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SB Voices: The tussle for high-end Tequila

After last week’s announcement that Diageo is to splash a cool US$1 billion on George Clooney’s Casamigos Tequila, Kristiane Sherry explores the big-money drinks battle for the premium-plus end of the category.

How will the battle for high-end Tequila play out? Kristiane Sherry muses on the future of recent acquisition bids

The Tequila Brand Champions makes for pretty sparse reading. The smallest category to come under scrutiny in the annual volume sales report, even when taking into account the non-disclosure from giant Jose Cuervo just a trio of brands pass the million annual nine-litre case sale threshold.

Before we get into the volume-versus-value game, it’s important to note that the fastest growing brand within that three is Patrón, long recognised for its luxury positioning. And with more than 2.47 million cases shifted in 2016, it outperformed Brown-Forman’s rival El Jimador (1.16m), proving that consumers are committing to their interest in high-end Tequila. This is not just a passing fling.

This realisation has sparked something of an agave acquisition quest among the world’s largest drinks companies. And it’s no surprise, given that super-premium Tequila sales in the US have shot up 706% in US since 2002, Distilled Spirits Council data shows.

So who is invested in the game? Diageo already had a stake pre-Casamigos through Don Julio, which is acquired from Jose Cuervo in 2015 in exchange for Irish whiskey brand Bushmills. In the last 12 months alone we’ve seen LVMH launch super-premium line Volcan de mi Tierra as part of a joint venture with Mexico’s Gallardo family; SPI Group’s Amber Beverage Group snap up Fabrica de Tequilas Finos; and Edrington sign a US deal with Tequila Partida, a move which will see the brand subsumed into its spirits portfolio. And these developments don’t take into account the other so-hot-right-now agave spirit: mezcal. Don’t forget, Pernod Ricard just acquired Del Maguey Single Village, while Bacardi took a minority stake in Ilegal just this February.

The quality question

What will this mean for the agave sector? There are some concerns on the operational and logistics side – see the July issue of SB for more on this when it comes to mezcal. But should industry stakeholders and consumers be alarmed? Will the influx of big business dilute quality? Will the craft, artisanal appeal of so many of these smaller brands evaporate in a more corporate environment?

Diageo recently acquired Casamigos for US$1 billion

Big companies do brand building well – it’s why the likes of Diageo and Pernod Ricard are where they are. While efficiencies will no doubt be made as a result of these deals, marketers aren’t in the business of tampering with brand cues and values that make these acquisition targets so alluring. In the short term at least, fears should be allayed.

But in the long term is there simply space for all these higher-end spirits playing the same space in a relatively under-developed category? This is where the gamble comes in. While sales in the US, UK and much of Europe are growing, development is coming in pockets and must be accompanied by meaningful trade and consumer education to push the category beyond its basic salt-and-lime standing. Tequila is not a sector to play in if you want to make a quick buck. While Diageo has done a good job with Don Julio – volumes soared by 125% from 2014 to 2015, before flattening in 2016, according to Brand Champions figures – its share price slipped 2% on the Casamigos news, showing the markets are in agreement that Tequila remains a risk.

Essential education

The brands that will succeed in this battle for high-end Tequila mind- and market share – and I don’t think they all will – will be those that invest in training and engagement above and beyond what does on across the board. All the recent acquisitions involve brands that have a niche, but now need to own the higher-end and take on Patrón at its own game. With such an established name already leading the field the others are playing catch-up and it will be intriguing to see how this particular dynamic in plays out.

There are other complex factors cradling the high-end agave market, too. Supply concerns are a cyclical but very real challenge, and trade tariffs – dubbed the ‘Tequila Tax’ – between the US and Mexico mooted at the behest of Donald Trump could hamper proceedings if they come into fruition.

But look to gin: when a stagnant does category takes off, the rewards are enormous. However it will take a mix of good planning and good fortune for these recent agave acquisitions to contribute significant financial gains for their parent company shareholders.

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