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Patrón TR chief: ‘every brand is a competitor’

John Kilmartin, travel retail chief at Patrón Spirits International, talks Tequila with The Spirits Business and shares his ambitions for the brand and wider category.

J-Kilmartin
John Kilmartin, travel retail chief at Patrón Spirits Internationa

*This article was first published in the October 2016 edition of The Spirits Business

“You’re speaking to a guy that never drank Tequila in his life before he joined Patrón,” quips John Kilmartin mid-way through our telephone interview. Patrón Spirits International’s vice-president global travel retail, a well-known and much-liked character in the TR industry, is characteristically conversational and as sharp as always. Today he is in particularly good spirits, buoyant off the back of a stellar first half of 2016, which saw his ultra-premium Tequila portfolio post 15% volume gains in travel retail.

Perhaps his surprising agave admission is indicative of both the wider Tequila market and its fight for consumer mindshare in recent years. Perceptions are changing, the spirit is evolving, and while the key US market has been turned on by the category’s charm for some time, its development into a serious, ultra-premium proposition is a relatively recent phenomenon. Think back even just five years: Tequila was far more likely to be found in shot form at frat parties than as a sipping liquor in executive circles.

If Kilmartin was not previously familiar with the marvels of Tequila, he certainly is today. He officially joined Patrón in April 2014, as the wider category was seemingly just waking up to its own popularity and started to tap strategically into its inherent growth potential. From total sales of £5.3 billion (about US$7.99bn) in 2009, the category was worth £7.3bn (about US$10.99bn) in 2015, at 2015 dollar values, Euromonitor reckons, and it predicts that the category will swell to £10bn (about US$15bn) by 2019 – roughly the size of the American whiskey market today.

patron*This article was first published in the October 2016 edition of The Spirits Business

While the liquid was not on his palate, Tequila’s growth was firmly on Kilmartin’s radar long before he joined Patrón. His 20-year stint with the travel retailer Aer Rianta International (ARI) saw him hold a number of senior roles spanning commercial, operations and procurement.

“I was very, very heavily involved in the procurement side of the business, so I’d really been working with brands on a daily basis,” he says. “I can’t say the move [to a supplier] was a huge, huge change for me, but it was always something I wanted to do. Now, not every category appealed to me; I guess the reality was I was more drawn to the wine and spirits sectors.”

While Kilmartin was building his career at ARI, Patrón set its sights on the channel. Instead of taking a domestic market-led approach to international expansion, the brand more or less pioneered a model of growing a global footprint via travel retail. “The strategy suited the brand perfectly,” Kilmartin says.

The approach centred on key focus markets – the US, Russia, the Middle East and Israel in this case – and building brand recognition from the airports out. “At the end of the day, distributors are like everybody else; they’re flying through airports, they’re looking for new lines to increase their business portfolios with, and that generated demand in the domestic markets as a result of going into travel retail,” Kilmartin says.

It makes sense then, that the annual TFWA World Exhibition & Conference was where Kilmartin discovered the brand. “I first came across Patrón in Cannes probably around 2003 – it was a while ago,” Kilmartin recalls. “Now I’m guessing timing is everything in life. The market in Russia at that stage was just beginning to turn and you could see that there were tentative roots in terms of premiumisation.” Tequila itself, mostly in mixto form, was quite strong in the market. “Clear white spirits sat quite conveniently alongside vodka,” he says.

“I really admired the foresight of Patrón, the gap they saw in the market. And I guess it’s probably easy to identify that gap in the homogenous US/Americas markets, but to identify that in travel retail and internationally, that was one of the things I admired most about them – and their commitment to the travel retail channel.”

Tough times

While Kilmartin says he has grown “quite fond of, quite passionate about” the TR industry, it has not all been plain sailing. Patrón might be flying high, but plenty of others are not; the wine and spirits category posted declines of 4.2% in value and 3.3% in volume terms in the 2015 calendar year, according to the IWSR.

A combination of geopolitical uncertainty, currency fluctuations and security worries have reined in the excesses of the channel, and tough times are upon the community. It invites the question: with such strong double-digit volume growth, is Patrón somehow immune to the situation?

“I would love to say yes, but the reality is, we’re all exposed to the sudden shocks in the market,” Kilmartin says. He cites Russia as one example: the country was a “particularly strong market” for the brand a few years back, but given geopolitical and economic events, times have changed.

“There are some tentative green shoots out there that show some signs of recovery and we’re confident that, maybe not next year or the year after but over time, the next four to five years, that it will get back to where it was,” Kilmartin says.

Currency volatility, particularly in the key US and Latin Americas region, has been a defining theme for the channel. But while Kilmartin speaks with caution, he remains upbeat.

patron“The reality is, if we enjoyed growth of 13% last year and we’re enjoying growth of about 15% this year, how much more could that have been given the current strength of the dollar? I’m confident that we’ll continue to drive those numbers. Forex is an issue; we’re not sweeping it under the carpet. We’re working very hard with operators to see where we can make some tweaks and modifications, and if we go on-shelf priced appropriately I think we should come out of this okay.”

If it is not some sort of magical immunity to really quite ferocious headwinds, what is the secret behind the brand’s enviable success? After all, as Kilmartin says, 13% volume gains represent “a hell of a lot more in terms of value” for the brand’s retail partners. What is underpinning the growth?

“Towards the end of 2014 and going into 2015 we really positioned ourselves to go back towards what was core within our business, and that really is Tequila,” he says. “Our liqueurs line [Patrón XO Café coffee liqueur, the chilli-forward Patrón Incendio and the orange-based Patrón Citrónge] is fantastic, but at the end of the day we’re all about the bread and butter of the business, which is blanco, reposado and añejo.”

In real terms this has meant identifying the strongest markets – the US, Mexico and the Caribbean – and “doubling down”, Kilmartin says: “Then, when you step out of that, we really doubled up our efforts in key markets such as the UK, Spain and India.” He also highlights Australia and Thailand as strong performers in 2015.

Exclusive offerings

Product development has, of course, also been important. One-litre travel retail- exclusive bottlings of the core Patrón Silver, Reposado and Añejo range, plus the Roca Patrón line, with its focus on “craft” cues and the Tahona production process, have drawn in ultra-premium Tequila aficionados and newcomers alike.

But what really rewrote the rules of what a Tequila brand ‘should’ do was the launch of Patrón en Lalique: Serie 1, initially unveiled at the TFWA World Exhibition and Conference in 2015. The partnership marks the first time the iconic French crystal-maker had worked with a Tequila producer, a significant departure from Lalique’s traditional Scotch and Cognac territory. The release carries a price tag to match the occasion, weighing in at £4,950.

PATRON_Lalique_Box“There was some discussion between Patrón and Lalique and there was the recognition that there were synergies between both brands – and both committed to the partnership,” Kilmartin says. “We have plans to develop and enhance on that partnership.” However, he is emphatic that there will not be a Patrón-Lalique partnership product coming out every year: “That would just devalue it, I feel.”

How long-term is this partnership? Could we see product come to market from both houses in perhaps15 or 20 years’ time? “I would like to think so,” Kilmartin says. If initial indications are anything to go by – he has just shipped a repeat order of 12 cases to the Middle East – the partnership has legs. “It really does appeal to that ultra-premium, bespoke-type consumer.”

Age is more than a number

The Lalique release is just one example of Patrón’s tactical encroachment onto the territory traditionally held by Scotch and Cognac in travel retail. Recent releases, including Patrón Cask Collection Sherry Añejo, suggest a wood management strategy similar to a Scotch brand, a shift Kilmartin confirms: “There’s no reason why one can’t transcend from being a malt drinker into an aged Tequila drinker.”

This is evident from the release of Patrón Extra Añejo 5 Años, a product developed with travel retailer DFS Group and available exclusively from its Asia Pacific stores. The expression is performing “very well”, with deluxe malts and Cognac drinkers the key target. In addition, “we’re in talks and discussions with DFS potentially and a number of other operators in developing what we call a barrel-select programme, specifically for them,” Kilmartin says.

Agave-FieldThe añejo end of the market in particular has been identified as a key opportunity to build further growth: “We need to make more of an expression about our age statements in Tequila, and these are the type of products you’ll see us coming to market with to entice brown spirits drinkers across into an aged Tequila statement.”

This is combative language, and Kilmartin’s words reinforce the notion that both brown spirits suppliers and the retailers themselves are not currently taking Tequila seriously enough as an ultra-premium proposition. Does he view the other aged categories as competitors?

“Look, when I go into a travel retail store, I look at everything on-shelf as being a competitor,” he says. “Because at the end of the day, the customers get a choice how to spend: they can either take ‘x’ amount because of his allowance or ‘x’ amount because of the value. And what you’ve got to do is make sure that one of the brands he’s leaning towards, if not the brand he’s leaning towards, is your brand. So every other brand on-shelf, whether it’s in white spirits or brown spirits, is a competitor.”

To this end, a ‘Make Your Next Whisky a Tequila’ campaign is set to roll out across Asia Pacific and India from the fourth quarter of 2016 and on into 2017.

Playing the portfolio

It is often forgotten that Patrón Spirits International itself plays in multiple categories. Beyond the core eponymous Tequila portfolio is the trio of liqueurs, which are in fact outperforming Tequila in terms of growth rate. “In duty free we’re up 28% this year,” Kilmartin says, which is impressive considering the line is not a core focus. “Every father loves his children, but he loves some more than others,” he jests.

Pyrat, Patrón’s little-known amber Caribbean blended rum, is even further ahead, notching up growth of 33% in 2015 and 30% year-to-date in 2016. The brand was an in-house development launched in 1997, with Kilmartin putting its popularity down to its positioning (a bottle retails for around £40, about US$52), its bottle design and because “it’s just a damn good rum”.

Does he have ambitions to grow it in a similar way to the core Patrón Tequila portfolio in travel retail? “Wouldn’t it be beautiful if I did? It’s a single product entity as it stands today. I think there’s still some more growth within the rum category, maybe not for all brands, but I’d certainly like to think [for us] as we’ve come from such a small base. Now we’ve got significant distribution in travel retail, it’s just putting some energy behind it, some tasting programmes, introducing it to new consumers, and hopefully that in itself will help to drive growth.”

patronThe only cloud on the otherwise crystal clear outlook for the company is Ultimat Vodka, which Patrón acquired the global distribution rights for from Adamba Imports International in October 2007. Kilmartin declines to detail the Polish vodka’s exact performance, but will say it is “holding ground”.

He says: “It’s a very, very tough category. I’m not going to pretend we are a player in the vodka category.” Will growing it be a focus? “Obviously it’s part of the portfolio but as a company we don’t have a significant strategy for it within travel retail.” He adds that he does not see the company divesting the brand, but it will be interesting to watch how developments for Ultimat pan out.

What about any further additions to the portfolio? “Discussions have obviously been had in the past, but at this moment in time I don’t see any acquisition on the horizon. But never say never.”

Agave ambitions

Kilmartin’s ambitions for the Tequila category are more pressing. He is still fighting with both consumers and retaileo change perceptions of the category: “In each and every meeting that I have with each and every operator I’m trying to ensure that we get our share of voice and share of space, and then it’s really trying to convince them to give us room to breathe. And if they do give us the ability we can deliver on their behalf, we can push up average transactional values.”

In order to deliver on that ever-critical ATV, Kilmartin is calling for partners to give the category not just enough shelf space, but room in the right location, too. He is convinced it will pay off in the long term: “Tequila is one of those exciting categories that does show some significant growth potential going forward, between 3 and 4% CAGR for the next number of years. It’s a big opportunity.”

On the consumer side, Patrón is making strides with its VR Oculus technology and the Know Your NOM campaign for both sales staff and consumers. Both are employed to build brand awareness and “help underscore the uniqueness” of the brand, in addition to challenging perceptions of the Tequila category more broadly.

patron“Education… you’ve never won the battle,” Kilmartin says. “It’s constant and it’s ongoing and you just have to keep repeating it and repeating it and repeating it. You can’t step back from it, every day you’ve got to be prepared to go in there and battle again. But we’re making headway.”

Assuming that the retailers jump on board, education continues to prove effective and barring any further geopolitical or economic shocks, how big can the Tequila category grow in the TR channel? Kilmartin is immediately excited: “Oh god – it would be great if we could hit that 5 to 6% of total market share across all spirits categories. That would be very, very ambitious. But look, it’s a category that’s going to keep growing, that’s for sure.”

He is convinced that in both international and domestic markets and in travel retail there is a great deal of scope for development, with many markets still in their Tequila infancy.

“The future is exciting for Tequila, and it may not be that exciting for other spirits categories – they may have peaked or plateaued. It just requires a little bit of belief and a little bit of almost… faith on the part of the retailers, to give the category a little more space to breathe.”

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