This website uses cookies so that we can provide you with the best user experience possible. Cookie information is stored in your browser and performs functions such as recognising you when you return to our website and helping our team to understand which sections of the website you find most interesting and useful.
Analysis: Diageo’s move into Cuban rum
With Diageo now tied into a joint venture with government-controlled Corporación Cuba Ron to distribute Santiago de Cuba rum, what will this mean for rival Pernod Ricard and the rest of the rum category?
“Cuba is one of those rum regions that consumers have an emotional connection to”
It’s been 26 years since state‐run Corporación Cuba Ron entered into a joint venture with French firm Pernod Ricard to distribute the Havana Club rum brand internationally.
The group controls the brand in all international markets apart from the US, where a trade embargo against Cuba remains. The importation of Cuban rum and other goods into the US has been banned since the implementation of the trade ban by president John F Kennedy in 1962.
In August, in a landmark move for the category, Diageo signed a deal with Corporación Cuba Ron to distribute Santiago de Cuba rum internationally – excluding the US. The deal was certainly a surprise for the industry, with Pernod Ricard keeping quiet when asked to comment on the matter.
The joint venture, called Ron Santiago, is the result of an agreement between Diageo Europe and the Cuban distiller. Ron Santiago will have exclusive global distribution rights to Santiago de Cuba, which will join Diageo’s super‐premium Reserve portfolio with a focus on “driving growth in key cities and resorts across Europe”.
It will also be marketed and sold in Latin America, with a focus on Mexico, and in travel retail outside of the US. “This joint venture provides a great opportunity to expand our rum portfolio into the premium‐and‐above segment of the category,” a Diageo spokesperson tells The Spirits Business. The drinks giant says the brand “has not yet had the global exposure, particularly in Europe and Mexico, where we feel it can grow”.
Diageo claims the premium‐and‐above segment “is growing ahead of the rum category overall, with premiumisation trends driving growth in Europe, specifically”.
Cuban brands account for 9% of value retail sales in the premium‐and‐above rum segment, according to IWSR 2018 figures cited by the Johnnie Walker maker.
“In many of Europe’s largest rum markets, including the UK, France and Italy, rum is expected to continue to progress and premiumise, especially in terms of dark rum, favouring premium‐and‐above brands,” says Euromonitor’s senior analyst Amir Ali. “The rise in popularity of premium rum is reflective of the growing consumer interest for craft and premium spirits, as consumers continue to drink less but better.”
Maria Castroviejo, senior beverages analyst at Rabobank, says rum is yet to benefit from the premiumisation trend. “A good deal of industry analysts have been predicting that rum will be the next big avenue for growth in premium spirits for a few years now, but their forecasts haven’t come to fruition,” she says.
“Diageo’s partnership with Cuba Ron will provide additional visibility and support to premium, well‐crafted products. Ron Santiago should benefit from Diageo’s wide‐reaching marketing, portfolio power and brand‐building expertise.”
Diageo has signed a joint venture with Corporación Cuba Ron to distribute Santiago de Cuba rum
Good reputation
Alastair Smith, director of market researcher IWSR, cites several reasons for Diageo’s move into Cuba. He says Diageo “didn’t have a brand in this sector of the market” and that Cuba “has a credible and good reputation from consumers as a producer of rum”.
He also notes the “pressure on standard/mainstream rum brands in the face of gin, a move away from sweet sugar‐laden mixers and the rise of Cuba as a holiday destination, especially for Europeans”.
The agreement comes as Diageo’s core Captain Morgan rum brand endures declining sales. In the group’s year ending 30 June 2019, the only category to fall was rum, which dropped 2% as a result of Captain Morgan’s struggle in the US. Organic net sales of the rum brand also declined by 2%. During a briefing for the results, Diageo CEO Ivan Menezes said the rum category in the US “has been very sluggish for a long time”.
The new deal certainly seems to have huge potential for Diageo. Santiago de Cuba is the second‐largest Cuban rum after Havana Club, and is “already a popular brand with bartenders”, adds Castroviejo.
Global rum ambassador Ian Burrell is positive about Diageo’s joint venture, and believes the deal would provide more choice for bars and restaurants to offer Cuban rums.
“There is far more awareness than ever about the various styles of rum and how they are being drunk,” he says. “Cuba is one of those rum regions that consumers have an emotional connection to, especially through its classic cocktails, which is the biggest driver for rum volume. Because of politics, these joint ventures seem to be the only way forward for consistent and constant supply of Cuban rums.”
There has been some speculation about what, if any, impact the deal could have on Pernod Ricard’s dominant position in the Cuban rum market. Havana Club is one of the biggest rum brands in the world, growing from 300,000 nine‐litre cases in 1993 to 4.6 million in the 2018 calendar year. The brand also witnessed double‐digit growth in Cuba during Pernod Ricard’s fiscal year 2019.
Regardless of its success with Havana Club, the French owner has been involved in a long‐running trademark dispute with Bermuda‐based Bacardi over the brand name. Bacardi sells a brand of Havana Club rum, distilled in Puerto Rico, in the US.
Pernod Ricard owns the international rights to the Cuba‐made Havana Club brand outside of the US since the country’s ban on Cuban imports remains. However, in 2016 the firm was granted permission to renew its trademark registration in the US, prompting Bacardi to launch a lawsuit.
On the Cuban rum market, IWSR’s Smith calls it “not very profitable”. He says: “Pernod Ricard has asked the Cuban government for price rises in the domestic market for its rum brands (a 15% price rise), given the success of the Havana Club trademark globally, but this has not been approved. So Havana Club sells in Cuba at very low prices compared with its international price benchmark, and Pernod Ricard is not really happy about this because it’s a growing domestic market (there is little competition other than unbranded bulk rum in Cuba), which means less supply for export markets.”
Castroviejo says the impact of Diageo’s joint venture “won’t be felt immediately”, adding that it has “the foundations in place to work well”. She believes that it “signifies a longer‐term bet by Diageo on the potential for premium rum to become the next success story at the higher end of the market” and shows its belief in “single‐origin premium products”.
She adds: “Its long‐term success will ultimately come down to a mixture of marketing, product quality and shifting consumer trends.”
Smith believes it won’t be long before other producers strike up similar agreements. He says: “Almost certainly there will be more similar deals from
other multinationals.”