Category Archives: Tequilarack

Change is at Hand for the Tequila Market, Part I

tequila market, masa azulPart I of II

Written by Chris Zarus of TequilaRack

Tequila Brands and Producers Have Already Sailed Into the Sucker Hole

For those new to the expression, a “sucker hole” is a colloquial term referring to a 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 on them. Some in denial, others looking through rose-colored margarita glasses, still believe they can navigate through to that glimmer of light on the horizon. However, the perfect storm of doom looms just past the horizon of hope, and will soon envelope and destroy most, if not 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.

This is because of a number of factors, primarily that too many of us bought in to the Yankelovich and similar studies that declared premium and above 100% Agave Tequila brands as the next big thing.

While the premises of these market premonitions were undoubtedly true, too many of us jumped headfirst into the juice just before the world economic decline. Six hundred brands have turned into 1200 brands in less than five years. The growth of the market has been dramatic compared with other distilled spirits, yet, it’s still relatively small, ranked only 4th in US volume. It has not grown fast enough to accommodate all of the entries into the field.

Resistance is Futile – Change is at Hand for the Tequila Market

train wreckThe Gravy Train Wreck Ahead

I’m sure that for many of you, in just reading the title of this article, your blood pressure has escalated, and you may already be misdirecting your anger at the author.

For others who have experienced the many similar economic paths to consolidation in the global beverage industry, you have already accepted that change has to occur, and you will soon better understand and appreciate the math behind what I am about to lay out, and why everything I’m about to outline here will happen in due course.

For those of you who have your personal fortunes riding on the Tequila Train, both prominence and profit may still seem to be so close that you think you can see the light at the end of the tunnel, or beyond the next bend. But, I’m sorry to say that for most of us in the biz, the light at the end of the tunnel is that of an oncoming locomotive. This will be a catastrophic collision, albeit in slow motion, that will drain your resources and your resolve.

iwsrWhat can be learned from the Russians? (Excerpted 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 current research.

A recently released report from the International Wine and Spirit Research (IWSR) on Russia’s spirits market 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…”

cloud liningThe Silver Tequila Clouds have a very Dark Lining (Excerpted from Global market review of Tequila – forecasts to 2013 www.researchandmarkets.com )

The history of the Tequila industry has been one of boom and bust. Sales rose during the 1940’s only to collapse again in the mid-50’s. Export sales rose steadily from the 1960’s onward, although domestic sales fell sharply in the 1980’s due again to an economic slump, and the severe Mexican economic crisis of the early 1980’s resulted in plummeting sales.

The market was again disrupted by a critical shortage of Agave beginning in the late ’90’s, which served to hold back the category’s international development as brand owners were forced to divert limited supplies to the core US market, and quality perceptions were damaged as some manufacturers moved from 100% to 51% (Mixto) Agave products.

Today, that dynamic is in reverse, and the market is in oversupply. More and more 100% Agave products are coming into the market. This is helping to raise quality perceptions, and in turn, demand is surging not only in core Mexican and US markets but across a number of other countries.

The outlook for the category has rarely been better, and Casa Noble Tequila president and COO David Ravandi commented, “Tequila is entering a stage of consolidation in the world markets. It is no longer a fad. The fact that 100% Agave Tequila exports have increased tremendously over the last two years is extremely positive for the product’s outlook in the years to come.”

US Tequila Importation is a Sucker Bet

tequila history, santa fe“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 fifty percent cash up front to start the process.”

Unfortunately, far too many have fallen for this old gag. Relying heavily on the forecasting reports of the early 2000’s that suggested that luxury Tequila would be the next big spirits category after vodka.

With dollar signs in their eyes, the believers drank the Tequila Kool-Aid, most of them spending way too much to buy a brand, custom molded bottles, etc. But the worst part was that this 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 100,000 cases in volume in 2001, 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 play in the same ballpark as Patron’s $50M plus, Sauza’s $35M plus, and Cuervo’s $30M plus marketing budgets.

Who could have predicted that a “realistic” business plan for the next successful ultra-premium Tequila brand calling for only 10,000 cases in the first year would end in it’s investors taking a bath?

The problem with this equation is three-fold:

1) Pricing: Unlike vodka and white rum, 100% Agave Tequila 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 consumer, the cost involved with 100% Agave Tequila is always going to be too high to attain critical volume and profit levels.

2) Volume: US mass volumes are best when a spirits category is between $9.99-29.99/750ml. One hundred percent Agave Tequila is currently profitable only at the upper ranges when higher volumes are attained.

3) Distribution: The US “3-Tier” Distribution System is at best an oligopoly, and 19 states run a monopoly. Of the 1200 plus Tequila brands, want to guess how many they want to carry? Well, after the top 20, you are very lucky to be “special order only”. If you are fortunate enough to live in the states of California or Arizona, where one can be both the importer and distributor, you will find yourself driving your precious Tequila brand around to each account in your car.

Without product volumes or market clout, you will be hard pressed to get even an appointment, let alone a vender number with the chain restaurants and grocery stores. These major chain stores like Chili’s, Chevy’s, Costco, Kroger, etc., drive at least 85% of the combined volume in all but the control states. Without access to the chains, your market becomes the handful of privately owned, “Mom & Pop” accounts that usually know that small independent distributors are easy prey for bending the law on consignment, stringing out payments, or not paying at all.

While driving your own brand around certainly makes time for the personal touch and focus, these hand-selling efforts prove to be the most inefficient ways to distribute one Tequila brand. Your glass ceiling to fame and fortune becomes that next level of chain distribution that can only be had by a state-wide delivery system of the large wholesale distributor.

With Tequila segment Pricing, Volume and Distribution all against you, one will need to have a lot more money than the brands of the past in order to simply survive in the US.

Tanks-a-lot for Nothing

Call the tank maker and raise your stocks of liquid now!

no masUnfortunately, most of the mid-sized Tequila distilleries have bought into the notion that Agave prices will go up in the very near future. They base this notion on the boom and bust cycle of the past, and like Lehman Brothers, believe that they have successfully timed the market.

Greedily, many producers are now mortgaged to the hilt in order to produce all the Tequila that they possibly can afford to store in stainless tanks or wooden barrels. 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 stockpiling frenzy.

Are they storing Blanco, like acorns, for the hard winter ahead? These stored nuts of liquid demise are in reality winds conspiring to produce the perfect storm for all but the most financially secure and/or nimble producers.

Copyright 2010 International Tasting Group (ITG), All rights reserved. Unless otherwise noted, ITG is the legal copyright holder of the material on our blog and it may not be used, reprinted, or published without our written consent.

Links

SPIRITS TRENDS

U.S. Spirits Market 2008, Gross Revenues by Price Category

http://www.discus.org/pdf/2009IndustryBriefing.pdf (This is the most recent report by DISCUS for 2009. Tequila volume is still listed as 4th.)

http://www.thefreelibrary.com/Spirits+fast+track+brands.-a0144204154 (shows Patrón reaching 119K cases in volume in 2001.)

http://archive.cyark.org/2012-understanding-the-maya-calendars-blog

http://www.forgottenagesresearch.com/index.htm

http://www.nostradamus.org

http://www.oceanfreightusa.com/topic_impg.php?ch=19 (Bonded warehouses.)

http://dsc.discovery.com/news/2009/02/09/tequila-agriculture.html (agave farmers)

http://www.yankelovich.com/ (state of the consumer)

tequilarack

Originally posted October 1, 2010 by Chris Zarus of TequilaRack.  This is considered a standard in the industry and is even more relevant today.

Please visit TequilaRack, a member of the Tequila Aficionado Flight of Sites.

 

 

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Alcohol May Reduce Men’s Heart Risk

Study Shows Moderate Drinking Cuts Risk of Heart Disease in Men by 51%

By Kathleen Doheny, WebMD Health News

Nov. 18, 2009 — Regular consumption of alcohol — beer, wine, or hard liquor — reduces the risk of heart disease in men by a third or more, according to a new Spanish study.

heart risk, health, drinking, tequila”Our study confirms what many other studies have already said,” says researcher Larraitz Arriola, MD, of the Public Health Department of Gipuzkoa in San Sebastian, Spain. One difference, she says: Researchers in the new study separated ex-drinkers from lifelong teetotalers in hopes of better understanding the alcohol- heart health link.

Arriola and colleagues also found a beneficial effect of alcohol for women’s heart health, she says, but it was not strong enough to be considered statistically significant. She suspects it’s because of the relatively low number of women in the study who developed heart disease.

While drinking was associated with heart health, Arriola is quick to offer this caveat: ”I would not advise anybody to [start to] drink alcohol, because alcohol causes, as we mention in our paper, 1.8 million deaths a year” in addition to disabilities.

“If somebody already drinks alcohol, then I would advise to drink moderately, eat healthy food, and do some exercise.”

In the study, researchers evaluated more than 41,000 men and women enrolled in the ongoing European Prospective Investigation into Cancer (EPIC) study. That study includes a half million adults living in 10 Western European countries.

In the current research looking at alcohol and heart health, the researchers evaluated 15,630 men and 25,808 women ages 29 to 69,  all free of heart disease at the beginning of the study, following them for a median of 10 years (half longer, half less).

The researchers calculated alcohol intake from a diet history record; a follow-up revealed which participants had a cardiovascular event — either a heart attack or unstable angina (chest pains) that required a procedure such as a bypass operation or angioplasty.

During the follow-up, 609 such events occurred to 481 men and 128 women.

Spain has low heart disease death rates in comparison to some other countries, but high levels of alcohol consumption.

Amount of Alcohol and Heart Risk

Drinking any type of alcohol lowered the risk of serious heart disease in men, with the amount of risk reduction associated with the amount of alcohol:

  • Light drinking reduced risk by 35%
  • Moderate drinking reduced risk by 51%
  • High and very high levels of drinking reduced risk by 54% and 50%.

Former drinkers had a 10% risk reduction.

For the study, the researchers considered a drink as an alcoholic beverage with 10 grams of alcohol, the U.K. standard, Arriola says. In the U.S., a standard drink is equal to 13.7 grams of alcohol, according to the CDC.

heart risk, heart disease, heart health, tequilaRoughly, here is how Arriola defines her categories:

  • Light drinking was up to 5 grams a day — or about one glass of wine, one and one-half beers, or less than a half glass of hard liquor.
  • Moderate drinking was 5 to 30 grams a day, or about two glasses of wine, two or three beers, or a half to one glass of hard liquor.
  • High and very high levels of drinking were 30 to 90 grams a day, or about five or more glasses of wine, seven or more beers, and one to one and a half glasses or more of hard liquor.While the type of alcoholic beverage consumed, overall, did not have an effect on the level of risk reduction, the researchers found the protection greater for those drinking moderate to high levels of alcohol, which included beverages other than wine alone.The study results replicate many other studies, according to Kristi Reynolds, PhD, MPH, a research scientist and epidemiologist at the Kaiser Permanente Southern California Medical Group. But she points out that heavy alcohol consumption carries many risks.In an email, she writes that heavy alcohol consumption has been shown in other studies to lead to increased illness and death from other causes. “Therefore, the implications of these findings should be examined cautiously. Advice regarding alcohol consumption should be tailored to the individual patient’s risks and the potential benefit.”

 

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Originally posted November 20, 2009 by TequilaRack.

Please visit TequilaRack, a member of the Tequila Aficionado Flight of Sites.

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Tequila Pricing: How Low Can It Go? (The Math Behind Cheap Tequila)

tequila pricing

Written by Chris Zarus of TequilaRack

I just got off the phone with an old industry Pal and we were talking back and forth about Tequila pricing. Not just any pricing, but the pricing at the low end of 100% Agave Tequila in the state of California. I had just gotten back from a trip to Jons Market (http://jonsmarketplace.com/) and had seen Morales 100% Agave Blanco and Reposado on display for $7.99 a liter. You can see a picture of it I took with my phone here: http://twitpic.com/6ie5fi

For those interested, below is what the corrected math looks like on importing the cheapest case of six 1Liter bottles of Tequila 100% Agave into Southern California with every tier (Distillery, Importer, Distributor & Retailer) making their full 30% gross margin, which is what is typical for an unknown brand:

Item

US Dollars

Tequila liquid cost/bottle

$ 0.50

Paper label/cap/bottle

$ 1.00

FOB /Bottle cost

$ 1.50

Importer Cost/Case

$ 9.00

Transportation to US Border

$ 3.77

Customs Clearance

$ 0.50

Transportation to US Warehouse

$ 0.50

Warehouse Fee

$ 0.30

Back Office

$ 0.30

Federal Excise Tax

$ 17.12

Importer Laid-in Cost

$ 31.49

Importer Margin

$ 13.50

Price to Distributor

$ 44.99

Freight to Distributor

$ 0.50

State Tax

$ 5.23

Tax-Other

$ –

Distributor Laid-in Cost

$ 50.72

Distributor Margin

$ 21.74

Price to Retailer

$ 72.45

Retailer Margin

$ 31.05

PTC (Price To Consumer/Case)

$ 103.50

PTC (Price to Consumer/bottle)

$ 17.25

 

If you understand the numbers above, then you can plainly see that it is impossible for a bottle of Tequila to be on the shelf for sale in California for under $17.25 per liter. So how do they do it? How is it that we can find so many bottles below this $17.25 threshold price? Well, it first starts with a reduction in margin at every tier in the equation. This is only possible for a known, volume brand of at least a container per month in US volume. For high volume brands, the equation should look similar to this:

Item

US Dollars

Tequila liquid cost/bottle

$ 0.30

Paper label/cap/bottle

$ 1.00

FOB /Bottle cost

$ 1.30

Importer Cost/Case

$ 7.80

Transportation to US Border

$ 2.50

Customs Clearance

$ 0.20

Transportation to US Warehouse

$ –

Warehouse Fee

$ –

Back Office

$ 0.05

Federal Excise Tax

$ 17.12

Importer Laid-in Cost

$ 27.67

Importer Margin

$ 7.80

Price to Distributor

$ 35.47

Freight to Distributor

$ 0.25

State Tax

$ 5.23

Tax-Other

$ –

Distributor Laid-in Cost

$ 40.95

Distributor Margin

$ 11.55

Price to Retailer

$ 52.51

Retailer Margin

$ 14.81

PTC (Price To Consumer/Case)

$ 67.32

PTC (Price to Consumer/bottle)

$ 11.22

 

So, with a volume brand, all tiers, producer, importer, distributor and retailer reducing their margin to 22% each, the best price on the shelf is $11.22/Liter.

So how is it that we have $7.99/liter pricing on the shelf at retail in Southern California? How can they possibly do it? Your comments below are much appreciated before I do the reveal. What I will also show is the new range (new age?) of Tequila pricing that, if you spot it on the shelf, you will know that the brand is either being liquidated (or if back by a larger company is being introduced). In almost every scenario, with the exception of a new brand launch, the importer or distributor is supporting this loss was left holding the bag (inventory) and has lost all of their investment in the inventory.

If you are a small US importer or importing distributor of Tequila, pricing such as this can be very disturbing and are confirmation of my previous predictions found in this blog. It’s time to seek shelter and/or strap yourself firmly to the yardarms and cut all costs. Hang on for the ride of your (and your brand’s) life. Good Tequila will be available for below actual cost of production/tax/shipping for at least two more years, maybe more.

You as a brand owner have to be very attentive to your price and pricing models, but more importantly your actual profit. You have to have a line item for free samples, events, competitions and other marketing costs which are not even captured here in this exercise as we are assuming lowest cost pricing models. If you are a brand owner and have a business plan that states that your brand will sell 10,000 ce’s in its first year and will be profitable in anything less than 20 years from inception, you have already bought a losing lottery ticket.

If any of the above rings true for your brand, please contact me, I may be able to assist.

 

tequilarack

 

Originally posted by Chris Zarus of TequilaRack on September 15, 2011 by TequilaRack.

Please visit TequilaRack, a member of the Tequila Aficionado Flight of Sites.

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TequilaRack™ Tequila Tasting Kit Gift Pack

tequila tasting, tequilarack

A special thanks to the late Brad Hoover who assisted in the development of this latest interpretation of TequilaRack™.  It was his sound advice and encouragement that has kept me going through these very tough times.

TequilaRack™ Micro Tequila Tasting Kit gift pack – Is comprised of three distinctly different 100% Agave Reposado Tequila brands from diverse distilleries, aged in different barrels along with a proper tasting jigger, spirit-specific tasting information and food pairing via www.TequilaRack.com – all of the items needed to perform a tasting of these rare, aged, sipping Tequilas. Very limited and numbered quantities available.

Just in time for the holidays!  Buy the TequilaRack™ Micro Tequila Tasting Kit Gift Pack for that special aficionado on your Christmas list by clicking here.

Tequila is finally coming into its own and garnering the respect it deserves. It is a complex and complicated spirit that takes time to appreciate and discern. This idea is the evolution of TEQUILARACK™. The International Tasting Group has sourced several of the finest boutique Tequileras in Mexico and assembled their products of Micro Tequilas as a collection to be sampled and compared. Each Tequila has its own unique story. The flavor variations come from the differences in the soil within the appellation of origin where the Weber Blue Agaves are grown, as well as the kinds of water and yeast used in the distillation process and the length of time and types of barrels used for aging. The color of each brand depends on how long it has been aged and what type of barrel was used. These differences all combine to give an array of flavors, aromas, textures and mouth-feels to our collection of Mexico’s finest Tequilas.

tequilarack

 

Buy the TequilaRack™ Micro Tequila Tasting Kit Gift Pack for that special aficionado on your Christmas list by clicking here.

Originally posted November 16, 2010 by TequilaRack.

Please visit TequilaRack, a member of the Tequila Aficionado Flight of Sites.

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TequilaRack and the Tequila Aficionado Flight of Sites

tequila aficionado, flight of sites

We are pleased to announce the addition of TequilaRack to our Tequila Aficionado Flight of Sites

TEQUILARACK™ is a constantly evolving, handpicked collection of Mexico’s finest 100% Agave Micro Tequilas. In addition to Tequila Aficionado and TequilaRack’s authoritative learning resources, this product enables you to buy the perfect Tequila Aficionado starter kit.

tequilarackTequilaRack is the perfect study set for that friend you managed to get to stop shooting tequila who now wants to learn more about it.

TequilaRack will set you on the road to learning about how the flavor variations come from the differences in the soil within the appellation of origin where the Weber Blue Agaves are grown, as well as the kinds of water and yeast used in the distillation process and the length of time and types of barrels used for aging. The color of each brand depends on how long it has been aged and what type of barrel was used. These differences all combine to give an array of flavors, aromas, textures and mouth-feels to the TequilaRack collection of Mexico’s finest Tequilas.  This is a perfect gift for both novices and experienced aficionados.  Just look at what each kit includes:

 

tequilarack

As part of our new collaboration with TequilaRack, over the next several weeks, you’ll see much of their quality content moving to the Tequila Aficionado website.  We’ll be working in conjunction with TequilaRack to help inform tequila aficionados about the benefits of this product as well as sharing the great resources available to our readers at www.TequilaRack.com.  You just can’t find a better Tequila 101 primer than the information found at www.TequilaRack.com and, once you’ve learned all about the basics there and put your own TequilaRack kit to use, you’ll be well versed and ready to share your thoughts and tastings here with us at Tequila Aficionado.

tequilarack

We hope you’ll visit TequilaRack.com and find a retailer near you so you can get the perfect gift for a friend (or from Santa) this holiday season.  As soon as TequilaRack kits are available online, you’ll see the announcement here!

In the meantime, look for more announcements about our new partnerships and collaborative efforts with more of the finest tequila culture resources in 2014.

 

 

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