Subscriber login Close [x]
remember me
You are not logged in.

Friday Read: Riding the tequila wave

Published:  09 August, 2019

It is a tumultuous time to be a smaller tequila producer. External forces are a mixture of positive market growth and negative trade tensions, including rising supply costs (agave, in 2018, was up 571% since 2016), fuel shortages engendered by pipeline pirates and fraying civil structure in the main production area of Jalisco. Against this background ‘adaptation’ is the keyword for the smaller producer.

On top of extraordinary events, there are difficult conditions that are a regular part of the Mexican business landscape such as underdeveloped distribution channels and supply chain, and retail competition from mixto tequilas to those who produce 100% agave.

The tequila market is dominated by majors. Brown-Forman has Herradura, Beam-Suntory Hornitos, Sauza and El Tesoro. Pernod Ricard has Olmeca. Constellation has Casa Nobles. Bacardi has Cazadores. Gruppo Campari has Cabo Wabo. William Grant has Milagro. Diageo has Don Julio and Casamigos.

The tequila market continues to grow strongly in the US, but Mezcal - currently tiny by comparison - is growing much faster. It would not be surprising to see the major liquor conglomerates enter that market in the future.

I got a first-hand look at what adaptation meant on a recent visit to Corralejo, a producer in Guanajuato, adjacent to the state of Jalisco, and one that is also entitled to produce tequila in certain areas. Corralejo is a good example of a medium-sized tequila producer, ranked 14 in the US market, with 56% of production heading north to the States. Its whole product range is 100% agave (no mixto), with the core product range being the expected blanco, reposado, and añejo.

The label was founded by Leonardo Rodriguez Moreno, a Mexican entrepreneur with overseas business experience. He spent five years in Spain working for himself in Extremadura where he had invented a liqueur of acorns and hazelnut named ‘Extreme Kiss’, ran two hotels, and a restaurant.

One lesson he learned on his return to Mexico was security of supply. At Corralejo he brought bottle production in house after the only bottle producer could not guarantee him a supply. He created a giant glassworks that made all the bottles, despite the difference in industrial glass making technology from medium-scale tequila production. The optimal scale for glass making was larger than the distillery needed for its own supplies so he successfully contracted to make bottles for other tequila brands. On a tour of the glassworks I saw the distinctive shapes of world famous brands.

The other lesson was diversification, in all things.

Sales are now diversified with Mexico at 30%, the US 56%, Europe 9%, Asia 3%, Canada and other countries in the Americas 2%. He takes an open-minded approach to distribution channels. Corralejo formed a global distribution agreement with Fraternity Spirits in 1995 to distribute Corralejo products globally outside Mexico. Product manager for the US, Ray Ramos, provides a face behind the name when he visits hundreds of retailers each year.

The US arm also administers the producer’s side of the complex and archaic three-tier system, under which producers must sell solely to licensed distributors in a US state, which in turn sell to retailers.

In operations, the state distributors play a logistics role, rather than a sales one, leaving Fraternity to provide the latter, while also distributing to over 75 other countries worldwide, including the UK, where Raffaele Berardi fronts the business.

The price tiers and product profile differs around the world, so Corralejo also differentiated by region or country. The idea was that whatever price category the consumer sought (except for the bottom-end, where the distillery took a conscious decision not to compete) Corralejo would have a product.

They considered the US tequila market to be stratified into price tiers: Corralejo ($25-$33) serving the premium category; Corralejo 99,000 (an 18-month extra añejo, $35-$50) and Gran Corralejo (a 24-month extra añejo) serving ultra-premium; 1821 Extra Anejos (anejo aged for 36 months, $130-$150) at the luxury end; plus Los Arango ($35-$50), an ultra premium range created for the craft spirits lover.

For the Latin American market in Central and South America a product line, Quita Penas, was created. And for the South African market, the El Diezmo brand.

Another diversification was to other drinks.

El Ron Prohibido is Mexican rum, which competes with the Centenario brand and a handful of other producers in the EU.

A tequila coffee liqueur is an alternative to Mexico’s own Kalhúa, and chocolates filled with it a short extension of the market.

There is a vodka named Boker, and a grape-based brandy, plus a few more exotic drinks.

Don Leonardo does not think this diversification takes attention away from tequila. “We can manage them together. All of the bigger distributors of beverages have a big portfolio, so we need to increase our portfolio to be competitive. It is an opportunity to diversify the market, beyond the tequila, there are other drinks that the consumer prefers”.

Other producers are following a similar strategy. Some are also going into liqueurs made with tequila or mezcal. Others make strategic alliances with other brands of brandy or rum.

Another diversification measure was product market diversification beyond drinks entirely. Leather goods were historically intrinsic to the local city of León and Leonardo Rodriguez has helped revive the industry by creating a leather museum where leather goods are also produced for sale.

This product mix may initially appear anarchic, but it makes sense when one factors in the market in which independent tequila producers must function. Don Leonardo is philosophical. When asked what medium-sized tequila producers need to do to be successful in coming years he says “we need to take care of 100% agave quality, because nowadays the consumer is looking for better quality tequila”.