Tequila sells to more than 100 countries worldwide. While the US remained a large and growing market last year, taking 77.6% of exports, that is a smaller proportion than the previous year despite an impressive 9% annual growth. In other markets the growth is incredible; 76.7% in Canada, for example.
Despite the odd surge in selected developed markets, growth rates have been particularly impressive in the BRICs. For example, in 2009-2010, premium sales grew by an astonishing 46% in Russia, where the customers are newly-affluent women wanting to drink something more prestigious and more flavourful than the indigenous vodka. Interestingly, Germany is listed as the second-largest export market for tequila, though its producers point out that the drink is often sold on from there across Eastern Europe. Even so, as the market heats up direct sales are becoming more common.
While the BRIC nouveaux riches’ seemingly insatiable appetite for global luxury brands can explain the attraction for expensive tequilas, the drink and its brands need some explanation for unaccustomed customers. Producers worldwide still have to point out that the agave is not a cactus and that it is mezcal, not tequila, that sometimes contains a worm. On the other hand, that could be an advantage, since a common worry of many of the high-end makers in the US until recently, and even now in the European Union (EU), is that if consumers knew about tequila at all, it was from cheaper brands used as an adjunct to binge-drinking, epitomised in the postcard slogan “Tequila! Have you hugged your toilet yet?” At least cheap tequila and binge habits had not imprinted such folk memories outside the US and the EU!
Tequiladores take comfort not only from the stunning growth rates in sales, but also from the relatively low global penetration of the spirit. That implies lots of room for expansion. Even in Mexico it accounts for 34% of local spirits consumption; and surprisingly it is often more expensive in its home market than its foreign rivals. The big attraction is that even in the US (by far the largest market for the spirit) tequila only accounts for 6% of the spirits market, leaving plenty of sales space, while in the rest of world there is even more room for growth.
Global liquor groups have been working hard to leverage that fact. Over the past decade when the major liquor providers shuffled their decks of brands to avoid anti-competition litigation, they had all acquired a tequila brand, whether by outright acquisition or by contracting for distribution rights. Diageo, for example, bought Herradura a decade ago and has concentrated on the premium end of the market. It is now the US market leader with more than a third market share.
Commercially, there are pluses and minuses to the industry. Unlike various whiskies, brandies and rums, tequila does not generally need large inventories of spirits that mature over years and decades. Most brands are aged less than two years and many less than two months, although that is increasing for the premium brands. On the other hand, from a maker’s point of view, each bottle of tequila incurs a long-term investment in nurturing the agave plants from which it is made. They can take from eight to ten years to grow to maturity.
Spearheading the global charge are business groups such as Pernod Ricard with its Olmeca brand, Brown Forman which produces Herradura, Fortune Brands sells its Sauza tequila, and Diageo distributes Cuervo.
Diageo is wooing Cuervo with the intention of buying the brand outright but the family is playing hard to get. In any case, the global distributors all appreciate the need for a distinctive identity for their high-end brands, regardless of ownership. They maintain historical haciendas and promote the history and continuity of their brands. Homogeneity does not work at the luxury end, and the global liquor groups know that they should not impinge on the distinctive identities of the brands while using their worldwide distribution networks to push the product.
Specialised high-end brands such as Patrón and Casa Noble have carved a niche as boutique luxury brands and have had to build their own distribution networks, bottle by bottle. John McDonnell, chief operating officer of Patrón Spirits International, muses: “Take Germany, our second-biggest market, the biggest brand is a cheaper one, but in London with its mixology culture, they have really taken up Patrón. All good things take time. We’ve come from nowhere to [this point] in a short time.”
Commitment to quality
Common to all the premium producers is an insistence on quality not to be compromised by bean-counting. McDonnell says: “We do not stint on making it. If you don’t have a good liquid, then no amount of packaging and marketing can make it up. Ours is a fantastic liquid. We only use the best agaves, and we sell the ones we reject to our competitors. We cook it in clay ovens for 72 hours; we use a tahona wheel along with a roller mill.” To leverage an old Western chestnut: there is money in them thar mills. Patrón is private, incorporated in Switzerland, and McDonnell comments: “We are not beholden to shareholders, and every year we have grown, even during the recession, at high prices and our expansion is self financed based on private money.” Patrón’s expansion was based on its existing customer base being affluent travellers, and, says McDonnell: “When they fly into major cities and can’t find Patrón, they might try something else and then we could end up losing them, so we made sure that Patrón was available at all the high-class restaurants, bars and hotels.”
He adds: “Our duty-free strategy was different. Duty-free is for luxury and we are a premium white spirit that happens to be a tequila. So we went to the duty-free operators and pointed out that they only offered cheaper tequilas. They accepted the concept and it worked and I would say we’re now in 45 of the top 50 airports around the world.”
While rum, whisky, vodka and other spirits have strayed far from their original homes, nature and nurture tie tequila production to Mexico, as the only home to blue agave plant from which it is made. Its national origin is reinforced with strict government regulation backed by international legal protections that restrict production not just to Mexico but specify the states, centred on Jalisco, where it can be produced. The legally-empowered Tequila Regulatory Council ensures that every bottle has the number of its distillery, which is monitored constantly to ensure that they all meet the exacting, mandated standards.
The National Chamber for the Tequila Industry, representing the major producers, also runs a comprehensive advertising and educational campaign to educate the world’s consumers and bartenders about their drink as well as pushing the government to ensure market access and name protection.
It is more than their good names at stake. Tequila manufacturers directly employ 30,000 people in the agave fields and distilleries and many more in transport and similar industries. In that regard, tequila is a significant element in the Mexican economy, all the more so because it cannot be off-shored to China, unlike the maquiladores on the US border strip, nor overwhelmed by NAFTA competition.
Aside from the traditional high mark-up and taxation that characterises the spirits industry, the grit in tequila’s bottle is that while the US has agreed that all tequila had to be made in Mexico according to Mexican government requirements, it none the less insisted that US companies and plants could continue to bottle it. Indeed, not only do they bottle it, the Americans export it under a wide variety of brands, after which the Mexicans lose track of the market, and estimates put global demand much higher than the official figures. It is indicative of the terms of trade that while the Mexican government estimates the value of tequila exports to the US was $748m in 2010, representing a 20.8% growth over 2009, liquor trade figures value Tequila and Mezcal global sales at $2.7bn in 2009 alone. At the spearhead of the expansion are the tequileros, the Mexican makers, who, whether employees of multinationals or local families, share an almost quasi-religious reverence for the drink and its manufacture.
Casa Noble’s Jose Hermosilla and several other local families have taken 20 years from buying the initial fields to bringing the product to market and invested heavily in producing a product that would appeal to the high-end market. They experimented with different woods for ageing before settling on French oak. Based in a centuries old distillery near the town of Tequila itself, they have tapped into the tourist market to educate people about what is distinctive in their attractively-sited complex. The latest product is aged five years, which, he points out, represents the equivalent of 15 years in other products. “We grow our agave in the mountains, to stress them, and they take ten years to be ready,” he points out. The fruits of that labour are now available in 23 countries, and he considers its price of $130 a bottle to be very reasonable with all that care and capital invested in it.
The premium brands keep more of the value added inside the country. Jesus Fernandez, manager of Pernod Ricard’s Olmeca Tequila plant, comments: “It took some time for a lot of companies in the tequila business to realise that there’s a lot of benefits in making premium tequilas. First of all, you don’t have to sell a lot of cases to make good money, so it’s better to make quality tequila and get a better margin instead of just continuing to make bulk tequila and ship it to the United States, and bottle it with the Safeway brand.”
Asia bulks up on the high end
As ever, Asia is the holy snifter for luxury brands. The thought of billions of Indians and Chinese knocking back tequila are enough to get everyone out planting agave down near Jalisco. However, some roadblocks to entering these markets remain firm. Many tequila brands hover close to the permitted methanol levels. Beijing bureaucrats, says Casa Noble chief executive officer Jose Hermosilla, put tequila in a category of drink that has a very low permitted level allowance for methanol—only 2 grams per litre in fact, while the Mexican government norm is 3 grams. Some producers are reformulating to meet the lower standard, but reluctantly so, since premium brands are particular sedulous of their profile.
In the longer term the industry and the Mexican government are trying to persuade China to change the definition. However, even in a country with a fair tradition of bureaucracy of its own, they are having difficulties working out which buttons to push. The Mexican government for its part is sympathetic to their plight and is using its diplomatic clout worldwide to protect and promote tequila. Aside from its obvious economic benefits, tequila certainly lends a better spirit to the country’s image than gang warfare and shootings.