Broken Hill: Part 2

Puerto Rico, a small island in the Caribbean, has been pillaged and plundered by conquistadors and colonizers for over 500 years, a trend that has resulted in a very strong black market, rum running subculture. Although taxes and cabotage laws do not permit this broken hill to directly do commerce with any country other than the United States, its citizens have managed to create industries that have permeated these markets using international distribution centers overseen by the United States. Where coffee was once the Puerto Rican product that captured the most hearts around the world it is now spirits and beer the driving force behind its exports. Based on Bacardí’s success, which is considered a Cuban company by heritage and is now a world renowned multinational corporation, Destilería Serrallés and Cervecera de Puerto Rico – known prominently for its Don Q and Medalla brands, respectively – are planning to follow in the rum giant’s footsteps to make their local brands staples in every bar and retailer of spirits in the Americas, and beyond.

Compañía Cervecera de Puerto Rico – Medalla Light Expansion

Compañía Cervecera de Puerto Rico started as Cervecería India in 1937, opened by the brothers Alfonso, Sabino, and Ramón Valdés Cobián in Mayagüez, Puerto Rico. The first beer, Cerveza India was released to the public in 1938 and became very popular with locals and visitors alike. From its inception through the 1970s, the company became the largest beer brewery in the island, and its success enabled them to expand operations to manufacture non-alcoholic beverages such as “malta”, made from the same barley and fermented to create a sugary drink, and eventually bottle and can local soft drink brands. As palates changed and consumers became health conscious and joined the gym and at home fitness video craze, Cervecería India decided to produce and market a light beer that would allow this consumer market to enjoy a nice cold one without the high calorie count. This approach was also pursued by Budweiser and Coors in the USA, a trend that is still in full force today. After doing some research, they decided to use the 1980 Pan American Games, celebrated in their home town of Mayagüez, as the platform to release and market Medalla Light (medalla is medal in Spanish). This international exposure allowed them to quickly garner fans in the very same space they were attempting to attract, using the clever pun/brand name to resonate with the proud locals who hosted an international event. Around the same time their main local competitor, Corona[1], lost popularity and went bankrupt – Mexican investors moved the brand to their native country and replicated the light beer strategy launching Corona Light which became international power house a decade or so later.

Since then, Medalla Light was the only local light beer manufactured on the island, becoming a national symbol and one of the most recognized and respected brands for those growing up in the 80s and 90s. Their local marketing campaigns helped it stave off Bud Light and Coors Light for a while but saw challenges in attracting new younger customers. There was a boom in exports and Heineken, Bud Light and Coors Light traded the #1 beer spot for this new crowd. Medalla had to react fast but the relationship it had with the government made this transition slow: tax breaks and subsidies made Cervecería India profitable in spite of high manufacturing costs. For Medalla to leave Puerto Rico’s shores, it had to reorganize and lean out inefficiencies or else it would remain marooned.

To position the company in a position to begin distributing its products abroad, the company changed its name from Cervecería India to Compañía Cervecera de Puerto Rico in 2009. After their reorganization and move to a bigger and more modern production facility, it began expanding their product lines locally into niche markets, growing its market share. They were able to do so with the 2010 release of Silver Key Light which compete in the value beer category – canned products costing less than a dollar each – against Busch Light, Keystone and Colt 45. In 2011, they went after the premium beer category, releasing Magna, a lager style beer that directly competed with glass bottled imports Heineken (Dutch), Presidente (Dominican Republic and sister island), Peroni (Italy), and Stella Artois (Belgium). Medalla Light was repositioned to compete against Coors Light, Bud Light, Heineken Light, among others by stressing its 92 calories and less than 2g of carbohydrate content. This allowed the company to earn 30% of that market, not far behind Coors Light which has the largest piece, 34%, of the local market[2]. Medalla became more popular because it started to pursue permanent taps at popular watering holes selling kegs to restaurants and bar in small and chain businesses alike. Tourists enjoy this local treasure, and many urged the company to at least try to get the beer stateside to test out market reception and potential sales.

For over 38 years, Medalla Light has been a Puerto Rican staple which benefited indirectly of the diaspora migration that initiated shortly after the collapse of the island’s economy in 2008. Over a million people have left the island seeking work and better living opportunities in mainland US, many arriving within the last year due to Hurricane Maria’s aftermath. This has created new Puerto Rican communities in Atlanta, Orlando, Jacksonville and other southern cities which has allowed Puerto Rican businesses to expand into these locations due to a consistent and growing demand. El Mesón, a sandwich fast food chain, and Antonino’s Pizza, a local delivery and takeout pizza chain, opened stores in Orlando, Florida, in the mid-2010s, with a large positive response by the community. Striking while the iron was hot, Medalla Light was introduced into Orlando and Tampa, in 2012, through a partnership with Titan Products of Puerto Rico, a distributor based in Orlando, FL.

Cervecera de Puerto Rico began with a modest five-year projection of selling 175,000 cases of 10 oz canned beer and have remained tight lipped about how well they are doing in the Florida consumer market only confirming that they have exceeded their own expectations. With over 300,000 Puerto Ricans moving to Orlando after Hurricane Irma and María it is not a secret that the nostalgia for the home comforts has driven a lot of the demand and supply predictions. It is a brilliant strategy, yet again but it can deflate very fast if the fan base is not expanded to attract locals and the fitness and healthy lifestyle folks that made the beer popular to begin with. Based on their top-secret performance metrics, Cervecera de Puerto Rico expanded its offerings in Florida, and in April 2018 began distributing 10oz bottles. By September 2018, they had also brought into store shelves the 12oz bottles as well[3]. The beer can be found at Walmart, Sam’s Club, Winn-Dixie, and other supermarkets in central and south Florida, and as recently as November of 2018 the brand’s website has a GPS beer locator akin to Google Maps that indicate where to find its products.

The brewery had a plan to expand for six years, which did not come into fruition until the natural disasters aided it along. Red flag? Time will tell on this one. They do have a very good chance to keep expanding as more Puerto Ricans continue to settle in other US cities. New York, Atlanta, Chicago, and other major cities already have large Puerto Rican communities like Seattle and Houston, which may lack the Puerto Rican population density reached so quickly in Orlando, at close proximity to the island. Cervecera de Puerto Rico would have to find distributors for those areas that would have modest transportation and shipping costs to keep the beer profitable without turn it into an expensive light beer export that wouldn’t be able to compete price-wise. I agree that they should ride this wave as long as they can but be wary of market saturation. Medalla Light is part of the nostalgia for the people who are out of the island, but eventually their children will not have their same pining to return to Puerto Rico as they do, and the market for Medalla Light might wane. The Floridians may like the beer, as it is intended to be refreshing under the heat and for the beach, but with so many beers available in the US to choose from it can easily be pushed out of the Orlando market by InBev and bigger, mightier competitors. Moving operations closer to their market may help with the exporting costs but can also come with other issues, such as losing the tax breaks and subsidies. It is a very interesting situation they are in; time will tell if their plan succeeds.

Destilería Serrallés – Don Q Expansion

The other side of this export and expansion conundrum is Destilería Serrallés, a rum producer originally based in Ponce, Puerto Rico, a municipality in the south of the island. It was started in the 1865 by the Serrallés family, a Spanish family from Catalonia, who produced and exported sugar cane through their Hacienda Mercedita, a sugar plantation operating since the 1830s. In 1865, they imported a still from France to the sugar plantation and set up a space to begin producing rum using the sugar cane molasses they produced. Eventually the sugar cane production waned in Puerto Rico, forcing the family to purchase the sugar cane molasses from the Dominican Republic and Guatemala to continue their rum production. Don Q, their most popular rum and flagship brand, gets its name and logo from Miguel de Cervantes’ character Don Quixote de la Mancha. Serrallés began selling Don Q in 1932, competing with Bacardí rum, which at the time was also being produced in Puerto Rico although headquartered and started in Cuba. (The Bacardí family fled Cuba during the revolution and settled in Cataño for many decades until they moved headquarters to Miami and Bermuda in the early 2000s.)

Don Q has several rum products: Don Q Cristal (clear), Don Q Limón (lemon flavored), Don Q Pasión (passion fruit flavored), Don Q Coco (coconut flavored), Don Q Mojito, Don Q Gold, Don Q Añejo (aged), Don Q 151 (151 proof, or 75.5% alcohol per volume) and Don Q Gran Añejo (blended from samples aged between 9 and 12 years, their top of the line). They also began recently to offer Oak Barrel Spiced rums and a premium “single malt” (unblended) rums to cater to more sophisticated palates. These brands are considered superior to Bacardí’s by locals, yet the competitor has a global presence Serrallés can only humbly aspire to achieve. The Don Q rums have most of the Puerto Rican rum market, but the rest of the world erroneously believes that Bacardí is the best rum in the world due to the company’s ubiquitous marketing strategy: it sells almost everywhere in the world over the guise of being the premium Puerto Rican rum.

The distillery has not sold much Don Q outside of Puerto Rico, but compensated for that in 1985 when they bought Puerto Rico Distillers, Inc. from Joseph E. Seagram and Sons, LTD. This expanded their portfolio immediately, as Puerto Rican Distillers had a product line with very popular products, such as Palo Viejo rum, Ron Llave, Granado rum, among others. With this sale, Serrallés also purchased the rights to distill and distribute Ronrico and Captain Morgan rum. Because Captain Morgan is the second most recognized and sold rum in the world after Bacardí, Serrallés increased their sales substantially. However, this was sort lived because in 2012, though, Diageo, Captain Morgan’s new owner, did not renew the contract with Serrallés and production sales decreased sharply, plummeting to the point of bankruptcy. The end of this deal cost them 13 million gallons of production as the Diageo moved to a new facility built in the Virgin Islands.

From 2012 through 2016, Serrallés shifted their plans to recover and gain ground by targeting an expansion into Europe as a Puerto Rican rum (Bacardí sells in Europe and Asia as a Cuban rum) for niche markets, people who want a premium rum and would like a product not from a multinational distillery, but a smaller, family owned brand. Serrallés meets these requirements and has been in the process to meet that new demand. This surprised the industry because it began by expanding their production and investing $15 million in equipment with a production target goal of 20 million gallons in 3 years (finishing their expansion by 2019) instead of folding under the pressure of bankruptcy. They are also bringing back part of their sugar cane production by purchasing 12,000 cuerdas[4] of land to grow sugar cane in Puerto Rico. This involves an investment of $40 million over five years. They expect to save about 30% in transportation costs right off the bat, as well as reduce the sugar price fluctuations impact on their product. They are also looking to build renewable energy facilities and establish reusable waste processes in their production, and to cater to the more sophisticated European markets for which they are creating new brands akin to the single malt whiskeys: premium unblended aged rums with a $40 a bottle price tag.

Serallés target sales back in 2016 in this space were 10,000 cases of rum in Europe a year but the company is selling close to 40,000 cases a year instead. Pictures below, the aged barrel production is closely monitored by the family who is eternally grateful to the people of England, France, Spain, Germany and Italy for falling in love with the brand and its products. As business booms, targeted expansions into the Check Republic, Luxemburg, and Holland by 2021 loom in the horizon. Once the numbers prove to be solid, and performance is stable, the company should be able spread into Russia, Hong Kong, Guam, New Zealand, and Japan. China would also be a desired market because its patrons very much mimic the trends of the European markets and North American brands. A success at home and in Europe can score big from this little company that has managed to thrive under Bacardí’s shadow. Serrallés has had its market share in Puerto Rico decrease 3% recently due to the large movement of whiskey and select spirits people are now enjoying but plan to offset this loss within their expansion plans by heavily going into the whiskey category.

I believe that Serrallés has a solid plan, and with shifting demand, they are poised to grab a foothold in the international markets to complement their local rum market in Puerto Rico, North America and the Caribbean. The Puerto Rican people, who have heavily migrated stateside, have served as ambassadors of the brand helping spread the virtues of Don Q rum over mainstream spiced rums. Slowly, Serrallés is moving from mass marketing like Bacardí and Captain Morgan do in the USA to niche marketing in Europe, and hopefully soon into Asia. Unlike Medalla, they do not rely on nostalgia to push their products into the airwaves but do need to capture some of the viral social media magic that their beer counterpart has garnered with the younger crowds. Sponsorship of events beyond bartending and the food scene can help Don Q create a fan following which is desperately needs if it plans to go global. They may benefit from investing in social media managers to create hype and reach those consumers that could heavily influence their supermarkets and membership clubs to carry Serrallés products.

Concentrating in sophisticated markets with their premium rum is a great idea, and with the demand for family owned, not big multinational company-produced spirits, is just what they need to meet those target goals they have set. The CEO since 1981, Felix Serrallés, Jr., stepped down as CEO in 2017 and moved to being chairman of the company to allow Phillipe Brechot, the new CEO with Diageo, Veuve Cliquot, and most recently William Grant experience, to take them beyond the Puerto Rican shores as the rum runners of the past did during the pirate heydays. His experience in the international markets will be necessary for their expansion plans as the family has struggled to find the magic recipe that can catapult them into international heights. Growing the sugar cane in Puerto Rico to make the product more authentic and less dependent on supplies is a great idea but federal minimum wage and local worker demand might not help their case if they don’t offset labor costs in the manufacturing line. It seems that the Puerto Rican government is very excited and pleased to have more business to tax against and make profits, especially since Serrallés doesn’t get the same subsidies and breaks as Cervecera de Puerto Rico. If at all possible, they should benchmark Bacardí’s expansion strategy to accelerate their plans and catch up in the market. It will definitely be nice to see Don Q in shelves all over Seattle and beyond, to the point I will be able to ask for some añejo during my vacation trips around the world. For now, I will continue to purchase bottles every time I go back home and bring them with me, a small reminder of the sacrifices made to ensure the broken hill can be restored to its former glory, one export at a time.

References

Cervecera de Puerto Rico – Medalla

Destilería Serrallés – Don Q

[1] The Modelo group from Mexico bought the rights to name their beer Corona to exporting into the US. The beer known today as Corona Extra and Corona Light are Modelo products using the Puerto Rican beer’s brand name.

[2] https://www.elnuevodia.com/negocios/finanzas/nota/dominiodelmercadocervecero-1315378/

[3] https://www.brewbound.com/news/medalla-light-introduces-12-oz-bottle

[4] A cuerda is a Spanish acre, or 0.971 acres. It is exactly 3,930.395625 m².

Broken Hill: Part 2

Compañía Cervecera de Puerto Rico – Medalla Light Expansion

Destilería Serrallés – Don Q Expansion

References

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