Fighting Spirit | B.C. liquor, Island Spirits Distillery

Local distilleries are winning fans all across Canada and around the world. But here at home, where Prohibition-era policies still rule, selling B.C.-brewed hooch is proving a tall order.

The building that stands 30 metres from Pete Kimmerly’s house does indeed look more like a cathedral than a high-end gin and vodka distillery.

Nestled amongst the firs and cedars on his Hornby Island acreage, Kimmerly’s “church,” as he calls his Island Spirits Distillery, climbs two storeys high in rustic carriage-house fashion with a swinging barn door and timber flourish. Inside, the pulpit is reserved for five 200-litre bubbling vats of fermenting sugars, a three-metre sweep of a bar and a wildly eccentric display of copper pipes, glass jars and stainless steel.

“We want to bring gin and vodka up to single-malt class,” says Kimmerly, wearing a plaid shirt and blue jeans, as he glides behind the bar to pour the first round of drinks. A couple of years ago, when he and his business partners, winemaker John Grayson and chemist Naz Abdurahman, asked friends to blind taste-test their gin and vodka against some of the world’s top-ranked brands, their product consistently won out.

As an artisan distillery producing no more than 60 bottles of liquor a day, Island Spirits doesn’t keep its still going at all times. This means that, instead of having to filter impurities out of its liquor after the fact (as the large distillation companies do), Island Spirits can let its still run its course, waiting to use the purest alcohol – the “heart” – for its spirits.

In November the partners sent off their first two pallets to Alberta – 360 bottles of gin and 360 bottles of vodka under the Phrog label – through a private distributor and received word that a gin club in Calgary promptly bought out the entire stock at their local liquor store. “I don’t believe we’re going to lose too many customers,” Kimmerly says, with a grin.

But keeping customers isn’t the problem; it’s finding them in the first place. While Alberta – with its privatized liquor distribution and slew of high-end stores selling just its kind of product – has proven friendly to Island Spirits, in B.C. it’s a different story. Prohibition-era policies dating back to the early 1920s have left this province with a complex bureaucracy, whopping taxation and a distributor – the Crown-operated Liquor Distribution Branch (LDB) – that, in Grayson’s words, “has a heritage of complete control.”

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All this makes it next to impossible for artisan distilleries – high on quality, low on quantity – to launch, let alone survive. Five such distilleries – including Island Spirits – now exist in the province. Not so bad when you consider there are between 12 and 15 artisan distilleries in the whole country. Disappointing, perhaps, when you hear there are nine in the city of Portland alone – or 33,000 in Germany.

The LDB effectively owns all distilled spirits (any liquor with over 22.9 per cent alcohol content) as soon as they hit store shelves, charging a 167 per cent markup (on top of a hefty federal excise tax) and dictating exactly where and how they can be sold.

By the time a $50 bottle of Phrog gin has been shipped from Kimmerly’s distillery to the LDB, ordered by the local Hornby Island Liquor store and sold to a customer, Island Spirits is left with $12.50. The actual cost to make that bottle, because of the extra time and energy required for Island Spirits to let its still run its course, is almost $13. No wonder the distillers are searching outside B.C. for buyers.

But when Kimmerly told the LDB that Island Spirits wouldn’t sign its distribution agreement because Island Spirits was going to export only, the LDB threatened to pull its licence. “In their defence,” Kimmerly says of the LDB, “they’re tasked with enforcing B.C. liquor laws, one of which states that the province ‘assumes title’ of liquor as soon as it’s packaged in consumer-quantity containers.”

In other words, if Island Spirits wanted in the game, it would have to play by the LDB’s rules – and lose money doing so. “We’re being stifled, treated like a big distillation company making millions of gallons,” Grayson says, wearing jeans and gumboots, joining Kimmerly at the bar. “We just want distilleries treated like wineries.”

In the late ’70s, the federal government agreed to waive its excise taxes on all Canadian wines made with 100 per cent local grapes. Seeing the wisdom in helping its local farmers and a burgeoning industry, B.C. soon followed, allowing wineries to sell these same wines directly to tourists, bars, private liquor stores, restaurants and hotels without any LDB markup.

Within 20 years, small mom-and-pop vineyards dotted the Okanagan and Cowichan valleys, each with its own winery and tasting room for the growing number of tourists lining up for samples. One minor regulatory change and suddenly grape farming, winemaking and agri-tourism were viable industries in the province.

“We want the LDB to acknowledge small [spirit] producers,” Grayson says. “Give them a chance to thrive and diversify the economy.”

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For B.C.’s early colonists, liquor was less a luxury and more a way of life. “Hard liquor was cheap and readily available, unlike milk, coffee and tea,” writes Robert Campbell in his book Demon Rum or Easy Money: Government Control of Liquor in British Columbia From Prohibition to Privatization.

“In rural areas, distilled grain reduced transportation costs and served as a substitute for cash.” By the beginning of the 19th century, B.C. had a ratio of 177 men to every 100 women – a result of the transient nature of its burgeoning mining, fishing and logging industries. Cheap, accessible whisky helped break these settlers into their bleak, lonely lives in the wilderness.

Cheap whisky, as well as beer, helped fuel the rapid expansion of saloons across the province – but also spurred the growing temperance movement into the western hinterland. The local anti-liquor lobby – the “drys” – now had a symbol for their cause: the dark, dank bar filled with drunk husbands and absent fathers, drinking away their family’s income in the company of less-than-reputable women.

A B.C. referendum, instigated by the anti-liquor lobby, officially endorsed Prohibition in 1917, with the provincial legislature passing a bill banning the sale of liquor in B.C. later that year. A year after that, the federal Parliament tightened the noose further, passing its own law to ban the manufacture, transportation and sale of anything stronger than 2.5 per cent alcohol content and thus restricting interprovincial trade in liquor. Selling or buying booze from anyone but your doctor was now a crime in B.C.

Between bootlegging and medical “prescriptions” for liquor, however, the B.C. government soon discovered it couldn’t effectively enforce Prohibition. It also discovered it didn’t want to. With sales of liquor to industry, churches and “patients” bringing in over $1.5 million to provincial coffers in 1919, there were fat profits to be made in the booze business. In 1921 the government decided to end Prohibition but maintain control over the business, creating a three-member Liquor Control Board, at arm’s length from the government, to make regulations and set policy.

While the bureaucracy grew and changed shape over the years, eventually separating into the Liquor Control and Licensing Branch and the Liquor Distribution Branch, its raison d’être remained the same: a government body that didn’t look like a government body to enforce regulations, sell booze and cash in.

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And cash in they have. In 1922, the first year post-Prohibition, liquor revenue for the government was $2.1 million. In 1947 it had climbed to close to $15 million. The LDB’s latest figures, for the fiscal year ending March 2008, show a net income of $857 million for the B.C. government on gross sales of almost $2.7 billion.

Of that total, Canadian-made spirits sold through the LDB represent $410 million in sales, with more than a quarter (over $110 million) accounted for by three “domestic” brands – Captain Morgan, Crown Royal and Smirnoff Red – manufactured here for British liquor giant Diageo PLC.

“We choose what we carry, what not to carry, based on consumer demand,” says Gord Hall, the LDB’s director of corporate policy, when asked how artisan distilleries such as Island Spirits, which represent a fraction of that sales total, can break into the market.

“If we choose not to carry a product, [local distilleries] have access to private liquor stores and restaurants – but through the LDB.”

Unlike beer – whose powerful interests successfully lobbied the province to allow breweries direct access to the public through saloons, restaurants and hotels as soon as government control began – and homegrown wine – which now enjoys an equally direct route to their buyers – the fate of local spirit producers remains in the hands of a few provincial bureaucrats. “Spirits are still back in Prohibition days: controlled, ironfisted,” Grayson laments, savouring his last sip of gin. “People have lost sight that distilling is just another way of processing fruit.”

Frank Deiter, owner and founder of Okanagan Spirits, is keenly aware of that fact. A German expat, Deiter spent 30 years in the B.C. forestry industry before deciding in 2002 to switch careers and get into the distillery business. All it took was a late fall stroll through an Okanagan orchard.

Seeing row upon row of rotting apples lying on the ground, Deiter recalled how in Europe farmers were turning rotting apples into high-end bottles of brandy, shipping them across the ocean and selling them on B.C. liquor store shelves. “I thought, What are we doing?” Deiter explains over the phone from his distillery in Vernon.

Today, using soon-to-be-dumped fruit from farms across the area, Deiter sells thousands of bottles a year (under his Okanagan Spirits label) of fruit brandies, absinthe and aquavit, grossing over $350,000 annually. For him the problem has never been the spirits themselves, which win lots of awards, but rather how much harder it is to get them into the hands of customers compared to wine or beer. Like Island Spirits, Deiter doesn’t technically sell his own liquor; the LDB does through its outlets, bars, restaurants and private liquor stores, including one that’s two blocks from his distillery.

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Even the bottles Deiter sells directly to the public at his on-site store are sold on behalf of the LDB, with Deiter sending all money from on-site sales to LDB coffers; in return he gets a 30 per cent “commission” in the mail. B.C. wineries using locally grown produce, on the other hand, can sell their wines directly to whomever they choose – on-site or off-site, with no markup and no excise tax – and keep every penny (except GST and PST) for themselves.

Even the wines they sell through LDB stores are only charged a 117 per cent markup, compared to the 167 per cent markup for spirits. Less markup, less taxes and direct sales mean wine producers can sell for less and walk away with more.

That’s why, in 2007, Deiter helped form the Artisan Distillers Guild of B.C., which includes Okanagan Spirits, Merrydale Ciderworks Corp., Spirit West Distillery and soon Victoria Spirits and Island Spirits. Its objective is to lobby the province to ensure “the policies in place for wineries be extended to our types of distilleries,” Deiter explains.

These days Deiter and other B.C. distillers are looking with hope to what’s happening south of the border, in Washington state, where just such policy changes are in the works. The soon-to-be-approved Senate Bill 6496 will see the distillery licence fee lowered from $2,000 to $100 and will allow distilleries producing liquor with at least half locally grown produce to offer free samplings and sell up to nine litres of their product per customer on-site, markup free – effectively bringing craft distilleries in line with Washington wineries.

Arlen Harris, director of the Washington Brewers Guild, predicts the distillery scene is going to explode as a result. He told the Seattle Times in 2008 that within the first year of the proposed regulations he expected to see 10 to 12 new distilleries in Washington.

As far as local distillers are concerned, the potential for such growth exists here too – when and if government lets it happen. “Look at our burgeoning wine industry,” Deiter says. “It’s only because of changes in policy to distribution. The industry takes care of itself.”

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Back at the “church” on Hornby Island, Kimmerly is pouring another round of gins. He and Grayson could talk about their product (and the politics) for hours, but their partner, Naz Abdurahman, has just walked through the door. The South Africa native and retired UBC chemistry professor is Island Spirits’ “god of purity,” according to Kimmerly – a title earned from his intimate, if not spiritual, understanding of distillation.

Short glasses of gin in hand (“You just need a touch of water,” Kimmerly insists), the three men hover by the bar talking up their latest experiments. They’re currently fermenting Hornby Island apples in a barrel by the bar to see whether they can harvest fruit sugars on-island, and they just sent samples of their gin and vodka to the chemistry department at the University of Toronto for “the first full spectrographic analysis” (a test for impurities) in Canada.

With ambitions to sell over 18,000 bottles a year across North America and Europe, the trio believe they can turn Scotch worshippers worldwide into gin and vodka believers too. But before all that, there’s some missionary work to do here at home. A few simple changes in regulations, they insist, and not only will their distillery survive, but dozens – if not hundreds – more could flourish alongside them. They need the LDB to make the first move.

“The problem is habit,” Grayson says, leaning back against the bar and staring at the dozens of boxes filled with gin and vodka waiting to be shipped out. “The habit of total control and not thinking that the industry evolves.”

Adds Kimmerly beside him, “Once an organization gets used to their ways, they begin to feel like, Why change?”