After a period of flatness, rum has slowly enjoyed a renaissance on the island with the emergence of artisan distilleries in Vieques and Aguada, the revival of the island’s oldest brand, “Ron del Barrilito”, and the debut of new varieties with spicy and tropical tones.
So far this year, worldwide revenue in the rum segment amounts to $16.3 billion, according to Statista, a German website that gathers economic information. The market is expected to grow by 3.7 percent in the next three years, while the United States generated $2.6 million in sales.
Last month, a survey by the marketing firm Report Buyer also revealed that demand for premium varieties of rum will lead to the expansion of the global rum market by 2 percent during the next four years.
The island is no exception.
“Rum is trending. We have seen a rise in rum bars. People are more interested in learning about the history and elaboration process of rum. The perception that rum was not a premium product has been shattered and you have cognac and whiskey lovers opening up to rum sipping,” indicated Alexandra Salgado, director of the Rums of Puerto Rico Program.
“In recent years, we have seen a small growth in the local market. There is an interest in premium brands. People are drinking less but are consuming better quality. It’s a phenomenon called premiumization. We saw it in the U.S. and we are seeing now it in Puerto Rico,” added Roberto J. Serrallés, vice president of business development for Destilería Serrallés.
This rise in interest responds to a confluence of factors: better products, wider availability of spirits and a new crop of bartenders and mixologists, making rum the star of their cocktail creations.
“We have talented bartenders and some of our bars are ranked among the best in the world. That has a halo effect and boosts growth,” Serrallés told THE WEEKLY JOURNAL.
Since 2016, La Factoría in Old San Juan belongs to the prestigious club of the top 50 bars in the world. It’s such a popular corner on San Sebastián street that two years ago Daddy Yankee and Luis Fonsi filmed parts of the video of their mega-hit “Despacito” in the bar.
Until not too long ago, it seemed that soda was rum’s ideal partner. Not anymore. It slowly earned a space as an essential ingredient in cocktail menus. While La Factoría flaunts “Peligroso” (Dangerous), a drink made with “Ron del Barrilito,” Bottega showcases “Ritmo Tropical” (Tropical Rhythm), a cocktail crafted with aged Bacardí. And the list of inviting drinks goes on.
“Our project is to raise the standard so when the tide rises, it raises all boats,” Serrallés said. “We follow the same process as whiskey producers. We distill five times, age our rum in the barrels used for bourbon. We do blends. It’s a process that requires craftsmanship and knowledge.”
Following this vision, four years ago the company celebrated its 150 anniversary releasing Don Q Reserva, a premium quality rum aged 20 years that sold for $1,800 a bottle. Along the way, Don Q presented its limited-edition single-barrel rum and its vermouth cask expressions to imbue the rum with a distinct flavor.
“With all that knowledge and the quality of our product, we are perfectly established to lead this expansion of premium rums,” indicated Serrallés of the company that celebrates its 155 anniversary next year.
The Rum Industry
But before reaching this point. Destilería Serrallés and the government of Puerto Rico suffered a blow in 2011, when Captain Morgan moved its business to the Virgin Islands, lured by a staggering $2.7 billion in tax incentives, according to The New York Times during the controversy.
Besides affecting the local production of rum, Because Serrallés produced the bulk rum for the Captain Morgan brand, the government coffers faced a loss of revenue. Why? The U.S. Treasury reimburses Puerto Rico millions of dollars each year for the excise tax on rum produced on the island and exported to the U.S. mainland.
In separate interviews, Manuel A. Laboy Rivera, secretary of Economic Development, and Salgado explained that the tax rebate pours over $330 million a year into the economy. The rum industry also creates between 700 and 1,000 direct jobs.
“In the 2018-19 fiscal year, the tax cover-over totaled $427 million. Since 1917, Puerto Rico and the Virgin Islands receive a rebate for the rum sold in the United States,” Laboy indicated of the rebate that has maintained the same level for the past five years.
Under current law, the excise tax on rum is $13.50 per proof gallon of rum sold stateside. In return, the federal government reimburses Puerto Rico and the Virgin Islands $13.25.
After this, a 46 percent of the rebate returns to the rum producers gathered under the Rums of Puerto Rico Program, Destilería Serrallés, Bacardí, Club Caribe and Ron del Barrilito, to invest in their product and marketing strategies. The other 54 percent goes to the General Fund, except for a 2.5 percent that by law is allocated for the Rums program, with a cap of $10 million.
Not all local or artisan distilleries that export rum to the U.S. participate in the Rums of Puerto Rico Program and receive the rebate. To receive the incentive and bear the Rums of Puerto Rico label, producers have to comply with requisites such as creating a molasses-based rum, distill it on the island and age it at least one year in oak barrels.
Laboy shrugged criticism from some sectors that claim that the rum industry is been subsidized by the government. “When we were working in the Tax Incentives Code we studied the Rums of Puerto Rico program and it has a positive return of investment. This means that for each dollar you invest, Puerto Rico receives more than a dollar in taxes,” argued the secretary of economic development.
Serrallés also rejected the premise and explained that the government of the Virgin Islands established the benchmark when in the process of getting Captain Morgan to jump off the Puerto Rican boat.
“We use 100 percent of that money to compete with the Virgin Islands and other markets that have lower production costs,” he indicated.
The vice president of Destilería Serrallés also indicated that after Captain Morgan’s departure, the company reorganized its business and worked out long term contracts with an undisclosed number of new clients.
“If we were selling them 10 million gallons of bulk rum, we have now exceeded that mark and are selling and exporting 17 million gallons annually,” said Serrallés, while clarifying that bulk rum exported and the Don Q brand are two different types of rum.
Last year, Destilería Serrallés became the main exporter of bulk rum to the U.S. market due to an increase in production.
The Local Experience
As part of its marketing strategy, Puerto Rico bills itself as the “Rum Capital of the World” because it’s home to Bacardí, the biggest distillery in the world, its centuries of rum-making experience and the premium quality of the rums produced on the island. Data from Statista recorded that Bacardí sold 6.5 million 9-liter cases in the U.S. last year.
The island is also responsible for over 70 percent of the rum sold in the U.S., making it the chief export. When combined, those distilleries bring up a cart of over 80 types of rum, according to Discover Puerto Rico, the destination marketing organization for the island.
“Con Calma” tour is set to continue on Thursday, Dec. 12 and is scheduled to wrap up two days before the year ends, after a record 10 shows at the Coliseo of Puerto Rico
Despite the importance of the industry, the government numbers are scattered and fragmented. When asked about rum revenues, the Treasury Department calculated that $274.5 million entered the public coffers in fiscal year 2018-19. This amount adds a part of the federal rebate and other local taxes, but it doesn’t’ take into account the money reimbursed to the distilleries.
The rums program provided a list that includes: Destilería Coquí in Mayagüez, Destilería Pito Rico in Jayuya, San Juan Distillers in Vega Alta, Bacardí in Cataño, Serrallés in Ponce, Club Caribe in Cidra, Trigo in Toa Baja, Ron del Barrilito in Bayamón and Crab Island in Vieques. It doesn’t include Raisingcane in Aguada or Caray in Juncos.
Serrallés, however, estimated that the island exports close to 32 million gallons of rum a year to the U.S., using his own production as a starting point for the projection.
In 2016, the sales volume of rum in the U.S. amounted to about 24.7 million cases or close to 50 million gallons of rum. On average there are approximately 2 proof gallons of rum per case. Commercial rum export value reached $65.8 million, according to data from Statista.
A Changing Industry
To secure its growth path, Destilería Serrallés invested $18 million to increase its production of rum and other $4 million in a modern bottling plant.
Other investors have followed with unexpected deals.
Two years ago, Joaquín Bacardí partnered with two other local businessmen to buy and revive the “Ron del Barrilito” brand, established over 140 years ago.
“I am the majority shareholder... As usual, it often happens that people prefer to keep their role privately. However, I can tell you that all of us who have invested in this “Ron del Barrilito” live here in Puerto Rico,” Bacardí responded to emailed questions sent by THE WEEKLY JOURNAL.
This mixologist is taking the bar scene by storm after grabbing the second position at the prestigious Bacardí Legacy Cocktail Competition this year
For Bacardí, investing in “Ron del Barrilito” was an obvious choice. As a businessman, the company had the potential to expand and grow. But as a rum connoisseur, it had appeal since the brand is considered one of the world’s finest sipping rum.
“‘Ron del Barrilito’ is very different from the rums that Bacardí produces. While Bacardí has ventured into other sophisticated products, its greatest strength has been the white rum that reaches a very wide market. “Ron del Barrilito” is an aged rum still produced in its original artisan method and that will not change,” he insisted.
Since the new investors arrived things are moving fast at Hacienda Santa Ana in Bayamón, Barrilito’s home and birthplace, where a new visitor’s center was inaugurated to celebrate its history and legacy. Three new rums also debuted: Ron del Barrilito Five Stars, Ron del Barrilito Four Stars and Rum Hacienda Santa Ana, a smooth cask-strength rum at 138° proof.
“The quality of our products is the most precious treasure and we use that strength to continue to build the industry. However, I think we can improve the collaboration between rum makers on the island. For example, the way in which scotch producers in England help each other has always attracted my attention, to the extent that they exchange aging barrels and support each other in challenging times,” said Bacardí of ways of improving the industry.
On their part, Laboy and Salgado reiterated the government’s continued support of the sector and advocated for initiatives to promote the rum industry as a destination in alliance with Discover Puerto Rico and Invest Puerto Rico.
Salgado also insisted on the importance of educational programs, as well as other promotional events, to introduce local rums to new buyers.
“We are convinced that the Puerto Rican rum industry can increase its contribution to the development of our economy. We will continue to support it because it is a local product of great quality that has gained international recognition. It has enormous possibilities of growth,” emphasized Laboy Rivera.
For Serrallés, the continued success of Puerto Rican rums also requires thinking outside of the box like the Kentucky experience, which created a Bourbon tour similar to the wine tours in California, to promote its whiskey.
“Rum is an art. There will always be room for innovators and new products,” said Bacardí.