Tequila is booming business. In the last couple of months we’ve seen a lot of movement on the market. Diageo paid 700 million dollar for Casamigos, which is a rather small brand. Another 300 million dollar in bonusses can be added to the deal if the brand reaches certain targets. Bacardi-Martini already owned 30% of Patrón Spirits. In 2017 they applied to buy the remaining 70% of the shares. This deal values the tequila brand at a whopping 5.1 billion dollar. Pernod-Ricard also made a move last month when they took full control of Tequila Avión (after already owning a large majority of the shares).
Tequila, as an industry, is strictly regulated and inspected by the Consejo Regulador del Tequila (CRT). One of the benefits of the many inspections is that the CRT has loads of reliable records. I gathered a (big) bunch of data* and crunched the numbers to find out why big companies are paying up crazy amounts to get in on the action. Here are some of the results I came up with.
Reason no. 1) Increasing revenue
The biggest reason is obvious: the sales of tequila is increasing. Over the last 20 years the sales of tequila has nearly tripled. Tequila export grew from less than 65 million liter in 1995 to over 180 million in 2015. It doesn’t seem to stop either. From 2015 to 2017 the market increased by another 20% to over 210 million liter exported tequila per annum.
The year 2018 has just started, so it’s a little early to jump to conclusions for growth in 2018. But if we compare the numbers of January 2018 to January 2017 and January 2016 we can see the market seems to keep on growing at a nice pace.
The USA leads the way! In 2017 the USA took in a solid 81.5% of all exported tequila! Knowing that number two on the list (Spain) only represents 2.5% of the total market shows us even more how important the USA is for this industry. In 2017 about 30 million liter of tequila was sold in California. This state by itself is a bigger market than the remaining 9 countries in the top 10 of tequila loving countries combined. According to the first stats of 2018 all of the popular markets seem to keep on growing.
As a Belgian, I had a little peek on the local market as well. I was surprised to see that Belgium was responsible for a 0.24% share, while bigger neighbor The Netherlands only had a market share of 0.18% in 2017. They are rather small markets but both markets have grown steadily compared to previous years, which shows that tequila is also on the rise locally.
Reason no. 2) Premiumisation
Tequila brands are not only selling more tequila, they are selling more expensive tequila. Premiumisation is a known strategy in marketing: products are upscaled and sold with the same percentage of profit margin. When the strategy succeeds it can have a big positive impact on the turnover of the company.
Premiumisation can be done in several ways, for example by packing it in a nice box. But tequila has a very tangible way of premiumisation: moving from mixto tequila to 100% agave tequila. By doing this the overall quality of tequila has gone up, which really helps a lot to shake off the bad reputation tequila has had for a very long time.
The consumer behavior stats show us that there is a huge shift from mixto to the more premium 100% agave tequila. In 1995 73% of all tequila was mixto tequila, only 27% of all tequila was 100% puro. Nowadays it’s nearly vice versa. Now 72.3% of all tequila is 100% agave tequila and only 27.3% is mixto.
When the consumer behavior changes, production follows. In the production stats we also see a big shift from mixto to 100% agave.
Reason no. 3) the perceived value of aged tequila
The third reason on this list, barrel aging of tequila, can be seen as premiumisation. In a way it is, but I like to mention it separately because there is no direct correlation between aging of spirts and the quality of spirits. Some people prefer unaged tequila, others prefer the gently touches of aged tequila. So whether aging improves the product is up for discussion. But aging spirits surely does lift the perceived value of the product. In the world of whisky and rum a lot of consumers live by the misconception that the longer the product has matured the better it will be. Other spirits like tequila (and now also mezcal) seem to follow in the footsteps of whisky and rum when it comes to this misconception.
If we take a look at the stats of the biggest market (the USA) we see an increasing share of aged tequila. In the year 2000 88.43% of all tequila in the USA was classified as blanco or joven. In layman’s terms: tequila that is either completely unaged, aged for a very short period (long term aged tequila (>2 months) has won 7.65% market share compared to blanco and joven tequila. Looking at these stats in percentages it does not seem like a big shift, but translated into absolute numbers it makes a difference of 89 million liter.
Another interesting fact: within the segment of blanco & joven there is a strong shift towards tequila blanco. Around the turn of the century tequila joven had a big market share. From 2000 on production and sales of tequila has been growing rapidly, but the production and sales of tequila joven did not grow along. The production of tequila joven did not drop, but it didn’t rise either. Therefor it has seen a big drop in market share. This is probably because the term ‘joven’ does not add much perceived value. In fact, blending of spirits even has a (undeserved) negative connotation.
The shift from unaged to aged tequila even caused some changes in the laws and classification of tequila. In 2006 the CRT decided to add another classification: Tequila Extra Añejo. Tequila has to be aged in barrels at least 3 years before it can be called Tequila Extra Añejo. Until today it’s still a small category. But the fact that this extra classification was added shows us that consumers perceive it as valuable and are prepared to pay extra for it.
In 2017 about 340 000 liter of Tequila Extra Añejo was exported to the USA. There is a good explanation why this number isn’t higher. Whisky and rum that is aged for 3 years is considered as short-term aged product. In tequila 3 years is considered as a long period for aging. There are some tequilas available that have aged for 5, 10 or even 15 years. But these are the exceptions. The reason tequila is not aged very often for 10 years after distillation is threefold. All tequila has matured for a long time but in a different stage of the process. Tequila is made from agave that has been maturing for several years, 7 to 8 years ideally. Secondly, because of the Mexican climate, tequila has a bigger Angel’s Share than (for example) Scotch whisky which makes aging less interesting. And finally, tequila is not aged for several years very often because by aging tequila you lose a large part of its USP, the flavor of cooked agave.
To conclude: it’s safe to say that tequila is a booming business. This has some great benefits. The worldwide supply and selection of good quality tequila has never been bigger. But there is a downside as well. Tequila is growing so rapidly, it’s outgrowing its supply of raw materials. Agave is getting scarce. The big players in the industry are buying entire fields and smaller brands have a difficult time to keep up. The rules of supply and demand are easy and well-known: if the demand is higher than the supply, prices rise. A lot of producers (both big and small brands) are looking for shortcuts in the production process. The production needs to be faster, cheaper or preferably both. Unfortunately this can have a negative impact on the quality of the product. In my next article you’ll read which corners are cut and how you can try to spot brands that have taken these shortcuts. 😉
*all numbers and percentages from this article are based on calculations of data from the most reliable source: the official reports of the Consejo Regulador del Tequila, A.C & Statista.
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Text & graphics: Yannick Van Dyck | @Yannickvd