From Don Papa to Casamigos: founders toast payday from spirits start-up boom

Drinks group Diageo’s $1bn deal for George Clooney’s Casamigos tequila brand brought plenty of Hollywood glamour but was also met with scepticism.

“The stars must line up perfectly for this deal to create value,” one analyst cautioned when the acquisition was announced in 2017. More than five years later, it is clear they have.

Casamigos was the fastest-growing tequila brand in the US at the end of 2022, according to Jefferies. Its popularity ensured that Clooney and his co-founders received their final performance-based payment from the deal in 2021.

Clooney’s celebrity undoubtedly helped sales. But 10-year-old Casamigos is one of a wave of spirits start-ups that have flourished as consumers pay up for premium liquors whose success is often powered by clever marketing.

Thanks to a string of deals in recent years, start-ups are now the chief source of fast-growing brands for global spirits groups such as Diageo, Pernod Ricard, Bacardi, Campari, Beam Suntory and Brown-Forman.

Diageo this week snapped up Don Papa rum, a decade-old brand from the Philippines, in a deal that could be worth more than €400mn. The hotly contested acquisition came despite the global economic downturn hitting dealmaking and casting a shadow over other consumer sectors.

“If there’s one clear trend in our industry, it is that in developed markets, and then developing markets when they reach a certain level of wealth . . . consumers will tend to drink less, but to drink better,” said Bob Kunze-Concewitz, chief executive of Campari Group.

Over the past year “the spirits sector has done remarkably well compared to most of the consumer complex,” said Gaurav Gooptu, a managing director at BNP Paribas. “There has been a lot of innovation and that has given spirits companies pricing power . . . Spirits valuations are holding up.”

Independent distilling, a fringe enterprise two decades ago, is now a thriving industry that grew even in the acute phase of the pandemic. In the US alone, the number of craft distillers increased from 1,400 in 2016 to 2,450 in 2021, according to the American Craft Spirits Association.

The sector’s explosion was partly enabled by regulatory changes. Twenty years ago, authorities in many countries were still hostile to new distillers, assuming that newcomers seeking licences were engaged in duty fraud, according to Frank Lampen, chief executive of Diageo’s start-up accelerator Distill Ventures.

The picture began changing around 15 years ago, said Lampen, when entrepreneurs saw the increasing popularity of artisanal drinks and the potential for start-ups to break into the market. Those wanting to muscle in lobbied regulators to make it easier to do so.

As entrepreneurs eyed their potential prize, established spirits giants had already seized on the drink “less but better” trend, enabling them to push up margins while also responding to pressure to encourage responsible drinking.

Clooney is the best-known winner, but the combination of the two trends began creating windfalls for start-up founders in 2004 with the landmark acquisition of Grey Goose vodka by Bacardi for about $2bn.

Founder-led start-ups are particularly suited to developing spirits because bartenders and consumers look for “authenticity” in these brands, according to several people in the field.

“A lot of the exciting innovation is coming from outside of the big companies,” said Lampen. “There’s often an element of irrationality needed in starting something.” 

The playbook for new entrants generally combines a distinctive distilling process with an origin story — or, as in the case of Don Papa, a legend created around a previously little-known figure from the Philippines’ 1890s revolution.

Yet many fast-growing brands do not actually make their own liquor. Some craft distillers delight in homespun techniques for creating unusual brews, but founders like Stephen Carroll, of Don Papa, focus on creating a brand around a drink produced by a third-party distiller.

Don Papa is distilled by Philippine drinks group Ginebra San Miguel, majority-owned by the San Miguel Corporation.

The third-party set-up can “radically change your cost of getting into business,” said Lampen. Start-ups can source spirits from companies like Dutch rum broker E&A Scheer or US spirits and ingredients maker MGP.

The model plays to the strengths of founders like Carroll, a former marketing executive at Rémy Cointreau. Although “the liquid”, as drinks executives call it, is important, marketing is crucial to success in a field where the vast majority of start-ups fail.

“Making rum is one thing and selling it is an entirely different thing,” said Miguel Riascos, co-founder of Colombian rum brand La Hechicera, which sold a majority stake to Pernod Ricard in 2022.

Riascos hails from the third generation of a rum-making family, but La Hechicera — meaning Sorceress — is their first experience of creating a “rich brand, with storytelling, graphics, the brand universe”.

Only a few brands achieve the “magic formula”, says Dan Gasper, founder of California-based drinks accelerator The Ardent Company. “Building a successful drinks business is an incredibly difficult journey,” he says, adding that about 1,800 distilleries launch each year globally and about the same number “die a quiet death”. 

Seamus Holohan, a co-founder of Helsinki Distilling Company, which sold itself to Finnish group Olvi in 2018, said distribution is a particular roadblock for start-ups seeking to scale up.

“Often you come into a chicken and egg situation, whereby you won’t get any distribution if you don’t have the end customers but you won’t get the end customers without the distribution,” he said. “The global spirits business is totally dominated by a handful of players.”

The large distribution networks built by the established companies are one reason those players vie to acquire successful new brands.

“In the case of the start-ups, clearly we pay a high multiple,” explains Campari’s Kunze-Concewitz. “But since they’re growing so fast and there are huge synergies, by plugging them into our distribution network, we recover that very quickly.”

But the market for would-be distillers is an increasingly crowded one. When Don Papa launched in 2012, the rum market was “a little bit boring,” said Gasper. “There weren’t as many strong brands, there were lots of older brands that were underinvested in.”

By contrast, hundreds of new upmarket rum distilleries are now in operation and several have been swallowed up by multinationals, including La Hechicera’s sale to Pernod Ricard and the acquisition of Diplomático by Brown-Forman last year.

Jason Kidd, founder of Dublin-based drinks start-up Outcast Brands, said: “The more mature the drinks category, the harder it is to find your own bit of space.”

That has led to a scramble for as yet untapped niches. Outcast’s Blood Monkey gin is designed for sipping, rather than drinking with tonic, and to appeal to male drinkers less drawn to “feminised” gins.

In a bid to capitalise on another niche, Diageo last year bought Mr Black, a coffee liqueur made with high-grade Arabica beans. Campari recently took a stake in a banana-flavoured bourbon.

While the likes of Diageo remain on the hunt for new brands, higher inflation and the sell-off in technology stocks mean that today’s start-ups face a tougher climate, said Mark Lynch, founding partner of UK-based advisory boutique Oghma Partners.

“Investors are being very cautious and what they’re encouraging their partner companies to do is to move to profitability as quickly as possible,” he said. “That’s the focus rather than hunting for new investments. People are wanting to see how all of these changes in the market, and the cost of living crisis, impacts these growth businesses.”

Yet he says the sale of Don Papa should be seen by founders as a reason “not to give up”.

Trevor Stirling, an analyst at Bernstein, says consumers so far are not trading down in spirits, even as they retrench elsewhere. “The premiumisation has stopped but it hasn’t gone into reverse,” he says.

In the long term, he argues it will persist. “Once you hit a certain income then people drink for status — and that’s true forever.”