You don’t have to whisper. It’s safe now – cachaça is a legal term in the US. When it finally came in April, the US government decree was the biggest news to hit cachaça in years. It meant after hard times and hard lobbying, there was finally recognition from the world’s largest spirits market. It meant cachaça could be cachaça and not just another rum.

Indeed, this feature might well have pivoted on this development, the US market and all that its exploration entails. But right now the US market is embryonic and will have to take a back seat – driving the cachaça agenda is what’s happening at home, in Brazil, where, lest we forget, a lopsided 99% of the 100 million 9-litre case volume is consumed (Euromonitor International).

Diageo’s buyout of the giant cachaça brand Ypióca midway through last year cast a perfect beam of light onto the Brazilian market. We all knew Brazil was fast becoming one of the world’s critically important markets, but when Diageo pays £300m for a local spirits brand – even one selling 7 million cases per year – the drinks industry pauses to pay attention. 

Granted, Diageo and arch nemesis Pernod Ricard already owned small cachaça interests, but this is the first time any drinks group has gone after one of the big four cachaça brands, the others being Pirassununga 51 (18.6m cases in 2011 – Millionaires’ Club 2012), Pitú (10.49m cases, 2011) and Velho Barreiro (8.4m cases, 2011). Gruppo Campari’s Sagatiba is worth a mention at this juncture for its attempts to super-premiumise the domestic category and engage with a new generation but, at about 200,000 case sales per year, it is still an adolescent figure domestically. Bacardi’s JV Leblon, another super-premium, has an outward bent, particularly the US market – but more on this later.

As market analysts tell us, the Ypióca deal is not really about cachaça. But let’s not let cynicism get the better of us – the deal is not just about distribution either. Ypióca may be a one-market pony, but Diageo is not about to let it out to stud. With its new stable of international brands in support, previously closed doors will spring open for Ypioca. The arrival of the 2014 World Cup and 2016 Olympics make this an even more optimistic time for the brand. 

And even if sales are only maintained at their current size, Ypióca volumes are still huge – double that of the global leading tequila brand Jose Cuervo that Diageo tried so hard to buy. Ypióca represents a seat at the top table of the world’s fourth largest spirits category, behind baijiu, vodka and whisky. 

Fast-growing market

But over to the horse’s mouth, Paul Walsh, CEO of Diageo: “Brazil is an attractive, fast-growing market for Diageo with favourable demographics and increasing disposable incomes. The acquisition of Ypióca gives us the leading premium brand in the largest local spirits category. It will also provide Diageo with an enhanced platform from which to accelerate the long-term growth of our premium international spirits brands in Brazil. The acquisition meets our return criteria and this investment represents the continuation of our strategy to increase Diageo’s presence in the fastest growing economies of the world.”

With Ypicoa in Brazil, leading baijiu brand Shui Jing Fang in China and now a controlling share in United Spirits in India, Diageo is a big Russian brand away from completing the BRIC quartet. It also has Europe’s great hope in the bag with the 2011 purchase of Turkish raki giant Mey Içki. As Ashley Everett Rountree, MD of market investment banking firm CW Downer & Co, neatly puts it: “Emerging markets have been a significant part of the spirits industry’s recovering growth story.”

But back to Brazil. Joeny Cremasco, international trade manager of the country’s number four brand, Velho Barreiro, talks us through the cachaça territories of Brazil: “The north east of Brazil belongs to Ypióca and Pitú. But the south east, which includes Sao Paolo and Rio De Janeiro, is Pirassununga 51 and Velho Barreiro territory.” Despite his brand being Ypióca’s closest competitor in volume terms, if not geographically, Cremasco welcomes Diageo to the category. “Diageo will increase the distillation and sales of Ypióca and for the category this is good. When we have a big company like Diageo involved, the category can only grow.”

Looking back to his homeland with great interest is Cosme Gomes, a willing cachaça commentator and founder of the US-stationed super-premium brand Bossa. “I suspect this purchase was more about leveraging Diageo’s existing world brands via Ypióca’s existing sales channels than anything else, because I can’t imagine how much more market share Diageo will gain with a family of cachaça brands that has successfully existed in Brazil for more than 160 years. In other words: What does Diageo know about Brazil that the Teles family didn’t already know after more than a century doing business there?” 

Expansion

Through its existing network, Diageo has much of the south eastern corner covered. So expansion into the north east is akin to the journey that is underway from the first to the second and third tier cities of China. But Diageo’s strategy could also be one of necessity, not adventure. Is expansion into second cities an acknowledgement that Brazil’s first cities are becoming increasingly competitive and saturated? Gomes picks up the point: “Much like the large traditional Brazilian cachaça makers, brands such as Smirnoff and Johnnie Walker have been around Brazil for decades. 

“The newly affluent are finally learning about other premium brands such as Absolut, Skyy, Laphroaig, Balvenie, etc. So, if that is the case, Diageo had no choice but to expand its coverage to the now relatively more affluent classes B and C in Brazil. Its older ‘winners’ are possibly a step behind the curve in terms of generational appeal to the ‘old money’ class A and young and trendy adults.”

And of course Diageo’s portfolio is not restricted to spirits. “Beer in Brazil is another huge market which is looking for exotic new products,” Gomes says. “In this scenario, Guinness fits the bill perfectly, especially with the World Cup coming up and millions of men flocking to Brazil for the event.”  

With Diageo’s seemingly obsessive drive to be the leader where ever it goes, whatever it does, you might think Pirassununga 51’s owner, Cia Muller, has something to be worried about. “Cachaça 51 has 30% of market share (in litres) in Brazil,” says Ricardo Gonçalves CEO of the sugarcane spirit goliath. “Sales in the Brazilian market correspond to an average of 1.6m 9-litre cases per month. This is an expressive number even for other global brands. We were happy with the entry of a multinational such as Diageo in the cachaça business. We believe this group will have an important contribution to both local and international markets.”

A confident reply from the king of cachaça, and why not? This is a company that has sat on top of the cachaça tree for so long it barely looks down. But with the category marginally contracting in Brazil (3% down in 2011 and a similar story expected once the 2012 figures are released) and added competition it’s conceivable 51’s sales will, over time, recede. Gomes offers his views: “I believe the new Ypióca-Diageo will likely end up eating up some market share from 51 and the competition that will ensue will likely cannibalise to extinction other smaller, less efficient players with less operational efficiency than Cia Muller – 51. Again, this will trigger an industry consolidation and, at some point, we will only have very large Brazilian cachaça makers and cool niche brands, but nothing in between.”

International markets

A 1% share is not very much. Unless of course the 1% is of 100 million cases, in which case cachaça’s international sales are well worth a mention.

Leading the way is Germany, where cachaça, for reasons unknown, sells around 400,000 cases. Heading the market is Pitú, through its European rights owner, bottler and distributor, Underberg, which is based in Switzerland. 

For Pitú, the strategy in Europe is about building a brand, not a category. Latin bars, Brazilian carnivals and events are targeted for promotions where Caipirinhas, often dispensed by Pitú-branded Caipirinha machines, are called Piturinhas. “It depends on how advanced the market is but some consumers do not know what cachaça is so we do not talk about it,” says Andrea Baumgartner, international marketing director at Underberg. “We try not to sell the category but the brand. They just need to know what to buy and what to buy it for.”

Maybe not by numbers, but of all the international markets the US holds the most hope. Cachaça brands certainly think so, anyway. “One day at a Chicago fair and nearby liquor store I counted 28 cachaça brands,” says Velho Barreiro’s Cremasco. “In Europe it’s just 51, Pitú, Velho Barreiro, Sagatiba and Ypicoa. In South America and North America people are keen for new brands but in Europe they prefer traditional products. New cachaças go straight into the US market.” 

Promotional support

The brand’s own North American sales were 10.5% up last year, thanks in part, says Cremasco, to promotional support from the government. “Apex-Brasil promotes Brazilian products for export.  We have a stand at events such as Indycar racing, where we can offer guests Caipirinhas,” he says. 

Brands such as Bossa and Leblon have certainly backed the US market, hoping when the worm turns, perhaps from tequila to cachaça, they are on hand with relevant super-premium products. For these brands, in a large, lonely market, the recognition and classification of cachaça was an important development. 

Indeed, for Leblon, the ruling – which also sees bourbon and Tennessee whiskies protected in Brazil – is the happy ending to its campaign, Legalise Cachaça. “We’re very happy that cachaça is finally being recognised as a distinct spirit from Brazil, and can now be properly presented to consumers as cachaça,” says founder of Leblon, Steve Luttmann.

“Cachaça is deeply rooted in the culture of Brazil, just like rum is deeply rooted in the culture of the Caribbean. Cachaça was initially created in Brazil around 1530, and rum approximately 100 years later in the Caribbean. They both have great cultures and expressions of taste – it’s silly to call them the same thing. This is only the beginning, and as the leaders of the cachaça category in the US, we plan on embarking on an aggressive campaign through the 2014 World Cup and the 2016 Rio Olympics to ‘take Americans to Brazil – one Caipirinha at a time’.”

And so to Bossa’s Gomes: “Major brand houses will now understand that cachaça is missing in their portfolio and that will better the prospects that innovative brands such as Bossa will find a major partner. Moreover, it is easier to discuss a product when you can call it by its original name, reinforcing its exotic appeal and mystique. Having said that, no brands will ever be created by a legal decree, as only investment and the commitment of time can produce the big winners of this nascent international category of cachaça.”

In light of this new US ruling, the usual tired and unanswerable questions are bound to rear their heads again. Will the Caipirinha be the next Mojito? Can cachaça become the new tequila? The truth is, beyond conjecture, nobody knows. Perhaps a better question is: Now American consumers know what Cachaça is called, will they actually be able to pronounce it? You have to be careful what you wish for.