The Tequila category is on a sustained upswing. Consumption trends for the Mexican spirit are evolving as consumer palates grow more sophisticated, and the shift toward 100-percent agave offerings continues. In 2015, total Tequila volumes advanced 4.5 percent to nearly 14.7 million cases, according to Impact Databank. Luxury brands priced over $40 grew even more quickly, with the top five brands in the segment shooting up 7.6 percent in 2015.
“The shift in quality is undeniable at this point,” says Lock Reddic, president of Green’s Discount Beverage Stores. The retailer—which has four locations in South Carolina and one in Atlanta—has seen Tequila sales increase about 11.5 percent in the past six months compared to the prior year, and Reddic attributes that growth to an increasingly sophisticated customer base. “With the explosion of new brands, we’ve seen an uptick in the average purchase price,” he says. “Consumers are a lot more educated than they used to be.”
At over 2 million cases, Patrón remains the dominant force in the luxury Tequila segment, which totaled 2.7 million cases last year. Diageo’s Don Julio, Brown-Forman’s Herradura and Pernod Ricard’s Avión all advanced by double digits off smaller bases, while relative newcomer Casamigos from Casamigos Spirits Co. more than doubled to 80,000 cases in 2015.
Suppliers and retailers expect the growth to continue. “There’s tremendous interest in ultra-premium Tequila, and Patrón is doing very well,” says Patrón Spirits Co. chief marketing officer Lee Applbaum. “The first quarter of 2016 got off to an extraordinarily strong start for us.” Led by Silver ($44.99 a 750-ml. bottle), the core line drives most of Patrón’s volume, and both Reposado ($49.99) and Añejo ($54.99) are also accelerating. The upscale Roca Patrón line ($69.99 to $89.99), which is produced using a traditional tahona stone, is another bright spot. “Roca exceeded 20-percent growth coming out of the first quarter of 2016,” Applbaum says. “The growth is actual flow-through, not just sell-in.” The increased interest in handcrafted Tequila has benefited both Roca and the full Patrón range. “We address both sides of the consumer coin,” he says. “Our brand has the aspirational equity and swagger some consumers want. Other consumers are looking for true artisanal Tequila, and we’ve spent the last several years reinforcing that story.”
The artisanal emphasis is occurring across the luxury category. “Consumers are seeking out complex brands with personality and history,” says Alex Tomlin, Diageo senior vice president of marketing for Tequila. Diageo’s portfolio features two upscale Tequila brands, Don Julio and DeLeón. The former rose 13 percent to 305,000 cases in 2015, according to Impact Databank. “Don Julio’s main focus is craft and quality,” Tomlin says. “We’re continuing to build scale by offering in-depth tastings of our portfolio.” He adds that almost half of the brand’s volume is sold in the on-premise. The DeLeón brand—a joint venture between Diageo and Combs Wine & Spirits—focuses more heavily on millennials and lifestyle consumers and tripled to 15,000 cases last year.
Ken Austin, founder and chairman of Avión Tequila, says that Tequila’s growth is broad-based, driven by both open-minded millennials and older drinkers. He explains that many older drinkers had bad experiences with Tequila when they were younger, but embrace 100-percent agave offerings once they try them. “When you convert older drinkers, they’re very passionate about it,” he says. Avión advanced 26.5 percent to 132,000 cases in 2015, and Austin says the brand has since surpassed 150,000 cases. The company—in which Pernod Ricard USA took a majority stake in 2014—launched a nationwide marketing campaign this summer. Based around the tag-line “Tequila elevado a un arte,” which translates to “Tequila elevated to an art,” the effort emphasizes Avión’s artisanal, hand-crafted credentials and features television, digital, radio and out-of-home components.
In The Market
The growth in ultra-premium Tequila has brought major changes to the category at the retail tier. At Warehouse Wine and Spirits in New York City’s Greenwich Village, consumer knowledge levels have increased dramatically. “Ten years ago, most New Yorkers only knew Patrón and Don Julio,” says general manager Jim English. “Anyone who knew anything about Tequila was from the West Coast. Now, in a store that’s known for being price-driven, we definitely have customers who know Tequila.” He cites smaller brands like Fortaleza, Siete Leguas and Tequila 123, which have a reasonable price point and appeal to connoisseurs. “They’re higher-end, but still good value,” English adds, though he notes that there are some customers who aren’t interested in the nuances of Tequila. Reddic of Green’s sees a similar move toward higher-end offerings. “We’ve seen a big shift away from 1.75-liter bottles, which are traditionally our strength, to 750-ml. bottles,” Reddic says. “People are buying better, but buying a little less.”
Tequila’s handcrafted message resonates particularly forcefully with millennials. “The Tequila category is going crazy, especially the premium and super-premium products,” says Mark Roy, spirits marketing specialist at the New Hampshire Liquor Commission (NHLC). “For millennials, higher price points aren’t a deterrent. They’re purchasing Tequila based on its historical and traditional background.” The NHLC carries 259 Tequila SKUs across its 79 locations, and the category is booming. For the NHLC’s rolling fiscal year from June 30th, 2015, to June 19th, 2016, the Tequila category grew 39 percent by value to $3.07 million. Top-sellers include Jose Cuervo, Hornitos, Casamigos and Roca Patrón.
Interest in ultra-premium brands, however, can be “fickle,” says David Jabour, president of Austin, Texas–based Twin Liquors. Jabour notes that Patrón and Don Julio are the market leaders at the roughly 80-unit chain. Smaller craft Tequila brands haven’t drawn major interest, with some exceptions. “Even though Tequila is made in Mexico, local angles like Texas ownership or a regional geographic focus translate to sales,” Jabour says, citing regional brands like Pepe Zevada and Dulce Vida, as well as Patrón, whose founder lives in the Austin area.
Silver And Gold
The emerging trend of enjoying Tequila neat or on the rocks has brought growth to aged expressions, but silver Tequilas are also moving into that sophisticated arena. “Silver Tequila is really the purest form of Tequila,” says Avión’s Austin. The trend is borne out at retail. “We’ve seen a big shift back toward the silver expressions,” says Roy of the NHLC. “For years, consumers thought that reposado was better and that añejo was even better than that, but a lot of consumers are going back to the silver. They want that true agave flavor.”
Each expression has a different role to play, says English of Warehouse. “Margarita drinkers tend to look at blancos, which are definitely the driver,” he says. “Reposados are more versatile for sipping or simple cocktails. Añejos are for people who know Tequila well.” Style trends can vary by region. At Green’s, interest in both silver and añejo expressions outpaces reposados. “Reposados often have the smallest number of unit sales,” Reddic says. “It’s consistent across most of the brands.” But at Twin Liquors, Jabour says that some brands do best with their reposado. Other brands do well with specific subsets of the population. “Brands that don’t index well in some demographics, like Cabrito, Cazadores or Sauza Cien Años, do index well in the Hispanic community,” Jabour says.
Across the category, Tequila consumption is evolving. “The Margarita will continue to be the No.-1 cocktail in America, but the pie is becoming bigger,” Avión’s Austin says. “People are drinking Tequila straight or on the rocks, maybe with a splash of soda or lime.” Home mixology is also key to the off-premise. “Margaritas and Palomas continue to drive sales,” says Jabour of Twin Liquors. Roy of the NHLC notes the effect mixology has on purchasing habits. “When consumers want a Tequila for mixing cocktails or entertaining, they’re looking for the 1.75-liter bottle size in the $28-to-$40 range,” he says. “But consumers looking to sit back and sip something are looking for higher-end Tequila in 750-ml. bottles.”
The continuing premiumization of Tequila bodes well, but the surge of investment and new brands has resulted in a crowded market. “There’s a gold rush in Tequila right now,” Avión’s Austin says. “It’s a very competitive category and ultimately there will be a shake-out.” But he sees ample opportunities for companies that invest in their brands and consumers. “People who are in Tequila for the right reasons will do really well because consumers are gravitating toward products like this,” he says. “There’s nothing but blue skies ahead for Tequila.”