Shooter, slammer, hangover, regret. It’s a cycle only too familiar to a great many of us from many a wasted evening at college or university. However, it’s also a vastly outdated representation of the modern Tequila segment, the growth of which has been supercharged by premium and super-premium expressions in recent years.
Tequila’s journey beyond the college frat boy party stereotype mirrors wider premiumisation trends within the spirits sector. However, it differs from other spirits categories in that the overwhelming majority of growth has been focused on a single market – the US. In 2021, more than 60% of global Tequila and mezcal sales (in value terms) were in the US, according to GlobalData. Mexico, the spirit’s country of origin, registers healthy sales in volume terms (87m litres, to the US’ 203m litres), but most of the growth, and the future value potential, appears to be located squarely in the land of stars and stripes.
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The reasons for this dominance are manifold. Firstly, and most obviously, is geography. The US’ proximity to Mexico, and the high percentage of Hispanic consumers – particularly in states such as Texas and California – has helped Tequila seed itself successfully in US bar culture.
“Mexico remains a growing cultural influence, as a travel destination, as a food destination, and of course with food comes drink,” explains Stoli Group’s premium category leader Nik Keane. “The US is becoming much more diverse, with over 20% of the total population predicted to be Hispanic by 2030. That figure is even greater in the LDA to 29 range, which tends to be the period when you set your fashion, music and drinking choices for life.”
Chris Swonger, president of the Distilled Spirits Council of the US (DISCUS), shares this view. “The booming interest in both Tequila and mezcal is really being driven by spirits' deep-rooted heritage and tradition,” he says. “America has such great affinity with Mexican culture; we clamour to go and eat Mexican food and Tequila is very complimentary to that.”
Tequila rides premiumisation wave
Another factor in the success story of Tequila has been its ability to ride on the coat-tails of broader spirits premiumisation trends in the US. Within Tequila there is an obvious progression upwards – blanco, reposado, añejo, with most brands offering a quick and easy trade-up once the consumer is hooked.
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By GlobalData“The morphology of Tequila is easily understandable to the consumer,” explains Mike Dolan, ex-Bacardi CEO and founder of B Corp certified brand Mijenta Tequila. “Blanco is what goes into the margarita and then, as you move up the spectrum, you are moving from the classic cocktail to more sipping Tequilas. There is a thread that connects the different expressions, and each is a riff on the basic line of music.
“The margarita created this incredible exposure for the category. Now what we are seeing is the migration into people trying sipping Tequilas, which enables the category to take market share from Scotch. The vastness of both the whisk(e)y and the vodka market has really been to Tequila’s benefit, and its success has been down to its ability to draw drinkers away from those sources.”
Tequila’s momentum in the US has also been aided by the proliferation of celebrity-owned brands, with everyone from The Rock to Kendall Jenner getting in on the action as the spirit’s popularity began to soar. The mass exposure brought by the cult of celebrity has propelled Tequila to new heights, successfully introducing the spirit to millions of new consumers across the US.
Stoli Group has been one of the multinational beverage brand owners to jump on the celebrity bandwagon, partnering with US singer Nick Jonas to launch its Villa One brand of Tequila in 2019. Keane admits the prevalence of celebrity-owned brands has helped improve the visibility of the segment outside of its Hispanic base.
“I think they spotted the trend and a lot of them have done really well out of it, so it has been mutually beneficial,” he says. “It has been significant fuel for further category growth but what the celebrities are is a further accelerator of the broader Mexican [culture] trend.
“In particular, they have helped to take Mexican culture and Tequila into the mainstream. They take the brand outside of just the Hispanic population and into the whole of the US. These are popular mainstream drinks now, and celebrities have helped to fuel that.”
Does post-pandemic dominance beckon for Tequila?
For a spirit so closely associated with the on-premise, the Covid pandemic could have spelled disaster for Tequila. Instead, the opposite was true. With pubs and bars closed, US drinkers turned their hands to cocktail making at home, with Tequila proving popular in everything from Margaritas to Palomas and (Reposdado) Old Fashioneds.
“The drinks are easy to make and don’t require you to be a mixologist or to have a lot of paraphernalia,” Dolan explains. “In 30 seconds, you can make a pretty good drink and part of the process of making it is that it is fun in itself.”
In the post-pandemic landscape, Tequila brand owners are now finding more ways of bringing the spirit to new audiences, tapping into the RTD trend with accessible expressions such as ranch water – a cocktail that sits somewhere between a Margarita and a Tom Collins. At the premium end of the spectrum, producers are experimenting with an increasing array of distillation and maturation techniques, wooing drinkers from other categories such as Scotch and Bourbon with US$100-plus añejos and extra añejos.
This innovation have helped propel Tequila to a position of enviable dominance, with the spirit now representing 14% of the total US market in value terms, according to DISCUS. Tequila and mezcal was the second-fastest growing spirits segment in 2021, trailing only pre-mixed cocktails. The segment contributed 30% of total US spirits market value growth last year, and agave-based liquors are now the second best-selling in the country, ahead of scotch and only behind vodka.
High agave prices: Help or hindrance?
As is often the case with such runaway growth, Tequila’s biggest threat could end up being its own success. Surging demand for agave – the plant used in the production of Tequila – has led prices to skyrocket. Dolan cites the example of one grower who got into the game in the 1970s when a kilo of agave sold for MXN 0.18 (US$0.01). The price is now around MXN 30 (US$1.49).
With the long lead time required before agave can be used to make Tequila (the plant can take up to seven years to reach maturation), there are fears limited supply could drive up prices to such an extent that the segment overheats – both Jose Cuervo and Campari have blamed agave price inflation for pressures on gross margins – or that there won’t be enough mature plants to meet demand. This has been an issue that has blighted the Cognac market in recent years, with Moet Hennessy and Remy Cointreau both unable to meet the growing demand for their products.
According to Keane, however, the shortage and high price of agave are actually helping to drive growth at the premium end of the segment.
“Those stories have been going around for many, many years, and it has inhibited growth outside of the US and Mexico, but one of the drivers of demand is scarcity,” he says. “Yes, there is a shortage of agave but there have also been shortages of Scotch, Cognac, Champagne and Bourbon in years gone by. All the categories that have become premium have been driven, to some extent, by scarcity. If you let that play forward – as the cost of raw materials increases – it favours the ultra-premium space.
“I wouldn't want to be running a large, mainstream, competitively priced brand. At the higher end, there is more margin to play with, and the scarcity is driving the premiumisation we are seeing.”
Dolan agrees, adding supply is most constrained for early age agave (typically three years old) because of the number of producers looking to use it in their Tequilas. This unripe agave, Dolan claims, requires additives such as caramel or glycerin to be added to it to compensate for the lack of sugar in the liquid extracted from the plant.
“We know there are a lot of other people out there using agave that is three years old,” The Mijenta Tequila founder says. “I think you have to almost sub-segment the market into the demand for three-year-old [agave] – which is enormous but inexpensive, and a market onto itself – and the other market of five-year old-plus agave, which is smaller. It’s a different business model.”
“If you look at the price of agave over 20-30 years you will see that it is cyclical – like crops. You have a run-up of demand and it outpaces supply but, because the demand is so robust, people will plant more and then the prices go down. The issue is the amount of time you have to wait until you can satiate that demand.
“Yes, the prices are high, but it has not reduced the supply to the point where we've had a problem sourcing the agave that we need for our Tequila.”
Could a reversal of spirits trends derail Tequila’s growth?
If high agave prices and supply shortages are not posing a significant threat to Tequila’s growth in the US, then it seems fair to ask: what will? Perhaps the only things likely to curtail the segment are a reversal of the tailwinds that so favoured it in the first place. If Americans were to lose their appetite for spirits, or start to trade down as the cost of living continues to climb, then this could hurt Tequila’s growth prospects, particularly at the premium end of the segment.
The latest data coming out of the National Alcohol Beverage Control Association (NABCA) suggest this is a reasonable possibility. In the three months to the end of June, volumes of spirits in the US fell by 1.6%, the worst quarterly figures for the category since early 2009. In a note to clients, analysts at AllianceBernstein said the figures meant “we may now be seeing the first concrete signs of volume declines and downtrading, as higher inflation begins to bite”.
Although Tequila bucked the trend of wider decline, posting a 6.2% volume rise in the latest three-month figures, the rate of increase has slowed significantly and is now far below the 20-30% year-on-year increases seen around a year ago.
Swonger, however, remains optimistic. “We are really excited about consumers gravitating to distilled spirits,” he says. “There are headwinds that the industry is grappling with – supply chain, inflation, and recessionary challenges – and we are not immune to that. But what is brilliant about the distilled spirits industry is even with those headwinds, these products remain an affordable luxury for consumers.”
The Mex Factor – why Tequila’s growth could blaze trail for others
