Tequila’s slowing growth in the US last year is likely to have pushed many spirits heavyweights to reassess their strategies in the category.
However, while the heady growth seen in the US in recent years may have eased, Pernod Ricard still has serious ambitions through its House of Tequila business unit.
The French group’s interests in Tequila (and mezcal) takes in four brands – Olmeca Tequila, Olmeca Altos, Avión and Del Maguey mezcal – and majority stakes in Codigo and Ojo de Tigre. The stable’s top markets are the US, the UK, Canada, Australia and Italy.
Just Drinks sat down with House of Tequila CEO Michael Merolli to discuss the company’s growth plans, innovation and why premiumisation still holds promise for Tequila inside and outside the US.
Just Drinks: What are your overall thoughts on the Tequila market worldwide at present?
Michael Merolli (MM): Overall, the Tequila category is still growing in the world. It’s been slowing down in terms of growth in the US, compared to what we have been experiencing in the previous years where we had an accelerated growth [in] double digits. Of course, this has been slowing down recently in the US and we have been slowing down accordingly.
What is really exciting… is what’s happening in the rest of the world because there we can see an acceleration on the market, especially on the 100% agave Tequila. I will say Australia, Canada, the UK and Italy are the four most important markets for us. Altos, which is our transversal global brand, is growing on a faster pace than the [overall] category. We have a very exciting position in these markets… I think they are following somewhat the trend that we have been experiencing in the US.
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By GlobalDataJust Drinks: Why do you think Tequila is growing in these markets?
MM: It’s a combination of factors. There is a growing influence of Mexico. I’m talking about gastronomy but it’s also true through design, through movies, very famous directors, which has been really growing the fame of [the country].
At the same time, there is a better understanding of cocktails. The Margarita is growing very fast in all the markets I’ve [mentioned]… but it’s not the only cocktail. The Paloma is the number one cocktail for Tequila in Mexico… It’s also growing fast, especially in the south of Europe. Paloma at the moment is more popular than the Margarita in Italy, for example.
Just Drinks: Have you seen a stronger uptake for Altos in the on-trade or off-trade?
MM: I think the first trend and demand will happen probably on-trade. This is… where we are putting a lot of effort. We have a high presence [in on-trade] with Altos and Del Maguey, which is our mezcal brand, has a very strong presence in the on-trade.
This is usually where we see the demand around the brand and the cocktails, and once this has happened you will have an impact… in retail because people will start to enjoy and learn about Tequila, about Margarita, of the quality that you can find.
Very linked with this trend, we’ve been launching a new product which is the ready-to-serve Altos Margarita. It’s done for off-trade to facilitate the way of life of our consumers that want to enjoy a very nice Margarita but do not always have all the ingredients at home or the patience to do the cocktail themselves… The Altos ready-to-serve Margarita, we first launched in the US two years ago, then into Canada [last year] and most recently the UK [in February].
A bit similar to this… is the ready-to-drink, which we’ve been developing on Altos for Australia [and New Zealand], which we’ve been launching from [September] 2023 with two references: lime and watermelon.
Just Drinks: Besides the US, the UK and Australia, where are your other key geographic markets?
MM: If we talk about Olmeca, we have a very different geographical footprint. For example, we are the number one Tequila in Turkey, we have a huge market share [there]. We are very strong in Colombia also.
I just came back from a market visit to China two weeks ago… This trend in Tequila is happening there in different ways… [mainly through] shot drinks among the young generation and this is where Olmeca is playing a very good role. At the same time, and [it’s] still emerging, cocktails and cocktail bars are developing in Shanghai.
Prestige Tequila is also happening in the nightclub. In China, still very high prestige [spirits] are doing very [well]. Usually what we [used to see would] be more Cognac and Champagne but now, more and more, you see also prestige Tequila like Avión Reserva 44 being ordered by the affluent… or young consumers from China.
It’s super exciting. Of course, nothing to compare in terms of size and trends to the US or Europe, but I think there are exciting signals that show that China could be the next one. If [Tequila grows] in China, it would completely change the size of the category in the future. Again, it’s not going to happen overnight but it’s already starting. That’s what I can testify.
Just Drinks: Are there other areas within Tequila that you’re looking to grow, such as infused or more premium expressions?
MM: We want to increase our footprint in Mexico, which is the land of origin of Tequila, of course. We are doing a lot of great work on the Avión prestige brand, but on the super-premium segment, we didn’t have such a footprint… we needed to offer something a bit special and different because we are a bit late in the game.
This is where we’ve been thinking about new innovation for the Mexico market, which is the infused Tequila that we just launched last September 2023 with a strong support plan, the highest-ever investment plan for us in Mexico.
There is a fierce competition in Mexico so we need to have a unique proposition but, at the same time, we make sure that the consumer will notice it. It’s an important investment, it’s not a one-shot launch. We want to have some consistency in the coming months… We really want to create this new trend around this new product.
Just Drinks: Amid signs of downtrading in the US, what is your thoughts on the strength of premiumisation in the country’s Tequila market?
MM: The 100% agave is where we are putting our focus. We think that the big space and where [we] can get growth and increase our footprint is the 100% agave and that proposition. Starting with the super-premium segment with Altos, and then going up to the ultra-premium segment with Codigo and then we have the prestige range with Codigo and we have Avión Reserva. These are very important brands for us because the competition is super fierce. There have been a lot of new entry players… it means that the consumer will be more and more discerning [about] which brand deserves to put that level of money.
There is still a future for these brands and for the segment. The quality will be the early success criteria for the brand. This is where we have a lot of work to be done in terms of education… We are putting a lot of effort to brand ambassadors to make tastings to make sure that the trade and consumers will understand the Altos and Codigo propositions.
Just Drinks: Are you considering developing a non-alcoholic component to your portfolio?
MM: We are looking at possibilities… of having a non-alcoholic proposition on agave. There is no clear answer to it for the moment but… it’s part of what we have to look at when we take care of agave for Pernod Ricard, so yes, looking at it… we have to see what is the best way to do it, through [our] own brand or through a new proposition.
Just Drinks: What’s your approach to pricing been like at a time when consumers have been trading down?
MM: It’s true that two to three years ago we could see that the high-end segment of Tequila was growing at a very fast pace. It’s where we were playing for example the Avión Reserva. We have an Avión Reserva 44 and we launched an Avión Reserva Cristalino, which [is priced] above $100. The segment was very well developed in the US market specifically… In terms of growth, it was the one which was doing the most because people during Covid started to enjoy very high-end quality Tequila at home, they were saving some money because they weren’t going out in the on-trade.
I will say this has been slowing down very heavily, so it’s not the same situation today, especially in the US market. We have to be a bit more cautious on the pricing strategy that we are putting in place to fit better the situation. People are paying a bit more attention to how they spend their money, even in this high-end segment.
It doesn’t mean that we are ready to decrease it but we just have to be realistic on what we can expect consumers to accept. This is where all the work [we] do on the quality of our product is very important for people to understand.
Just Drinks: How has inflation affected House of Tequila and what challenges remain with that?
MM: I mean the demand has been slowing down, that we see. There is less pressure in terms of inflation. I will say in terms of logistics, dry goods, there is still inflation but at a lower pace because things are normalising.
What is very striking is the change in terms of the agave supply and the agave price. As a consequence, the price of agave has been growing and reaching a peak of 30 pesos per kilo one year ago. Now… It’s going down because people have been planting seven or eight years ago a lot, expecting that the demand will continue to grow at the same pace that we were experiencing some years ago.
We’ve been planting our own agave, so we are less dependent also on the fluctuations of the market. This creates, in terms of supply, a better situation, because there is no more risk of out of stocks or not being able to deliver the demand. I think overall we’re well equipped.
Just Drinks: What role does M&A have in your future growth plans?
MM: We have already a very exciting and comprehensive portfolio of Mexican spirits, which is quite unique within the industry… I think we’re happy with that. It doesn’t mean that we will not look at any other opportunity because we want to become stronger… [But] it is not obviously the number one focus at the moment. It’s more to [build] the demand on our brands and our existing portfolio.
