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Serralles In Tough Fight Over Puerto Rico Rum Rebates

July 19, 2011

Diageo’s decision to move production of Captain Morgan from Puerto Rico to the U.S. Virgin Islands (USVI) continues to send ripples through the Caribbean rum industry. Diageo was enticed by the USVI’s offer to return much higher tax rebates than the company was receiving in Puerto Rico. The Diageo USVI distillery is now operational and is slated to handle all of Captain Morgan’s output by next year. In all, Puerto Rico lost 9 million cases of Captain Morgan annual production in the deal.

Puerto Rico has since reached new incentive agreements to keep Bacardi, as well as smaller player Club Caribe, on the island for the next 20 years. But one holdout is Destileria Serralles, Captain Morgan’s former Puerto Rican producer, which lost 70% of its volume when the Captain set sail for USVI. Thus far, negotiations between Serralles and Puerto Rico on a new incentive pact haven’t borne fruit.

Serralles complains that it’s being offered a far less favorable tax rebate than Bacardi, mainly because Puerto Rico is making a distinction between branded and bulk rum. Bacardi will receive 46% of tax revenue on its branded rum production (similar to Diageo’s deal with USVI) while Serralles is being offered only 25% on its bulk production. Serralles’ branded business is led by DonQ, but bulk production constitutes most of its business. Bacardi rum’s U.S. volume is 9.4 million cases, nearly all of which is produced in Puerto Rico. Bacardi’s Castillo rum brand, which depleted 940,000 cases in the U.S. last year, is also produced in Puerto Rico.

Puerto Rico argues that its Serralles offer allows for higher bulk subsidies if Bacardi begins to compete in that area. But Serralles vice president Roberto Serralles remains unpersuaded, adding that he’s focused on rising bulk-market competition from USVI. “A couple major potential clients are on the fence—and we’re competing with USVI, which is offering much larger subsidies and long-term deals.” Puerto Rico risks losing its primacy in bulk rum if it doesn’t better incentivize its producers, he says.

Serralles also argues that the dispute is hurting Puerto Rico’s efforts to get Caribbean rum rebates capped across board. “If we don’t even have a level playing field in Puerto Rico, we have no moral authority to go to Washington and ask them to uniformly cap rum (rebates) across the territories, which remains our primary goal,” Serralles says. Puerto Rico unsuccessfully sought to get rebates capped at 10% in the last Congress, and it’s now proposing a 20% cap. “We may have a better chance with this Congress,” Serralles says, noting that current Puerto Rican governor Luis Fortuño is a Republican who has good relationships with the Republican House leadership, particularly the Ways & Means Committee. But the USVI’s current rum agreements—with Diageo for Captain Morgan and with Beam Global for Cruzan—remain the biggest obstacle for Puerto Rico, commercially and politically.

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