(Very Rough Draft) Tequila Brands & Producers: Sailing Into the Sucker Hole
Let’s start out this post with a little Sucker hole background. For those new to the expression, a “Sucker hole” is a colloquial term referring to a short spate of good weather that “suckers” sailors into leaving port just in time for a storm to resume at full force and wreak havoc on the ship and crew. For both Tequila Brand owners and producers of a certain size, their ship has already sailed, and the storm is now closing in upon them. Some still in denial, others looking through rose-colored margarita glasses, still believe they can navigate through, and believe they are able to see a glimmer of light on the horizon just ahead. However, the perfect storm of doom looms just past the horizon of hope, and will soon envelope and destroy most all in its wake. Oh, and that’s the good news. The bad news is that only a few of the big and the very nimble will survive.
What can be learned from the Russians? (Excerpt from JustDrinks.com)
The global economic crisis has had a significant impact on the Russian spirits market, changing market dynamics and briefly halting the much-lauded premiumisation trend, according to recent research. A report from IWSR on Russia’s spirits market, released this week, claims that the downturn has also led to disruptions across the supply chain, with many suppliers and distributors going bankrupt or halting production. For healthier companies, however, it has presented an opening to establish their brands and take market share.
Tanks-a-lot for Nothing
Unfortunately most of the Tequila distilleries have bought into the notion that Agave prices will go up in the very near future. Time is-a-wasting Senior! So hurry up and call the tank maker and stock up now! Greedily, many producers are now mortgaged to the hilt in order to produce and store all the Tequila that they possibly can. Fear of the impending Agave price increase that has yet to happen (and may not for many, many years) has seemingly forced them all into a squirrel-like frenzy. Storing Blanco, like nuts, for the hard winter ahead? Ah, but like nuclear winter, these stored nuts of liquid demise are in reality, the cruelest of Trojan Horses. They are in fact time bombs in which will bloom the perfect storm for all but the most financially secure and/or nimble producers.
As the dooms day clock ticks down, all but the biggest Distilleries, short on cash and heavy in liquid inventory, will soon be courting anyone with a US Dollar. But that market is rather small, and unless the CRT changes the law, and allows 100% Agave to be bottled outside of Appellation area, the price of a “Pipe” of Tequila 100% will begin to drop faster and farther than that of its half brother Mixto. Too much 100% Tequila chasing too few in-zone buyers will cause another price collapse, only this one in finished liquid.
As this scenario starts to unfold, a few things will begin to happen simultaneously. 1) The largest producers (top 5) will buy out the top 20 as their values will be diminished. Larger or well-financed producers will be able to buyout the next tier with little cash and mostly their own corporate stock. These bigger players will do this not just to shut down a competitor, but to get their hands on their vast depressed inventory of Tequila 100% for their own use, and perhaps get some under marketed brands of promise as a bonus. 2). The next tier, 25-75 will die out. 3) The smaller producers, like micro brewers, will survive by remaining small and being content just making incredible craft Tequilas.
US Tequila importation is a sucker bet: My Cousin will make the best Tequila for you Mr. Gringo
So, my friend, you want a great Tequila brand? We will make it for you. Just 50% cash up front to start the process. Unfortunately, too many have fallen for this old gag. Relying heavily on the forecasting reports of the early 2000 that suggested that luxury Tequila would be the next big spirits category after Vodka. So, with dollar signs in their eyes, the believers drank the Tequila Kool-Aid hook, line and sinker. With most of them spending way too much to buy a brand, custom molded bottles, etc. But the worst part was that they left little if any money for marketing. Many did not even understand brand marketing inflation was happening right under their noses. It had started soon after Patron hit 100k cases and the cost to market a Tequila brand in the US went from $1 to $10M per year. Today it takes at least $20M per year just to stay near the likes of Patron’s +$50M, Sauza Family at +$35M and Cuervo somewhere north of $30M. Who know that the brand plan that called for 10,000 cases in their first year called out for investors in the next big ultra-premium Tequila success was unrealistic and investors were going to take a bath.
The problem of the equation is two-fold: 1) Pricing. Unlike Vodka & White Rum, Tequila 100% is just too expensive to produce and bottle in Mexico. Unless, like Rum, Vodka and Mixto Tequila, it is able to be shipped in bulk and bottled near the final customer, the cost involved with 100% Agave Tequila is always going to be too high to attain critical volume and profit levels. 2) US mass Volumes are best when a spirits category is $9.99-29.99/750ml. Tequila 100% is only currently profitable at the upper ranges with high volumes.
So what is the endgame Senior?
Unless some government interference changes the course of this riptide and rescues the lot, Blanco Tequila 100% pricing will fall in line with other white spirits, Vodka & Rum with the bulk of the volume at $9.99 per 750ml for the low-end and $29.99 at the Grey Goose/Belvedere high-end. Aged Tequilas will march down in lockstep to accompany their Blanco brethren at a $5-$10 spread on the shelf. Yes, exotic Tequilas will still command higher prices, but the volume to run a business will be the same range as Vodka.