Latin America lifted by ‘top-end cachaça renaissance’

With youth on its side and a surging middle class, the Latin America region has so much to offer – all that’s needed is a little more calm and a little less politics, writes Tom Bruce-Gardyne.

Caracas, the capital city of Venezuela

*This article was first published in the October 2016 edition of The Spirits Business

“Sometimes there might not be milk in grocery stores and people will complain. But if we ran out of whisky there could be a riot,” a Caracas shopkeeper told the FT in 2013. Three years on there have been riots and protests galore in the Venezuelan capital, but rather than whisky, they are directed against the deeply unpopular president Nicolás Maduro.

“Venezuela is a bomb that could, at any moment, explode,” declared opposition leader Henrique Capriles at a recent rally, and he wasn’t joking. The country is suffering its worst ever economic crisis and seems on the verge of collapse. Inflation is predicted to hit 720% this year, and for many Venezuelans life is an endless queue for essential items like rice and cooking oil. A lack of Scotch is the least of their worries.

“All Scotch whisky exports to Venezuela have virtually ground to a halt because of economic mismanagement, hyperinflation, the currency totally losing value and exchange controls,” says Roddy Mackenzie, who covers Latin America for Ian Macleod Distillers. “The most common word in my discussions with customers is triste – it’s just very sad,” he says. “It shouldn’t be that way. It’s an incredibly oil-rich country that is massively mismanaged.”

Maduro’s predecessor, the late Hugo Chavez, saw Scotch as a symbol of western excess, and once railed against state executives in their “luxury chalets where they perform orgies while drinking whisky”.

According to Juan Gentile, Edrington’s VP regional director for Latin America and travel retail, seven years ago Venezuela was the fourth-largest global importer of Scotch. Since then shipments, as tracked by the Scotch Whisky Association (SWA), have crumbled by over 90%. Chavez would be thrilled, but Mackenzie and others haven’t given up.
“I think Scotch is pretty much in their blood as it’s been a Scotch market for decades,” he says. “If there’s a change in government, an improvement in the economy and a subsequent easing of exchange controls, then I think Scotch has a long-term future, but it’s going to take some years.”

Positive outlook

Yet within Latin America the key macro-economic trends appear positive. Referring to the region’s key cities, Gentile says: “These are modern, developed, financial hubs with a sophisticated on-trade and shopping malls. You could be in any big capital in the world.” The eight largest cities account for around 100 million people and over half the region’s total GDP. “If you total up all of the middle class in Latin America, it is bigger than the middle class of India and China combined,” he claims, adding that in the past 10 years, “the market for luxury goods grew at an average of 15% a year”. That clearly matters for his main brand, The Macallan.

Brazil has also been moving up-market, though not all at the expense of local spirits, maintains Vitoria Cavalcanti, director of external affairs for cachaça brand Pitú. “The middle class consumer has rediscovered cachaça and is increasingly surprised by its excellent quality and diversification,” she says, adding that ultra-premium cachaças in luxury bottles are driving the category up.

With expressions like Pitú Gold and Pitú Vitoriosa, which is aged for five years in French barrels, the brand grew 20% last year. And while cachaça had a slightly dodgy image with the word cachaçeiro used for a drunkard, Cavalcanti senses a change. Apparently, nowadays a Brazilian drunk is a bebum or pinguço.

Pitù cachaça has gained from diversification

Guy Shingles, who tracks Brazil for the IWSR, notes “a slight cachaça renaissance at the top end” despite the category’s “long-term decline over the last decade”. Of a recent trip, he says: “I was looking at some of the higher-end supermarkets where you had displays of artisan cachaças from all sorts of regions, and not just the traditional zone of Minas Gerais.”

Doubtless among them was Capucana, whose marketing director, Juan Carlos Maroto, also handles Gin Mare at Vantguard. He sees a new middle class generation of consumers who are “happy to keep drinking their local spirit if it evolves into a more interesting shape of flavours and packaging”. Like everyone he mentions premiumisation, though he favours a boutique approach and points to the success of Hendrick’s Gin in the region over big brand rivals from Diageo, Pernod and Bacardi.

Down, the PUB

In the overall PUB – that’s Diageo-speak for Paraguay, Uruguay and Brazil – the firm’s net sales were down 9% in the year to June. This was blamed on a slowing economy, currency volatility, a slowdown in duty free and December’s tax hike – spirits now have to pay the IPI levy of 25-30% on value. In its fiscal 16 preliminary results, Diageo claimed to have “gained share in Scotch, delivered through Johnnie Walker and Black & White marketing campaigns”.

Perhaps more significant has been the firm’s willingness to absorb the impact of tax and currency on price. As Gentile says: “Key Scotch players are investing heavily to keep prices down as they battle for market share, and some are also experimenting with more affordable packaging.” It is not a battle he wants to join.

The Jack Daniel’s story appeals to millennials

While he expects no short-term growth in Brazil, Gentile says The Macallan has grown in duty free. Presumably he’s talking about airport sales, rather than the frontier trade with Paraguay and Uruguay that always skews the data for those countries. Their citizens are not the biggest whisky drinkers on the planet; they often flog bottles over the border, legally or otherwise. However this army of foot-soldiers known as hormigas, or ‘ants’, has been culled by Brazil’s economic woes, with GDP forecast to shrink by 3.3% this year. Brazilians have been trading down to locally bottled whiskies like Passport, Teacher’s and Bell’s. Bulk shipments jumped 338% while bottled blend exports slumped 31% in 2015, says the SWA, but of course there are other whiskies available.

Brown-Forman loves millennials, of whom there are 80m in Brazil, and according to marketing manager Daniele Cunha, they “are interested in trying whiskies that are not Scotch”. He adds: “American whiskey has been gaining relevance among them, since they are driven by values like independence and authenticity. We’ve been telling the authentic Jack Daniel’s story, the way we’ve been making our whiskey over the past 150 years, and there is no doubt that these stories are resonating with Brazilian consumers.”

An Italian twist

Head south and there’s a distinct Italian twist to the spirits market. Beloved by hip bartenders from London to LA, Fernet Branca is a national obsession in Argentina where it is mixed with Coke. Produced here since 1942, Fernet Branca saw production soar from around a million gallons in the early 1990s to 14.8m in 2014 (IWSR) as it captured a new generation. From here it is being exported to Bolivia, Uruguay, Chile and Paraguay.

Fernet Branca takes its marketing to the streets in Latin America

In Latin America, “Argentina has always been very strong in tracing new trends and becoming a reference point”, says marketing chief Hernán Guillermo Mutti. His latest challenge is building Fratelli Branca’s vermouth brand, Carpano.
Campari is also big in Argentina, with plans to grow the brand and its stablemate, Cinzano, by feeding off the Latin connection. As Juan Carlos Maroto puts it: “Whatever’s trendy in Spain or Italy, afterwards it normally becomes a hit in Latin America.”

Yet throughout this vast region, there is no escaping the politics. Argentina’s new pro-business president, Mauricio Macri, sounds promising after the Kirchner years, although the economy has been hobbled by Brazil, its main trading partner. Peru also has a new centre-right president in Pedro Pablo Kuczynski, while the Colombians have finally ended decades of conflict with the FARC rebels. A period of relative stability could do wonders for the major spirits categories, yet proof of how quickly it can be shattered is there in Nicolás Maduro’s Venezuela.