Will MGP’s Huge Guess on Penelope Bourbon Pay Off?

“I knew we’d discover it.”

Hunched over, torso parallel with the ground, Penelope Bourbon co-founder Danny Polise is inspecting barrel heads. He factors to a cask of 11-year-old corn whiskey on the backside of the rack. A member of Ross & Squibb Distillery’s sampling workforce drills into the barrel, and Polise stands.

“Generally, the situation isn’t the place it’s alleged to be primarily based on the spreadsheet. However I’ve gotten fairly good at discovering them after they go lacking,” he says, gesturing broadly throughout the expanse towards hundreds of nondescript barrels.

We’re in one in every of Ross & Squibb’s historic warehouses, an unlimited six-level brick facade rising up from the encompassing panorama. This brick behemoth nonetheless has “SEAGRAMS” and “SINCE 1857” emblazoned on the outside, a nod to the once-prosperous firm that distilled right here a number of homeowners in the past.

Polise flies in about each two weeks to pattern stock, tasting for shut to 2 hours earlier than his palate turns into exhausted. It’s been his routine since July 2018, when he and his Penelope co-founder Michael Paladini made their first journey to the historic distillery, then (and infrequently nonetheless as we speak) referred to as MGP of Indiana. Lower than 5 years later, MGP purchased the model in a deal valued at as much as $215.8 million, together with an up-front money cost of $105 million.

The sale was a part of a broader effort by MGP to bolster its in-house manufacturers after spending a long time contract distilling for and supplying aged liquid to dozens of different corporations. It’s not an excessive amount of of a stretch to say a lot of the bourbon growth — and a few modest fortunes alongside the way in which — was constructed on MGP whiskey. However till lately, MGP was largely the quiet provider behind the manufacturers, the supply for a whole bunch of labels whose solely point out of their liquid’s supply was “Distilled in Indiana.”

Gaining a extra direct line to customers was a catalyst for MGP’s $475 million acquisition of Luxco and its subsidiary Lux Row in 2021, and in the end Penelope two years later. It’s additionally on the genesis of the Lawrenceburg distillery’s renaming in 2021, from “MGP of Indiana” to “Ross & Squibb.”

It’s a collection of huge bets essential to MGP’s long run plans. Whereas the corporate’s contract distilling and provide enterprise noticed double-digit contraction from 2023 to 2024, its premium owned manufacturers (together with some Penelope merchandise) stood as an essential revenue heart and uncommon space of development.

With American whiskey gross sales persevering with to gradual, that’s a section we may see the publicly traded conglomerate leaning much more closely into. And it’s an enormous wager, timed to permit MGP to forge its personal future with the whiskey it lengthy offered to others. Whether or not Penelope is the model that may take it there stays a nine-figure (or larger) query.

The Penelope Story

In 2018, Polise and childhood buddy Michael Paladini based Penelope Bourbon. They named the brand new model after Paladini’s daughter, pondering it’d enchantment to a broad swath of potential drinkers, each female and male. Their preliminary aspirations had been modest by virtually any customary.

“I feel [MGP] was disillusioned by us at first,” Polise says. “Once we first confirmed up, I feel they had been anticipating us to purchase 1,000 barrels. We actually solely had the money for six.”

Slowly however certainly, Polise and Paladini started discovering a match for his or her merchandise. The duo began off sourcing three predominant mash payments from MGP: 99 p.c corn bourbon, 45 p.c wheat bourbon, and 21 p.c rye bourbon.

“We needed to innovate with simply these three recipes,” Polise tells me. “So cask ending and proof had been the levers we may pull.”

“No customized mash payments. No groundbreaking manufacturing course of. Penelope acquired aged inventory immediately from MGP or the majority market. So all MGP needed to do was purchase the model and provide the product.”

Other than a one-time mortgage from Paladini’s brother, the model by no means took on exterior capital. That 2019 injection went towards buying barrels of an experimental wheat whiskey laid down by former MGP grasp distiller Greg Metze.

With its inexpensive blends and cask-finished specialities, Penelope hit in quite a lot of candy spots, together with bars and eating places. Notably, the founders centered on their core lineup and stored costs low throughout a time when many manufacturers had been shifting quick upmarket.

“Their ardour and dedication to have interaction the neighborhood and put[ting] out a top quality product for an approachable worth was inspiring, and one thing I didn’t see new manufacturers do within the growth market of 2019/2020,” says Greg Benda, who runs the favored Instagram account BourbonFinds. Benda’s fandom for Penelope finally grew to roughly 100 bottles in his assortment, together with 15 single barrel picks for his pals and followers.

In just some years, the corporate grew to change into one of many market’s most recognizable new manufacturers, with distribution in round 30 states. Nearly all of the stock got here from MGP shares.

Penelope’s development was so spectacular that MGP itself wished not only a piece, however the entire pie. In Could 2023, MGP subsidiary Luxco acquired Penelope in a probably $215.8 million deal that despatched the bourbon world right into a tizzy. By the point the corporate was offered, Penelope had 22 workers on the payroll.

“This acquisition aligns nicely with our premiumization technique and our give attention to rising high- potential, high-margin manufacturers,” David Colo, then-president and CEO of MGP Substances, stated in a press launch.

“Pre-sale, we weren’t handcuffed by what we wished to discover, we had been handcuffed by capital. Now, if it’s accessible, it’s accessible to Penelope.”

An advising regulation agency launched extra specifics relating to the deal, which encompassed “100% of the fairness in Penelope Bourbon LLC and its associated property in a transaction valued at as much as $215.8 million.” That included an upfront money cost of $105 million, with potential earnout funds of as much as $110.8 million “primarily based on the achievement of sure milestones by Dec. 31, 2025.” In impact, an undisclosed portion of the deal noticed MGP shopping for again its personal barrels.

“Penelope had a easy system: Get whiskey that’s ok and market the hell out of it,” says Kenny Coleman, co-founder of Pursuit Spirits and co-host of the favored Bourbon Pursuit Podcast. Bourbon Pursuit has recorded a number of episodes with Paladini and Polise, together with one shortly after the acquisition.

“No customized mash payments. No groundbreaking manufacturing course of,” Coleman continues. “Penelope acquired aged inventory immediately from MGP or the majority market. So all MGP needed to do was purchase the model and provide the product. Penelope was nicely on their approach of gaining mindshare throughout {the marketplace} whereas MGP has notoriously struggled at creating manufacturers.”

Polise says that in the end, Penelope’s development got here right down to primary enterprise fundamentals as a lot because the whiskey itself.

“We ran a very wholesome enterprise,” he tells me, in between barrel samples. “If we’re caught with this on the finish of the day, we’d like a great enterprise. We simply constructed it so we wouldn’t have to leap ship. When MGP noticed our development and what number of barrels we had been shopping for, they noticed a wholesome EBITDA. … It simply made sense.”

Sure features of the deal weren’t made public. Given the milestone-tied payout, the founders probably had loads of monetary incentive to remain on. However Polise is fast to level out the duo’s deep ties to the model they’d constructed from scratch. “We weren’t emotionally and bodily prepared to depart,” he says.

Now, with unfettered entry to the vary of each Ross & Squibb and Lux Row shares, Polise is working with extra instruments than ever in crafting new merchandise. “Pre-sale, we weren’t handcuffed by what we wished to discover, we had been handcuffed by capital,” he says. “Now, if it’s accessible, it’s accessible to Penelope.”

Generally, new merchandise begin with an thought, or perhaps a vibe. Polise and Paladini comply with the “rule of threes” when ideating new blends and releases. If an thought comes up in discussions three separate occasions, it strikes on to the subsequent stage of improvement.

Polise factors to Havana, a latest introduction to the lineup that consists of bourbon double-finished in Caribbean rum and maple syrup barrels. “Havana was an thought earlier than it was a product,” he says. “How will we seize this vibe of the Caribbean and rum?”

Within the roughly two years since promoting, Polise and Paladini have tremendously expanded Penelope’s lineup, particularly on the higher finish of the premium tier. Separate from always-on choices, Penelope now buckets its premium, restricted releases beneath the “Property Assortment” banner.

“Softening whiskey consumption and elevated industry-wide barrel whiskey inventories had a bigger and quicker-than-expected impression on our aged and new distillate gross sales.”

The gathering permits the model to indicate off its greatest choices from accessible barrel inventory, with greater age statements and extra premium worth tags. And the Single Barrel collection highlights single cask choices, which Polise is continually earmarking throughout his Indiana visits. He estimates the model will launch about 80 single barrels for 2025, which may enhance considerably within the coming years.

A brand new Founders Reserve line focuses on distinctive barrels and liquid streams, like an 11 12 months wheat whiskey, and a 17 12 months gentle whiskey. Whereas extremely restricted choices can actually seize the hardcore fanatic, some {industry} observers consider Penelope’s long-term success stays grounded in entry-level expressions, just like the non-chill-filtered, 80-proof bourbon that originally put it on the map.

“Penelope wasn’t constructed with age statements or loopy stats,” says Eugene Nassif, co-owner of Cat’s Eye Distillery and Obtainium, an impartial bottler that has sourced MGP merchandise. “Certain, they’ve some particular stuff now, however their core doesn’t depend on excessive age statements or excessive proofs. … They gained’t really feel obligated so as to add age statements like so many [legacy brands] at the moment are returning to.”

MGP’s Huge Guess

For Penelope’s guardian firm, the wager on in-house manufacturers may have huge and lasting penalties. Home gross sales of American whiskey dipped almost 2 p.c in 2024. And in response to latest investor stories, MGP appears to have been hit particularly onerous, with double-digit contraction in key areas.

“Softening whiskey consumption and elevated industry-wide barrel whiskey inventories had a bigger and quicker-than-expected impression on our aged and new distillate gross sales,” the corporate stated in a latest quarterly report.

Within the third quarter of 2024, the corporate’s Distilling Options section — which incorporates contract distilling and gross sales of aged product — fell to $71.9 million, an 18 p.c drop in comparison with the 12 months prior. Branded spirits — together with Penelope, Remus, Yellowstone, Insurgent, and Ezra Brooks — fell to $62.6 million, a extra modest 6 p.c drop.

“We stay assured within the trajectory and positioning of our enterprise, enabling us to reaffirm our 2025 outlook and proceed to make progress in direction of our objective of creating MGP as a premier branded spirits firm.”

In November 2024, MGP introduced a discount in distillation for 2025 as a way to “optimize price construction” whereas placing away much less growing old whiskey.

However MGP’s third-quarter report wasn’t all doom and gloom. The corporate’s “premium-plus” tier of gross sales stood as a uncommon shiny spot, with a 1 p.c enhance year-over-year. That features premium tequilas, in addition to extremely aged, high-value American whiskey.

The corporate’s first quarter outcomes for 2025 confirmed a continuation of each developments. Consolidated gross sales decreased 29 p.c, with Branded Spirits gross sales falling by 4 p.c. However the premium- plus portfolio grew 7 p.c from bumps in American whiskey and tequila, “significantly the stronger than anticipated efficiency of the Penelope model.” (An MGP consultant declined to offer particular particulars on Penelope’s whole gross sales quantity for the reason that Could 2023 acquisition.)

“We stay assured within the trajectory and positioning of our enterprise, enabling us to reaffirm our 2025 outlook and proceed to make progress in direction of our objective of creating MGP as a premier branded spirits firm,” stated Brandon Gall, MGP’s interim president, CEO, and CFO, in the identical report.

For nearly 20 years, manufacturers capitalizing on the whiskey growth picked by MGP’s shares, utilizing a fusion of promoting and mixing prowess to promote bottles for high-end costs. Understandably, MGP now needs its likelihood to do the identical.

The corporate’s general gross sales have contracted, a standard development proper now as main producers provoke layoffs and scale back manufacturing. However relating to Penelope, on paper, the outcomes have been up and to the best.

The Market Forward

If Polise’s biweekly journeys are any indication, the Ross & Squibb facility nonetheless has loads of gold value mining from its seemingly limitless rows of sleeping barrels. He sees his present position as akin to a conductor. He can choose the barrels, eradicate faults, dial within the proportions, and mix the whiskey. However in the end, the ingesting expertise — and particular flavors — will range from one individual to the subsequent.

“It’s my job to get it in concord. Individuals will expertise what they expertise,” Polise says Polise. “I simply hope they prefer it.”

Now, post-acquisition and on a continued upward trajectory, not one of the {industry} execs I spoke with doubt Penelope’s capacity to construct (or preserve) market share. As a substitute of the myriad different NDPs and blenders, they see Penelope’s predominant problem as shifting into competitors with the nation’s true distilling titans, particularly Kentucky’s legacy producers. As Bourbon Pursuit’s Coleman places it, that’s much less a collection of iterative steps and extra a leap to “cross the chasm of being a family identify.”

However for Coleman and others who’ve noticed Penelope’s development over time, its success to this point is simply additional proof of one in every of whiskey’s most time-honored truths.

“On the finish of the day, manufacturers win,” he says.

Penelope — and MGP’s backside line — are relying on it.

This story is part of VP Professional, our free platform and publication for drinks {industry} professionals, protecting wine, beer, liquor, and past. Join VP Professional now!