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Growing Middle Class Feeds Spirits Business in Latin America

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Diageo executive Randy Millian is proud of the fact that eight out of every 12 times someone pours a standard or premium whiskey in the Latin American and Caribbean region, they're drinking one of his company's brands.

That kind of dominance is why the spirits giant is bullish on its future in Latin America, which recently has been the fastest growing region for Diageo worldwide. In 2012, the Latin America and Caribbean region represented 12 percent of Diageo's net worldwide sales and 11 percent of the company's operating profit. Diageo hopes Brazil will become one of its top three markets by 2017, behind the U.S. and the United Kingdom.

But getting there hasn't been easy. During periods of economic and political unrest in the region over the last decade, there were times when it would have been more profitable for Diageo to pull back, said Millian, president of Diageo Latin America and the Caribbean. Yet, the company focused on growing its scotch business across the region and it paid off. Over the last eight years, Diageo has increased sales more than two and a half times and almost tripled its operating profit.

"I believed it would get good," said Millian, who supervises more than 3,000 employees across the region and 119 in Miami. "But I'm not sure I realized it would get this good."

Millian has been running the region out of Diageo's Miami office for more than a decade. But he's also no stranger to this part of the world. He first lived in Argentina as a child and during his career has done stints in Venezuela, Brazil, Mexico and Costa Rica.

The Miami Herald sat down with Millian during a media day, which was part of a Diageo investor conference in Miami spotlighting the success in the Latin American and Caribbean region. Here is some of what Millian had to say:

Q. Has your growth over the last decade been comparable to Diageo's growth around the world?

We would definitely be in the top positions in the league within Diageo. That's one of the reasons they're focusing on us. Like many corporations, the emerging markets have a huge potential for growth. I'm including Asia-Pacific, Africa and Latin America. We are seeing higher growth rates than we are seeing in the developed world, especially Europe. Although the U.S. is starting to come back, the growth rates in the emerging markets are significantly higher.

Q. What is driving the growth Diageo is experiencing in Latin America?

The improved demographics. You now have over 50 percent of the population who is middle class. You have had an increase in spending. Not only are there more people in the middle class, but you have more people in the (upper) class. We expect over the next year to have 60 million more people in the (upper) class. They're also learning to spend money in different ways.

Q. In what countries do you see the most growth or most opportunities for future growth? Is Brazil the main focus?

There has been broad growth in Brazil, Colombia, Mexico, Chile and Peru. We have seen it all over, but those would be the ones we're focusing on. It's not just Brazil, it's throughout the region.

Q. Why did you remain committed to this region over years when there was not a lot of growth and there was a lot of political and economic unrest in some countries?

One of the reasons is that we figured there could be a better day. Our brands were loved here and scotch was aspirational. We had a 40 to 50 market share and we were able to increase that to 80. A lot of it was, we went to our core, expanded that core and the rest was the demographics happened. We were benefactors of that. We could have cut everything and made more money. But we stayed the course. We appropriately spent behind our brands and built our brands.

Q. Was scotch initially as popular in Latin America or has it been an educational process?

It had a good foothold and we've increased that foothold. In Mexico, it was 3 or 4 percent of the spirits category but now it's 12. We've invested behind it. Because it had aspirational characteristics, once you spend behind it and people can buy it, they begin to buy it. Latins are very brand conscious and brand loyal. Johnnie Walker as a family is our strongest family, but we sell more of Buchanan's Deluxe then Johnnie Walker Black. Old Par is a strong brand as well. We have three strong 12-year-old scotches.

Q. Tell us what attracted you to the recent acquisition of Ypioca, the leading premium cachaca brand in Brazil?

We looked at the cachaca category and did research on what the strongest brand was. We liked the fact that it had a tradition that had been around for 150 plus years and it was also a leading premium cachaca. We saw something that we thought had a lot of legs and with some marketing we could improve it even more. We couldn't have done this 10 years ago without the premium business we have today.

Q. You talked about how you now have a major role as an exporter in certain Latin American countries like Guatemala, where you are the largest exporter, and in Venezuela, where you export more than 90 percent of the country's rum. What kind of power does that give you?

What it does is allow us to have a conversation with the government, if we want to have any conversations on tax policy or alcohol policy. It gives us a seat at the table. Power is probably too strong a term.

Q. You talk about the opportunity for the future that lies in the growing middle class. Talk to us about where you are at reaching this population and what are your goals for the future?

We're going to go after the middle class in two ways: through our core portfolio and by innovation. That means either bringing something new to Latin America or taking brands like Ciroc, Ketel One or Rokk Vodka that we have around the world in the Diageo portfolio and bringing them down here. As we extend our route to market and activate more accounts, they'll be able to use our products more.

Q. What is the status of negotiations on the purchase of Jose Cuervo before your distribution agreement runs out next year?

We haven't consummated a deal yet. Cuervo is a phenomenal brand and to have it in our portfolio makes sense. I would hate to lose Cuervo. But to do a deal that doesn't make sense for our shareholders wouldn't be good either.

Q. What do you define as "premium" brands in Latin America?

Premium in many ways depends on the category. There's a premium sector in each category. What's premium in the cachaca category may not be premium in the Scotch category. What we do talk about is our reserve business that would be Johnnie Walker Platinum, Zacapa, Ciroc, Buchanan's Reserve and Johnnie Walker Blue label. When we think of reserve, which is super-premium, that's what we think of.

Q. Do you see an opportunity for super-premium business in all countries in Latin America or just certain larger countries like Brazil and Mexico?

I think you see an opportunity in all countries, the question is how big it is. Most countries in Latin America have people with high net-worth. How you bring that to life is different in each market. We have a lot of in-market companies. It's their job to figure out how to capture that opportunity.

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