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Venezuela's spirits market clobbered by weak economy
Impact International / March 1, 1997

By Larry Luxner

CARACAS -- In 1996, Venezuela earned the dubious distinction of being the only country in Latin America with not only negative GDP growth (-1.5%) but also triple-digit inflation (103.6%).

That has spelled bad news for the oil-rich nation's once booming liquor industry.

"The economic situation has led to a significant shrinkage in people's buying power," says Peter Gutierrez, marketing director for United Distillers de Venezuela S.A. "With population growth continuing, there's been a huge growth in the D and E class. It's so bad, there's now an F class."

Interviewed at length in Caracas, Gutierrez told Impact International that a variety of factors -- ranging from tight foreign-exchange controls to rampant inflation to a dramatic increase in street crime -- have hurt the industry. "Not only has there been shrinkage in total volume, there's been downtrending from high-quality, premium spirits into more affordability; people are drinking standard instead of 12-year-old scotch. That's brought about an increase in beer in the on-trade, but also at the expense of other liquors," said Gutierrez.

"There's also the security issue," he added. "People are spending more time at home and less time out, bedcause they're afraid to go out at night. Most consumption of imported whisky, around 65%, occurs in bars and restaurants. It's a vicious circle. Restaurants have fewer customers, so they hike up the prices, which fewer people are willing to pay."

According to Carlos Silva, chief sales analyst at Ron Santa Teresa, Venezuela imported 1,080,000 cases of scotch in 1996 -- a 7.5% drop from the 1,167,000 cases imported in 1995, which in turn was slightly lower than the 1,214,000 cases imported the year before that.

"In 1994, the first stages of the economic crisis hit Venezuela. Foreign-exchange controls caused a drop in imports, since companies had to justify the purchase of dollars because the government gave dollars only for certain purposes," he said. "The government, for example, would ask, 'Why should we give you dollars to buy imported scotch when we produce scotch in Venezuela?'"

Indeed, nouveau-riche Venezuelans were famous, some would say notorious, during the boom years of the 1980s for flying up to Miami for weekend shopping trips, and for their domination of South Florida's banking industry. At one time, Venezuela -- flush with revenue from its oil exports -- had South America's highest per-capita income, and its people had the region's most expensive tastes when it came to liquor. No more.

"Foreign-exchange controls affected everything having to do with imports," Silva explained. "Obviously, whiskey also suffered, but this generated a phenomenon. The big companies had to justify every bolívar they used to buy dollars. But smaller ones bought dollars on the black market and began to import cheaper brands of scotch and whisky. They were private comanies that played with the margin between the official rate (170 bolívars to the dollar) and the black-market rate (250 to the dollar). Thus, the smaller brands established themselves and now represent 40% of all imported scotch and whisky, when originally the didn't even represent 5%."

Silva says Santa Teresa distributes three imported wine labels (including Chile's Concha y Toro) as well as Ballantine's MacNair, Courvosier cognac and 10 other brands.

"Rum is now an expensive product, and there are other unaged products on the market which have substituted for rum, such as Superior and Carta Roja," he said. "They're like aguardiente, but better quality." Those two brands both sell locally for Bs. 800 ($1.70), compared to Bs. 2,000 ($4.20) for standard rum. By comparison, a lower-standard scotch sells for Bs. 4,000 ($8.40), while a premium brand like Johnnie Walker Black goes for Bs. 12,000 ($25.30).

Venezuela -- a nation of 22 million people -- currently has around 20,000 outlets for alcoholic beverage sales; some 65% of all liquors are sold through supermarkets, 25% through liquor stores and 10% through bars and restaurants. According to Silva, the liquor market is now split among super premium (2%), premium (23%), standard (35%), and low (40%).

The Santa Teresa official calculates the total spirits market at around $190 million, with rum accounting for 40% of that market by volume (roughly 1.8 million cases last year), but only 25% by value. He says Santa Teresa -- owned partly by Allied Domecq -- now dominates the rum market with a 40% share, followed by Cacique (owned by Seagram's Licoreras Unidas) with 35%; United Distillers' Pampero, with 20%, and remaining minor brands, 5%.

Gutierrez sharply disputes those numbers, estimating that Venezuela's three major rum producers each have a one-third share of the pie. He says the country's rum market totals 2.5 million cases, down from 6.0 million cases four years ago -- and that "our two standard rum brands account for 23% of the standard-rum category." United Distillers also claims 50% of Venezuelan vodka sales, having broken Smirnoff's monopoly with the introduction of Gordon's Vodka in July 1996.

"We're in a very young country, with half the population under 18. Therefore, with people being born more quickly than they're dying, that doesn't help drinks consumption. We've seen a market of nine million cases in 1994 shrink to 7.3 million."

He explains that "we're not lowering prices. We're trying to hold affordability in all categories. We've also launched new brands to address the situation."

Yet optimism abounds. Antonio A. Herrera-Vaillant, vice-president and general manager of the Venezuelan-American Chamber of Commerce in Caracas, says his country has undergone an important transformation.

"Since Apr. 15, 1996, with the loosening of price controls and foreign-exchange controls, the economy is picking up very quickly," said Herrera. "We still have very serious problems. Obviously, investment comes first, but it takes time for investment to have an effect on the general population. Our key areas of growth are oil, mining, telecommunications, petrochemicals and tourism."

What that means for the liquor industry remains to be seen.

"Our prognosis is one of guarded optimism," says Donald DeVost, finance director at Cervecería Polar, the country's largest brewery. "President Caldera's Agenda Venezuela is a good formula for restoring economic growth. There are two very important stumbling blocks: reform of the labor law, and sterilization of excess foreign-exchange reserves so as to not put so much pressure on the bolívar."

Silva, of Ron Santa Teresa, says that "in rum, the market will be the same or 15% better, because the Venezuelan economy will be much better than last year. We all think the rum market has hit the bottom and can only go up. Whisky and scotch also will stay the same or go up, but mainly the low standards will rise impressively."

Remarks Gutierrez: "Anyone who predicts 1997 with any confidence should have his head examined." But he added that "we don't foresee any big shifts in volume, or any further downtrending. Until the labor laws are reformed and middle-class purchasing power is addressed, it's going to continue to be difficult."

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