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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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Tequila Week in Review: Avion, China, Camarena, Mezcal, Hacienda del Sol and Patron

In case you missed some of our articles over the past week, we’ve linked them here for you:

Sipping off the Cuff: Avion Tequila

It was Throwback Tuesday and we released this never before heard podcast from the tequila Aficionado vault.

China Opens Its Bars to Mexican Tequila – What Does This Mean For The Tequila Industry?

Tequila fan Rick Thibault Levy shared his opinion about this news item.  If you would like to share your opinion about this or other news items, feel free to visit our Contributors page for details on how to be a Tequila Aficionado Guest Contributor.

Tequila Aficionado Media Goes to the Ballpark With Camarena Tequila

As part of Camarena Tequila’s Step Up To The Plate promotion, Mike had the opportunity to enjoy a night at the ball park – with tequila!  He tells us all about the big event with this multi-media feature article.

Mezcal Production Drawing Mexicans Back Home

A great report by Lorne Matalon about how the growing market for Mezcal is creating jobs and happier families in Mexico.

Sipping off the Cuff: Hacienda del Sol Reposado

Hacienda del Sol Organic Tequila impressed Mike and Alex so much it was nominated for the 2013 Tequila Aficionado Brands of Promise Awards.

Tequila Revisited: A Redemption Story

Dan Pashman’s audio interview with Ilana Edelstein, author of The Patron Way.

 

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Tequila Revisited: A Redemption Story

patron way, ilana edelstein, patron tequila, tequila, book reviewsDan Pashman of The Sporkful did an audio interview with Ilana Edelstein, author of The Patron Way. We felt it was worth sharing since we’d recently reviewed Ilana’s book.

You can read Lisa’s full review here.

Click here for the audio of Dan Pashman’s interview.

 

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Review of Ilana Edelstein’s The Patron Way by Lisa Pietsch

the patron way, tequila, ilana edelsteinBusiness Narrative, Marketing Manual, or Romance?

Described as a “deeply personal business narrative,” the story centers around the development from the ground up of Patrón tequila, a “brand that single-handedly changed the face of the liquor industry,” by its co-founder, Martin Crowley, and as told by his then young and lively life partner, Ilana Edelstein.  

Tequila is by far my spirit of choice.  I’ve loved it for decades, and I still love learning by tasting more tequilas and by researching its fascinating history.  That’s why when the offer to preview Ilana Edelstein’s new book, The Patron Way, came across my desk, I jumped at the opportunity.

I wasn’t fooled by the above description, however. In fact, I’m not even a fan of Patron Tequila.

Drinking it is an unsettling experience for me, though I do understand the big batch Patron Tequila available today is a different product than the one the partners Martin Crowley and Jon Paul DeJoria fell in love with years ago.  I simply wanted to learn about the early days of one of the biggest brands ever.

A Lifestyle Business

Yes, business is a key player in this story.  At a time when the term “Lifestyle Business” had yet to be coined, Patron was just that.  Ilana Edelstein and Martin Crowley, along with J.P. and Eloise DeJoria, lived that lifestyle and created the Patron brand around it.

The DeJorias had money and plenty of Hollywood connections.  Martin Crowley had hustle and Ilana had an instinctive, albeit racy, style.  The combination was magic.

Great juice, sexy presentation of the distinctive bottle with the green ribbon, and even sexier presenters in a time when using gorgeous women to promote liquor was a novel idea.

Today, products and celebrities are branded intentionally and strategically.  By contrast, the Patron brand grew organically through the millionaire lifestyle lived by J.P. and his gorgeous wife, Eloise, and guided by the hustle and determination of the rough-around-the edges Martin Crowley and his bombshell lover, Ilana Edelstein, who softened his brash approach to business.

Having a background in branding and marketing, I understood all that. I’m a novelist with a degree in business who pays her rent with marketing work.

It made perfect sense – top end lifestyle and top shelf tequila.  But, what captivated me was the love story.

*Spoiler Alert*

ilana edelstein, the patron way, tequila

The Patron Way is the tragic story of a thirteen-year love affair between Martin Crowley and Ilana Edelstein that ended when ego, greed, and lawyers got in the way.

Ilana was making a great living as a financial advisor to school teachers.  When Martin asked her to give it all up and work with him full-time on Patron, she didn’t hesitate to accept.  He didn’t offer her shares, a paycheck or a wedding ring, only the opportunity to continue their love affair living the glamorous lifestyle they both enjoyed.

She was madly in love with him and, by all accounts, he with her.  What more could two lovers want than a business they could build together?  Why wouldn’t she accept?

It all went well for a loving couple that seemed to complement each other perfectly.  A beautiful home, parties, A-list social circles, yachts and island vacations.  Until Patron became so in-demand that it caught the attention of Big Liquor.

The book blurb describes it as an “astonishingly competitive and sometimes cutthroat industry.”  Cutthroat it was.

Lawyers swooped in and worked on Martin’s insecurities.  His health was failing due to advanced heart disease and he and Ilana weren’t married.  It doesn’t take a genius to see how lawyers could play that to their advantage.

What if she broke up with him and filed a palimony lawsuit?  If he’d known the history of Marvin vs. Marvin, Martin Crowley wouldn’t have given it a second thought, but lawyers can make persuasive arguments.

What if she tried to take half of his half of the company?  What if she sued for unpaid wages?  Did she have a contract?  Did they have an agreement?

Martin follows the questionable advice of lawyers, enacted by an even more questionable court system.  This is where the glitter fades and the story turns ugly.

He breaks up with the woman he loves, the woman he can’t bear to sleep without at night.  Hearts break.  There is a long drawn out trial, her reputation is smeared and yet, he continues to watch her, to stalk her, to love her, and she still loves him.

He moves to a house on Antigua and shelters his money.  A new will is drawn up.  Though he assures her she’ll be fine, he promises her nothing.

At the end of the story, Ilana is rebuilding her life.  All those years of love for Martin and Patron earned her nothing in the way of financial security.  Though she is still loyal to the Patron brand and loves Martin dearly, she realizes she must press on.  Martin’s story doesn’t end as well.

His financial future is secure with Patron, but when he has a heart attack at the top of the stairs in his beautiful home in Antigua, the lawyers that he depended upon to protect his interests were nowhere to be found.  He died alone, at the bottom of the stairs, surrounded by his wealth.  His body was found the next day by his staff.

My heart ached for Ilana, for her hard work, love and devotion, for what she’d gone through with the breakup and then what she must have felt when she learned how the love of her life had died.

Though I may never be a fan of Patron Tequila, I can honestly say The Patron Way by Ilana Edelstein was a delicious cocktail of innovation and inspiration with a twist of tragedy for a bittersweet finish.

The Patron Way is available at Amazon.com and other booksellers in both ebook and hardcopy.


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What If There Were No Duty Free Tequila?

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.

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