Analysis

Research - Downturn hampers Tequila export growth

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With Tequila’s sales concentrated in the on-trade in most countries apart from its two principal markets, the US and Mexico, the downturn’s negative impact on the on-premise channel is expected to have hit Tequila volumes, and its drive to develop international sales substantially beyond the US, says a new report from just-drinks/IWSR.
 
In spite of sustained growth over a number of years, the Tequila category remains dominated by the US and Mexico. And the economic downturn does not appear to have done anything to help the Tequila sector address that situation, according to a recent just-drinks/IWSR report.
 
Although the report, Global Market Review of Tequila – Forecasts to 2014, points out that Tequila displayed ‘high volume growth across a broad spectrum of international markets’ between 2003 and 2008, the US and Mexico still account for 84.4% of global Tequila volumes, put at 22.99m nine-litre cases.
 
The global market grew by a CAGR of 6.5% between 2003 and 2008, the report states, but adds that, according to preliminary indications, this growth slowed in 2009 as a result of the global economic crisis. The report forecasts that 2009 volume sales will have declined to 22.72m cases, and will remain stable in 2010. And while all mature Tequila markets suffered, the report goes on to state:
 
‘One of the aspects of the global economic downturn has been a broad shift in consumption from the on-trade market to the off-trade. This has been a fairly universal development across most mature markets. The problem is that outside of the US and Mexico, Tequila is largely an on-trade-driven business.’
 
The report puts projected 2010 volumes in Germany at 400,000 cases, against 413,000 cases in 2009. And alarmingly, further declines are forecast for the German market which is expected to fall to 379,000 cases by 2014.
 
There is better news from the travel retail sector, the fourth largest market for Tequila, which only saw a marginal decline in 2009 from 268,000 cases to 266,000. This market is expected to recover to 272,000 cases in 2010 and grow steadily to reach 359,000 cases by 2014.
 
The case sales figure in Germany, Tequila’s third largest market, puts the gulf between Tequila’s top two markets and the rest in context; the US and Mexico stand at 11.4m and 8m cases respectively.
 
While the report states that ‘even in the midst of recession, there are green shoots of growth in many markets’, it adds that the strong growth in percentage terms being seen in countries such as Russia, Greece, Canada, Japan, South Africa and Brazil is all coming off a small base. IWSR does not anticipate a significant change in the balance between major and minor markets in the medium term. ‘While the potential for international development is vast, the volume will remain centred in the US and Mexico for the foreseeable future,’ the report states.
 
Moreover, outside of the US and Mexico, the Tequila sector is largely a ‘low-price or standard category’. Sales of premium-and-above Tequilas are ‘relatively minor’, the report states. ‘Premiumisation is just at a nascent stage.’
 
Nascent or not, and the rigours of the recession to one side, clearly international drinks companies believe that Tequila has further growth potential, as well as possibilities for premiumisation, in markets other than the US.
 
There has been a significant amount of investment in the category by multinationals in recent years, notably Beam Global’s acquisition of the Sauza brand from Allied Domecq, though Pernod Ricard, in 2005, and Brown-Forman’s acquisition of Herradura at the beginning of 2007. These deals respectively involved the second- and fourth-largest Tequila houses. Brown-Forman followed its purchase of Herradura by acquiring the remaining portion of the global trademark for the Don Eduardo super-premium Tequila brand from the Orendain family.
 
Looking at how the US market for higher-quality Tequilas has developed should give international spirits companies encouragement as they endeavour to premiumise the sector in Europe and elsewhere. Over the years, Tequila consumption in the US has broadened from being primarily centred around the Margarita cocktail, creating growth opportunities for products such as sipping and aged Tequilas.
 
And more recently there has been another trend in the US, the report points out, which ironically centres around white/silver Tequila rather than the darker, aged and more expensive offerings. ‘Twenty years ago white Tequila was perceived as low-grade but the perception in the US has changed,’ the report states. ‘Many consumers now prefer white Tequila as it is a bit less challenging and easier to drink, especially for those already used to white spirits such as vodka and gin.’
 
In essence, this allows Tequila to compete with vodka in certain US markets, particularly the East Coast of the US. Patrón is a key brand leading the growth of white Tequila in the US, the report states. Given that the US appears to be many years ahead of European markets in terms of the appreciation of Tequila’s subtle qualities, the question for Tequila brands is whether this trend would help or hinder premiumisation efforts in growing European markets.

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