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Rum Makers Tout Government Marketing Deal

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Nov. 27, 2006 — A five-year marketing agreement between the government and V.I. Rum Industries would boost the territory's rum revenues and keep the local rum industry from "evaporating," representatives from Cruzan International said Monday.
"The $80 million in rum revenues the government presently retains largely hangs on bulk-rum sales," said Jay S. Maltby, Cruzan International's president. "The problem is that those rum sales are highly vulnerable. And, as world trade barriers are broken down, the V.I. bulk-rum business will evaporate and the only portion of the revenue we'll retain is the 20 percent that comes from Cruzan Rum."
Maltby spoke during a press conference held Monday at the Holiday Inn Windward Passage Hotel on St. Thomas.
Ezra Shoshua, Cruzan International's chief financial officer, underscored Maltby's statements by adding that countries such as Brazil, with cheaper labor costs and lower molasses prices, could flood the world's bulk-rum market if world trade tariffs are taken down, thereby reducing local rum revenues.
Unless the company is able to work out an "aggressive" marketing program to build the Cruzan Rum brand, Maltby explained, rum revenues remitted to the territory from the federal government would remain stagnant, showing limited growth over the next five years.
Since purchasing V.I. Rum Industries in 1994, Cruzan International has already invested more than $100 million in marketing the rum, Malty said. Without support from the local government, he added, the company would not be able to propel Cruzan into top spots on the national and international markets.
"It's now time to up the ante," Maltby said. Cruzan International managed to increase excise-tax revenues from approximately $28 million in 1994 to about $77 million during the 2005 fiscal year, he said.
"Distributing the rum without the proper marketing dollars behind it will kill the brand," Maltby said.
The federal government currently collects $13.50 in excise taxes on each proof gallon of Cruzan Rum sold throughout the mainland. Of that amount, $13.25 is remitted to the V.I. government.
The proposed agreement stipulates that the local government will pay the company 35 percent of the extra excise tax revenues it receives each year because of the marketing efforts. In exchange, V.I. Rum Industries will initially invest $60 million to promote the rum brand. Maltby calls it a "win-win" deal for both sides.
Based on projected rum sales — which forecasts the sale of approximately 7.2 million cases of rum if the agreement goes in place — Cruzan International anticipates that the government would receive an extra $54.9 million in excise-tax revenues because of increased marketing efforts. Of that amount, V.I. Rum Industries will receive $19.2 million to continue rum promotions.
The government will make no marketing payments if there is no increase in rum sales, the agreement states.
Additionally, V.I. Rum Industries would be "giving up" some of the benefits it enjoys under the territory's Economic Development Commission tax-benefit program.
"We will be changing our EDC status so that instead of getting a 90-percent credit on the taxes we would otherwise be paying, we'll be getting a 55-percent credit," Shoshua said. "This would quadruple the amount of taxes we pay, creating more revenue for the V.I. government."
The agreement resembles a marketing proposal drafted in June 2005 that failed to receive approval from Gov. Charles W. Turnbull, Maltby said. According to past Source articles, the 2005 agreement failed to get off the ground because of an investigation launched by Turnbull regarding possible "criminal or ethical violations." (See "Governor Orders Investigation of Rum Agreement.")
"The differences are that this agreement is not retroactive — meaning that it becomes effective as soon as it is ratified by the full Senate — and there is a five-percent cap on the amount of excise-tax revenues we receive through total rum sales," Maltby said.
The agreement has already been reviewed by the territory's attorney general and inspector general, he added.
"It's bulletproof," Maltby said.
Senators will have an opportunity to review the agreement during a special legislative session scheduled for 10 a.m. Tuesday.
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