Impact International / November 15, 1996
By Larry Luxner
SÃO PAULO, Brazil -- Few liquor-industry executives know this, but the Western Hemisphere's best-selling spirit isn't Jack Daniels, or Johnnie Walker, or even Bacardi. It's Brazil's Cachaça 51 -- a potent aguardente distilled from fermented sugar-cane juice and sold throughout this vast nation of 165 million people, from corner markets in São Paulo and Rio de Janeiro to the farthest fringes of the Amazon.
Many brasileiros say cachaça represents one of the three pillars of their society, along with soccer and carnaval. Known widely as a drink of the middle and lower classes, cachaça (pronounced ca-CHA-sah) has been around ever since 1543. That's the year Erasmus Scheltz, a Swiss immigrant, developed the fermenting process at one of Brazil's first sugar-cane mills near the port of Santos. Today, a one-liter bottle of cachaça retails for $2 or less, putting the liquor within reach of even the poorest Brazilians.
Peter Carl Armstrong is sales and export director at Indústrias Müller de Bebidas Ltda., the family business that owns Cachaça 51, formerly known as Pirassununga 51. The Canadian-born executive says his company enjoys a 34% share of Brazil's cachaça market, though volume has declined by 4.6%, from 26.3 million cases in 1997 to 25.1 million cases in 1998.
The total volume of caçhaca in 1998 was estimated at 750 million liters, or approximately 83 million nine-liter cases.
"This industry is extremely competitive. Our price margin in Brazil is extremely small," said Armstrong, interviewed recently at his office in São Paulo. "The export market allows us to have a slightly higher margin, though on a much smaller volume."
At present, the top 10 brands of cachaça -- accounting for 75% of Brazil's market -- are Cachaça 51 (34.3%); Pitú (11.3%); Velho Barreiro (8.8%); Ypioca (4.3%); Da Roça (4.0%); Oncinha (4.0%); Jamel (3.0%); Sapupara (2.6%); 7 Campos (1.4%) and Colonial (1.4%).
In 1998, the cachaça category alone accounted for 62.3% of spirits consumption in Brazil, followed by cognac (9%), vermouth (6.6%), wine (6.4%), vodka (4.1%), whisky (3.7%), rum (1.9%) and others (6%).
According to the Impact Databank, Cachaça 51 ranks as the world's third-largest distilled spirit; only Russia's Stolichnaya vodka and South Korea's Jinro outsold Cachaça 51 in 1998.
"When it comes to cachaça production, the formal market comprises 700 million liters out of a total 1 billion liters," says Armstrong. "There's very little informal production of whiskey, but every farm in the interior produces cachaça informally."
Indústrias Müller, established in 1959, has 1,150 full-time and 400 part-time employees. Its annual sales have risen from $145 million in 1993 to $250 million in 1998, with a single brand -- Cachaça 51 -- generating approximately 80% of the company's total revenues.
To tour Muller's sprawling operations, one has to visit the town of Pirassununga, some 235 kilometers north of Sao Paulo, along the main highway that crosses the Tropic of Capricorn and links dozens of cities in the interior of Sao Paulo state.
The Pirassununga distillery sits in the middle of a 4,000-hectare sugar-cane field dotted with tall ipe amarelo trees, their distinctive yellow flowers visible from miles away. The company-owned field, known as Fazenda Lageado, generates 350,000 tons of sugar cane a year and supplies 25% of Indústrias Müller's raw material; the remainder comes from about 100 other suppliers.
"The plant operates from May to November. The rest of the year it's closed for maintenance," Armstrong told Impact, donning a hardhat as he made his way through the labyrinth of pipes, vats and stainless-steel tanks that employ 100 workers in three shifts. "Our factory is entirely self-sufficient, using bagasse energy to run the plant. Bagasse is the residue left over after all the sugar is extracted. We even sell excess bagasse to the state electric utility."
From there, the fermented cachaça is transported to the bottling plant in downtown Pirassununga (population 60,000), which churns out 36,000 bottles an hour of Cachaça 51 -- so named, according to a company official, because Barrel No. 51 happened to produce the best-tasting cachaça.
According to Armstrong, Indústrias Müller decided several years ago to diversify its product portfolio, "precisely because we realized the consumption of cachaça in Brazil had peaked and was declining year by year" -- even though the Cachaça 51 brand was still growing slightly in volume and mainly in market share.
"Increased competition from other categories of alcoholic beverages (mainly beer) as well as the stabilization of the economy with increased unemployment, meant we had to branch out from being a one-category company with just two brands of cachaça -- the other being Pirassununga 29, sold only in certain regions of Brazil," he said.
"At the time, we researched several categories and chose the Brazilian brandy or conhaque category because it is the second-largest spirit in Brazil and offered less competition and better margins than the cachaça category."
As a result, Domus Conhaque was introduced in June 1996 in São Paulo state, and later rolled out to national distribution. According to Armstrong, 1998 sales of Domus were up an impressive 101% over 1997 levels, having become a million-case brand in just 31 months. Domus now has an 8.6% share of the Brazilian cognac market, behind UDV's Dreher (38%), Presidente (22%) and São João da Barra (12%).
The company recently opened a $25 million distillery in the northeastern state of Pernambuco for distribution of Cachaça 51 throughout northern and northeastern Brazil.
The new facility has an initial capacity of 150 million liters a year. The plant employs 170 people, using locally produced sugar cane. Commercial Director Rinaldo Ferreira says the expansion is necessary thanks to the introduction of new products and growing exports of Cachaça 51 through the Suape Port Complex near Recife.
In 1998, Müller introduced its newest product: Caipirinha 51 Mix -- an instant cocktail mix in powder form to be combined with Cachaça 51, water and crushed ice in order to create caipirinhas. The mix is packaged in aluminum foil and contains freeze-dried Brazilian lime juice and cane sugar.
While the Brazilian domestic market is of course Armstrong's main focus, the company isn't overlooking the export potential.
In 1998, Müller's exports exceeded $1 million for the first time, with overseas shipments in the first nine months of 1999 up 35% over the same period last year.
"Our cachaca is now exported to 40 countries on five continents, but still accounts for under 1% of total volume," says Armstrong. "Our volumes are so large on the domestic market, that if we wanted to export 10% of total volume, it would mean 2.5 million cases -- which is more than many of the top-selling imported brands in the world."
To handle those growing exports, Müller in April announced it had established a bonded warehouse in Antwerp as part of a venture with Belgian Pakhoed N.V. So far, the facility has handled shipments of bottled rum and caipirinha mix to European markets such as Sweden and Cyprus.
"These are small countries that are difficult to ship to from Brazil. It's basically to cover emergencies," says Armstrong. "From a logistics point of view, it was always difficult and expensive to service small orders and get distributors started with less than full containerloads from Brazil, because of the distance. Now delivery by road or local shipping lines can deal with this problem in a matter of days."
Asked if Brazil's January 1999 currency devaluation -- which slashed the value of Brazil's real by 50% -- has affected sales, Armstrong said yes, but that things are starting to look up.
"We're recovering some of the volume lost in 1998. But in the meantime, the total market has decreased," he says. "Consumers aren't spending their money on the more expensive spirits, liqueurs and wines. Even champagne is down. These are hard times. It's been difficult for the industry in general to put into practice any price increases, even though the real is worth a lot less than before. Those companies that tried were not very successful."
"For us, we see recovery next year," Armstrong concluded. "For the other categories, it's going to take a lot longer."