Rum Maker Wins Incentives - Fortune Brands in Manufacturing Pact With St. Croix

[Edward Hamilton]

Source: WSJ
By DAVID KESMODEL
Oct 6th



Spirits maker Fortune Brands Inc. reached a tentative agreement with the U.S. Virgin Islands to continue making rum on St. Croix in exchange for marketing and other incentives whose value is projected to exceed $1 billion over 30 years.
The long-term deal, spearheaded by Virgin Islands Gov. John P. deJongh Jr., includes a pledge by the government to cover the roughly $100 million cost of both expanding the Cruzan Rum distillery and building a state-of-the-art wastewater-treatment facility.
The accord comes on the heels of a similar agreement last year between the U.S. territory and London-based Diageo PLC, the world's largest liquor maker by sales. That pact has raised some questions in the U.S. Congress because Diageo is moving production away from Puerto Rico, a U.S. commonwealth.
Key to the rum deals for Fortune Brands and Diageo is the U.S. rum-tax "cover over" program. Dating back decades, it stipulates that most of the excise taxes collected on rum sold in the U.S. must be rebated to rum-producing U.S. islands to help them promote economic development and pay for social services. The allocation of that revenue is based on how much rum an island produces.
Mr. deJongh, a Democrat, hopes to secure a long-term stream of U.S. excise-tax revenue for the Virgin Islands by wooing distillers to produce rum there, ultimately helping to bolster the territory's fragile economy. In its current fiscal year, the territory faces a projected budget deficit of about $250 million. The agreement with Deerfield, Ill.-based Fortune Brands still has to be approved by the Virgin Islands senate.
"This is about building an industry and getting some stability within our economy," Mr. deJongh said. "It allows us to keep a company that has been in the Virgin Islands for a very long time."
Fortune Brands, a conglomerate that makes everything from Jim Beam bourbon to Titleist golf balls, bought the Cruzan Rum brand from Pernod Ricard SA last year for $100 million. About 648,000 nine-liter cases of Cruzan rum were sold in the U.S. last year, making it the fifth-largest rum, according to market-research firm Beverage Information Group.
Fortune Brands spokesman Clarkson Hine said the company is "delighted to secure a long-term agreement to deepen Cruzan's roots in the U.S. Virgin Islands." The Cruzan distillery, which also makes the company's Ronrico brand and "bulk rum" used in other companies' brands, employs 58 full-time workers.
Last year, Diageo signed an agreement to produce rum for its Captain Morgan brand on St. Croix, with initial sales in 2012. Diageo will receive incentives projected to total $2.7 billion over the 30-year deal, including the cost of a new distillery.
That agreement means Diageo will stop acquiring rum from a supplier in Puerto Rico. The switch has upset officials in Puerto Rico, which will lose part of its rum-tax receipts. Puerto Rico, unlike the Virgin Islands, requires that 90% of rum-tax proceeds be used to provide for public services.
Pedro R. Pierluisi, Puerto Rico's nonvoting representative in the U.S. House, introduced a bill in April that would limit subsidies to rum makers to a maximum of 10% of total rum-tax revenue. But the Democrat's proposal has garnered only seven co-sponsors, and the House Committee on Ways and Means hasn't acted on it.
"Many states have made major investments in manufacturing plants," said Diageo spokeswoman Zsoka McDonald. "Diageo and the [Virgin Islands] have succeeded in partnering to advance a brand with long-term durability."
The Virgin Islands Senate will take up the Fortune Brands agreement Oct. 21.

[Rum Runner]

That's good news for Cruzan.