SPOTLIGHT ON BUSINESS MAGAZINE
NOVEMBER 2017
John Pocekovic is a measured man. He says it comes from his years as a banker. Risk management is after all the exercise when you have a client’s business plan in one hand and the bank’s money in the other. For John, it’s always been a numbers game – but not all numbers are created equal. “The first place to start with any business plan is to identify the opportunity,” he explained. “It doesn’t matter what you make or how much of it you make, you have to know if there are customers for your product or service. In
this situation, for example, the starting point is not the distillery or the product, it’s the market place. What is the consumption in the local market where we’re going to operate? We have a licensing restriction that only allows us to operate in BC, therefore our market is restricted to BC. So the question that naturally comes out of that is how much vodka is consumed by all vodka consumers in British Columbia. Then there’s determining the age range of your customers, your potential client group, which is from 19 to 55 or 65, say. Then you have to determine how much vodka the average person from your client group drinks. Once you have that, you’ve started to figure out the potential market and that allows you to look realistically at limitations when you’re putting up a facility.” John is the President of Stealth Distillery in North Vancouver, British Columbia. The facility is on Orwell Street and the potential market for his high quality hand-crafted spirits was well-established before opening day. John wouldn’t have had it any other way. He’s a measured man. SPOTLIGHT ON BUSINESS MAGAZINE • NOVEMBER 2017 2
By David MacDonald J ohn, how did you go about market research in such a young industry? JP: I think we had more of an advantage there than most people entering into this field. You’re right; this is a very young industry. So there isn’t a whole bunch of people running around that have expertise in distilling or brewing or for that matter even making a bottle of wine – although the vineyards are ahead of the curve in BC. The brewers are ahead of the distillers and the distillers are just following in their footsteps, making their way into the market place. The vintners have done really well; the brewers have done really well; there is no reason not to think the spirit manufacturers
are not going to do well. But there isn’t a pool of suppliers or local knowledge when you’re just starting off. So for us, the advantage was that before the attractive licencing was in place, we were actually contracting our product out. In other words, someone would make our product for us and someone would bottle it and get all the component parts and assemble it in Chicago. We’d import it into BC and then sell it to our clients ourselves and those clients would be in the restaurant, bar, or club scene – or retail stores. Having done that for a few years from 2006 to 2012, we started learning a little bit about production; we learned a little bit about distribution; we learned a little bit about client preferences and establishing a reputation and credi- bility. Unfortunately we didn’t make a lot of money because
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NOVEMBER 2017 • SPOTLIGHT ON BUSINESS MAGAZINE
JP: With all craft distilleries in Canada, there’s a limit to pro- duction – which gives you a favourable pricing outside of a controlled regulatory environment. In other words, if I were to sell through a government distribution I would get very little money. In fact, I’d be losing money on every case that I make. If you want the real numbers, it’s 85 percent of the retail price. The distribution agency or government-owned liquor stores make 85 percent or 85 cents out of every dollar spent. The producer gets 15 percent or 15 cents out of every dollar. Like I said before, that’s not a lot of money. I’ve been there. “So for us, the advantage was that before the attractive licencing was in place, we were actually contracting our product out.” As craft distillers, if we sell through a privately-owned liquor store, we don’t have that restriction. We can provide a margin to the retailers and then we keep the rest to cover our higher costs: excise and sales taxes, investments and capital, rent, and labour. It’s much more expensive to produce small batch products than if you were to contract it out – in a very large commercial contract – to a bottling facility. It boils down to know how much vodka is there being sold, how much being consumed. Then, we match it up with how much can we make. For us, for example, for our business, the relationship between the two is this: there is roughly two-hundred million dollars in vodka sold in BC every year. Our licence capacity is around a million dollars. In other words, optimally operating and selling everything we make, at the very most what we’re after is half of one percent of the total market share. That’s not a big number. If, for example, you go through this exercise and you find out that you have to capture 20 to 30 percent of the market share to actually make money, then I would question whether that was a rational move. John, I think it’s time for the big introduction. Can you please tell the readers about your craft product? JP: We don’t make just one product, we make two: one from corn, one from wheat. Our corn product has a slight sweet- ness to it, so it’s a signature craft product. The reason we’re making that is because we identified a need in the market place for something different than the taste of the recog- nizable brands already on the shelf. It was a differentiation issue that we felt was important to our success. The corn vodka gives us a signature product. The second product, the wheat vodka, is a more neutral product. It appeals to a broader range of palates. It gives us balance and it’s exactly the same process and exactly the same quality.
we were in the 15 percent world.
It’s really hard to make any money on 15 percent of your retail sales, so we did well on the production side, the retail side, and we learned how to develop relationships in the industry, but the business model didn’t give us enough of a margin. It was not going to go anywhere until regulations changed in British Columbia just a couple years ago and it was possible then to have a licence to make your own product. For us, that change was most welcome. It allowed us to leverage the experience we had in contracting - our contract modelling, if you will – into making our own product and basically servicing and assisting our clients that we had a relationship with already. That’s very different than someone starting out. How have you thrived within such a complex regulatory environment?
The more neutral a product is, the easier it is to mix. This gives it more appeal in the market place and keeps people
coming back for more. We’re a small craft distillery; we’re not looking for hundreds of thousands of people to buy our product. We’re looking for a small, but loyal, portion of the market place. I want to sell everything I produce, so there has to be a uniqueness to the product that sets us apart. There can’t be anything boring about what you distill because the clientele is ready to try something that’s at least a little bit different, something new, something they haven’t been drinking for the last five, 10, 30, or even 50 years. It’s a niche market out there; that’s the nature of the craft distilling market place. “As craft distillers, if we sell through a privately-owned liquor store, we don’t have that restriction.” So much of it is about relationships. We don’t do a lot of advertising because, again, we don’t need tens or hundreds of thousands of customers. It’s mostly relationship-driven. For example, say we sell to a restaurant. The restaurant then sells our product to ten different clients or customers and out of those ten, two of them really like what they’re trying and they go on to buy a couple bottles. Or consider someone who goes to a privately-owned liquor store and they’re drawn to our product because they think it’s a good fit for their craft Caesar mix and they basically expose it to their clientele. They’re likely going to introduce it to at least 100 customers and out of those customers, 20 will buy a bottle. So you see, it’s all about relationships. In other words, I’m not selling to anyone directly but someone else is whether it is a person in a store, a person in a restaurant, a bar, or a pub. They’re really an agent of my brand. To stay at the sales level that we want to be in, we need those many sales agents who are embracing the brand. It’s not just a matter of developing those relationships, you have to grow them – you have to appreciate them.
with Jerry a third-generation dairy farmer in nearby Delta that uses our spent mash to make milk, or to produce bio fuel that can be used on site by his farm or our distillery as well as create a secondary bi-product, an odorless fertilizer. When those new sales agents and those new customers embrace your brand, I bet they’re wondering the same thing that I am: Where did the name come from? JP: Not my idea. I was actually concerned it would have negative militaristic overtures while others in and outside of our family thought it was “cool” – whatever that is. Looking at a dictionary definition, among other things ‘Stealth’ means “Artfully sly” and “under the radar” which is precisely our business model. Not wanting to settle a difference of opinion arbitrarily, I decided on a course of action that we follow without fail to settle any significant branding disputes: we ask our pro- spective customers. The test we used for the name is three clip boards with five top brand name picks. These picks are made by family and associates and they would fight to the death for their pick. These three clip boards were placed in the front of three separate popular liquor stores at 5pm on a Friday. We wanted 50 vodka drinkers to answer the following question: If you were to decide on trying a new vodka brand on name alone from this list what name would you choose? All thee clip boards tracked identical prospective client responses and ‘Stealth’ won by an overwhelming majority. That’s a true story and the process has never failed us. The customer is always right!
What ever brand name is chosen, however, trade mark pro- tection is crucial. If someone else has a legitimate earlier
For example, our distillery is waste free and environmen- tally sustainable. A key relationship in this respect for us is
trade mark registration it could be the end for any business right there.
Stealth Vodka is trade mark protected in Canada, the US and the Benelux countries in the EU, before a single bottle was produced.
In the US, I faced a formidable trade mark challenge from an infamous vexatious challenger, Leo Stoller.
In a nutshell, Leo had a specific trademark for a specific product that he used to frivolously challenge all trade marks with the word “Stealth”, everywhere. “We opted to get formal training in the best possible place in North America and that is Moonshine University in Louisville.” That is how I met Lance Johnson, a well-known and highly regarded trade mark lawyer in Washington, DC. Lance was impressed with my public defence filings with the TTB and reached out to me. That led to an introduction to his group of some 50 trade mark lawyers across the US. Many of us in this circle pooled together to fight Leo. After several years of brutal contests with Leo, the TTB in an astounding landmark move seized all of Leo’s trade mark registrations and awarded them to the plaintiffs, that is Lance’s group, our group. They fined Leo and pressed for jail time in the interest of the public good in the United States. It was a profound win that our group used to voluntarily de-regis- ter all of Leo’;s trade marks so that all other existing regis- trations, including mine, have precedent and none of Leo’s could ever be used maliciously again, which is something I am very proud of having achieved collaboratively with other like-minded leaders in their field. John I’m curious: Who is the “we” in Stealth Distillery? JP: That would be Randy Poulin as well as other family members and friends that often help out. Randy is the Head Master Distiller here. I met Randy at a reception after my son proposed to my now daughter-in- law. Randy was my daughter’s date – so it was Nicole that brought him into our lives. It was purely chance. He was a mechanical engineer, just in university at the time, and we had no idea we’d ever be working together two years later. I was in the field already, the opportunity presented itself, and Randy was ready for a new challenge. The equipment really appealed to the mechanical engineer in him – he graduated from UBC. Randy also previously worked for some well-known craft breweries in BC, so his technical acumen is honed by a production environment. I’ve learned a few things through my research about the equipment you have at the distillery, John. Care to tell the readers about what you’re operating with at Stealth
Distillery? JP: There are only three people who know how to make distilling equipment in the world. Two are in Germany, one is in the US. You can find all sorts of used equipment on eBay from India or China but that equipment doesn’t have a proven track record. To get a really useful piece of equip- ment, you need someone who has been doing this for a very long time to share their expertise with you. Because there are only three manufacturers in that category who are world class, your choice is made a little easier. Our supplier is Vendome and they’re a fourth generation, privately-owned company in Louisville, Kentucky, which is the centre of the world for spirits. They take clients who are referred by an existing client. Then you put your money down and you wait for two years for your equipment to arrive at your front doorstep. The equipment is a minimum of a half of a million dollars – and up to one million dollars – for a craft distillery operation. It doesn’t come pre-assembled and every piece of equipment is unique and every piece of equipment has capacity. You have to balance all these factors out and it starts with what you’re making, how much you’re making, and then you have to design your equip- ment line backwards. Well, no one does it that way, but we
For more about the Stealth Distilleries venture please visit www.stealthvodka.com .
did. That’s because we only make one product: vodka.
If you only make one product, you can optimize every piece of equipment to optimize your process so that it’s as good as it can be done by anyone, anywhere. That’s a tough call to make on the investment side. The banker in me would tell you that’s risky because if it doesn’t work out, you’re done. You need the setup that allows you produce at a profitable level. There’s no such thing as scaling up. The moment you turn on the equipment, you’ve scaled-up – that’s it. That’s not your only connection to Louisville, is it? I understand that you and Randy were both students in The Gateway to the South. We opted to get formal training in the best possible place in North America and that is Moonshine Universi- ty in Louisville. There’s no other place I know of at that level. They have the exact same equipment we have at our distillery, Vendome, and they have a classroom and they invite presenters, some of whom have doctorates in their fields. Some of them have a lifetime of experience and most of them come from generational experience. These experts present in a small intimate group setting or one-on- one for a half hour, about the most miniscule things you could imagine and this goes on for 12 hours a day for seven days. The advantage is that you don’t just get to learn the preferences of one person but what the leading professionals in their field are doing at a world class level – and then you can make your choices from there. If you’re my son and I’m the only one who teaches you to drive, you’re just going to pick up all my bad habits. A formal scenario like Moonshine University gives you all the options, not just a set of bad habits. Where you want to go and how you want to get there is up to you in the end – you build your own road map. For Randy and me, this was the right choice. It’s been instrumental in our success. I went first. Randy went almost a year later. That was also the right choice. The distillery was in one place when I went first and we were in a different place when Randy went. When he went, he was testing some assumptions and ideas he had on his own, independently. That was a very worthwhile experience. What are the holidays looking like for Stealth, John? JP: The busy holiday season is usually a peak for us. We’re just making sure that everything is good to go while Randy is away in Hawaii on his first wedding anniversary. I hope people in BC consider our products for their cel- ebrations. Our products are uniquely distilled three times and they’re clean of the impurities that turn so many people away from spirits. Tiny elements make such a big impact on any spirit. Minute, extraneous factors can really influence your bottom line as a distillery. We don’t sell products that will harm our reputation. We’d sooner start over.
“We’d sooner start over.”
STEALTH DISTILLERIES
#3 - 20 Orwell Street North Vancouver, British Columbia
www.stealthvodka.com
as spotlighted in the NOVEMBER 2017 issue of SPOTLIGHT ON BUSINESS MAGAZINE
www.spotlightonbusinessmagazine.com
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