Tequila and Mezcal: Maturing Gracefully

The tequila and mezcal category appears to be gradually coming of age, leaving behind the adolescent years of salt and lime shots to embrace the sophisticated ritual of sipping and savouring. But eventual maturity also has its downside. Still troublingly laying all the proverbial agave plants in one basket, the category is beginning to increasingly look beyond the comfort zone of its Mexican homeland and its US neighbour. Having proved its resilience credentials both in the vast desert expanses of Jalisco and in the face of the global downturn, tequila and mezcal still holds massive volume and value potential moving forward.

Sipping is the new shot

According to Euromonitor International’s latest and still preliminary research, overall tequila and mezcal volumes are set to register solid 2% total volume growth in 2011, a performance that will be largely in line with 2010 and with no signs of the 2009 blip resurfacing. The category has not witnessed the meteoric rise enjoyed by vodka across the globe and is not expected to see the monumental leaps forward experienced by whiskey’s newfound popularity in India. Instead, tequila and mezcal appears to be moving one step at a time, seemingly mirroring the long and arduous process involved in the harvesting and distillation of the indigenous agave plant.

Deciphering tequila and mezcal’s historic and forecast performance requires underlining the respective shares of the category’s top five markets. Within this analytical context, the US and Mexico’s absolute dominance becomes all the more clear, with the former accounting for around 46% of global volumes and the latter 40%. Germany with 1.3%, South Africa with 1.2% and Canada with just 1% are virtually dwarfed in comparison, a fact directly linking the category’s fortunes with those of its two top markets.

2008 was the watershed moment when the US overtook Mexico as the largest tequila consumer globally. The rapid rise in tequila sales in the US can partly be attributed to its popularity among Hispanics, the fastest growing ethnic group in the US, as well as to the introduction and promotion of premium, smaller batch varietals in recent years. According to Euromonitor International’s latest findings, tequila and mezcal sales in the US are actually set to post buoyant 4% total volume growth in 2011 as increased promotional activity and sustained educational campaigns have successfully embedded the category into the country’s contemporary drinking habits.

On the other hand, in Mexico, a number of tequila manufacturers opted for the flavour sophistication route in an attempt to widen target audiences and drinking occasions. It is hoped that new launches like these will breathe new life into the tequila category, particularly in terms of attracting ever-elusive female consumers and young adults. While tequila remains the most popular spirit in Mexico, it has something of an old-fashioned image and the maturity of the category inescapably limits growth in volume sales. Heritage, tradition and authenticity are hence increasingly entering centre stage as a sense of national pride and identity shifts consumption towards artisanal, small-scale offerings. Flat total volume growth for the category in 2011 might seem relatively anemic but taking into consideration tequila’s saturated nature in Mexico, it should be seen as comparatively robust.

The story of premium varietals outperforming standard brands is adequately personified by Patron’s rise among the pantheon of luxury brands. Patron, particularly successful in the US but expanding its reach rapidly, makes for an interesting case study. The brand’s initially skyrocketing sales proved to be surprisingly resilient and remain so, with Patron accounting for 15% of total tequila volume sales in the US in 2011. As the socio-economic mood darkens once more a slowdown is inevitable, but building brand equity, pointedly snubbing discounting and the support of a fiercely loyal following will insulate the brand from the worst of the storm moving forward.

But what about emerging nations? Asia Pacific and the Middle East and Africa, for example, are expected to show very dynamic percentage growth, the actual gains of which will be eclipsed by the regions’ relatively very low sales bases. Focusing on tequila and mezcal’s two powerhouses is hence the only way to understand actual global category gains in the short to medium term.

That said, activity is picking up. Pernod Ricard announced that it is targeting Russia with the release of a limited edition bottle for its Olmeca tequila brand in September 2011. The company said that the bottling forms part of its partnership with DJ Ferry Corsten, while Russia has been chosen as Olmeca is the top tequila brand in the country, accounting for a 20% volume share according to Euromonitor International. Specially tailored offerings and a youth-oriented profile will be the keys to opening up the emerging market floodgates moving forward.

Heritage, heritage, heritage

According to Euromonitor International, tequila and mezcal is expected to post a 2% total volume CAGR over 2011-2016. The category has come a long way from its humble origins in the arid desert plains and this momentum needs to be protected. Mexico’s Tequila Regulatory Council (TRC) is working to curb a rising trade of fake and “toxic” blends through confiscation operatives and testing initiatives that will further cement the category’s credibility and safeguard its quality.

On the other hand, maturity constraints, the category’s rather two-dimensional focus on just two markets and the spectre of further financial turbulence on the horizon are behind Euromonitor International’s low single-digit CAGR projections. Premiumisation will continue to change the face of the category but entering more dynamic emerging markets – a development which is still in embryonic stages – will be vital moving forward.

The mezcal category, still little known outside its native Mexican market, will become all the more prominent as a new generation of drinkers prioritises authenticity, tradition and story over mass- produced offerings. Tapping into these trends, tequila and mezcal manufacturers can enjoy prospects as sunny as a summer’s day in Jalisco.