International spirits grow in Latin America

Latin America maintains its desire for international spirits, despite economic turbulences, as Tom Bruce-Gardyne discovers.

Brazil’s economy has slowed down somewhat in recent months

Casting his eye from Mexico to the southern tip of Argentina, Mark Thorne says: “Whether it’s spirits or cell phones, the appetite to explore international brands is huge.” It is a vast area, but only half his allotted territory as Chivas Brothers regional director for the Americas. Thorne quotes a 2012 report which put mobile phone ownership at 95-96% in Mexico and Brazil, compared to 87% in the States.

On that score, international spirits have some way to go. In Brazil the IWSR put their share of total spirits at a mere 5%. “But just imagine the potential!” say Western brand owners, licking their lips. The demographics are pretty sexy too, with half the population of 192 million aged under 30. In Mexico, international spirits already have 15% of the market and in Brazil “it’s certainly heading that way,” says Dan Mettyear, the IWSR analyst who covers the country.

But for now things are not as smooth as they might be, with Brazil’s economic growth down to just 3.3% in the year to June. “After a decade of rising wages, Brazil’s new middle class may have hit a ceiling,” the BBC reported in July, adding, “the country may even struggle to hang on to what they have gained in recent years as inflation (currently around 6%) erodes their increasing wages.”

Mettyear declares: “Everyone thought the economy was going to keep on growing, but at the moment things have definitely slowed down a lot and people are being a lot more cautious. If you go to a supermarket in Brazil and buy cereal and milk, they’ll ask if you want to pay in instalments. Everything has been credit-based, and it seems to have caught up on people very quickly which is a bit of a shock to the system.”

On top of which the Brazilian real devalued 16% against the dollar between May and August damaging the important cross-border trade from Paraguay and Uruguay which, according to Mettyear, “is very susceptible to fluctuations in currency”. He says: “There are also much tougher restrictions at the border, and changes in the tax systems have also effected prices.”

And yet the aspirational pull of, say, Johnnie Walker Red appears irresistible to the freshly minted middle classes of Brazil. Not for nothing is this the biggest market for the world’s biggest brand of Scotch whisky. While overall spirits are flat, the trend from local to imported brands continues. “There’s still a lot of trading up,” says Mettyear, “and people are very reluctant to move back now that they’ve made this lifestyle advance.”

Western spirits are seeping into Latin American culture gradually

The first rung up the ladder from cachaça is usually vodka, much of it produced domestically including the market-leader Smirnoff which has been losing share of late. Last year vodka hit 8.5m cases according to the IWSR, up from 5m in 2008. Above that sits Scotch with a dominant 44.5% share of Brazil’s imported spirits compared to 31% for Central and South America as a whole.

Randy Millian, Diageo’s outgoing president for Latin America and the Caribbean, blamed the Brazilian slowdown on “destocking in the wholesale channel driven by a stricter enforcement of tax collections”. In the firm’s report on the year to 30 June, special mention was given to White Horse among standard brands and Old Parr “which grew by over 20%” at the premium end. While Johnnie Walker Gold Label was credited with a “particularly strong performance”.

Thorne says: “Because Johnnie Walker’s so big we focus on Ballantine’s regionally, particularly in the north east.” Its stablemate, Passport, which Brazilians can buy for around 35BRL (US$15) is a big volume driver, but gets nothing like the marketing spend of Chivas Regal. Thorne is unrepentant: “To focus on super-premium whiskies is a good thing because we do know consumers will at some point aspire to be there. ‘There’s a feeling that I’m going to start drinking Scotch and one day I’ll be drinking Chivas or Johnnie Walker Black’.”

Mettyear believes future expansion will come from the interior: “Logistics are a nightmare in Brazil, and most imported spirits have focused on the big cities, but now there’s a lot of wealth in the interior states with people moving out to these small, fast-developing towns.” While Scotch delves deeper inland, other Western spirits are seeping in. Among the most successful is Tequila, especially gold Tequila which Jose Cuervo is pushing hard and not just in Rio and São Paolo. Brazilians are well versed in drinking shots and drink as much cachaça that way as they do in Caipirinhas.

Rum has been losing out to Scotch, including the Pernod-owned market leader – Montilla which dominates the category in northeastern Brazil. The exception being Bacardi Apple, which, from 70,000 cases in 2009 “completely took the market by storm”, according to Mettyear, who suspects it may well be over a million cases by now. How many Brazilians realise it’s a rum, rather than a flavoured vodka is debatable. Meanwhile Cognac remains stymied by the term: “conhaque” to describe all brandy, although Brazilians have been banned from using the word “Cognac” in reference to their domestic brands.

The influence of North America is driving growth of premium international brands

As for gin, there is no sign yet, though it is slowly trickling its way south. Sales of premium brands, led by Tanqueray, Beefeater and Hendricks are up 50% in Colombia and Mexico where Thorne says the “category is now around 35,000 cases”. He puts it down to “the influence of North America where gin is massive and where there’s a resurgence in premium and super-premium gins”.

Yet it is a drop in the ocean within total imported spirits in Mexico which have maintained a steady 16% annual growth in the last three years. Scotch accounts for a third of this, with Diageo well out in front. Net sales of its Scotch brands reportedly grew 18% in the year to June with Johnnie Walker enjoying growing share for Red and Black Label.

To the south, “V” stands for volatile and Venezuela, where import prices have risen 80% thanks to the devaluation of the bolivar by a third against the US dollar in February, and an inflation rate that hit 45% in August.

Yet despite the instability and the country’s embarrassing shortage of loo paper, Mark Thorne calls it “a fantastic market where they consume Scotch at a phenomenal rate”. While Chivas Regal has slipped slightly against its arch-rival Johnnie Walker Black, most of the company’s volume comes from Something Special which claims to be the third top-selling blend in South America. The Venezuelans’ favourite Scotch is still Buchanan’s whose sales grew 55% according to Diageo.

Competing with Diageo in Latin America and the Caribbean is “a big challenge”, says Juan Martine Gentile in something of an understatement. Gentile looks after Edrington’s brands in the region and his focus is firmly on value over volume. He says: “For Famous Grouse to compete against Johnnie Walker Red is very difficult, so we try and go premium.”

The company’s flagship malt – The Macallan, is enjoying double-digit growth in all its South American markets, but from a small base with single malts accounting for just 1-2% of total Scotch, according to Gentile, though it is definitely growing as whisky drinkers trade up.

The same shift is happening among premium rums like Havana Club whose authentic Cuban roots has won the backing of the bartending community across the continent, according to the brand’s export director, Sergio Valdés. It has over 50% of its home market in Cuba and has climbed to number two in Chile, which Valdés describes as “really dynamic, though now reaching maturity”.