Randy Millian, Diageos president of Latin America & Caribbean

Randy Millian, Diageo's president of Latin America & Caribbean

Earlier today (28 May), Diageo announced that it will buy the Ypióca cachaça brand in Brazil from Ypióca Agroindustrial Limitada for BRL900m (US$453.9m). As part of its press material, the company issued a short interview with the president of its Latin America and Caribbean operations, Randy Millian, in which he discussed the purchase.

Q: Diageo believes that the emerging middle class consumer in markets such as Brazil will premiumise their spend on beverage alcohol by trading up in local categories and by increasing their spend on international spirits. How does this acquisition deliver on that strategy?

Randy Millian: We are seeing the middle class grow in Brazil in both number and income. 31m Brazilians entered the middle class in 2010 and by 2014 it is expected that the middle class will account for 57% of the population or 113m people at a time when real per capita income is growing at 4% CAGR (compound annual growth rate). This is driving premiumisation trends across all categories with increasing penetration of products (mobile phones, household appliances, internet, cable TV) and consumers up-trading from low-end/basic to 'affordable' products and services.

Q: How does Ypióca lean into these trends?

RM: We believe that Ypióca is a great way to participate in the premiumisation of local spirits as 100% of their volume is at a premium to the average price of cachaça. The average price of cachaça is about BRL6 (US$3) per litre and Ypióca’s key brand (Contagota Silver/Gold) is retailing above BRL9 per litre and their lowest priced brand (Sapupara) is retailing above BRL7. When compared to the category leader, 51, Ypióca has a higher penetration in the higher ‘socio-economic level’ (SEL) population, which drives premiumisation opportunities.

In addition, Ypióca has been the most innovative player in the category in recent years, with the largest portfolio of premium products among the key players, and it is now the leader in the premium cachaça segment. Premiumisation and pricing is key as the overall cachaça category has seen double-digit revenue growth over the last few years due to improved price/mix and despite the slight volume decrease at the same time.

Q: Does the Ypióca acquisition drive route-to-market benefits for Diageo?

RM: Yes, it does as it brings scale as the number three player in the overall cachaça category by volume, and number two by value. It means that Diageo becomes a relevant player in the largest local spirits category in Brazil, where we currently don’t really participate as our Nega Fulo brand has less than 10,000 cases and would have taken many years to build.

Ypióca’s volume is over 6m cases, representing an 8% market share within the category, which is a fragmented category with four key players accounting for around half of the volume. The acquisition of Ypióca, therefore, is a step change for us as it more than doubles our size in Brazil and gives us a platform to further penetrate the middle class by reaching a larger and wider outlet universe with a combined broader brand portfolio covering more category and price point, and will also increase our understanding of middle-class consumers.

Diageo currently has route-to-market penetration of about 160,000 outlets versus around 256,000 for Ypióca. Also, Ypióca is strong in the north-east, where nearly 80% of their sales are. The brand is especially strong in its home-state of Ceará, where 70% of its sales are. This creates an opportunity to drive sales of Diageo brands in this state with brands such as Smirnoff Ice, and to innovate with smaller formats for current Diageo brands. 

Outside the state of Ceará, Diageo can complement Ypióca’s current route-to-market through access to key accounts, and through investment in A&P and commercial execution.

Ypióca’s penetration in Diageo key accounts is currently low, so Diageo can harness its existing relationships with key accounts to accelerate brand growth in this channel, especially outside Ceará.

Diageo is especially strong in the south-east of Brazil, given the relevance of Johnnie Walker Red label and Smirnoff in the region. This historic lack of focus outside Ceará presents an opportunity to develop the Ypióca brand further.

Q: What will Diageo do with the Ypióca brand in the long-term?

RM: Ypióca has the best brand attributes among key players which gives us a great platform for brand building initiatives. Cachaça is an under-invested category in terms of A&P, which gives us the opportunity for brand building and further premiumisation and through that the opportunity to grow share within the category. We think we can grow the brand as Ypióca has traditionally focused on commercial execution instead of brand building initiatives. So, with more investment we can drive growth, and we can innovate with products that complement our portfolio. We will increase A&P as a percentage of NSV – A&P will be region- and occasion-focused, and we will aim to leverage on current brand attributes.

Q: What does it do for margins given Diageo’s focus on margin expansion?

RM: The brand already has a good margin and we believe that we can deliver double-digit growth in NSV. We will increase marketing in the first few years which will lead to a slight reduction in margin, but our aim is to improve the margin over the next five years which would be accretive to the current margin.

The original interview, released by Diageo, can be found here.