Just because you make your whiskey in Tennessee does not mean you are making Tennessee whiskey.
The exact definition of Tennessee whiskey is the subject of a battle between two of the world's largest suppliers of the caramel-colored nectar of the gods that is definitely whiskey ... but not necessarily Tennessee whiskey. The law was supported by Brown-Forman Corp. (NYSE:BF-A) and its Jack Daniel's brand when it was proposed and passed last year. But now legislators are considering a change.
What is Tennessee whiskey?
You would think that Tennessee whiskey would be whiskey made in Tennessee, but as of last year the law would say you were wrong. According to the 2013 Tennessee state law, Tennessee whiskey must be made from fermented mash of at least 51% corn, aged in new oak barrels, charcoal-mellowed, and stored in Tennessee.
That's how Jack Daniel's does it. But according to an article in The Tennessean, legislators are now debating House Bill 2330 and Senate Bill 2441, which would change one item in the original law. The whiskey-makers, under the tweaked law, would be allowed to store the whiskey in reused barrels.
That sounds like a minor distinction, but it's one that has Jeff Arnett, Jack Daniel's master distiller, up in arms. He told The Tennessean that using fresh oak barrels, charred on the inside, is essential to making high-quality whiskey.
"What we have here is nothing more than an effort to allow manufacturers to deviate from that standard, produce a product that's inferior to bourbon, and label it Tennessee whiskey — while undermining the process we've worked for nearly 150 years to protect," he told the Tennessee Daily.
The attempt to change the law, he believes, is being pushed by London-based Diageo (NYSE:DEO), which owns Tennessee-based George Dickel, a rival in the whiskey market.
What is Jack Daniel's protecting?
Arnett said the company is simply doing what beverage makers around the world do to protect their products. He cites how Scotch markers in Scotland and Champagne producers in France have associations that regulate what beverages can be called by those names. Domestically, Kentucky also has strict regulations as to what can be called Kentucky bourbon.
Aside from the value of protecting the inherent purity of the product, there is a significant marketing value to the term Tennessee whiskey. If Jack Daniel's can keep a law on the books that makes it harder and more expensive for other companies to compete, there is a strong economic incentive for the company to do so.
Jack Daniel's sold 11 million cases of its signature Tennessee whiskey, according to Brown-Forman's annual report. Net sales grew 7%. And perhaps most important to the battle over what can be called Tennessee whiskey, the company did 49% of its sales outside the U.S.
Brown-Forman does not specifically break down sales for its brands, but the company sold a total of 38 million cases in 2013, which makes Jack Daniel's responsible for about a third of its volume. Price for products vary of course, but (roughly speaking) if Jack Daniel's sales equal a third of the company's $3.8 billion in 2013 revenue, that's a $1.3 billion business the company is fighting to protect.
The definition of Tennessee whiskey
Critics of the current law say that it wasn't written based on any historic definition of Tennessee whisky. Instead they contend it was done to protect Jack Daniel's.
"This would be similar to Anheuser-Busch saying, 'You have to use this recipe to call yourselves an American beer,' " state Rep. Ryan Haynes (R-Knoxville) told The Tennessean. "I don't think it's right that we put something in our law that is basically protectionism."
There is no specific historic basis for the current law, according to Phil Prichard, owner and master distiller of Prichard's Distillery in Kelso, Tenn. He told The Tennessean that in the 18th century only white corn was grown in the state and whiskey was aged in pot stills, not barrels.
"If I had the power and influence Jack has in this state, and I told everyone that Tennessee whiskey was made with white corn in pot stills, how would distillers feel about that?" he told the paper.
You don't know Jack Daniel's
The strongest argument that can be made for the restrictive law is that the popularity of Jack Daniel's established Tennessee whiskey as a category. Still it seems anti-business to make the parameters for legally using the term so restrictive.
Tennessee should protect its whiskey and create a standard that companies must adhere to. Starting with the idea that Tennessee whiskey must be distilled and aged in the state is a good idea, but getting into the specifics of whether you must use new barrels for aging strikes me as too specific.
Jack Daniel's is right to fight to protect its brand, but legislators have a broader mandate to protect their constituents. Modifying the law makes sense and while it might not give Jack Daniel's the strict wording the company wants, it still puts up barriers that stop just anyone from putting brown whiskey in a jar and calling it Tennessee whisky.
Daniel Kline has no position in any stocks mentioned. He prefers Scotch. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.