Tequila Rack Blog

In the December 17, 2009 issue of Drinks International online magazine, the headline reads:

WHO plans global duty free liquor ban

The story goes on to say…

“The World Health Organization (WHO) has shocked the duty-free industry by proposing a global ban on duty-free liquor sales, a business which was worth $6.3bn last year.”

The proposal to slow down alcohol consumption was actually published in December of last year, but will finally get onto the WHO’s Executive Board agenda between January 18-23, 2010. The Board is made up of health ministers from 34 leading countries, and if it approves the proposal, it will be presented to the WHO’s full annual General Assembly in May 2010.

Keith Spinks, secretary general of the European Travel Retail Council (ETRC) believes that the proposal will pass the Executive Board and into the General Assembly that is made up of 193 governments, and warns, “If this goes though, it will be a disaster for the industry.”

Should the World Health Organization ratify this proposal, there is an upside.  According to Spinks, this proposal on liquor would not be “binding.”

“It is going to be up to each member country to decide whether to implement the proposal or not.” But, he adds, “My fear is that some countries will and some won’t, leaving us in a big mess.”

In 2005, the WHO tried to ban duty-free tobacco sales through its Framework Convention on Tobacco Control (FCTC). The FCTC was ratified by 165 countries worldwide, but has yet to be implemented by any country.

A quick review of the members of the World Health Organization may give a clue as to why.

Alcohol, Tobacco, and Tourism

All countries which are Members of the United Nations may become members of World Health Organization by accepting its Constitution.  So, which countries are members?

Australia, the Bahamas, Costa Rica, Dominican Republic, Egypt, Finland, Germany, Hungary, Italy, Mexico, Switzerland, UK, and the USA, to name just a few.  Most all of these countries have one or more international airports with duty free stores selling among other things, spirits, cigars, and cigarettes.

Not only do most of these member countries tout tourism as a major industry, but many also have their signature spirits (and cigars, in some cases) that define them.  Examples are rum from Barbados, limoncello from Italy, and of course, tequila from Mexico.

Where duty free merchants pay inventory/business or other taxes, customers usually pay none.  For these countries, tourism, and the profit made at duty free shops from alcohol and tobacco sales, is directly related to each other.

How much damage could the enforcement of this proposal do?

WHO vs. Patrón

As stated above, duty-free liquor sales from last year amounted to $6.3 billion in 2008.  That accounted for 17.2% of the total global liquor business according to the Drinks International article.

In the April 2008 issue of Impact Magazine, it states that Patrón tequila was also penetrating the travel retail sector overseas, long a key channel for high-end spirits but one in which tequila was underappreciated.  Patrón was aggressively growing its brand by sampling at very visible public relations events in key cities such as London, Athens, Hong Kong, Singapore and Sydney, all whose countries are members of the World Health Organization.

The Patrón Spirits Company, producers of Patrón tequila, claim on their website to be in over 100 countries and islands worldwide.  Given that there are only 193 members of the WHO, the chances are good that Patrón is available in the duty free stores of most of these member countries.

Assuming that the same 163 countries that ratified the duty free tobacco ban in 2005 also decided to ratify—and enforce–the duty free alcohol ban, the results could be devastating not just for Patrón, but also for Sauza, Brown-Forman (El Jimador brand), and Jose Cuervo, as well as all spirits suppliers, duty free retailers, and airports.

While it seems likely that the World Health Organization’s Executive Board will ratify the alcohol ban proposal, it seems unlikely that any countries will actually enforce it.

By Andrew Cleary

Nov. 26 (Bloomberg) – Patron Spirits International, which outspent all other U.S. liquor brands on marketing last year, plans to grab more “blockbuster” billboards, ousting auto, phone and beer ads to catch up with tequila rival Jose Cuervo.

Patron, controlled by shampoo billionaireJohn Paul Dejoria, this year gained control of a 225-foot-tall billboard, New York’s largest, near Penn Station. Formerly held by AT&T Inc., the billboard says shoppers can “eliminate regifting” by buying Patron for their loved ones this weekend, the busiest of the U.S. Christmas shopping season. Clear Channel Outdoor Holdings Inc. says such a billboard can cost $1 million a year.

Chief Operating Officer John McDonnell said the third- biggest U.S. tequila maker is raising its marketing budget by 10 percent to secure similar billboards in the 10 biggest U.S. spirits markets. Sales of Patron, which costs between $40 and $500 a bottle, rose 10.6 percent in the year to Sept. 6, Chicago-based researcher Information Resources Inc. says.

Patron is “taking advantage of opportunities that haven’t been available in the past, like choice outdoor locations,” McDonnell said yesterday. “Increased awareness and exposure is very much attributable to our advertising.” Las Vegas-based Patron may pick up sites being vacated by automakers, he said.

A Patron ad replaced Heineken NV on a billboard above the I-93 expressway in McDonnell’s home town of Boston last year.

Heineken, which is cutting costs like advertising to stay profitable, saw U.S. sales of its Dutch beer plunge 12 percent by volume in the first half. Diageo Plc, the largest liquor maker and Cuervo’s U.S. distributor, cut its marketing spending by 9 percent in the year ended June 30.

Seagram Veteran

For Patron, “it is particularly smart to increase that spend,” said Tom Sebok, chief executive officer of advertising firm Young & Rubicam North America. “Those who are aggressive will get long-term dividends. Those who aren’t will have a much harder time clawing back in better times.”

Patron, which also owns Ultimat vodka, may buy more brands, McDonnell said. The veteran of Seagram Co. said the company has no debt, and declined to provide sales or profit figures.

Larger tequila rivals Casa Cuervo SA de CV and Fortune Brands Inc.’s Sauza, which both sell for less than Patron, saw their revenue decline 2.4 percent and 8.9 percent, respectively, while total U.S. liquor sales rose 1.6 percent over the same period, according to Information Resources.

Patron is also spending more to secure inside covers and pull-outs in magazines including GQ, Sports Illustrated, and Forbes, McDonnell said in an earlier interview in London. “You have to have these blockbuster positions,” he said.

The company generates 90 percent of its revenue in the U.S. and spent $50.9 million on advertising its tequila in 2008, more than any other liquor brand, Taylor Nelson Sofres Plc says.

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