Scotch and vodka show Latin America promise

Global distillers are using whisky and vodka brands to beat a path for premium international spirits through Latin America’s jungle of local favourites, discovers Chris Mercer.

Bright lights, big city: in urban centres such as São Paulo, two-thirds of spirits are sold in the on-trade Photo: Embratur

Headline spirits sales for Latin America are underwhelming. Consumption is smaller today than in 2006 and will only expand by 6% on 2011 levels up to 2016, to 2.24bn litres, says Euromonitor International, whose regional figures include Mexico.

However, falling consumption of native spirits, such as cachaça in Brazil and Tequila in Mexico, conceals premium opportunities. “Scotch and vodka are showing a lot of promise,” says Diageo’s president for Latin America and the Caribbean, Randy Millian.

Diageo saw net sales rise by 16% in Latin America & Caribbean in the first quarter of its new fiscal year, and that’s no fluke. The drinks giant has posted double-digit growth in the region for five of the last six quarters, according to Sanford Bernstein analysts.

Millian says Latin America was the largest regional contributor to Diageo’s global sales growth on Scotch whisky in its last fiscal year. “In Paraguay, Uruguay and Brazil, over 60% of [our] net sales growth was driven by Scotch, primarily Johnnie Walker and Old Parr,” says Millian. He names Venezuela, Colombia and Mexico as other strong-performing countries in this increasingly dynamic region.

In calendar 2011, Scotch exports to Central and South America increased by 38% in value to £489m, according to the Scotch Whisky Association (SWA). Brazil was the ninth largest single export market for Scotch globally, worth £99m.

“The most exciting market at present is Brazil,” explains Mark Thorne, regional director for Pernod Ricard-owned Chivas Brothers. “Brazilian consumers are increasingly looking to trade up with an interest for international brands.”

Expect to see more marketing around Chivas 18 and 25 Year Old blends in Brazil, and across a Latin America region that is traditionally known for 12-year-old whiskies.

Native Scotch

However, premium international brands must still mix with Scotch blends that have “gone native” to the extent that many outsiders either don’t know them or have forgotten they existed. Names like Passport, Old Parr and Haig are not just gathering dust on bar shelves, while Pernod’s Something Special has enjoyed a decade of success via its collaborative ‘Enbotellarte’ competition with regional artists.

To emphasise the point, Diageo reported Buchanan’s net sales up 25% in its last full year, with Johnnie Walker up 12%. In Brazil, Pernod reported Chivas sales up 10% and Passport up at more than double this rate.

Andre Barquero’s Danza Vitrificada artwork for Something Special’s annual Enbotellarte competition

Vodka’s versatility
Beyond Scotch, vodka is also flying the flag for international spirits. Again in Diageo’s last fiscal year, Millian said vodka “accounted for over 20% of incremental net sales in Paraguay, Uruguay and Brazil”.

Brazilians’ taste for white spirits, coupled with rising incomes and 50% of the population under 29 years of age, offers fertile ground for vodka’s perennial appeal to global youth culture. Last year, vodka drove white spirits sales 10% higher in volume and 19% higher in value terms in Brazil in 2011, says Euromonitor.

Caipiroska cocktails, a play on caipirinhas using vodka instead of cachaça, have smoothed vodka distillers’ passage into a Brazilian market where two-thirds of spirits are sold in the on-trade. Bar culture is key: it’s no coincidence that Diageo recently held its Reserve World Class Bartender of the Year event in Rio.

Diageo’s Smirnoff and Pernod’s Orloff dominate Brazil’s vodka market, but Cîroc, Absolut and Campari’s Skyy are winning fans at the higher end of the category. Domestic players are also trying to compete. Brazil’s third largest brewer, Petropolis, launched Blue Spirit Unique premium vodka in 2011.

Premiumisation in Brazil is largely happening at the expense of cachaça, which constitutes 82% of the country’s spirits market volume. Some see opportunities for premium cachaça, as shown by Gruppo Campari’s takeover of Sagatiba, and Diageo’s buyout of Ypióca earlier this year.

However, Sanford Bernstein analyst Trevor Stirling reports: “For most Brazilians, beer is the trade-up from mainstream cachaça, not premium cachaça; and middle-class Brazilians would rather drink caipiroska.”

Zooming out from Brazil, opportunities for international spirits in Latin America have been historically restricted to industry heavyweights. What hope is there for smaller players?

Space for single malts?

“Latin America is a backwater for single malt whisky reps, outside the big boys,” says Ronnie Cox, brands director at Berry Bros & Rudd spirits division, which includes Glenrothes single malt Scotch. Still, he sees opportunities. “It is only a matter of time before single malts start to take off,” Cox says. Rising household incomes and a love for “conspicuous consumption” will drive single malts, he believes. “It would be very simple to trade these guys up,” he says.

A similar story is already developing in South East Asia. That said, market access remains a thorny issue in Latin America. For instance, Brazil imposes a 20% import tariff on spirits imports, according to the SWA. “The chances of this being removed are very slim,” said SWA spokesperson Rosemary Gallagher.

Talks between the European spirits industry and the South America trading bloc Mercosur, which includes Brazil, Argentina and Chile among others, are currently suspended. “Mexico is another priority market, but one of the challenges there is a high rate of taxation,” says Gallagher.

More positively, the EU is negotiating a free trade agreement (FTA) with Colombia that would reduce tax on imported spirits. “Colombia is a focus for us,” says Gallagher.

She adds that the SWA has applied for greater legal protection in Brazil via geographic indication (GI) status. Recent GI approval for Napa Valley wines in Brazil signals a reason to be optimistic.

Skye’s the limit: New bars such as Skye at São Paulo’s Unique Hotel are driving international spirits sales

Distribution challenge
Alongside tariffs, distribution is a challenge. “Small distributors don’t exist in any sort of force,” says Cox, referring to a period of intense consolidation during the 1980s and 1990s.

Some medium-sized drinks companies have gone native. Campari was one of the earliest to do so in Brazil, a country that now accounts for 8% of the firm’s annual sales. In 2010, Glenfiddich producer William Grant & Sons established a standalone distribution operation in Colombia.

More generally, there is a sense of Latin America blinking ever larger on all distillers’ radar screens. One analyst describes Campari’s position as a “fairly big bet on Brazil and to a lesser extent on Argentina”. Beam Inc counts Brazil as one of its top four growth markets worldwide, having established a solid base there with Teacher’s whisky.

“Latin America is an important part of our long-term strategy, which is one reason we established our own distribution company in Brazil a couple of years ago,” adds Brown-Forman SVP Salvador Alvarez, who is also MD of the group’s global Tequila business.

Others are pursuing acquisitions. Diageo’s US$454m deal for Ypióca is arguably more about market access for Scotch and vodka than an irresistible interest in premium cachaça. Ypióca has access to 256,000 outlets in total, in particular in the north-east.

Further consolidation in the region looks likely, as both spirits producers and retailers demand ever wider distribution networks – and sales of local economy brands continue to decline.

Pernod and Campari were both reported to have looked at Ypióca, and all eyes will be on Pernod’s reaction to Diageo’s deal. The French spirits giant likes to build organically in emerging markets and is not seeking big deals, but it has declared itself open to bolt-on buys.

Mad for Mexico

On the domestic front, it seems inconceivable that Brazil’s plethora of cachaça producers can all survive the market drift towards premium international spirits, even if export demand grows.

Beyond Brazil, Mexico is one market to watch, despite its high taxes. Between 2006 and 2011, whisky volumes more than tripled in the country off a low base, and should jump by a further 50% by 2016, hitting 37.4m litres, Euromonitor says.

Pernod Ricard and Beam have both spent the past year fine-tuning distribution arrangements in Mexico, while Diageo is motoring there with 16% net sales growth in its last fiscal year.

Campari has also arrived on the scene via its deal to acquire control of the owner of Appleton Estate and Wray & Nephew, Lascelles deMercado.

“In Mexico, Campari’s share will go from negligible to over 1% of the market,” says Euromonitor’s senior alcoholic drinks analyst, Jeremy Cunnington. “This should provide a platform for driving growth of its existing portfolio, in particular Skyy and Wild Turkey.”

Competition for space in Latin America is only going to increase. Most analysts give Diageo a lead, but expect rivals to fight back and look out for smaller players coming down the track cleared by the big-hitters.