Sipping pretty: Tequila’s global ambitions

May 21, 2015, 12:30 PM UTC

In early November locals in the village of Bushmills, in the upper reaches of Northern Ireland, got a surprise. The British liquor giant Diageo, owner of the venerable Old Bushmills whiskey distillery on the outskirts of town, announced it had decided to trade it for—of all things—a tequila maker. In exchange for Bushmills, Casa Cuervo, the Mexican company behind Jose Cuervo, gave Diageo its super-premium Don Julio brand, along with $408 million.

To whiskey fans, the deal made no sense. At 272 years, Old Bushmills is widely considered the longest continuously operating distillery on the planet. Irish whiskey is one of the fastest-growing spirits categories worldwide. And Diageo had already bought two major tequila brands—DeLeón and Peligroso—earlier in the year.

But Diageo was onto something. While the media have focused on the surge in consumption of vodka and, more recently, whiskey—both of which far outsell tequila—the agave-based spirit has been quietly outpacing their growth rates in the U.S. market. Almost all the action is at the top end, with brands like Don Julio, whose sales have been spiking by 25% annually in recent years. “It’s a bet on value, not on volumes,” says Spiros Malandrakis, a senior alcoholic-drinks analyst for Euromonitor.

The calculation is simple. Liquor sales are increasing at a healthy 5% clip, and hard alcohol is stealing market share from beer and wine. And as in other parts of the food business, the past decade has seen a tectonic shift among consumers away from inexpensive mass brands toward artisanal, high-end products. It’s what people in the industry call premiumization. And there is no liquor riding the premiumization wave as high as tequila.

Patrón’s tequila ages in oak barrels in Atotonilco in the Mexican state of Jalisco, the only region in the world where the liquor may be made.Photograph by Frederic Lagrange
Photograph by Frederic Lagrange

“There’s a much greater recognition that tequila can be a sipper, not just a shooter or dropped in a margarita,” says Bill Norris, the beverage director for the Alamo Drafthouse Cinema chain, whose venues feature dozens of premium tequilas. “People see it alongside single-malt Scotch.”

This isn’t your college frat’s tequila. Two decades ago almost all tequila sold in the U.S. was mixto, or blended, from a combination of just over half agave mash and the rest sugar and flavoring chemicals, the sort of additives that give tequila its nasty reputation for leaving you with a mind-piercing headache after you down a few (or more than a few) margaritas. Tequilas like Don Julio, by contrast, are made exclusively from a single species, Weber blue agave—more expensive, but a world of difference in flavor. And though too much of any drink will leave you reeling in the morning, fans swear that 100%-agave tequilas provide a “cleaner” buzz and leave them fresh the next morning. Last year, for the first time, Americans drank more 100%-agave tequila than mixto.

The numbers tell it all. According to data from the Distilled Spirits Council of the U.S., between 2004 and 2014 total U.S. tequila sales grew 63%, decent if not blockbuster growth. But consider the super-premium level, where bottles start at around $30. In 2004, Americans bought just 513,000 cases; a decade later they purchased 2.39 million, a 365% increase. By comparison, vodka grew 51.8% overall and 143% at the super-premium level, while bourbon, the industry darling, grew just 40% overall and 282% for super-premium.

For Diageo, numbers like that made dumping Bushmills for Don Julio a no-brainer. “Tequila is one of the most exciting categories in spirits,” says Alex Tomlin, senior vice president of marketing for tequila and other drinks at Diageo North America. “It has broken out of the shots ghetto.”

Tequila still has a lot to prove. For every newcomer or convert, there’s a consumer whose queasy memories of past hangovers keep him away. And unlike vodka and whiskey, which are popular around the world, tequila is mostly sold in the U.S.  For the category to really hit big, it’s going to have to find a way to win over even more consumers. That may mean not just breaking out of the shots ghetto, but also making inroads in a new market with huge potential: China.

Read the entire story here.