15/09/2022

Is tequila’s future under threat?

IWSR analyses how growing demand for tequila is shaping the category's outlook

Tequila has enjoyed new levels of consumer demand over the past few years. In 2021 tequila commanded 2.5% volume share of the global spirits market (excluding national spirits), up from 1.8% in 2016. The category is expected to grow at a volume CAGR of 7% globally, 2021-2026.

This unprecedented demand for tequila, however, has led to agave shortages, higher production costs and new external threats, such as alternative agave spirits from Mexico, Australia, the US, and other countries. Agave prices are likely to remain high for the next few years, not least because it takes several years for plants to reach full maturity.

“Agave prices have remained close to record levels for the past three years, at MX$26-28/kg,” points out Jose Luis Hermoso, IWSR research director. “And bear in mind that it takes 7-8kg of agave to make one litre of tequila. Prices will only start moderating when there are signs that tequila is cooling down in the key US market.”

So far, there is little prospect of this. Consumption increases were higher than expected in 2021, and IWSR forecasts 2021-26 volume growth for tequila in the US at a CAGR of +9% (+13% in value terms). Tequila volumes in the US are poised to overtake those of vodka in the country over the same timescale. By 2026, the US alone will likely be consuming more tequila than the entire world did in 2021.

IWSR also forecasts that the global value of agave spirits will rise by 67% between 2021 and 2026, with super/ultra-premium tequila taking a 55% category value share by 2026. In the UK, the category’s most valuable European market, agave spirits are poised for an 88% increase in value between 2021 and 2026, from a small base.

“With this perspective, it is difficult to foresee any decline in demand for agave, or in agave pricing,” says Hermoso. “Having said that, if the US market does show signs of cooling down, the possibility of a rapid fall in agave prices can’t be ignored, as panic selling of surplus agave takes place.”

As well as rising agave prices, brand owners are also dealing with inflationary pressures linked to pandemic-related issues, including the sourcing and cost of packaging, labour shortages and shipping issues – all of which put pressure on pricing and margins.

As a result, the category is being impacted in several ways, including a feared negative impact on product quality. “While prices have gone up for many brands, quality has decreased due to many producers relying on underaged agave plants or using efficient diffusers to keep costs low during the production process,” notes IWSR research director for North America, Adam Rogers.

Another consequence is rising prices and reduced promotional activity for entry-level tequila brands in Mexico, the category’s second-largest market, which Hermoso warns is pushing some mainstream consumers out of the category altogether and into the Destilado de Agave segment. This has led to some brand owners to reformulate their products from 100% agave tequila to mixto offerings, or to withdraw from the market altogether. However, a larger-scale revival of the mixto segment looks unlikely, as 100% agave tequila products are perceived as more premium.

IWSR figures bear this out: 100% agave tequilas have seen their share of global volumes more than double over the past two decades, expanding from 29% in 2001 to 63% in 2021. Their value share rose to 79% in 2021, thanks to strong demand for blanco and gold tequilas, plus the fast-growing Cristalino segment.

Many brand owners too are keeping their focus on higher-end tequilas, even while remaining mindful of high agave prices. “Agave costs are below their peak, though easing at a slower pace than expected due to the higher demand within the category,” says Mia Simpson Culp, MD of Tequilas at Brown-Forman, owner of Herradura and El Jimador. “We have focused innovation efforts at the prestige segment (US$100+), given its rapid growth in recent years.”

In a similar vein, Julka Villa, global head of marketing at Campari Group (owner of Tequilas Espolòn and Cabo Wabo, plus Montelobos mezcal), sees no evidence of declining agave prices yet, although she expects this to occur “sooner or later”.

She adds: “Having said that, within the agave category we continue to see consumers trading up, choosing more premium-and-above spirits on the whole, and thus furthering growth and demand within the category.”

Current IWSR analysis of the tequila category shows that the premium tequila segment is set to drive the category forward, especially in the dominant US market, where the segment is expected to add more than $15 bn additional value to the overall category between 2021 and 2026. Growth prospects in other countries are attractive as well.

The pressures on tequila pricing raise the prospect of category-adjacent challenger products emerging, including mezcal and other agave spirits, whether produced in Mexico or elsewhere.

Campari’s Villa expects to see rising interest among bartenders and consumers in agave alternatives, such as raicilla, bacanora and sotol, adding: “At Campari, we’re always on the look-out for what’s next in spirits, but we also know that authenticity, provenance and heritage are paramount.”

Alternative agave spirits are already being produced in countries including Australia, the US and South Africa – and, over a longer timescale, these could challenge tequila in meeting growing global agave spirit demand, says Brandy Rand, chief strategy officer, IWSR.

“There is a genuine long-term threat to the tequila category of locally-grown, agave-based spirits,” she says. “Agave grows wild in South Africa, Australia and along Mexico’s northern border with the US.

“An industrialisation of these agave plantations to produce spirit of a recognised quality could erode the dominance of tequila in the agave spirit space in the longer term. After all, only 20 years ago consumers worldwide would turn to Scotch or Bourbon when thinking about whisky, but now the choice has expanded widely.”