Alternative agave spirits could challenge Tequila

The Tequila category could be threatened by the rise of other agave-based spirits in the long term, according to IWSR Drinks Market Analysis.

The Tequila sector is expected to rise in volume by a compound annual growth rate (CAGR) of 7% globally from 2021 to 2026, the IWSR said. In 2021, Tequila had a 2.5% volume share of the global spirits market (excluding national spirits), up from 1.8% in 2016.

However, demand for Tequila has resulted in agave shortages, higher production costs and ‘external threats’ such as alternative agave spirits from Mexico, Australia, the US, and other countries, the IWSR warned.

Brandy Rand, chief strategy officer for IWSR, said these spirits could ‘challenge Tequila in meeting growing global agave spirit demand’ in the long term.

“There is a genuine long-term threat to the Tequila category of locally-grown, agave-based spirits,” she explained. “Agave grows wild in South Africa, Australia and along Mexico’s northern border with the US.

“An industrialisation of these agave plantations to produce spirit of a recognised quality could erode the dominance of Tequila in the agave spirit space in the longer term.

“After all, only 20 years ago consumers worldwide would turn to Scotch or Bourbon when thinking about whisky, but now the choice has expanded widely.”

Julka Villa, global head of marketing at Campari Group, also expects to see rising interest in agave alternatives, such as raicilla, bacanora and sotol.

Agave prices

The IWSR noted that agave prices are ‘likely to remain high for the next few years’.

“Agave prices have remained close to record levels for the past three years, at MX$26-28/kg,” said Jose Luis Hermoso, IWSR research director.

“And bear in mind that it takes 7-8kg of agave to make one litre of Tequila. Prices will only start moderating when there are signs that Tequila is cooling down in the key US market.”

However, the IWSR does not expect a downturn in the US market for Tequila.

The IWSR forecasts Tequila to grow by 9% in volume in the US (CAGR 2021-2016). The category is expected to overtake vodka in the US over the five-year period.

By 2026, the US alone will likely be consuming more Tequila than the entire world did last year, the IWSR predicts.

The IWSR also forecasts that the global value of agave spirits will rise by 67% between 2021 and 2026, with super and ultra-premium segments taking a 55% category value share by 2026.

In the UK, the category’s ‘most valuable’ European market, agave spirits are predicted to soar by 88% in value between 2021 and 2026, albeit from a small base.

“With this perspective, it is difficult to foresee any decline in demand for agave, or in agave pricing,” Hermoso added. “Having said that, if the US market does show signs of cooling down, the possibility of a rapid fall in agave prices can’t be ignored, as panic selling of surplus agave takes place.”

The IWSR also noted that rising prices have led to decreased quality as a result of producers choosing unmatured agave plants or diffusers to reduce costs.

Hermoso said the increasing prices and reduced promotional activity for entry-level Tequila brands in Mexico, the category’s second-largest market, is “pushing some mainstream consumers out of the category altogether and into the destilado de agave segment”.

As such, some producers have changed their products from 100% agave Tequila to mixto offerings, or left the market altogether. But a revival of the mixto category is unlikely, said Hermaso, as 100% agave is seen as more premium.

IWSR pointed to data that showed 100% agave Tequilas have seen their share of global volumes more than double over the past two decades, expanding from 29% in 2001 to 63% in 2021.

The segment’s value share jumped to 79% in 2021, driven by ‘strong demand’ for blanco and gold Tequilas, plus the fast-growing cristalino segment.

The IWSR said the premium Tequila segment is set to drive the category forward, especially in the US, where the segment is expected to add more than US$15 billion additional value to the overall category between 2021 and 2026. Other countries also have ‘attractive’ growth prospects, the IWSR added.

In the July 2020 issue of The Spirits Business, we looked at whether alternative agave spirits could follow the same growth trajectory as Tequila and mezcal.