything for you. So, go work on your business, and when you graduate, then come and talk to us.'

So, that was sort of the lesson we got from a large distributor when we first started out. I'm happy we graduated; but I mean, it was really hard getting there. And, in the beginning, just trying to find a distributor was difficult.

And then even when you got a distributor, it was very difficult--because we started out with a wonderful but smaller distributor who didn't have a large sales force, so we had to basically help him. We were selling as much as we were doing everything else.

And, I remember taking my son in the stroller for a walk down Clark Street in Andersonville and putting in the bottom of the stroller a bunch of whiskeys and some liqueurs and some of our products, and knocking on doors. And, they thought that I was a mom that wanted to come in with her baby, and I said, 'I own the distillery a few blocks away. Do you have a minute? I'd love to taste you out on my line.' And, they were so shocked, and I think it sort of took them off guard that I was multitasking, taking my baby for a walk and also tasting out the local businesses on my product. But, really, that was how I started to learn about the sales side of the business. [More to come, 1:14:00]

And they would talk to me and they would say, 'I would love to bring in your product, but come over here, look at this closet.' And, I would look in the closet and it was full of cases of a particular brand of something, and he would say, 'The distributors come, I ask for this, they bring me all these extra cases. They think I really want it. It's just sitting around here.' He's like, 'I don't have any room even for other stuff,' and they would tell me all the issues. It's a hand sell. What is that? That means then they have to take more time to educate their customers on what it is, or I'd go to somebody and they would say, 'Oh, I can't bring you on.' And, I would say, 'Why?' And, they would say, 'Well, I can't really tell you the details, but this other brand is building a patio for me and I don't want to lose it.' Or somebody would say, 'Well, it's a competing brand with this other brand. They're sending me to France and I don't want to lose my trip.'

So, I started learning a lot about how this business was run, and there was a lot of shadiness, and there were a lot of expectations put on brands, and we realized that that was not a game we could play. It just wasn't. It wasn't a game we wanted to play, it wasn't a game we could play. We did not have endless cash resources. We were living in my mom's house, saving money, investing everything back into the business. And, it's funny, because we were right next to a brewery, Metropolitan Brewing Company, they were right next to us. We started at the exact same time, and we would talk about these issues in trying to sell our products and how we both would run up against this desire for free goods or money, or all sorts of things that neither of us were willing to do. And, the brewery told me how there was this restaurant, she'd just come back from trying to sell a lot of her beer and she said there was this restaurant that said that, sure, they'd put it on, but they would have to bring them a growler every week--

Russ Roberts: A large container of beer.

Sonat Birnecker Hart: Yeah, and I said, 'You know, I just had that exact same experience, where this really nice restaurant said that they would bring my product on, and then they expected it to be free.' And, we were both talking about this and we said, 'You know what? If we stick it out and we just keep trying to do things right, eventually they'll bring it on and then they'll pay.' And, they did.

Russ Roberts: I have to say, 'growler' is one of my favorite words in the English language. I love that word.

1:16:57

Russ Roberts: But, what legislation makes it difficult? What existing legislation makes it difficult for a new beer or whiskey to break into the market? What needs to change?

Sonat Birnecker Hart: There's no legislation.

Russ Roberts: But, you said--

Sonat Birnecker Hart: The legislation is fine. It's just the way the business industry has developed over time, is one in which there's a lot that goes on that is tricky. And, the thing is, is while there might be legislation against these kinds of activities where you can't--you legally cannot drop off a check at a bar and wink, wink, and say, 'Okay, so now all of your cocktails are going to be ours.' It happens. Clearly we don't do that, but I know it happens. I know that there are all sorts of types of shadiness in the liquor industry, and it's not just limited to one state.

Russ Roberts: But why is it--usually, that would create an opportunity for a newcomer to have a different model. So, is there something that makes it difficult for that newcomer? Is there a barrier to entry?

Sonat Birnecker Hart: We have a different model. We don't do that. We can't do that.

Russ Roberts: No, I don't mean you. I mean the distributor. Why isn't there a distributor who says, 'Hey, we're going to give you a better deal. We're going to give you more than our competitors. We're not expecting you to give us any prizes or golf carts or trips to France or whatever'? Is it hard to enter the distribution business? I've always thought there's a tinge of violence there. Is there?

Sonat Birnecker Hart: Well, look: At the end of the day, it is a people business. And, I believe that anybody that is a people person can start a people business, and they will find individuals that don't care about being shady and don't care about trips to France and really just want to do business with people they care about and that they like, and that think have the same mindset.

That being said, you will always run into people who like trips to France, and golfing, and all sorts of other treats and tchotchkes, and checks[?]. So, it's as simple as that. And, while there are laws against certain things like that, there's also the difficulty of enforcing those laws.

Russ Roberts: Yeah. I just think--it's my intuition that there are certain industries in America, not many, that have a history of being run by people who are happy to go outside the law if you don't play with them the way they want to be played with that. That it's different. In other industries--like the book distribution business. There's a few places, it's not that highly competitive, there's a handful, and there's a couple of really big ones, and they have a very strong say in how the market works. But, you could start a new one in theory, and they're not going to burn your books down--your book warehouse down.

Whereas I feel like in the liquor distribution business, that barley story is not that different today. Maybe. I don't know.

Sonat Birnecker Hart: Right. Well, I mean, it's like this. You can read countless articles related to the liquor industry of people doing things wrong and getting caught. And then they might change. And they do; and I have seen change happen in this industry, certainly over the last five years, where there have been crackdowns. I think that the TTB [Alcohol and Tobacco Tax and Trade Bureau] has cracked down on certain things. I think that various liquor control boards have cracked down on certain things. And I think that's good because it means that some of the overt things that I think might have been happening happen a lot less.

That being said, this is an industry that's about--you know, it's about good times. It's very competitive. It's a business that takes place in bars, in restaurants, in hotels, in lobbies, in various places. It's not always a boardroom. Really, it's about the people on the ground going into these businesses and figuring out how to sell.

And, the way they might figure it out, and I don't even think that it's always something that the distributors themselves are even aware of, sometimes it might just be the rep--

Russ Roberts: Yeah, for sure--

Sonat Birnecker Hart: engaging in certain activities on the side to give a brand an edge or not. And so, these are the kinds of things that happen.

But, at the end of the day, as I teach my children, you're going to encounter a lot of people that don't play by the rules. If the rules are good and true, then there's no reason to break them. And you'll find people that appreciate that. And, those are the people that you really want to do business with anyway.

1:22:15

Russ Roberts: Why is it called KOVAL?

Sonat Birnecker Hart: KOVAL, well, so much of Koval is really about being inspired by family, and Koval, the name, is also part of that.

When we were trying to think of a name for our company, we were still living in D.C. and we were getting ready to move to Chicago to make our big business shift, and we went to go visit my Great Uncle Sigmund in Brooklyn. He was in his late 90s at the time, and we didn't think that we would be able to see him again probably, given all that we had on our plates and moving to Chicago. And so, we spent the day with him. He was from Vienna, we were speaking German, and he was telling me all about his friends in Vienna, who are people that I read about, and so they're my friends too, but he actually experienced them alive. And, we told him that we were going to be leaving our careers and starting a business in Chicago, making whiskey and gin and other alcohol. And, he said, 'Na geh,' which is sort of Viennese slang for 'No way,' but in an excited sort of way.

And, we said, 'Yeah.' And then he started to say that he thought it sounded like a fabulous adventure. And then he told me that it reminded him of my great-grandfather, whose name was [inaudible 01:23:50] or Emmanuel. And, I said, 'Why?' And, he said, 'Well, he did something very strange in the eyes of our family,' and that he walked down the stairs one day after studying at the technical university in Berlin--he was an electrical engineer. He walked down the stairs and he said, 'You know, Europe's over. It's about America. I'm moving to America, I'm starting a business.' And then he left. And, this was at the turn of the century, when Vienna was really the center of the universe at that time culturally. I mean, it was a great place to be.

His whole family thought he was a little bit out of the ordinary for doing this, and so they gave him the nickname Koval. Which, in many European languages is a common family name. It's like Smith. It really means Smith, it means like blacksmith. In German it's Schmied. But, Koval in Yiddish, it means something a little extra. It means someone who, like a blacksmith, forges something new. Like, takes something hard like metal--something that is difficult to work with--and then bends it and makes it something new.

And so, they gave him that as a nickname, and then he had blacksmith as his ex libris, which I never understood being that he was an electrical engineer--but, and started a battery company.

But, this story was fascinating, and as we're taking the train from Brooklyn, from New York back to D.C., Robert and I, we were talking about this and we said, 'Wouldn't Koval be a great name for the company? Because people think we're a little bit out of the ordinary for leaving our careers to start a liquor company in Chicago, but it also honors both sides of our family.'

You know, it's a family name on my side of the family, but Robert learned how to distill from his grandfather, whose last name is Schmied--which also means Koval.

So, it sort of worked out really beautifully, and that's what we took on.

But, there's actually an addendum to this story, which is that ,as we grew--Koval grew dramatically in the beginning--and we ran out of space. Our first location we thought was big when we moved in and then very quickly it was small. And then we kept trying to find more spaces for, you know, storage. We started ordering at a higher volume. We started ordering pallets, and pallets as well, and where are you going to put all of these things? It's cheaper when you buy more, but then you need a place to put it.

And so, this was always a problem of ours for many, many years, and we kept renting satellite warehouses.

And finally, you know, about in, I think it was 2014, we found the space that we're in today. And, half of this building was for rent. And, we went in and it was huge; and we were really nervous. It was very expensive, and there was nothing in the warehouse at the time when we were walking through except for some bricks stacked up. And, then I noticed there was one thing, sort of up by a pillar in the middle of the factory, and I walked over to it and could barely believe my eyes, but it was a KW battery charger from my great-grandfather's battery company, which hasn't existed since the 1970s.

And, I said to our person, the person that was showing us around, I said, 'Mario, if we rent this building, can we buy this battery charger from you?' And, he says, 'If you rent this building, you can have it. The last tenants, they left it here.' And so, it was bashert--it was meant to be. So, we actually have this battery charger and we use it to charge our forklifts. It still works.

Russ Roberts: Wow.

Sonat Birnecker Hart: So, my great-grandfather was a very good electrical engineer. But, that's sort of about the name and how family has woven its way into it.

Russ Roberts: My guest today has been Sonat Birnecker Hart. Sonat, thanks for being part of EconTalk.

Sonat Birnecker Hart: My pleasure. Thank you so much.


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