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Rum market growth represents opportunity to reboot Puerto Rico’s economy

The rum industry could play a significant role in the recovery of Puerto Rico’s economy since it has a considerable impact on the treasury. Under the Federal Rum Excise Tax Cover-Over Program, every year excise taxes collected on Puerto Rican rum imported into the United States is transferred to the treasuries of the island. 

Since 1917, there has been an excise tax of $13.50 per gallon of proof on all rum sold in the U.S., $10.50 of that is covered over to Puerto Rico. This means that the more rum the island produces and sells on the mainland, the more funds it receives. In 1999, the US Congress rolled over an additional supplemental coverage of $2.75, resulting in $13.25 subject to its legislation.

Revenue from rum sales
The cover-over program has resulted in millions of dollars in additional revenue for the island. During the U.S. fiscal year 2020, such payments totaled $478 million of which $471.1 million were paid to Puerto Rico1. This sector also provided over a thousand direct and indirect jobs in distilleries, which makes it one of the main employment sources.

Nowadays, more than 80 individual rum labels are produced on the island. Four brands — Bacardi, DonQ by Dest. Serrallés, Club Caribe, and Ron del Barrilito — lead the market for this liquor, which maintains 55% of the sales of distilled spirits in Puerto Rico, according to the latest reports. Besides, thanks to them around 80% of the rum that is sold in the world comes from the island.

According to Statista, in the US rum generates the third-highest sales volume in the spirit industry, behind vodka and whiskey. The country consumes over 70% of the $35 million of gallons (160 million liters) that Puerto Rico produces.   

Rum sales generated by Bacardi in the U.S. amounted to some 180 million dollars, ranking in the top ten of spirits brand sales in 20192. One year later, it became the second-largest global rum brand with a sales volume of about 17.7 million-9 liter cases3.  

In the case of Destilería Serrallés, the company closed two contracts to be the supplier of rum in bulk with two clients in the US, with a 25-year commitment. With a minimum annual growth of 2%, there is $3,000 million that would go net to the treasury of the island.  

The treasury retains 54% of the rum tax cover for its coffers. Specifically, the government of Puerto Rico allocates most of the revenue to its general fund and to entities that contribute to the population’s welfare such as the Conservation Trust (PRCT), the Authority for the Financing of Infrastructure, and the Trust for Research, Science, and Technology.

Act No. 178 enacted in 2010 also provides additional benefits to rum producers in the island as part of the cover-over program, establishing that up to 46% must return to this sector for incentives, marketing, and promotional expenditures. However, it does not impose any restrictions on how Puerto Rico uses the revenue.

Currently, the money is destined to improve the distilleries, buy more barrels, reinvest in the production process and wages, etc. In return, rum producers that have signed agreements with the Government have maintained a minimum level of production for 20 years. In this context, the Rums of Puerto Rico Program part of the Department of Economic Development and Commerce (DDEC) provides the treasury with a certain amount of funds based on the volume of sales of rums in the US.

Nonetheless, the law that implements the supplemental coverage expires at the end of this year. Payments through this federal rum tax program would only be activated if it is renewed or the rum consumption in the U.S. increases, which indicates that if the volume of sales goes up, the same will happen with taxes.

Regarding this issue, in July, Resident Commissioner Jenniffer González Colón introduced H.R. 4642 bill to modify the Internal Revenue Code of 1986 to extend rum tax cover in effect through 2022. The main purpose is to end the uncertainty on this matter and make the program permanent since this revenue can provide the means for rebuilding the island’s infrastructure and rebooting its economy after the island’s natural disasters that took place in 2017.

Marketing initiatives to promote Puerto Rican rums 
Rum sales in the US represent a substantial revenue stream for the island. This is the reason why Rums of Puerto Rico has been doing a huge marketing effort to encourage brands to move so that more people get to know their products, sales increase, and thus, the income of the government of Puerto Rico goes up.

Annually, the program receives 2.5% of rum tax cover that funds the program itself and helps it contribute to the brands in their promotional marketing. In the last decade, they have invested significantly in promoting Puerto Rican brands in the U.S. by sponsoring important events such as MLB games and Boxing Fights at Las Vegas, participating at the Martha Stewart’s Food & Wine shows, and taking its flagship event “Taste of Rum” on a Pop Up Tour visiting the majority of the key cities.

Washington, D.C., San Francisco, Boston, Dallas, New York, Los Angeles, and Chicago are some of the cities where Rums of Puerto Rico has had the opportunity to educate rum consumers about an industry legislated by the highest quality standards. 

The US Pop Up Tour has as its main goal to promote not only the premium portfolio of the Puerto Rican rum brands but also Puerto Rico’s Taste of Rum Festival. The latter, organized by The Rum Lab Company, has been celebrated for more than 13 years and has attracted to the island thousands of tourists, including beverage trade professionals and rum aficionados, to enjoy wide varieties of local rums. 

During the last years, the government has undertaken some measures to increase the budget to support the program and its promotional campaigns, considering the challenges in both the local and global economies.

In 2019, Act 60-2019 established the new Puerto Rico Incentives Code to promote economic development. It provides certainty related to the types of incentives that the island offers to attract investment and create jobs in different sectors such as manufacturing, tourism, and agriculture. 

Furthermore, until a couple of years ago, the proceeds from the rum cover-over had mostly gone straight to the large distillers, but a change in legislation makes it possible that producers with partial operations and micro-distilleries can access subsidies. A good example of this is Club Caribe and Ron del Barrilito. Both brands began to receive an incentive in 2015 and 2019 respectively.

The company Edmundo B. Fernández, Inc. began an expansion plan that will increase the production and export capacity of Ron del Barrilito by 400%, as well as generate 40% additional direct jobs. A project that is backed by $6 million from the Manufacturing Incentive Fund of the Industrial Development Company.

Recently, the DDEC also announced the distribution of an incentive of $2.5 million from the Rums of Puerto Rico Program among bar owners, mixologists, bartenders, alcoholic beverage retail merchants, and sales service professionals. 

The commitment of the Program and the brands it represents is to boost the development of the rum industry and local establishments and mixologists as well, since they are very important in the education and promotion of rum to those who visit them.

“Sounds of the Rum Capital” is part of this commitment. On September 5, Rums of Puerto Rico launched a new campaign that combines both rum and music, key components in Caribbean culture.

This new strategy promotes worldwide the attributes of rum produced on the island. It consists of a 30-minute film that seeks to captivate the attention of the Anglo-Saxon market by taking the audience on a journey through the process of making world-class rum, where the island’s distilleries and their respective rum masters will be known, proving why the island is considered the “Capital of Rum.”

Based on the above, rum producers are working hand in hand to satisfy the global demand, while expanding the market in Puerto Rico with reinvestment of both their capital and the incentive they receive from the rum excise taxes. 

Bacardi, for instance, has invested around $200 million in Puerto Rico in the last 10 years, which includes new distillation equipment, improvements in infrastructure, energy efficiency, and the expansion of the storage area. Destilería Serrallés, on the other side, confirmed a $22 million addition to its complex in Ponce to expand its participation in export markets.

These efforts are being promoted in parallel with the “Todo es Desarrollo” (Everything is Development) institutional campaign. The DDEC aims at creating awareness of the importance of all island residents feeling part of and responsible for the economic development and well-being of Puerto Rico.

So far, the Department has made two calls for more than $425,000 to encourage the export of products and services. This initiative includes an accelerator for the training of participants and financial incentives to pay for export initiatives of up to $10,000, including the development of E-Commerce platforms4.

Rum as a growing market
The rum industry is a growing sector within the Puerto Rican economy that can be further exploited for the socio-economic benefits of the island. It reinvests continuously, increasing production and competitiveness in the industrial activity which, for the first four months of this year, showed an increase of 2.1%, compared to the same period of the previous year5.

At the global level, the rum market registers optimistic growth rates throughout 2021 and 2022. It estimates that the pace of change will accelerate in this industry and companies that are already re-aligning their strategies are going to emerge stronger from the unprecedented changes6. In 2019, the market was valued at $15.5 billion, and in the coming years, it is expected to grow consistently, reaching an estimated $18 billion by 20267.

In the US, by 2020, alcohol consumption increased by 45 million cases, with spirits adding 15 million cases. It should also consider that the country continues adding almost 3 million potential consumers each year — those turning 21 years old — who are well educated about products and the companies behind them8

Author Emily Cruz Villegas is a journalist and freelance content writer from Venezuela, with four years of experience as an academic researcher, mainly focused on economic development, public policies, and digital diplomacy. She has postgraduate education in International Relations at the University of Salvador (Argentina), and a master’s degree in Public Management at KDI School (South Korea). She may be reached at emily@empresasfh.com.

Concerning the rum sales volume, it increased from 23.13 million, 9-liter cases (2019) to about 25.1 million 9 liter cases (2020) in the US9. On this issue, the Craft Beverage Modernization and Tax Reform Act has an important influence on both domestic and foreign qualifying liquor producers.

In this sense, alcoholic beverages tax revenues are expected to grow by inflation and population, which offers an optimistic panorama to rum producers. This theory is supported by relatively constant alcohol consumption in growing economies. The alcohol industry has turned its attention to low-income and middle-income countries’ markets as a new source of growth and profit10

These factors represent an opportunity to diversify the industry’s growth strategy and promote the brands in those countries. Initiatives such as Taste of Rum – Pop Up Tour are part of such strategic ways of doing campaigns and promotional endeavors to increase the Puerto Rican brands’ presence in the US to attract new consumers.

Although pandemic represents the major threat for the rum industry in the island, as well as the current contractual debt obligations and natural disasters, this sector has a great potential to help the government to recover Puerto Rico’s economy by driving revenues up. The key is in designing a proper fiscal policy.

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[1] Alcohol and Tobacco Tax and Trade Bureau. (2020). Annual Report. Fiscal Year 2020.
[2] Conway, J. (2021, July 1). Bacardi rum’s global sales volume 2009-2020. Statista.
[3] Conway, J. (2021, July 2). Global rum market: leading brands based on sales volume 2020. Statista
[4] Department of Economic Development and Commerce. (2021, April 5). DDEC offers up to $ 10,000 in incentives to promote export initiatives.
[5] Department of Economic Development and Commerce. (2021, July 2). Manufacturing Index continues to grow and recover.
[6] Report Buyer (2021, July). 2021 Rum Market Outlook and Opportunities in the Post COVID recovery- What’s next for companies, demand, Rum market size, strategies, and countries to 2028. Report Buyer
[7] Conway, J. (2021, Julio 1). Bacardi rum’s global sales volume 2009-2020. Statista
[8] Dingwall, K. (2021, September 30). As The Trade Wars Cool Off, How Will The Spirits Industry Change? Forbes
[9] Conway, J. (2021, April 8). U.S. sales volume of rum 2004-2020. Statista
[10] Walls H, Cook S, Matzopoulos R, et al. Advancing alcohol research in low-income and middle-income countries: A global alcohol environment framework. BMJ Global Health 2020; 5:e001958. doi:10.1136/bmjgh-2019-001958

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This story was written by our staff based on a press release.
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