Has high-end tequila hit a dry spell? A new report from the IWSR Drinks Market Analysis says brands at the top of the agave spirit shelf should expect a continued slowdown in the U.S. and begin to look elsewhere for growth.
After a premium tequila boom lured celebrities, plus everyone from beverage veterans to NBA superstars into the segment, sales in 2023 have reversed with lower price segments growing at a similar pace as premium-plus bottles. The growth profile for agave spirits has flipped in the last 12 months, with products over $50 down 2.7% and those under $10 up 5.9%, according to a recent report from SipSource.
That flip is trending across categories, but what are the causes specific to agave spirits and how should brands prepare? Here are our top three takeaways from the IWSR analysts.
Downtrading Occurs As Overall Quality Increases
Similar to conditions during vodka’s post-2008 recession, consumers are looking for products with a favorable price-to-quality ratio and sticking to lower priced options when finding more that exceed their quality expectations, according to the report. It’s what some analysts have called the “Tito’s moment”.
“As the tequila category becomes more mature and the number of brands grows, overall product quality improves, and this improvement is seen across all price tiers, justifying trade down,” he says.
But unlike vodka, which is limited as an unaged product, tequila presents more opportunities for consumers to migrate to the premium tier. Due to the influx of new brands, however, saturation is beginning to occur, making it more difficult for brands to differentiate themselves in the eyes of consumers, said the report.
The phenomenon is somewhat predictable for a segment that has grown to be significantly larger than in the past and therefore more difficult to expand. Only ten years ago, the tequila category represented less than 10% of the U.S. “status” spirit market (spirits in the ultra-premium-plus price segment) by volume. In 2022, nearly one in every three bottles of luxury spirits in the U.S. were agave-based and largely tequila.
Agave Prices Impact Margins
After agave prices soared to record highs in recent years, the cost of the tequila’s main ingredient has finally come down. That means manufacturers are better able to maintain margins, even through lower-priced products, said the report.
While that benefit may be delayed for groups like Diageo that hold a higher share of aged expressions, it could provide headwinds for newer brands or companies who don’t have agave supply in-house, like Campari.
Rethink Global Markets
As economic conditions improve, consumers are expected to return to higher end tequila, but at what rate remains unclear.
In the short and medium term, North America will continue to be an important priority for brand owners, with Mexico and the U.S. accounting for 85% of volumes. In other global regions, though, companies may have to rethink their brand strategies.
Agave is beginning to take off in a number of markets outside North America – albeit off a much smaller base. In the first half of 2023, agave grew in 15 out of the world’s top 20 beverage alcohol markets (including the U.S.) and recorded double-digit volume growth in 11 of them.
The report also highlighted growing appreciation in India, Spain, and the UK, as well as the recovery of duty-free and tourism channels in Asia as possible bright spots. That potential is underscored by the room for growth compared to North America: the U.S. and Mexico sell about 25 times as much ultra-premium-plus tequila as a group of nine markets (the UK, Spain, Australia, China, France, Japan, Italy, Germany and Poland). For other spirits categories, such as cognac and whisky, the differential in ultra-premium-plus volumes is less than two to one.