Diageo bullish on Tequila boom

The world’s biggest premium spirits group sees Tequila as the key to upping its value share of the global alcohol market from 4% to 6% by 2030.

Diageo’s new chief executive, Debra Crew, wants “to take Tequila around the world.”

“Its much like we did with Johnnie Walker in the 1800s when Johnnie Walker took Scotch to the four corners of the globe,” says Debra Crew, stressing the potential of the category to both expand volumes and premiumise rapidly.

Today some 80% of Tequila consumption remains in North America.

In 2021, when the pandemic-fuelled cocktails at home boom was in full swing, Tequila topped luxury spirits sales in the US, climbing by 75%, according to data from the Distilled Spirits Council of the US.

That made the market worth US$6 billion, out of total global sales of just under US$10 billion.

But last year the Mexican spirit overtook American whiskey to become the second most valuable spirit category in the US, as reported by IWSR Drinks Market Analysis, sitting only behind vodka.

By the end of 2023, IWSR predicts Tequila will take the top spot.

But as Crew puts it: “Tequila remains only sold in a couple of markets”, implying that the growth potential outside North America and Mexico could be enormous.

According to Fortune, global demand topped US$10 billion last year and will mushroom by 50% to US$15.57 billion by 2029.

In just one year, Tequila sales in Europe, including the UK, have doubled.

Crew wants a big slice of that future growth of Tequila as she drives Diageo’s ambition of grabbing a much larger proportion of the world’s total beverage alcohol market.

The world’s biggest premium spirits group has a target of increasing its share of the alcohol market by value from 4% to 6% by 2030.

That goal was set by the late Sir Ivan Menezes in the autumn of 2021 and Diageo says it has already moved its share up to 4.7%.

It plans to hit its 2030 target by building on a sort of three-sided category scaffold formed by scotch, beer (essentially Guinness) and Tequila, with the 200 brands in its portfolio being ratcheted up on the back of those categories.

That strategy is working. In the financial year to the end of June (F23) “we drove organic net sales growth in scotch, tequila and Guinness,” says Crew, the former US army intelligence officer who has been with the group for four years, including a stint as President of its crucial North American arm.

Scotch whisky accounts for a quarter of all Diageo’s net sales, led by the flagship Johnnie Walker brand which is segmented by price gradations.

Premiumisation means that consumers aspire to move up the quality and price scale, a policy which has turned Johnnie Walker into the world’s biggest spirits brand by retail sales prices, with a third of its consumers now being female.

Crew looks to repeat that formula with Diageo’s Tequila brand stable.

“We are the people who have done that successfully with so many brands,” she says, and now we plan to do it with Tequila. There is nobody better placed to do that.”

Yet Diageo has only comparatively recently moved into Tequila in a big way.

Until 2013 it held the global distribution rights to Jose Cuervo, the biggest selling brand which today sells more than 9 million cases.

But the then CEO Paul Walsh decided that he would either own the brand or develop his own. He made the Beckmann family, who control owning company Becle, an offer they refused, so he walked away.

Diageo already had Don Julio in its stable, which it set about building rapidly, but the transformation to its Tequila ambitions was announced in 2017 when Menezes bought Casamigos from George Clooney and his friends for an initial US$700 million and a further US$300 million based on a performance linked earn-out over 10 years.

That raised eyebrows at the time, but Diageo said it reflected the brand’s exceptional growth trajectory and upside potential.

That has proved more than far-sighted.

After two years in development, Casamigos was launched to the public in 2013. In 2020 it passed the million case mark and in 2022, according to the Spirits Business, it achieved a 95.6% increase in case sales to 2.2 million, approximately the same volume as Don Julio.

Yet that was at a time when demand was so strong that the shortage of agave and glass triggered by the pandemic restrained Diageo from innovating and expanding in the Tequila category as it had planned.

Those restraints have now eased and in the year to June 2023 Tequila gave Diageo its biggest growth category with organic net sales of Don Julio up by 20% and Casamigos 16% ahead.

Total net Tequila sales, including the DeLeon, increased by 19%.

In its past four financial years Diageo’s net sales have increased by 35%, led by Tequila, which grew its net income by 43% on volumes up by 32%, underlining both the growth potential and scope for premiumisation within the category.

By comparison, the group’s Scotch sales increased by 8% in value and 4% in volume.

Crew says that in terms of retail sales value Don Julio is the biggest brand worldwide, hotly followed by Casamigos, which she says are subtly different products.

“People are fascinated by Tequila. Bartenders love it because it makes great cocktails. It goes across occasions and with food so we are very excited about where we can go with it”, she says.

“Don Julio is No 1 in Mexico and is quite different from Casamigos. They play in different cocktail occasions and are used from shots to sipping. They differ in imagery and taste.”

The recently purchased 21 seasons brand is a fruit flavoured Tequila “so we have a very nice broad flavour portfolio.” That includes DeLeon, the brand launched with Sean Combs (rapper P. Diddy) and now the subject of litigation.

And the portfolio is being extended by differentiations such as Casamigos Cristalino and Don Julio Rosado Resposado which are aged in Port casks and American oak respectively.

Crew is convinced that the premiumisation trend will continue, especially in Tequila. And apart from grabbing the biggest slice of extra sales as the category spreads across the globe, she is proud of how Diageo will play a responsible part in protecting water resources as demand for its agave spirits expands.

As part of its drive to reduce water usage by 30% at the same time as driving efficiencies, Diageo is using drones in its Mexican agave fields to monitor plant growth to ensure that just the right amount of irrigation and fertilisation takes place where and when it is needed.

“That’s pretty neat,” she says.