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Diageo’s Cuervo deal makes ‘strategic sense’

While Diageo’s decision to swap its Bushmills Irish whiskey brand for full ownership of Don Julio Tequila may seem “strange”, the move makes “strategic sense”, a leading analyst has claimed.

Euromonitor's Jeremy Cunningtomn says Diageo's deal with Casa Cuervo to swap its Bushmills Irish whiskey brand for Don Julio Tequila is a "win win" agreement
Euromonitor’s Jeremy Cunningtomn says Diageo’s deal with Casa Cuervo to swap its Bushmills Irish whiskey brand for Don Julio Tequila is a “win win” agreement

It was revealed yesterday that the British drinks group has struck a deal with Don Julio part-owner Casa Cuervo to acquire the remaining 50% of the Tequila brand which it does not already own.

The deal also includes the early termination of an agreement that had seen Casa Cuervo produce and distribute Diageo’s Smirnoff vodka brand in Mexico. The UK group will be paid US$408 million upon completion of the agreement.

In return, Casa Cuervo will be given the Bushmills Irish whiskey business, which sold 800,000 cases worldwide in the year to June 2014, generating £57m for Diageo.

According to Jeremy Cunnington, senior alcoholic drinks analyst at Euromonitor International, some commentators may find the agreement “strange” due to the “expected global prospects” of both categories, with Irish whiskey set to see higher CAGR than Tequila, but it is a “win win” situation for both Diageo and Cuervo.

He said that the key to Diageo’s logic was its ambitions in the US, where Bushmills has “failed to work” with the brand’s share of the Irish whiskey market falling 17% in 2008 and 8% in 2013 due to the dominance of Pernod Ricard’s Jameson.

“Part of the problem with Bushmill’s has been its flavour profile which is less accessible than Jameson or Tullamore Dew, but has also been Diageo’s failure to develop an Irish identity for the brand separate from Jameson, not just in the US but also globally,” said Cunnington.

He added that it seems that Diageo believes it can gain greater traction in the US through the luxury Tequila segment, “if not in volume then in value”.

Meanwhile, Cunnington claims that for Casa Cuervo, the agreement gives it access to an international brand as well as stronger distribution in the US and around the world since the termination of its distribution deal for Jose Cuervo with Diageo.

“This deal potentially offers a win win situation for both parties and in the case of Grupo Cuervo shows that it is determined to remain independent for the foreseeable future,” said Cunnington.

“For Diageo the challenge will be to secure Don Julio’s growth in what may be a high margin, but crowded market place. However, this will be a risk and it will be at the price of not being in the world’s most dynamic spirits category.”

The deal is expected to be completed in early 2015.

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