The news Diageo is to buy Philippines-based dark rum brand Don Papa was met with positive noises by industry insiders this week.
Diageo’s acquisition of Don Papa will complement the spirits giant’s existing rum portfolio and should allow the group to better take advantage of favourable headwinds in what the company and some industry watchers call the “super-premium-plus” segment. Mainstream rum, especially in the US, has been sluggish for some time and, despite Diageo’s best marketing efforts, its flagship Captain Morgan brand has not been immune from this. In the year to 30 June, the brand’s sales fell by 3% globally and by 6% in North America.
In a client note discussing the Don Papa deal, analysts at investment bank Jefferies highlighted the poor performance of mainstream rum over the last decade. The analysts contrasted its fortunes with the super-premium plus segment of the category, which they said has grown by a CAGR of 18% in Europe and 27% in the US over the last five years (2016-2021).
“We believe there are reasons for optimism for the rum category, in particular in the high-end, dark variants,” Jefferies’ Ed Mundy said, pointing to a renewed interest in sipping rums, the drink’s relatively affordable price point and its sweeter taste profile as three reasons the category is set to prosper.
“Many bartenders are taking rum to a party, which is a leading indicator of category health.”
Although Diageo does have some exposure to premium rum (Ron Zacapa, Ron Santiago de Cuba, Pampero), the group’s portfolio is skewed towards mainstream and economy – according to Jefferies, the company sold 11m cases of Captain Morgan and 10m cases of local Indian rum McDowell’s last year – with a lower exposure to super premium (the group only owns 50% of Ron Zacapa, accounting for less than 100,000 cases).
Therefore, striking a deal to acquire a bigger brand such as Don Papa (180,000 cases) – and one that plays in both premium and super-premium; in the UK, the brand’s seven-year-old variant has an SRP of GBP34 (US$42) and the more premium Baroko variant costs GBP85 – helps bolster Diageo in a segment that is outperforming the rum category as a whole.
“The opportunity for Diageo here is two-fold,” Morningstar analyst Philip Gorham tells Just Drinks. "One, roll the brand out geographically across the Diageo platform and get it into new markets. This will require marketing investment but [is] still a fairly low-cost, incremental revenue for the brand.
"Two, see if there are opportunities to stretch the price points higher. This is a well-positioned brand at $35-$40 a bottle. It is unencumbered by mass-market pricing (they will never get to four-figure prices on Captain Morgan) but it is nowhere near the price heights of Johnnie Walker.
“In other words, there is a lot of headroom for premiumising the brand further, as Diageo are already doing in Tequila.”
The value of the deal – EUR260m ($281m), with the potential to reach EUR437.5m ($474m) by 2028 – makes for an interesting comparison with the $725m reportedly paid by Brown-Forman for Diplomático late last year. On an annual, per-case-sold basis, Diageo’s deal stacks up favourably to that of its competitor ($1.5m per case at the initial price paid, versus $1.85m per case for Diplomatico), although Brown-Forman’s brand retails at a higher SRP of around GBP44 per bottle.
The Jefferies analysts described the risk-reward profile of the deal as “asymmetric, in our view, given the low initial capital outlay and opportunity to leverage Diageo’s strong distribution network”.
Don Papa – with its distinctive packaging, unique liquid and authentic story – also fits the bill as far as Diageo’s wider M&A strategy is concerned. In recent years, the company has moved away from transformational deals in favour of bolt-on acquisitions in high-growth segments. The group’s 2021 purchase of Chase Distillery and last year’s move for American single malt maker Balcones Distilling are good examples of this strategy in action.
Gorham sees sense in this approach, stating his belief that “high price points are where the long-term growth is” in spirits.
“Whether premiumisation takes a breather as major economies enter recession, we’ll have to wait and see but there is huge long-term opportunity at the crossroads of beverages and luxury,” he adds.
In this context, the move for Don Papa, a fast-growing, high-margin brand in a category that is predicted to continue to continue to premiumise in the coming years, looks like business as usual for Diageo.