Diageo will use its purchase of Ypioca to try to reel in Pernod Ricard in Brazil

Diageo will use its purchase of Ypioca to try to reel in Pernod Ricard in Brazil

Diageo's deal to acquire the Ypióca cachaça brand in Brazil puts the drinks giant in a better position to reel in Pernod Ricard in the country's growing market for premium spirits.

A few analysts' eyebrows twitched when Diageo said today (28 May) that it will spend BRL900m (US$453.9m) on Ypióca, which is the market leader in Brazil's “premium” cachaça market. “By the standard of recent emerging market deals, this is not cheap,” said Sanford Bernstein analysts in a note.

However, they believe the deal will “wash its face financially” and that the potential benefits are enough to justify the price. 

Instantaneously, a combined Diageo and Ypióca would leapfrog Pernod Ricard in terms of volume share in Brazil's spirits sector. Research group Mintel puts Pernod's volume share of spirits retail sales at 7%, with Diageo on 6.5% and Ypióca on 6.8%, based on 2010 estimates.

(Granted, in value terms, Diageo on its own accounts for 25.7% market share of total off-trade spirits in the country, with Pernod on 19.2%. Ypióca's share is just 2.7%.)

Crucially, what Ypióca gives Diageo is a strong distribution platform in Brazil's north-east region. Although Ypióca itself may also benefit from Diageo's existing relationship with Brazilian retailers, this looks to be another example of Diageo laying long-term foundations for premium international spirits growth in a key emerging market. It is doing similar things with Mey Icki in Turkey and ShuiJingFang in China, albeit at different scales.

In Brazil, Bernstein analysts said that increasing numbers of locals would rather buy a beer than a premium cachaça. The analysts added: “It will be very important for Diageo to ensure that the challenges of defending a substantial base in mainstream cachaça does not act as a distraction from the big long-term prize in Brazil, which we view as driving the growth of premium international spirits, especially Scotch.” 

Diageo argues that premium cachaça is showing strong value momentum, but the group will surely be looking to use Ypióca's distribution platform to increase its presence in premium Scotch, a sector that is reaping rewards for all concerned in emerging markets around the world. The Smirnoff distiller will also likely seek to expand the country's vodka market, in which it already has a 40% value sales share, according to Mintel.

Taking a broader view, Mintel forecasts that Brazil's spirits market will increase by between 4% and 5% in value annually over the next four years, above projected national GDP growth and in contrast to an expected decline in volume sales. 

Diageo added that half of Brazil's 191m population is under 29 years of age. City dwellers are swelling in number, while per capita income is rising by 4% annually, the firm said.

When you stir in the FIFA World Cup in 2014 and the Rio Olympics scheduled for 2016, it could be carnival time for premium spirits.

This story was updated on 20 June, with revised figures from Mintel. We apologise for any inconvenience and/or confusion caused.