The cachaca category offers an opportunity for further premiumisation, according to analysts

The cachaca category offers an opportunity for further premiumisation, according to analysts

Cachaça, Brazil's most popular spirits category, offers scope for further premiumisation but the opportunity is “relatively small”, according to an analyst.

The comments came in the wake of Diageo's acquisition of Ypioca, Brazil's third biggest cachaça brand by volume, announced today (28 May). Ypioca is the market leader in the premium cachaça sector. 

In a note issued after the purchase was announced, Nomura said: “We believe that the category offers scope for further premiumisation, as well as international roll-out over time. Premium accounts for only 2% of total cachaca; the premium segment is growing at 11% pa on five-year CAGR, with the Ypioca brand growing 14% over the same period.” 

Analysts Bernstein agreed there was “potential for growth in premium cachaça”, but its note added: “We view the opportunity as relatively small in scale. 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.”  

Nomura suggested the deal should help widen Diageo's penetration in Brazil with its Scotch brands. The company currently has distribution in 160,000 outlets in Brazil, compared to Ypioca, which goes to 256,000 premises.

The note added: “Ypioca is strong in the north-east compared with Diageo’s existing strength in the south-east.” 

Both analysts suggested that the transaction was not a cheap deal, but Bernstein said it should “wash its face financially”. 

Nomura also noted the deal will mean emerging markets now account for nearly 40% of Diageo's EBIT.