Focus - Bacardi, Serralles and Rum Politics in Puerto Rico

The fallout from Diageo's decision to shift Captain Morgan to the US Virgin Islands still hangs thick in the Caribbean air, but are the opponents to the move becoming increasingly divided?

Diageo provoked a political storm when it announced its decision to take Captain Morgan production away from Puerto Rico-based Destileria Serralles. Shockwaves continue to ripple all the way to Washington DC, even nine months after Diageo opened the new Captain Morgan distillery on the US Virgin Islands (USVI).

Essentially, it boils down to what the Puerto Rico and USVI authorities are allowed to do with rebates derived from the excise tax on rum sales in the US. The rebates for the territories have been running since 1917 and 1954 respectively. 

Since Diageo's announcement, there has been well-documented disquiet in Puerto Rico, which houses Bacardi as well as Serralles, regarding the proportion of the rebate that USVI is siphoning off to develop its own rum industry. Proponents for Puerto Rico argue that the USVI is acting irresponsibly, but their critics, naturally, say that this is just sour grapes because Puerto Rico will lose rebate revenue on Captain Morgan.

Before anyone starts, the purpose of this article is not to assess who is right. What's interesting, however, is the way this issue is developing.

On the one hand, Puerto Rico has sought to persuade US Congress to support a cap on the proportion of the rum rebate that can be handed directly to the rum industry. It has so far tried - and failed - to push through a cap of 10%. This year, Puerto Rico is pushing for a 20% cap. In theory, the country's authorities have an annual opening to change the law because the rum rebate system is officially only a "temporary" measure, and so must be renewed by the US Government each year. 

That said, cracks have emerged in the Puerto Rico ranks. Earlier this year, Bacardi secured a new deal with Puerto Rico's Government. Assuming no cap is imposed by US Congress, it is reported that this could lead to it receiving 46% of the excise tax revenue from sales of its branded rum in the US. 

In addition, Bacardi will receive a US$95m five-year grant from Puerto Rico's rum rebate in order to upgrade and expand facilities. In return, Bacardi will continue to produce rum in Puerto Rico for at least another 20 years.

The deal was made possible by a new law, passed by Puerto Rico last year, which allows for authorities to use one quarter of the rum rebate to directly promote the local rum industry. The limit was previously 10%.

This sounds very much like 'if you can't beat them, join them'. Bacardi declined to comment on the negotiations, but it did pass on the Puerto Rico Government's statement following the announcement of the deal in February this year. "We are taking swift action to protect Puerto Rico from losing its rum industry," said Puerto Rico's economic development and commerce secretary, José Pérez-Riera. "We could not stay idle," he said.

However, while the Government has said that it is negotiating similar deals with other Puerto Rico-based distillers, some are wary of the deal on offer. 

Serralles, which previously produced Captain Morgan and lost 70% of its production volumes through the brand's USVI switch, has accused Puerto Rico's Government of unfairly distinguishing between branded rum and bulk rum. Subsequently, Serralles has argued, it is being offered a worse deal than Bacardi.

"We're a sixth generation local rum maker," Serralles' VP, Roberto Serralles, has told just-drinks. He fears what will happen to his business if US Congress members do not support a cap. "For us, it's a matter of life or death to get that cap going," he said.  

Serralles maintained that his company continues to have a "great relationship with the Government of Puerto Rico" and added: "The 20% cap remains our main objective and the Puerto Rico Government's main objective." 

A critic might argue, meanwhile, that, as Bacardi brands are responsible for bringing in 70% of Puerto Rico's total rum rebate, doesn't Bacardi deserve a better deal?

Serralles said that the disparity sends a confusing message to Washington. If Puerto Rico itself is not a level playing field, Serralles argued, then distillers lose the "moral authority" to argue for a blanket cap on the rum rebate both at home and in USVI.

Captain Morgan may have long since set sail, but this is an issue likely to float on for some months yet.