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Diageo Thinks Super-Premium Tequila is a Better Long-term Bet Than Irish Whiskey

11/3/2014
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Diageo’s decision to swap Bushmill’s for complete control of the Don Julio super-premium tequila brand, US$408 million - regaining the production and distribution of Smirnoff in Mexico with Grupo Cuervo - may seem strange in the light of the expected global prospects of tequila and Irish whiskey, at least at first glance. The categories are expected to see CAGRs of 2% and 11% or 14 million and 16 million litres respectively between 2013-2018. However, the deal does make strategic sense for Diageo as well as Casa Cuervo.

It’s all about the US for Diageo

The key to this logic is the US, the key growth market for both categories. As reflected in the global figures, Irish whiskies will outperform tequila dramatically in CAGR albeit less so in actual terms, but the actual difference is in the underlying dynamics of each of the individual categories.

In Irish whiskey Diageo has tried and failed to make Bushmill’s work in the US, with the brand’s share falling from 17% in 2008, to 8% in 2013. Category growth has continually been driven by Pernod Ricard’s Jameson brand. On the other hand, Bushmill’s continued failure over the review period can, in the early part be put down to a lack of corporate focus, but this cannot be said in recent years when Bushmill’s did enjoy support from the company and its failed launch of a honey variant can, with hindsight, be seen as a last stab at giving it a foothold.

Part of the problem with Bushmill’s has been its flavour profile which is less accessible than Jameson or Tullamore Dew, but has also been Diageo’s failure to develop an Irish identity for the brand separate from Jameson, not just in the US but also globally. This is what William Grant is trying in the US, with some early signs of success, for Tullamore Dew.

In tequila, Diageo obviously feels it can gain more traction and see stronger growth, if not in volume terms then certainly in value, despite the brand’s small size. The Don Julio brand has not only seen its share of the category grow from 1.3% to 2% between 2008-2013 it is also in the right place in the market, ie the super-premium end, to exploit the strong growth of tequila in the US- and possibly beyond.

Grupo Cuervo scaling up

For Grupo Cuervo gaining control of Bushmill’s gives it control of an international brand and greater distribution heft when it comes to dealing with distributors in the US and globally. This is something the company needs now that it no longer has Diageo distributing its brands and its reliance on 3rd party distributors. With the exception of the relatively small premium spiced rum Kraken, Grupo Cuervo lacks a portfolio of brands to help negotiate better deals with distributors, despite the scale of the iconic José Cuervo brand.

This deal potentially offers a win win situation for both parties and in the case of Grupo Cuervo shows that it is determined to remain independent for the foreseeable future. For Diageo the challenge will be to secure Don Julio’s growth in what may be a high margin, but crowded market place. However, this will be a risk and it will be at the price of not being in the world’s most dynamic spirits category. For Grupo Cuervo, the challenge will be greater. It will have to try and find a way to grow the brand and create a unique identity for Bushmill’s but without Diageo’s distribution clout, although perhaps with a greater focus.

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