The hype of agave-based spirits

In 2021 Tequila/Mezcal was the second-fastest growing spirits category by volume and revenue in the U.S. market. The same year, the category accounted for nearly 30% of the total increase in spirits revenue in the U.S.

The tequila market itself is projected to register a CAGR of 10.5% for the forecast period 2022-2027. Tequila stands for 80% of total agave-based spirit exportation, then follows mezcal. The U.S. is the biggest market for 8 bottle out of 10 have been sold in the country. The Mezcal category is also booming: if in 2011 less than 70 brands were registered, Mexico exports nowadays more than 300 brands to 70 countries.

The fastest growth of the agave spirits category is High-End and Super Premium brands. According to the U.S. Distilled Spirits Council, High-End brands have grown more than 800% in volume for the past two decades and Super Premium Tequila volumes have skyrocketed 1330% accounting today for 7.1 million 9-liter cases.

What are the key factors shaping the consumer interest and driving the category forward?

First, agave-based spirits are one of the oldest distilled spirits as first modern production goes back 400 years ago. While production of agave-based spirits is now industrial, many still are small-batched and hand-crafted in respect to the traditional ways.

Second, the mixability and easy use of these spirits in On-Trade venues or at-home cocktails have significantly raised consumer interest. Not only do most of agave-based spirits could be consumed through shots but also is mixology playing a large part in their democratization. Margarita is not anymore the only way to sip Tequila as numerous refined and complex cocktail recipes have been flourishing in premium On-Trade venues. In the past years, Tequila has seen a large range extension (Cristalino, Rosa) appealing to shifting customers′ preferences. Also, many RTDs are now also using agave as spirit base which largely helps raising awareness and volumes globally.

Finally, celebrities have largely participated to the rise of the category by buying and endorsing agave-based spirits in the past years. Casamigos Tequila success story (founded in 2013 by actor George Clooney and sold to Diageo for US$1 billion only 4 years later) has paved the way for other influent personality′s investments into the category.

Some of premium brands endorsed by celebrities have participated to boosting both consumer interest and foreign investments into the category:

• In 2019, Breaking Bad stars Bryan Cranston and Aaron Paul started Dos Hombres Mezcal. In December 2020, a limited-release Tobala was unveiled with a retail price above $300. 1 year later, Constellation Brands purchased a minority stake of the brand.
• Teremana launched in 2020 has benefited from actor Dwayne “The Rock” Johnson public image and made a deal to expand with Mast-J?germeister beginning of 2022.
• Texas music singer “King of Country” George Strait invested in Código 1530 Tequila. Pernod Ricard announced last October to have bought a majority stake in the super-premium brand.
• In October 2022, artist, musician and actor Lenny Kravitz, Pernod Ricard and Casa Lumbre announced the launch of Nocheluna Sotol. The brand is Pernod Ricard and Casa Lumbre third collaboration after their partnerships with Ojo de Tigre mezcal and Abasolo Corn whisky.

And the list goes on: 818 Tequila and Model Kendall Jenner, Lobos 1707 Tequila/Mezcal and LeBron James, Calirosa Tequila & Maroon Five singer Adam Levine or Cincoro Tequila (retail prices Blanco $70 to Anejo $130, up to $1,600 for Extra Anejo) and NBA Players including Michael Jordan.

With large firms and celebrities investing heavenly in the Tequila/Mezcal category, changes are becoming the norm. And when it comes to innovation, the Tequila category is having many upheavals especially with the emergence of two new expressions: Tequila Cristalino and Rosa.

Tequila Cristalino

What is Tequila Cristalino? Well according to Jaime Salas, Head of Advocacy – Agave at Proximo Spirits home of Maestro Dobel, Cristalino Tequilas “are blended and filtered through a refinement process to smooth out any harsh notes while still maintaining the characteristics imparted by aging process in taste and aroma, giving a crystal-clear appearance to the liquid.” So, how comes that Tequila Cristalino is the fastest growing tequila category in Mexico? This expression is one of the reason that made Tequila the largest spirit category in Mexico, and for shifting its consumption to more than 50% female.

To understand the rising consumer interest we need to take a look at Mexico consumption history. Mexico has always been a Reposado drinking nation but for obvious economic reasons, Silver have become the most sold expression worldwide. Cristalino Tequilas are offering a smart mix between Silver taste and color while having the complexity of an A?ejo Tequila. The Tequilas are aged in barrels over a period of time to obtain the flavors and aromas from the woods used, before being carefully filtered to balance the complexity from the oak.

Maestro Dobel paved the way for Cristalino for he first introduced its method of filtering the tequila with Dobel Diamante in 2008. A few years later, Don Julio celebrates its 70th anniversary with the launch of a Cristalino edition: a transparent Tequila yet 18-month aged in oak barrel. Since then, we have seen a significant growth in this sub-category and largely participated in the dynamism of the whole category in Mexico.

As Cristalino is not by itself a Tequila category rather a sub-category, customer can therefore pick between the most common A?ejo Cristalino but also?Reposado Cristalino until?Extra-A?ejo Cristalino. Nowadays, numerous brands have followed the trend adding sometimes twist to differentiate their products: Herradura Ultra puts agave syrup to make the Tequila more accessible or Mo?t Hennessy owned Volcan De Mi Tierra offers an A?ejo Tequila made with a blend of A?ejo and Extra-A?ejo Tequilas aged in barrels from the Old-World.

Tequila Rosa

Surfing the wave of Provence Rosé international reputation and driven by the successful launches of Pink Spirits (Mostly Gin and more recently, Vodka) now is Tequila Rosa big time. Appealing to Rosé-wine, Silver and Cristalino Tequila-consumers and most certainly to a younger, more feminine clientele, this new expression is the perfect match between pink color and easy-to-drink transparent Tequila.

Innovation once again has driven the category forward with the use of different methods to achieve a pink color. Unlike many categories, such as pink Gin which hue has come from the addition of berries flavor, Tequila have taken a different path.

Ex-Red wine barrel-aging

The most widely used technique from pink Tequila producers is definitely barrel-aging and finishing. Not only does this method provide a wider range of flavors but it also offers a way to add color – through the use of a former red wine barrel, for instance. The additional benefit of aging or finishing tequila in former wine casks allows to bridge the gap between two drinks categories (Wine and Tequila) and opens the door to collaborations between producers while creating cross-category appeal.

Producers have diversified the sourcing of red wine barrels, such as the ones originating from Napa for Código’s 1530 Rosa-Reposado, or the Mexican Cabernet Sauvignon barrels used for aging Ana María Tequila Rosa. In fact, Código 1530 is aging its tequila for a month in Napa Valley Cabernet Sauvignon oak barrels to give the Tequila this plummy-pink hue and a tannic structure from the grapes. So is Calirosa - the Adam Levine endorsed brand - which uses a mix of Cabernet and Merlot barrels sourced from Napa and Sonoma. The Rosa is then finished for 30 days in red wine barrels, while the Rosa A?ejo is aged in ex-wine barrels for 18 months. Both of the expressions have been launched in 2021.

Ex-Rosé wine barrel-aging

If ex-red wine oak barrel have been used at first, Rosé barrels are also starting to appeal. The first brand in the industry to use former Rosé barrels was Inspiro Tequila in order to produce its Rosa Reposado. Its founder, Mara Smith, has been working with Maestra Tequilera Ana Maria Romero Mena to create Inspiro Tequila with the goal to help women feel more seen and relevant in the spirits industry.

Other techniques

If barrel-aging is the most common way used by Tequila producers to add color, it’s not the only path. As a matter of fact, Casa Rica is extracting the color of mature agave plants, using them to create a hue to incorporate to its Tequila Rosado. The Butterfly Cannon is using carmine to color its Rosa Tequila while infusing it with pink grapefruit for taste and color.

Innovation in distillation and aging techniques is all the more likely to continue in view of the growing interest of consumers into the categories and its new expressions.

At the end of the day, it’s not only about the visual even if consumers do drink with their eyes, but obviously also about the taste. Richard Betts, co-founder of?Casa Komos Beverage Group which released?Komos Tequila Reposado Rosa in 2021, explains: “Pink isn’t enough on its own (…) but if it’s pink because it carries flavor, that’s a good reason.”

What’s next?

A steady 2021-26 CAGR for Tequila

2021-26 IWSR forecasts volume growth for tequila only in the US is set at a CAGR of +9% (+13% in value terms). It also means that Tequila volumes in the US are meant to overtake those of vodka in the country over the same period. In a nutshell, by 2026, the US alone is to consume more Tequila than the entire world did in 2021.

IWSR also predicts that between 2021-26 the global value of agave spirits will increase by 67% with super/ultra-premium tequila accounting for a strong 55% category value share by 2026. In the UK where the category is the most valuable European market, agave spirits are forecasted to see a 88% increase in value between 2021 and 2026.

An increase of agave prices/a shortfall of blue agave?

IWSR research director, Luis Hermoso, has highlighted high costs for raw materials, and does not expect this situation to change rapidly: “Agave prices have remained close to record levels for the past three years, at MX$26-28/kg (…) and bear in mind that it takes 7-8kg of agave to make one liter of tequila. Prices will only start moderating when there are signs that tequila is cooling down in the key US market.”

Besides, brand owners are also facing inflation following Covid-19 pandemic such as sourcing, cost of packaging, labor shortages and shipping issues which is adding more pressure on pricing and margins.

As a result, the category is sees its product quality decreasing. As IWSR research director for North America, Adam Rogers underlines, “while prices have gone up for many brands, quality has decreased due to many producers relying on underaged agave plants or using efficient diffusers to keep costs low during the production process”.

Subsequently promotional activity for entry-level tequila brands in Mexico is severely impacted and some mainstream consumers are pushed out of the category altogether and into the Destilado de Agave segment. In the meantime some brand owners have been redirecting their products from 100% agave tequila to Mixto offerings (requiring 51% at least of Blue agave) or even to a withdrawal from the market. Nonetheless, an increase of the Mixto segment seems unlikely to happen as 100% agave Tequilas are perceived to be much more premium.

A investment strategy in the Prestige segments

For now the premium Tequila segment is driving the category forward, especially in the U.S. market, where an additional $15bn value is expected to be added to the overall category between 2021 and 2026 according to IWSR.

Mia Simpson Culp, MD of Tequilas at Brown-Forman, owner of Herradura and El Jimador. “We have focused innovation efforts at the prestige segment (US$100+), given its rapid growth in recent years.”

Recently Patrón released its new Tequila expression which retail prices fixes around $179 indicate to sit within the super-premium category.

Exploring new horizons

Eli Raffeld, Co-Founder of High Road Spirits explains: “there are more mezcal brands than ever before and it still hasn’t crossed over into the mainstream…there is still a large lane for mezcal to grow in the consumer space, [though] the smokiness and lack of supply for raw materials will always be a limitation. Premium agaves are wild grown and take 18-30 years to mature, at a very high cost. There will be a switch to Destilado de agave and Sotol because of the raw material costs. Sotol will be next, there are millions of Dasylirion wheeleri (desert spoon) plants out there…[which could help] offset the demand in Mezcal and alleviate some pressure off the agave space. Tequila continues to surge, in the premium space and Cristalino, carbon filtered aged tequila is having a moment.”

While Tequila category seems to suffer from its own success with rising prices and quality either declining or going into very high-end spheres, interest has also grown in lesser-known agave spirits, including Raicilla and Bacanora, as well as Sotol, which is made from a different type of cactus than agave.

Sotol, a traditional spirit of Northern Mexico's arid Chihuahuan Desert often compared to Mezcal, is indeed the latest to receive international spotlights. The main difference between Mezal and Sotol lies in the sourcing of the raw material: while Mezcal is made from agave, Sotol is made from a close group of plants in the Dasylirion genus, referred to as “Sotol” in Spanish and desert spoon in English.

And when it comes to Sotol, all eyes are on Nocheluna which was recently launched as a result from a partnership between artist Lenny Kravitz, Mexican spirits group Casa Lumbre and Pernod Ricard. The aim is twofold and starts with the ambition from Pernod Ricard to be the first to invest heavenly into a new and yet unknown category from an international perspective as to appeal to consumers in search of a authentic and unique tasting profile. Second, the partnership is aiming at building up the reputation of Nocheluna in the Sotol category to become leader in the Super and Ultra-premium agave-based category.

Is Tequila under threat?

While in the short to medium term, Tequila and Mezcal are likely to increase their market share both in value and value, things become quite different when we look in the long-run. Brandy Rand, chief strategy officer for IWSR explains: “There is a genuine long-term threat to the tequila category of locally-grown, agave-based spirits. Agave grows wild in South Africa, Australia and along Mexico’s northern border with the US. An industrialization of these agave plantations to produce spirit of a recognized quality could erode the dominance of tequila in the agave spirit space in the longer term.”

Same could be said for other drinks: while Champagne is undeniably the leader when it comes to sparkling wine, some regions of France and many other countries have seen a significant growth of their sparkling wine like Franciacorta or Prosecco. One question still remains: will there be the same hype for the new agave-based spirits and more importantly will producers be able to compete against centuries of Mexican know-how to produce quality and capture international attention?

Sources

Distilled Spirits Council, The Spirits Business, Pernod Ricard press release, Food&Wine, Alcohol professor, Lisa Futterman article, Forbes Tequila producers, Wine Magazine ; IWSR ; The Shout, The Shout, IWSR “Is Tequila’s future is under threat?”, Alambic Magazine, IWSR "The rise of alternative agave based spirits"