Premium expressions boost ailing cachaça sector

Volumes of cachaça may be experiencing a long-term malaise, but premium brands are steadily repairing both the category’s value and its integrity.

The trend of premiumisation across cachaça is helping to restore its value

The term “chronic volume decline” strikes fear into the core of many a spirits category. Cachaça, the sugar cane-based spirit of Brazil, is no exception, having seen a 10% drop from 88 million cases in 2009, to 79m in 2013 (IWSR). For a category goliath that has depended on shifting hulking masses of affordable spirit, the picture looks bleak.

“In cachaça, the trajectory we are seeing is top line volumes going down,” said Spiros Malandrakis, senior alcoholic drinks analyst at Euromonitor International. “This is happening because Brazilian consumers are moving towards international spirits categories, and the cachaça market itself has become so saturated that it doesn’t have a lot of room to grow in volume.”

Since some 99% of cachaça’s volumes are consumed in its domestic market [see box], Brazil’s move towards “status symbol” spirits has huge implications for the category. International Wine and Spirits Research (IWSR) predicts that whisky sales in the country will grow by 1.2m cases by 2018, while vodka will grow by 2.6m. At the same time, it is thought that local brandy and cachaça will lose almost 4.7m cases between them.

Premium spirit

But look closer and a slow but pervasive trend of premiumisation can be spotted, slowly redefining the category by challenging old prejudices and adding incremental value. Despite a 6.2% value decline in 2013, the cachaça category has grown by US$2.2bn in the last five years, a staggering increase of over 2,500%.

“There’s a lot of opportunity for cachaça in terms of value growth,” adds Malandrakis. “But the only hope for volume growth is that it merely stabilises at this stage.”

This move towards premiumisation in the category has undoubtedly been aided by the involvement of international spirits groups such as Diageo. Seduced by the allure of such a voluminous sector with prime opportunities for premiumisation – as well as access to one of world’s most coveted emerging markets – the group spent US$450m (£278m) acquiring Ypióca in 2012.

“Diageo saw an opportunity to form an alliance in Brazil,” says Daan Dekroon, export director for Ypióca. “The company chose a brand which has high-quality liquid and is versatile. We do not want to be seen as the poor man’s drink; we want to premiumise the category in terms of taste and packaging. We have a vision to do something different with Ypióca.”

This alliance, according to Malandrakis, is helping the category “transition from low quality brands to the more aspirational and sophisticated”. Its premium trajectory has also been growing in line with Brazil’s gentrification, where an emerging middle class presents ripe marketing opportunities, despite its struggling economy and thirst for international spirits.

Steve Luttmann, founder of Leblon, describes cachaça as “two categories with the same name”

International outlook

At a mere 1%, international sales volumes are modest to say the least, but one event has given the category its most significant boost in modern memory: the FIFA World Cup 2014. As Brazil became the focus of TV screens across the world, and football fans got into the Brazilian spirit by sipping on cachaça-based Caipirinha cocktails, brands were able to step into the spotlight on both the domestic and worldwide stage.

“International volumes represent a small percentage of cachaça’s sales,” said Darlieze Barbosa, export manager for the world’s best-selling cachaça brand Cachaça 51. “But we will focus more on global markets over the next three to five years. The potential is really high.” Indeed it is, because in 2016 Rio de Janeiro will play host to the Olympic Games, giving cachaça producers the chance once again to enhance their products’ global reach.

And of course international, affluent drinkers will steer towards the premium end of the market, mirroring the movements of Brazilian consumers. Steve Luttmann, founder of Leblon, notes that similar to American whiskey and Tequila, this has led to the emergence of a craft subsector.

“For a long time cachaça has had a reputation of being a low quality spirit, but this is changing due to the emergence of artisanal brands,” he says.

“I always say cachaça is two categories with the same name – there’s industrial cachaça which is in decline, but alambique cachaça, made in pot stills, is growing in double-digit numbers. So when you look at the empirical measures, it masks over what is happening in the alambique category.”

Craft movement

However, Luttmann adds that volumes of mass produced cachaça will remain high, and the market for craft brands will stay limited since “outside of Brazil a lot a people don’t even know what cachaça or a Caipirinha really is”.

It is this restriction that has informed the opinion of Andrea Baumgartner, international marketing director for Underberg, the European distributor of Pitú cachaça. “I don’t think the craft segment is really growing,” she says. “A few distilleries might be doing tests with different with barrels and production methods, but I don’t see big international potential.”

Malandrakis explains that since cachaça has not yet found a dedicated international fan-base, growth in the craft sector will remain absent for some time.

“The evolution of the craft trend doesn’t come into play until later on in a spirit category’s maturing cycle, and I don’t think cachaça is close to this yet. This is what was supposed to happen to Tequila around 10 years ago, but has only now just started to come to fruition.”

Nevertheless, much like its Mexican cousin, cachaça is fighting off widely held prejudices with a modern, premium image. However, it may be some time before this is recognised at a global level.