Global Tequila and mezcal insights - market forecasts, product innovation and consumer trends

Earlier this week, Bacardi announced its intention to take full control of the Patron Tequila brand. The transaction, which should close before the end of June, sees the high-end Tequila segment leader enter the Bacardi stable. Here, just-drinks looks at the global Tequila category, Patron's position in it, and how the competition should be feeling today.

The Top Tequila Markets - 2011-16

Source: The IWSR

The US dominates the global Tequila category, accounting for 55% of total volumes. Next up is Mexico with almost 30% share. After these two, there's a major drop-off to third-placed Canada, with annual volumes of just under 370,000 cases.

Combined, The US and Mexico account for about 85% of total volumes. In all, the Americas region has a near-90% share.

Turning to market performance, and Tequila's domestic market is in growth, turning in a CAGR of 2.4% over the five years from 2012 to 2016. The US, meanwhile, is where the action clearly is: In the same five-year period, CAGR has hit 5.7%.

The IWSR forecasts that the two markets should both provide growth going forward. For the five years from 2017 to 2021, the CAGR for Mexico should be +1.6%, with the US expected to be 5% on a CAGR basis.

The Top Five Tequila Brands by Volumes - 2011-16

Source: The IWSR

Dominating the landscape in volume terms is Cuervo, with approaching 20% of the total Tequila market. Up next is Beam Suntory's Sauza, with Patron in third.

All of the five largest brands have seen volumes rise on a CAGR basis during the five years from 2012 to 2016, with Gran Centenario leading the pack (+10.2%), followed by 1800 (+9%). Patron's CAGR increase of 6% overshadows the 1.3% rise for Cuervo.

The Top Five Tequila Brands by Value - 2011-16

Source: The IWSR

It's when we turn to Tequila's performance in value terms that things get really interesting. Over the five years from 2012 to 2016, Patron has overtaken Cuervo - the switch took place in 2016 - to become the world's biggest Tequila brand by value.

Patron's CAGR is the strongest of the top five - +7% - with the exception of Diageo's Don Julio - up almost 15%. The brand, formerly jointly-owned by Diageo and Proximo's parent, Cuervo, is benefiting from Diageo's distribution muscle since coming under its sole control in early-2015.

So, how should Bacardi and Patron's competitors react to this week's news? According to analyst Ed Mundy at Jefferies, none of them should be feeling too nervous - well, maybe with the exception of Diageo.

Considering the size of the Tequila segment in the US, Diageo, for whom the US is its biggest market, could be justifiably concerned. Indeed, comments made by Bacardi in yesterday's announcement could prompt Diageo to look over its shoulder. "(Bacardi will become) the number one spirits player in the super-premium segment in the US and the second largest spirits company in market share by value in the critically-important US market", the company said.

Mundy doesn't see the threat as clearly or as present: "Diageo will continue to be twice the size of Bacardi-Patron in the US," he says. "The key opportunity for Bacardi is to widen Patron distribution ex-US."

Diageo ought to focus its attention less on Bacardi, Mundy writes, and more on its own high-end Tequila brand, Casamigos, which it snapped up last year for US$1bn. "We still see a large white space opportunity for Casamigos, where Diageo has a track record of scaling brands (eg Bulleit)," says Mundy.

With annual volumes for 2017 expected to hit 170,000 cases, though, Casamigos has quite a way to go to appear on the same radar as Patron.

Where Diageo could have a problem, according to Mundy, is with Don Julio, a "more direct competitor" to Patron. This week's purchase "arguably makes the environment for Don Julio tougher", he says.

Pernod Ricard, meanwhile, might feel put out to see Bacardi overtake it on US value share, however the group's cash churner as well as its growth drivers are not likely to be disrupted by the Patron buy.

Jameson's performance over the last five years has been remarkable, and the US has been fundamental to the Irish whiskey brand's impressive growth. Throughout that time, Patron has gone about its business in the US, proving the two can grow simultaneously. Future US growth for Pernod, Mundy believes, will come from Avion Tequila (currently at 130,000 cases compared to 10,000 in 2010), The Glenlivet single malt Scotch (420,000 cases versus 310,000 in 2010) and Martell's Blue Swift Cognac iteration. "Although Pernod will lose some scale versus Bacardi," Mundy concludes, "we do not expect a material impact from the deal."

For Gruppo Campari, the Espolon brand is doing very well, notes Mundy, with volumes in the first nine months of 2017 jumping 56% on the corresponding period a year earlier. Indeed, the company can sleep well despite the Patron buy: "Espolon and Cabo Wabo (which Campari bought majority control of in 2007) have a more contemporary positioning compared to Patron," writes Mundy. "We do not expect the Bacardi-Patron deal to have a meaningful impact on growth."

As for Remy Cointreau? Without a Tequila brand to speak of, the group is likely to be non-plussed by this week's news. And, if Mundy is correct, Remy may be positively Gallic in its insouciance. "We believe there is some scepticism on both the duration of the current super-premium Tequila boom and whether the category can travel outside the core US market," he says.

We watch with interest.

The road ahead for Tequila and mezcal - Research in Focus

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Global Tequila and mezcal insights - market forecasts, product innovation and consumer trends

Global Tequila and mezcal insights - market forecasts, product innovation and consumer trends

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