With Jose Cuervo off the menu, will Diageo begin gunning for Beam Incs Sauza?

With Jose Cuervo off the menu, will Diageo begin gunning for Beam Inc's Sauza?

Within minutes of this morning's announcement, the wires started glowing red. Diageo isn't buying Jose Cuervo, so it'll probably look to buy Sauza. So, Beam Inc will be next on the drinks giant's shopping list, right?

Let's rewind a little.

Diageo has handled the sales, marketing and distribution for Cuervo outside of Mexico since the company's inception in 1997. Throughout its life so far, the firm has struggled – for whatever reason – to expand coverage for the brand outside of the US. In Diageo's last fiscal year, for example, just under 90% of Cuervo's sales volumes came from the country (which is, obviously, the world's biggest Tequila market). Together, the US and Mexico account for around 85% of global Tequila sales.

The pending loss of Cuervo for Diageo, then, needs to be considered in this light: The Tequila category is not a sector that is exploding in the world's emerging markets. It is a segment that churns cash primarily, while offering growth potential in an über-developed market at the premium end of the scale. Exhibit A: Patrón Spirits International.

Sticking with the volumes theory, however, would see the spotlight now turn to Beam, specifically to its Sauza Tequila offering. The number two Tequila player – with 13% total market share compared to Cuervo's 30% - would tick the volumes box, certainly. But, then, the outlook for Tequila remains the same.

Diageo has already started trumpeting the existence of Don Julio, its soon-to-be sole representative in Tequila. Don Julio already operates in the super-premium price scale. Does a company the size of Diageo actually need another volume driver brand? While Plan A was to have taken ownership of Cuervo, plans B,C and D are to either grow the existing presence, build a new brand altogether or get involved in M&A. Feel free to put those in your own order of priority.

Despite this, investors, like many industry observers, will run to Beam now that Cuervo is out from under Diageo's wing. The US firm looks ripe for a pitch battle between the likes of Diageo, Pernod Ricard, Bacardi... Well, anyone, really, if they're prepared to team up.

Beam's appeal to Diageo, I feel, lies elsewhere other than Sauza. With the exception of its craft brand, Bulleit (yes, 'craft' in this context means 'small audience'), Diageo is painfully lacking in the Bourbon category. The Jim Beam brand would give the company a volume player in Bourbon and, with the Asian markets soaking up anything that's brown in international spirits, Diageo could add another string to its Scotch- and Cognac-strung bow.

Put bluntly, however - and I doubt that the group's execs will worry - I would be disappointed with Diageo for looking to simply buy its way back into Tequila. Maybe I'm kidding myself, but I would expect the company to plump for better over bigger. At least, just this once.