MARKET: Agave goes abroad

Euromonitor International’s Catherine Mars discusses key opportunities in Mexico and explores how producers are looking overseas to boost sales of beer and Tequila

In 2007, volume sales of spirits in Mexico grew by less than 1%, due to the weak performance of Tequila. In spite of a record year for Tequila production in 2007, domestic consumption was stagnant. Although the youthful Mexican population offers plenty of opportunities for alcoholic drinks producers (the average consumer age is 27), this works against the Tequila sector. Due to changing consumption patterns, young consumers are now opting for whisk(e)y, vodka and Cognac, due to the perception that Tequila is old-fashioned and the spirit of choice for an older generation.

Despite declining domestic consumption rates, Tequila remains a source of national pride and the favourite spirit of most Mexicans, accounting for 47% of total volume sales of spirits in 2007. However, as consumer preference switches to other spirits, Tequila producers will be challenged to reposition Tequila as a preferred spirit for young adults. Casa Cuervo SA de CV has already begun to reposition its brands through the sponsorship of concerts fostering young musical talent. This will hopefully help to build stronger brand loyalty and lead to the introduction of newer brands. Euromonitor International expects other leading competitors such as Casa Herradura SA de CV and Bacardi y Cía SA de CV to follow a similar strategy in the future. Tequila is also expected to see more premium launches. Super-premium Tequila, mostly consumed by older consumers, needs to recapture the artisanal and natural spirit image that Tequila held 10 years ago, but has now lost due to mass sales. Future innovation in super-premium Tequila may include limited production and newer packaging designs to convey a more sophisticated image.

Mezcal – the new Tequila?
Mezcal, a spirit made from the agave plant, similar to blue agave, is rapidly gaining in popularity as a new alternative to Tequila, and is expected to take sales away from Tequila in Mexico. After decades of being perceived as a poor man’s drink, mezcal is finally gaining respect among spirits connoisseurs. Mezcal producers, such as Nacional Vinícola SA de CV with popular brand Gusano Rojo, are succeeding in positioning mezcal as a higher-status spirit. The company presents its brand in aged and gold versions, implying an artisanal and more natural spirit than Tequila. The strategic move by this company may open the door to new possibilities for growth for other smaller producers of mezcal. Euromonitor International believes that fine artisanal mezcal could report good sales in the mid- to long-term.

Nascent wine culture
The high excise taxes on spirits, coupled with a wider consumer base, have contributed to positive developments in wine sales. In spite of the apparent slowdown in the economy, Mexicans continued to increase their consumption of wine at a healthy rate of 5% in 2007. Mexicans are consuming wine more frequently with their meals, partly due to the increasing consumer perception that still light grape wine is beneficial if consumed with a meal.

Additionally, the industry has embarked on an ambitious initiative to stimulate a wine-drinking culture. More than ever, Mexicans now have easy access to a wide range of wine options, from economy to super-premium labels to fit their individual budgets. Euromonitor’s research suggests that consumers from lower and middle-income levels purchase wine more for fashion and flavour than to pair the appropriate variety with a meal. Price still prevails over quality in many instances. The good news is that consumers at the base of the pyramid are being exposed to affordable wines such as California (Valle Redondo SA de CV) and industry participants accept this as the first step towards the creation of a true wine culture in Mexico.

Reflecting efforts to build a wine culture, the on-trade accounts for the majority of wine volume sales (58% of total volume and 73% of total value in 2007) in contrast to other categories such as beer and spirits where the off-trade dominates. In volume terms, the share of sales through the on-trade was up by five percentage points compared to 1997 as Mexicans  began to adopt wine consumption at higher rates in restaurants and bars than at home. This is the result of more consumers switching from expensive spirits or cocktails to a glass of wine. Many restaurants have expanded their wine lists to include wine by the glass or bottle. In fact, several upscale restaurants now offer the services of a catador or sommelier, so consumers can best pair their wine with a meal. Casa Pedro Domecq Mexico SA de CV, for example, manages a training facility in Mexico City, where waiting staff learn how to serve wine properly in on-trade establishments.

The emerging wine culture and the fact that younger consumers are including wine with their daily meals, will contribute to the continued dynamism of wine over the next five years (Euromonitor International forecasts a CAGR of 8% in total volume terms). The increasing consumption of wine by women is also likely to support future sales; however, a drastic downturn in the economy may negatively affect sales of wine. In spite of the weak economic perspective expected for 2007 and 2008, sales of wine are expected to remain dynamic. However, there may be a switch to more affordable brands if Mexican disposable incomes decline.

The beer essential
In contrast to the healthy performance of the wine sector, the maturity of the beer sector in Mexico means a less impressive showing (Euromonitor International recorded total volume growth in beer of less than 1% in 2007). Since most Mexicans perceive domestic standard lager to be of excellent quality and flavour, and at an affordable price, there is no strong incentive to push consumers towards premium or imported labels. Beer sales are dominated by domestic standard lager (which accounted for 97% of total beer volume sales in 2007) and for this reason exports are essential to Mexican beer producers.

Company sources indicate that Grupo Modelo and Cervecería Cuauhtémoc Moctezuma (the two leading Mexican beer players with a combined share of almost 99% by total volume in the domestic market) export at least 31% of their volume production. The main markets for exports are the US and Latin America. Mexico’s proximity to the US, and its status as America’s most visited foreign country, helped Grupo Modelo’s Corona beer brand grow by 67% between 2000 and 2006. The brand has been extremely successful by positioning itself as a “Mexican holiday in a bottle” to appeal to those who have visited or aspire to visit Mexico’s sandy, white beaches. Meanwhile, the large Mexican-American population in the US helped Modelo Especial, which is considered “an everyday beer” by Mexican immigrants, almost quadruple in volume between 2000 and 2006. Euromonitor International also expects Europe, Russia, China and Oceania to become significant importers of Mexican beer over the next five years and Grupo Modelo is anticipated to remain the leader in the export of beer with its Corona Extra brand.

Tequila exports
Similarly to beer, the maturity of domestic Tequila sales and conservative growth forecasts are forcing producers to develop international sales, particularly in the US and Europe. In 2007, exports of Tequila grew by 25% in 2006 according to the Consejo Regulador del Tequila (CRT – Regulatory Council of Tequila) and volume sales of Tequila in the US exceeded those in Mexico for the first time, driven by growing multi-culturalism and continued premiumisation. Additionally, the signing of the historic Trade in Tequila agreement between Mexico and the US in January 2006 signalled the end of restrictions on bulk Tequila exports to the US and contributed to surging sales in the country (in 2006 US imports of Tequila were up by 34% in volume terms and 22% in value terms).

While Tequila exports are expected to remain strong as producers focus their production on exports, there is, however, concern that after 2010 Tequila production may be constrained by limited crops of agave plants, as their maturation cycle will not yet be completed for distilling. To avoid future agave supply problems and an increase in production costs, companies are taking advantage of the current overproduction of Tequila by stocking excess supply for future use. The CRT and the government are working with independent agave producers to acquire any overproduction in order to secure future supply and avoid a production crisis in 2010. Additionally, Casa Cuervo, the domestic market leader in Tequila, is investing US$30 million this year to double its Tequila production capacity and meet increasing demand from international markets.

Future’s bright
Euromonitor International firmly believes that the popularity of Latin-inspired drinks is a significant trend which is here to stay. The popularity of Mexican food globally is testament to the current fascination with Latin culture and bodes well for both Tequila producers and Mexican brewers. Despite potential supply issues, Tequila is expected to gain more of a crossover appeal beyond traditional application (being paired with Mexican cuisine or as a component of Margaritas) and will benefit from greater demand for exclusive premium products. Similarly, authentic Mexican beer is expected to be in demand, especially as the development of new “faux-Latin” brands such as SABMiller’s Miller Chill and Anheuser-Busch’s Bud Light Lime bring new consumers to the category.

Catherine Mars is an alcoholic drinks analyst at Euromonitor International

db © July 2008