In focus: Tequila trends

Last year the spirits world looked on agog as Diageo snapped up George Clooney and Rande Gerber’s fledgling Casamigos Tequila brand for a cool US$1 billion (£750m).

It was an astronomical figure for a single brand, even by spirits standards, but even more so for a Tequila, albeit one with Clooney’s star power behind it. Little did we know then that an even bigger deal was on the horizon, one that would swallow Diageo’s five times over. This January, Bacardi paid US$5.1bn for Patrón Tequila, having held a 25% stake in the company for nearly a decade. The acquisition made Bacardi the number-one spirits player in the super-premium segment in the US, and the second-largest spirits company in market share by value in America. And while Diageo’s purchase of Casamigos was based on its future growth potential, with the brand producing around 170,000 cases in 2017, Bacardi’s was a sign of confidence in an established brand that already produces more than 36 million bottles a year. Founded in 1989 by Californian entrepreneur John Paul DeJoria, and launching at a bold $37 a bottle, Patrón created the super-premium Tequila category.

Announced within a year of each other, Diageo and Bacardi’s deals weren’t play-it-safe minority stake acquisitions intended to test the waters. They were confident, multi-million dollar purchases with little room for error should either brand hit the rocks. In short, it signalled Tequila’s arrival into the big league.

Some producers might have looked on with trepidation, as ever-bigger deals shape the landscape. But Raffaele Berardi, CEO of Tequila Corralejo, views the recent rush of megadeals as a positive sign. “We see only opportunities for all players,” he says. “Even though the infrastructure of these companies is huge, it reflects a stronger category and consumption. Global companies with the highest infrastructure in the sector are able to pay or invest high multiples for spirits brands, specifically for Tequilas. This reflects an attractive and accelerated growth of the category, especially in the US, thanks to the acceptance and the increasing demand in the ultra-premium segment. At the same time, it pushes all producers to improve the quality and value of their portfolios.”

Elsewhere, Pernod Ricard USA bought the remaining 16% stake it didn’t already own in Avión Tequila. Having snapped up a minority stake in the brand in 2011, in 2014 the producer upped its involvement, buying a majority stake for a reported US$100m. This year it took full ownership for an undisclosed sum.

Once maligned as a spirit to slam, Tequila is now carving a reputation as a sophisticated serve for sipping, particularly in the UK on-trade, as an increasing number of premium bars dedicate space on their lists to the spirit, supported by a growing number of Mexican restaurants, says Ivan Dixon, head of spirits at Enotria&Coe. “This is filtering down to the off-trade, albeit at a slower pace than was predicted, but educated customers are starting to treat Tequila as a serious craft product.”

STATISTICS

To get an idea of the growth potential for Tequila, you only have to glance at its export figures. The US is, overwhelmingly, Tequila’s biggest market, importing 171.7m litres in 2017, according to the Tequila Regulatory Council. However, its second-biggest market is Spain, which imported a comparatively miniscule 5.3m litres, followed by Germany (4.6m), France (3m) and Japan (1.9m). The UK, despite its reputation as a cocktail-loving, trend-setting city, trails in ninth, importing just 1.4m litres in 2017. The scope for growth, on even a modest scale, is vast.

“America has grown so fast, but now other countries can start catching up. The big brands are going to re-educate consumers about Tequila,” says Michael Ballantyne, co-founder of Scotland’s first Tequila producer, UWA Tequila. “An important factor in the continued growth of the category is that re-education. You can completely wipe away what you think it was before – 100% blue agave – that’s the future of Tequila. Not the mixtos with sugar and additives that people have at 1am and are always a bad idea. It’s a new age of Tequila.”

That new age is one that is driven and has been largely defined by the rise of super-premium Tequila, which began in the early 1990s with Patrón, but has rapidly evolved in tandem with the craft spirits movement and booming cocktail culture. It’s not an exaggeration to say that the US has single-handedly built and sustained this segment.

The US Distilled Spirits Council defines super-premium as a bottle priced at more than US$26.67; between $17.78 and $26.67 for high-end premium; between $10 and $17.78 for premium and less than $10 for value Tequila. Today, the ‘super-premium’ segment is the most valuable and fastest growing in the US, having grown by 804% by volume between 2002 and 2017, compared with 347% for high-end premium expressions, 82% for premium and 107% for entry-level Tequilas. By value, super-premium Tequila has surged by 730% over the same period, compared with 368% for the high-end premium Tequilas, 59.7% for premium and 81.2% for entry-level expressions.

GLOBAL GROWTH

“If you look at the global growth of super-premium Tequila as a share of the super-premium spirits category as a whole, Tequila is nascent,” says Lee Applbaum, chief marketing officer at Patrón, when asked about the value for Bacardi in its purchase of Patrón.

“Bacardi has been a partner for a decade and understands the value that we have created in the US, but the real bet is what’s going to happen globally with super-premium Tequila.”
While the $5.1bn price tag might seem obscene, today, Patrón is the world’s number-one super-premium Tequila, accounting for 70% of sales in the segment, with an annual production of
3 million cases. In the US, there isn’t much more that Bacardi could hope to gain, but the potential to replicate its success in other markets, applying its own distribution network as a brand owner, rather than brand partner, is where the value really lies.

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“Obviously the finance folks have to put pen to paper to make sure that the numbers make sense, but at a strategic level that is the ambition,” says Applbaum. “Tequila is relatively small in comparison with gin, vodka or rum, and if you look at the opportunities that exist, and the road map that Patrón has made, you get a sense of the future value of the brand.”

Signalling its growing importance, innovation in Tequila is also gathering pace. Most recently, Sekforde released a range of Tequila & mezcal-specific mixers, designed to compliment and enhance agave-based spirits, while Schweppes brought out a salted lemon variant to pair with Tequila. Last month, Patrón expanded its Citrónge range of Tequila-based liqueurs with the launch of a pineapple flavoured expression, made with piña miel pineapples from the Mexican state of Veracruz. Flavour variants are also emerging, such as 1800’s coconut expression, and Cazcabel’s coffee and honey releases, which Dixon says will “open up the category to a new demographic of customer who is more likely to further explore the category and experiment with unadulterated versions”.

Experimentation with longer-aged and cask-finished Tequilas is also growing. Tequila Corralejo recently launched Corralejo Extra Añejo 1821 – a double-distilled 100% blue agave Tequila aged for 36 months in American oak barrels. While Ballantyne’s UWA Tequila was the first to release a Tequila aged in ex-Speyside Scotch whisky barrels. It also has a reposado aged in ex-Sherry casks in the pipeline, as well as an Añejo aged in a combination of Sherry and Speyside barrels. Billed as Scotland’s first craft Tequila firm, UWA is based in Aberdeen and exports Speyside whisky casks to Mexico, where its Tequila is bottled and aged. “The point of using different kinds of barrels and strengths was about taking a leaf out of the whisky industry’s book,” says Ballantyne, who was born in Scotland but spent his formative years in Mexico, not returning to Scotland until he was 22. His mother lives in Mexico with Ballantyne’s Mexican stepfather, giving him a unique insight into the national spirit of both nations.

“It keeps things fresh and new. It’s just different. I’m happy for people to keep using ex-Bourbon barrels and selling Tequila at 40% ABV, but when you are a small producer you have to do things that really stand out. I chose Speyside because its generally a sweeter type of whisky and because we were using lowland agave, which is earthier. Highland agave is generally sweeter, so instead of using a really sweet barrel and a sweet agave, I wanted to balance the two. It has a hint of that single malt flavour, but still retains that true agave taste.”

‘BAD BROTHER’ MEZCAL

It would be remiss to not acknowledge mezcal, with the spirit growing apart from Tequila in its own right. “Bartenders love mezcal because it’s so different,” he says. “It’s almost like Tequila’s rebellious brother. It’s mischievous and a little bit dark. I always call it the little rascal of the agave family.”

While Tequila can only be made from blue agave produced in the state of Jalisco, and small parts of four other states, mezcal is subject to far less regulation and offers producers greater flexibility. It can be made from up to 28 varieties of agave, the most popular being Espadin, and in several regions, but production is centred around the state of Oaxaca. It gains its trademark smokiness through the agave hearts, known as ‘piñas’, being ‘cooked’ in wood-fired earthen pits for six days. “Mezcal is an altogether different beast that is showing faster category growth, albeit off a much smaller base,” says Enotria&Coe’s Dixon. “To its advantage, it is fresher and more mysterious, without the same negative connotations and stigmatisation that Tequila unfortunately holds for some.”

Signalling its growing importance, in May Diageo acquired the artisan mezcal brand Pierde Almas – the first stand-alone mezcal brand in its portfolio. This acquisition followed the addition of a mezcal to its recently acquired Casamigos range, which went on sale in the US, UK, Australia and Canada in April, priced at £44 a bottle in the UK. The ‘joven’ (young) expression is made from 100% Espadín agave from Santiago Matatlán in Oaxaca. Elsewhere, Pernod Ricard acquired a majority stake in the Del Maguey Single Village mezcal in August 2017.

“In the past five years, consumer appreciation of mezcal has been growing rapidly in Mexico and abroad, and we believe the category will continue to develop,” said Erik Seiersen, CEO of Diageo Mexico, at the time. UWA Tequila is also planning to release a mezcal expression in late 2019. So could mezcal be about to go mainstream? Perhaps, but Patrón’s Applbaum is cautious. “Mezcal can be beautiful and interesting, but you also get examples with no subtlety, with producers working to prove just how smoked they can go. It’s not as carefully regulated as Tequila. There are a wide range of expressions and some that are just marketing hype. As long as mezcal is made in a very honest and transparent way then great. But consumers and the trade have to be very careful that what they are getting is not a work of fiction but a true artisanal spirit.”

A REAL SHORTAGE

As far as premium Tequila is concerned, the only potential blip blocking its path is a blue agave shortage, which has already seen prices rise by around 500% in the past four years. Unlike vodka, gin, whisky or rum, Tequila’s raw material, blue agave, takes seven years to fully mature, four years at a push, and so its business model is unlike any other major global spirit. Already, the 17.7m blue agaves planted in 2011 for use this year fall short of the 42 million the industry needs to supply 140 registered companies, according to the CRT and the National Tequila Industry Chamber, with pressure likely to continue until 2021, as planting schemes mature. In the meantime, producers unwilling or unable to pay more for raw materials are being forced to cut corners.

“When you consider that agave takes seven years to mature and the explosive growth in demand, it’s no surprise,” says Applbaum. “There is a real shortage and pressure on agave. Patrón has had long-term contracts with the very best artisanal producers of 100% blue agave in the highlands for a long time. As a result, we have no concern about our ability to get the very highest-quality agave, and by that I mean fully matured agave. As for other brands, my understanding is that many are under immense pressure. That’s caused some brands to take shortcuts – harvesting agave earlier with lower sugar that results in an inferior quality product.”

Agave prices topped out at 22 pesos (US$1.18) per kilo at the start of the year – climbing from 3.85 pesos in 2016 – and have since softened to around 18 pesos. These soaring prices are not only a reflection of a shortage of mature plants intensified by surging demand, although many producers believe this pressure to have been overstated, but the growing premiumisation of the category.

“There are multi-billion-dollar deals going on and agave farmers are not really making a whole lot, and that’s the truth of it,” says Ballantyne. “I see what kind of job they do and I feel for them because they don’t necessarily reap the benefits that a brand does.”

With growing demand, and billions of pounds changing hands, rising agave prices seem inevitable. It’s likely then that producers of lower-cost Tequilas will find it increasingly difficult to compete with premium players more able to purchase higher-priced agave, which will lead to a level of rationalisation, says Applbaum. “There are brands that only got into it because Tequila was seen as a hot category, and agave was relatively inexpensive. That’s true of any category. There will probably be some rationalisation of brands but there are more than 1,200 Tequila brands, so the notion of monopoly is scary and not appropriate. Competition is a good thing and there is room for everyone. It’s more about brands that are in this for the long haul. The brands that were only there to extract money and weren’t committed, they are the ones getting squeezed.”

Tequila is still a baby compared with the likes of vodka, rum and even gin, and we have seen how quickly the latter category has grown. With consumer interest piqued, innovation growing and two of the world’s biggest drinks giants behind it, Tequila is primed to become a high-volume player. Its success will be determined by its ability to navigate the thorny issue of ensuring a sustainable and cost-effective supply of blue agave.

“I don’t think we’ve seen anything yet, and growth will occur steadily and organically as customers look for alternatives to gin, rum and whisky,” adds Dixon. “This is a spirit that has such a great story and a profound point of difference, and will remain completely unique and inimitable. The Patrón and Casamigos developments can only assist the category and accelerate this. Tequila isn’t the next gin, but I certainly expect to see some very exciting things from the category over the next four years.”