What the Future Holds for Tequila

"A computer lets you make more mistakes faster than any invention in human history - with the possible exceptions of handguns and tequila."

Mitch Ratcliffe

 

Tequila's growth seems like another gold rush for those entrepreneurs who are looking for new markets to invest in. There are millions of ripening agave in the fields. With global sales rising rapidly, especially in the USA, tequila's future seems assured.

 

But is it?

 

Many of the 110 producers do not own their own plant for making tequila, and instead use existing facilities for production. Fewer than that have their own agave fields: many buy from farmers, so production is dependent on available plants, and price.

 

According to the CRT's most recent inventory of agave plants, the number of new plants going into the ground in all regions since 2000 was rapidly dwindling:

• 2000: 60,032,279
• 2001: 72,736,636
• 2002: 93,033,743
• 2003: 86,002,424
• 2004: 42,021,157
• 2005: 27,988,476
• 2006: 12,865,774

While it might seem like that means a large crop of agave maturing in 2010-2011,

right now there's a huge glut of agave, and prices for agave have fallen so low that some independent farmers don't bother harvesting it: it costs more to get it our of the field than they will get from a producer. This author witnessed agave fields in 2007 that had been burned or ploughed under for other crops. I suspect that unless prices rise very soon, more and more fields will remain fallow or be reclaimed for other crops. In the meantime, fewer farmers are planting right now, so any shortage - and its associated crisis - will start to make itself known around 2010-2012 when the available crop will not meet the demand.

 

A story in Milenio, from late 2006, suggested as much as 360 million tonnes of excess agave could be at risk of being wasted because it didn't have buyers. In 2005, the National Chamber of the Tequila Industry (CNIT), purchased 75,000 tonnes of agave from farmers without contracts to producers.

 

During any agave shortage, prices rise, and mixtos often take precedence over 100% production because it stretches the available agave supply further. And a shortage IS coming, probably as early as 2010, but maybe as late as 2012.

 

In 2006, the federal agriculture secretariat (Segarpa) provided 59 million pesos in compensation for farmers hoarding low-value agave. Even with the help from Segarpa, the glut is expected to last until at least 2009, according to the Jalisco Rural Development Secretariat.

 

In January, 2007, the Mexican government unveiled a plan to give agave growers another 200 million pesos. The price of agave in January was around one peso per kilo, where it had been for several years after reaching as high as 16 pesos per kilo in the late 1990s. On our tour, in April, 2007, we learned the going price had dropped to $25 USD (250 pesos) per tonne!

Agriculture secretary Alberto Cardenas Jimenez commented that agave continued to arrive from outside of the designated growing area - from  San Luis Potosi and Zacatecas - which are not part of the authorized agave-growing or tequila-producing regions - and this was  exacerbating the situation. This will be a worse problem when the next shortage arrives.

The Jalisco government's rural development secretariat forecasted the supply of agave will plunge by the end of the decade after the glut works itself out, suggesting another shortage looms.

 

But while the demand appears to be growing as rapidly as ever, farmers are planting corn to sell quickly, both for the production of the biofuel, ethanol, and for food. Right now corn is selling high and growing higher, which is good for farmers but has already caused a crisis in Mexico as the price of tortillas, a staple in the Mexican diet, have more than doubled, generating widespread public protest against the government. High tortilla prices put some Mexicans in danger of being malnourished. The poor eat an average of 14 ounces of tortillas daily, giving them 40% of their protein, according to Amanda Galvez, who runs a nutrition research institute at Mexico's National Autonomous University.

Some farmers see planting corn for biofuel as their only salvation since NAFTA stripped away tariff protection for small subsistence Mexican corn growers in the 1990s. This move allowed U.S. genetically-engineered, highly subsidized corn to enter the Mexican market driving prices down. The Mexican government stopped regulating corn prices. As a result, farmers stopped plating a crop that could not sell. NAFTA favoured corporate agribusiness at the expense of poor Mexican farmers, many of whom sought a better living across the border. But when imported corn prices rose, the cost of tortillas went up with it.

 

This of course on affects independent growers, not the producers who already own their own agave plantations. Those at risk from any future agave shortage are those who depend on these independent growers.

 

In 2006, more than 228 million litres of tequila were produced. Of that, about one third - 77.75 million litres - were 100% agave.  The mixto market continued to dominate production and sales. But this pattern looked like it was changing. In the first quarter of 2007, 83.45 million litres were produced, of which 39.01 million were 100% agave, or about 46.7% of total production.

 

Traditionally, before the 1970s, tequila was a family-run industry: with a few exceptions, small companies and small sales. That has changed as large international corporations started buying tequila firms and marketing them on a wide scale. Now the market has some big companies pushing product - Cuervo/Diaego, Pernod Ricard, Brown Forman among them. In competition, many of the smaller firms simply can't match the marketing dollars, and depend more on word of mouth and consumer loyalty. Diageo has 20,000 employees worldwide, in 80 countries, and represents Smirnoff, Johnnie Walker, Guinness, Baileys, J&B, Captain Morgan, Cuervo, Tanqueray, Crown Royal, Beaulieu Vineyard and Sterling Vineyards wines. It's difficult for any small producer to get this sort of market reach.

 

David Agren wrote,

Several factors, both intentional and serendipitous, have propelled premium tequila’s popularity. According to Bertha Becerra, spokeswoman for the Guadalajara-based Tequila Regulatory Council (CRT), manufacturers began distilling better beverages, investing in new technologies and improving production techniques. Firms also marketed their products more effectively, leveraging tequila’s appellation of origin distinction, which imbues it with a certain cachet – similar to luxury drinks like cognac and champagne.

 

Start up companies will be hard-pressed to compete without a significant bankroll. Partida, for example, hit the market with a $20 million promotional campaign launch. Patron swept through the market with a powerful marketing campaign that rocketed it from unknown in 1989 to the envious number one position in premium 100% tequilas in the USA (accounting for more than 70% of ultra-premium tequila sales in the USA).

 

But conversely, the success of companies like Patron and Partida help pave the way for smaller producers because the consumer is already aware of premium and super-premium tequilas, and is likely willing to try something new and different, especially if it has an 'exclusive' or 'authentic' cachet about it.

 

The 'blue gold rush' that has drawn so many entrepreneurs to produce new tequilas in the past five years eventually has to have consequences in the market. There will be a product fallout: there simply isn't enough shelf space for everyone. Not every company can compete and survive, and when the next agave shortage arrives, many of these newcomers will be seriously challenged to continue.

 

Some people ask: can all these tequilas survive in such a competitive market? Is there room for another product? When will the bubble burst? Soon, I suspect. In late 2010, there were roughly 1,200 brands of tequila registered, many of the newcomers competing for the upscale, premium market niche.

 

While no one can predict the mood of the consumer, nor the sudden swings from one product loyalty to the next, producers might take heart by examining the single malt scotch market. There are about 120-125 whisky producers in Scotland alone (plus other producers in Ireland and Japan), with three or more times the number of brands. Yet the single malt market seems not to suffer from this crowding and indeed has grown over the past decade. In fact, 2006 was a record year for Scotch whisky, with more than 1 billion bottles exported.

 

So there is hope - but the single malt market was positioned as the sophisticated, premium choice for discerning consumers, and never had to compete against the low-level party-time mixtos that premium tequila sells in parallel with. So premium tequila makers still have the reputation of their mixto sibling to overcome.

 

Tequila's growing international popularity poses another threat. Tequila is an ethnic product, but that identity is in danger of being bleached by globalization. While tequila is protected from becoming a generic term, its familial relation with Mexico may be weakened, as it gets adopted by aficionados in distant lands, and as more outsiders get involved in the production. How truly Mexican are tequilas made and promoted by international corporations or by American businessmen, no matter how passionate they feel about their products? Will the consumer of these products give loyalty to the company or the land where it was made?

 

The addition of extra añejo as a category should have a positive effect on the perception of tequila as a premium product because the popular perception is that age conveys status. Not only will the prices be higher for these well-aged products, but they will be positioned with other similarly aged - and named - spirits.

"Tequila is taking advantage of the trend in the spirits industry that people want to drink better liquor," says David Ozgo, an economist with the Distilled Spirits Council of the United States.

Growth seems to be on the sipping side of the spirit. In response, some producers are marketing the exclusivity and rarity of some of their products to appeal to consumers looking for status-rich products. In a description of Chinaco Negro, on Preiss Imports site:

 

The Mystery of Chinaco® Negro is in the marvelous complexity and deep, alluring colors of this rare, 5 year old 100% Agave Añejo Tequila. Lost in the cellars of the Chinaco Distillery were 12 casks of aging Tequila, 7 of which were chosen by Master Distiller German Gonzales as worthy of the distinction: CHINACO® NEGRO. Each bottle represents an individual cask selection, and this extraordinary 5 year old is labeled with the unique lot 15 and is signed by German Gonzales. Collect the entire series and unravel the mystery!

 

Similarly, Clase Azul is promoting its new Ultra tequila for its exclusivity -  as well as its cost. It's interesting to note that Ultra is aged at the minimum for the extra-añejo category, three years, not five or even seven as others have done.

 

Clase Azul Ultra is the latest offering from Mr. Arturo Lomeli, the Award winning Master Distiller of Clase Azul Reposado® and La Pinta Pomegranate Infused Tequila®. Clase Azul ULTRA is an Extra Añejo Tequila produced in the Arandas region of Jalisco, Mexico that will garner a retail price of approximately $1,700 in the U.S. This limited production Tequila represents a collaboration of excellence in producing the “Best of the Best” of Mexico: the best Tequila presented in a stunning, hand-crafted decanter. Only 100 bottles will be produced and available in MX and the U.S. markets.

The decanter is made from ultra-fine, hand-made ceramic and stored in a fine wooden case that is hand-made by the awarded artisan Fernando Tanaka

This first edition is limited to 100 bottles, 50 for Mexico, and 50 for the United States. Estimated price is $1,200 USD in Mexico, and $1,700 USD in the United States.

Aged patiently for a minimum of three years in hand-selected, ultra-fine sherry oak barrels.

 

Marketing tequila has shifted subtly away from lifestyle advertising to emphasizing tradition, heritage and quality. And product lines are being presented as cohesive units, not merely single entities.

 

On the lower end of the scale, the agreement reached between Mexico and the USA over bulk (mixto) tequila might seem a victory for American bottlers, but it came with many restrictions, not least in prohibiting American bottlers to adulterate bulk tequila in the USA. This may change the way alcohol companies deal with mixto tequilas, and may encourage more to move into 100% agave products.

 

Bottling in Mexico means higher shipping costs, which means a higher price on the shelf. I predict that to move forward into a bigger and more profitable market, Mexican producers will have to allow bottling of 100% agave tequilas outside Mexico, in order to get the per-bottle price to a more consumer-friendly and competitive bracket. This will also increase the role of the CRT in monitoring external bottling to ensure the product is not adulterated after leaving Mexico.

 

Flavoured tequilas hold much promise, but are as yet unproven in the market which is already rich in similar products using different spirits. Although it's been several years since the category was created, the market has not accepted flavoured tequilas with the same vigour it has taken to flavoured vodkas.

 

AC Neilsen reported flavoured spirits of  all types made up more than 25% of all spirit growth in 2005, although they only accounted for a small portion of sales. Although several companies have come out with new lines of flavoured tequilas, it remains to be seen if flavoured tequilas capture a new market or simply confuse the consumer. Many companies are waiting to see if these new products have any success before venturing into the new field.

 

On the other side of the new market craze, cream liqueurs are a risky business for tequila makers to enter. The market is owned by Bailey's Irish Cream, which commands roughly two-thirds of all cream liqueur sales (a smaller portion in the USA). Allied Domecq tried to break into it with a massively-funded campaign for their product Tia Lusso, in 2002. That product was withdrawn in early 2006, after the declining cream liqueur market fell 9% in 2005. One report predicts a further drop of 7% in the market by 2011. Bailey's Glide, a lighter version of the product, didn't fare well and was dropped in 2005.

 

There are many competitors in the tequila liqueur market, including a variety of cream products like Baja Rosa, Baja Tango, Baja Luna, Baja Mocha, Coquila, Tequila Rose, Tequila Rose Cacao,  Tequila Rose Java, TJ Toad Tequila & Tropical Creme, TJ Toad Tequila & Vanilla Creme and many others. No one has shown any research to indicate there are enough consumers for all of the available products.

 

Worldwide challenges

Another potential challenge to tequila producers is the South African agave spirits. South Africa has millions of blue agave, imported as a decorative and boundary plant many decades ago, now growing wild across the Karoo. Some producers have started harvesting these for a new spirit. Originally they intended to call it tequila and confront the Mexican monopoly head on, but when confronted by a legal challenge from Mexico over the Denomination of origin, the producers opted to call their new liquor an 'agave spirit.' It started appearing on shelves around 2004. Whether this new spirit will win the hearts and minds of consumers remains to be seen. However, it might draw some market share away from tequila if the producers can craft a product that equals or betters Mexican tequila in taste and quality.

 

While the RSA operation closed in 2009, it still remains a potential threat is another company moves into that production.

 

India may also prove a competitor, as they are actively seeking to buy blue agave shoots to grow around Hyderabad. Agave is currently grown in India as a source of fibre, as well as a source for drugs. Several tequila companies are also vying for a position in the Indian market, including Voodoo Tiki and Cuervo.

 

China is aggressively moving into the alcohol market. Vineyards are being planted in great numbers to respond to the growing internal market. Spirit production is also increasing. While not yet prepared for an international market in alcohol, China's track record in manufacturing suggests it could be a potential threat to alcohol producers if it becomes aggressive in exporting alcohol. Blue agave could be grown in China and Chinese visitors have been in the tequila region of Mexico, visiting distilleries, several times over the past few years.

 

A market with great potential for agave growers - but yet only marginally tapped - is the health food and commercial food production industries, where agave nectar is showing great growth and sales. South African producers could also make headway into this market before Mexican producers establish themselves firmly. And then there's the potential world market for inulin (see the agave page) which could boost the agave market.

 

Tequila-flavoured ice cream? Maybe it will be next summer's big hit... A tequila and lime ice cream won the "Best New Product" award at the 2003 Research Chefs Association (RCA) Annual Conference and Trade Show in San Diego. The product was demonstrated by Wynn Starr Flavors (WS). Also in 2003, a Dutch company introduced Freaky Ice - popsicles in three alcohol-infused flavours: tequila, vodka and a cocktail blend. The popsicles contain 4.8% alcohol, and were reported to be a hit with international club-goers. Margarita popsicles are another item to beat the heat.

 

Smells so sweet! Tequila as a perfume. Here's a story from Doubleagent.com that should delight those who find the smell of the agave irresistible:

 

For those of us who enjoy fine tequila, there's some good, yet somewhat odd news. A pricey brand of tequila has been transformed into a fragrance, so you can now smell just like the drink you love.

100 percent blue agave Gran Centenario is used to make the limited edition fragrance called Angel Mist. A spokeswoman has said that this is the first time that agave has been used to make a perfume.

The Mexico-based company Jose Cuervo International, which is the parent company of Centenario, created the fragrance along with the Switzerland-based international fragrance and flavor company Firmenich, Inc.

According to the company, the scent is described as "a citrus burst of sparkling lime blended with 100 percent blue agave Gran Centenario Plata Tequila and alluring notes of oakwood."

The fragrance is part of the push Jose Cuervo is using to introduce the new Gran Centenario ultra-premium Tequila.

 

And then there's Jo Malone's "Blue Agava and Cacao" perfume, although it doesn't list any agave in the ingredients:

 

Inspired by the rhythm and vibrancy of Latin music, Blue Agava & Cacao is a sparkling citrus melody of lime and grapefruit leads to an exquisite heart of the blue agava. A sensual blend of vetiver, cinnamon and the primitive rawness of cacao, make an unexpected and surprising harmony.

Where we go from here

The CRT will continue to find itself, using the Mexican government and trade agreements as its arsenal, fighting on the protectionist front to keep tequila's name pure. It has won battles against the South African start-up firm, and against the California-based J.B. Wagoner's "Tequimila" and prevent both from using names that included or sounded too close to tequila. But on the horizon loom China and India, both of which could potentially produce their own blue agave spirits in the next decade or so.

 

And finally, tequila may come to help the world's demand for fuel, in a roundabout way. A bacteria that lives on the outside of the blue agave has been used to create cellulosic ethanol, which may prove an even greener, more environmentally-friendly fuel than ethanol. According to a story in the Wall Street Journal, January, 2006:

 

WILMINGTON, Del.—One way to wean America from its addiction to foreign oil might well lie in the muddy solution swirling about a glass container on top of a DuPont Co. laboratory bench.

Inside the liter-size vessel, a desert-loving bacterium is making motor fuel. The organism, which normally lives on the agave plant of tequila fame, is munching on the chopped-up leaves and stalk of a plant, and excreting a dilute form of ethanol, the gasoline substitute normally made from corn kernels in the U.S.

The tiny organism—and others being engineered in competing labs around the country—could hold the keys to a new U.S. fuel source: cellulosic ethanol, which can be made from crop residues, wood chips, switchgrass and even municipal garbage.

 

The bacteria is Zymomonas mobilis (also known as Z. lindneri, Thermobacterium mobile or Pseudomonas lindneri). It is one of the key organisms responsible for the production of agave nectar into pulque (along with Lactobacillus plantarum, Leuconostoc sp., and S. cerevisiae. Tequila and mezcal, which are also made from agave species, are the results
of yeast, not Z. mobilis, fermentation.

 

The business of replacing agave with corn is still fermenting, and will likely accelerate in 2008. January 2008 is a key date for corn producers in the US and Mexico, because that's when free trade for corn between the two nations will begin. And the demand for bio-fuels will be even hotter next year.

 

 

Sources

• 360 mil ton de agave, en riesgo de no venderse
• The Wall Street Journal
• Mexicans stage tortilla protest
• 75,000 stage corn protest
• Tequila ice cream wins best new product
• Extreme Ice Cream
• Tequila goes upscale with premium brands
• Margarita popsicles to beat the heat
• Do Copyists Have a Privilege to Make ‘Fair Use’ of ‘Semi-Generic’ Trademarks on Competing Goods?
• Gringo tequila maker unsettles Jalisco's regulatory officials and connoisseurs
• Tequila cologne
• Towards an Evolution of the Tequila Agroindustry Through Biotechnology Applied to the Agaves
• Utilization of by-products from the tequila industry: potential value of Agave tequilana Weber azul leaves
• Utilization of byproducts from the tequila industry: part 1: agave bagasse as a raw material for animal feeding and fiberboard production
• Exports of Scotch whisky hit record high

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