The US Tequila category continues to show strong growth, while the premium Tequila sector is booming, making it a highly attractive investment opportunity for major spirits companies. Dean Best reports.

The fact that Patrick Ricard could not hide his disappointment at having to give up Sauza Tequila to Fortune Brands last year, as part of the carve-up of Allied Domecq, speaks volumes not only for Pernod Ricard's ambitions but also for the health and growth possibilities of the Tequila sector.

Sauza would have been a great addition for Pernod, particularly in the US, where Tequila is a growing and vibrant category. According to Euromonitor International, the US Tequila market has grown by 5% a year since 2001, with consumption set to increase by 8% annually between now and 2010.

Sauza, which has around 14% of the market, is one of the two dominant brands in the US, alongside Diageo's Jose Cuervo, so it's easy to see why Fortune was so determined to snaffle it up in return for backing Pernod in the Allied takeover.

Nevertheless, while the category as a whole is growing, it is at the premium end where the real fun is. Tequila is following the trading-up trend seen in other categories, which in the case of Mexico's national spirit means 100% agave offerings.

Euromonitor's beverages analyst Brian Morgan believes the premium segment offers the most potential for other producers to challenge Cuervo's and Sauza's dominance. "The overall Tequila market is dominated by Cuervo and Sauza, and no-one's going to touch that," Morgan told just-drinks. "The premium segment is a much smaller segment right now but it's growing and driving a lot of the growth in the category."

This has not been lost on spirits producers outside the category, who see premium Tequila as the latest way - after the growth of top-end vodkas and rums - to tap into the burgeoning demand stateside for high-quality spirits.

Hence the reported scramble among multinationals for Tequila Herradura. Pernod, Brown-Forman and Bacardi have all been touted as possible buyers, and while all three are remaining tight-lipped, it's hard to imagine the brand not being of interest. However, some analysts remain unconvinced about Herradura's value to a company looking to gain a foothold in the Tequila category.

In addition to the "premiumisation" trend, the growing Hispanic population has also been a factor behind the Tequila boom. "There's a bigger Hispanic population in the US and it's continuing to grow," says Jeff Hopmayer, CEO of Blavod Extreme Spirits, which last year launched premium Tequila El Diamante del Cielo in the US. "As that happens, they're bringing their specialities, what they consume, what they drink, to the US."

However, Hopmayer insists that El Diamante, made by Diamante Spirits, Blavod's joint venture with Japan's Suntory, is a premium Tequila - and its selling point is its quality. "We have no intention of getting into the commercial type of Tequilas," Hopmayer says. "We want to be in the ultra-premium, luxury category."

Already performing strongly less than a year after its launch, Hopmayer believes there is a "significant opportunity" for El Diamante in the months ahead. However, his optimism may be short-lived. The premium segment is becoming more crowded as spirits producers catch on to the fact that there is growth to be had in high-end Tequila.

Pernod has launched two brands, Tézon and Tevado, in the US during the last year. And should a major company snap up Herradura, that brand stands to benefit from greater penetration in the US.

The premium Tequila segment is becoming more and more competitive, and while multinationals have made inroads into high-end Tequila - like Skyy Spirits and its 1800 brand - it is an independent player which has carved out the strongest position.

Patrón Tequila, owned by The Patrón Spirits Company, was created in 1989. In 2000, the brand held just 0.1% of the Tequila market. Four years later, according to Euromonitor International, Patrón had already secured 4% of the entire market and was dominating the top end.

"We represent 70% of super-premium or ultra-premium Tequila segment in the US and this year, it looks as though we're going to be 1m cases in the US alone," says Matt Carroll, Patrón's vice president of marketing. "It was a slow build. We had a number of distribution companies who took on the brand and didn't have a lot of positive things to say about it. They would handle the brand but said they didn't see it growing.

"People were looking for an alternative instead of the same old vodka and rum brands; they were looking for different flavours. They became more aware of 100% agave Tequila, and found it had a very pleasant taste. Tequila has had a history of slamming it down or covering it up but once consumers discover 100%, they say "wait a minute…"."

Last month, The Patrón Spirits Company launched a US$25m advertising push behind its booming Tequila brand in an attempt to keep ahead of its rivals. "That's an increase of 150% on its advertising spend last year," Robert van Brugge, beverage analyst at US investment bank Sanford C. Bernstein, observes. "I don't think there are any other brands that are big enough to afford that."

One area that Patrón has snubbed, however, is flavoured Tequila. Producers, including Cuervo, have been keen to try to imitate the success of flavoured vodka with the launch of flavoured Tequilas.

Carroll is dismissive of the potential of flavoured Tequilas. "We have flavoured Tequilas - silver, anejo and reposado," he quips. "I see flavours as just a way of getting shelf space basically. It may present an alternative where growth isn't really coming as easily as with a 100% agave Tequila. I don't see a significant future in it."

Brian Morgan agrees. "Flavours add to the versatility of Tequila and allow different mixed drinks (but) I can't imagine flavoured Tequilas will continue to drive the market beyond the short term."

Nevertheless, there is a high degree of optimism that the growth of the Tequila category will continue, given the popularity of margaritas. And industry watchers believe there is still room for rival Tequilas to attack Patrón's early dominance of the premium end of the market. "Within (the premium) category, while there are established brands, there is still a lot of room for competition," says Morgan.

Carroll appears unworried, not least because of the overall growth potential in the category. "I think the category will grow faster before it slows down. Even in the US, the category is very small; there is so much room."