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.

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One Response to “Tequila Pricing: How Low Can It Go? (The Math Behind Cheap Tequila)”

  1. Tequila Whisperer says:

    How do they do the $7.99 retail price?

    My guess is that it can only be done when the Importer and Distributor are the SAME, thus allowing one of those arms to take a “hit” while the business overall still squeaks out a minimal profit.

    -Lip

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