Tequila, the traditional Mexican spirit, is the fastest growing spirits category worldwide, forecast to see impressive 27% CAGR growth between 2021 and 2026. At the same time, and while accounting for one of the smallest volume shares among all major spirits categories, it holds huge value growth potential, having become almost synonymous with the premiumisation narrative. It’s an impressive rags-to-riches story for a segment that once had the humblest of beginnings.
While tequila is one of the fastest growing spirits categories, not all brands are growing equally, with clear winners and losers.
Winners and losers: premiumisation and economy brands
Premium-positioned brands have particularly benefited from the hype around tequila, even those which already have substantial volume sales, such as Patrón. Casamigos is also notable. The brand was founded by George Clooney and then sold to Diageo. The premium brand, which sells its Blanco option at around USD50, was the fastest growing among all tequila brands between 2017 and 2021. At the other end of the spectrum, the economy level, Sauza, one of the most traditional brands, retailing at around USD17, declined by 38% in total volume over the 2018-2021 period.
As tequila’s popularity rises and companies fight for sales, a significant storm is brewing: how time-consuming and costly it is to produce the agave spirit. Production of tequila takes place over an extensive time frame, as it is a long-cycle plant crop. Tequila production uses the piña (heart) of the agave plant, meaning each plant can only be harvested and used once, after the plant has matured completely, which takes five years or more.
This challenge is especially relevant for companies and brands at the standard and economy level, as the high production costs put pressure on their margins. The current energy crisis and increasing inflation of costs will likely add to the challenge.
The premiumisation of tequila, aligned with the consumer search for even more authentic and cool drinks, has pushed companies towards mezcal, a separate product category, also regulated by the CRT (Consejo Regulador del Tequila, or the Tequila Regulatory Council), but with other production requirements, that is quickly gaining popularity in key metropolitan centres and in mixology circles.
As tequila hits its limits, what are the alternatives?
Mezcal has the potential to present itself as the next step for the agave spirits category, or the “single grain” of the tequila world, while not necessarily cannibalising tequila sales. At the same time, it is important to consider how mezcal will interact with the current alcoholic drinks trends of mixology, RTD options, lower-alcohol options, and, especially, how it will deal with the economic and cost-of-living crises that are currently affecting the world.
But mezcal also has its limitations, and the paradox between its artisanal production requirements and intense growth in popularity will pose the question what else can be done for the agave spirits category?
Agave spirits are not limited to tequila or mezcal, encompassing a variety of products in Mexico, known as Licores de Agave, or Destilados de Agave. These products, which include Raicilla, can offer companies and brands the necessary portfolio expansion. Sotol also comes to mind as a product that can tap into tequila’s popularity while also being produced in the US.
Celebrity tequilas: viability and risks
One of the most interesting topics around tequila, and that also helps understand its vertical growth rate, is its association with celebrities, such as George Clooney, Kendall Jenner and NBA superstar Michael Jordan. Celebrities can be involved in a plethora of ways, from endorsing, being ambassadors and speakers, to owning a brand and tequila company.
The question remains how sustainable this strategy is. Celebrities fade, or become associated with a certain group, and may not appeal to the next generation. At the same time, celebrities are public figures, exposed to the risk of “cancellation” and scandals that can directly impact the brand and company.
Diversifying tequila: RTDs and Flavoured Tequila
Tequila, as a category, has also been influenced by trends seen in vodka, gin and other spirits, towards flavoured and RTD tequila products and cocktails. With Diageo’s acquisition of flavoured tequila brand 21 Seeds, a female-owned, super-premium tequila brand, infused tequila has become the centre of attention, echoing what has been done by 1800 Coconut Tequila and many other brands. Flavoured spirits, as a category, meets consumer demand for a simpler and easier tequila product to use in cocktails and in an almost ready-to-go format.
Flavour sophistication initiatives need to be undertaken carefully, as there is the potential danger of cannibalising the core brand and potentially devaluing the category if overdone, similar to what was seen in vodka.
Tequila-based RTDs is a category that is able to surf the intense growth and interest in tequila, as well as the interest in RTD products. The COVID-19 pandemic led to a shift to off-trade sales and at-home consumption, driving demand for RTD cocktails. RTDs also have the potential to tap into an important trend: the search for lower ABV. Exploring lower alcoholic content is part of consumers’ search for a healthier lifestyle, which is encouraging some to seek out and prioritise products that are included in the so-called “no/low” movement.
Tequila, mezcal and their cousins should be looked at carefully as sources of growth and innovation, pushing a Latin American spirit to the fore, showing the potential of how a local spirit can conquer the world. This is not without its challenges: limited production, artisanal methods and high prices will all put the category to the test in the short term, as the cost of living and agave production limitation will force companies to be innovative and creative. But in the long run, the wider category’s potential remains huge in both volume and value terms. It just needs to happen one sip at a time.
For further insight, read our report, From Shots to Sips: Understanding Tequila.