After years of agave shortages constricting tequila production, the sector has been hit by a double whammy of plummeting crop price issues and moderating demand.
Agave prices in Mexico hit a record MXP32/kg only 18 months ago, but by February 2024 they had plunged to MXP5/kg. IWSR reports price falls are set to continue due to the huge numbers of new plants that have gone into the ground in the past few years (up by more than 10% between 2021 and 2022 alone), and the fact that agave takes several years to reach maturity.
“The very large inventory of agave plants, coupled with slowing demand of premium tequila segments in the US after years of rapid growth, has sparked a panic sale among amateur agave growers who have recently joined the industry in a bid to cash in on the agave spirits boom,” said Jose Luis Hermoso, IWSR Research Director for Central and South America.
“With such huge numbers of new plants going into the ground in 2021 and 2022, it’s entirely possible that pricing will not hit the bottom until 2026.”
Slowing growth for tequila category
After several years of double-digit increases, overall tequila consumption volumes grew by only +4% in the US during the first half of 2023, according to IWSR data.
The influx of new brands, including a slew of celebrity ones, means saturation is beginning to occur, making it more difficult for brands to differentiate themselves in the eyes of consumers.
However IWSR said this need not signal the end of premiumisation for tequila.
Longitudinal IWSR data covering the last agave pricing trough shows that, while global agave spirits volumes grew at a CAGR of +3% between 2006 and 2010, premium-plus volumes expanded at a CAGR of +7% over the same timescale – outstripping standard-and-below CAGR growth of +2%.
“Declining agave prices give leading brand owners the opportunity to improve their margins and/or increase promotional activity in order to build category share,” says Adam Rogers, Research Director for North America, IWSR.
The opportunity for tequila brands
While it sounds like a brutal blow, IWSR says its an opportunity to improve product quality at lower price points, make additional marketing investments and divert extra supply to international markets with strong growth potential.
It will also allow brand owners to lay down more product for extended ageing – something that was previously difficult because of low supply levels and high input costs.
IWSR said the upside of of better quality tequila at lower price points was that it would attract new consumers.
“Logically, we would expect to see an influx of cheaper 100% agave tequila into the market in the near future – so, potentially, a higher-quality product at a lower price, which might attract new consumers and/or encourage trade-down,” said Richard Halstead, IWSR COO for Consumer Research.
Patrick Fisher, senior market analyst at the IWSR, told Harpers: “Anything that makes premium products more accessible, should help to boost trial and ultimately consumption. Growth is being driven by tequila being consumed differently. Drinkers are moving on from the traditional tequila shots (many of which were consumed in higher tempo night-time venues, which have suffered since the pandemic), to sipping tequila or having it in cocktails.”
The rise of tequila RTDs
Increased agave availability and the growing global market for tequila and RTDs has led to a slew of tequila-based RTD releases.
Although vodka remains the most popular RTD spirit base, agave is gaining fast. According to IWSR 41% of consumers name tequila as their favourite RTD base, up from 35% in 2022; among LDA Gen Z RTD consumers, the figure is 60%. This is mirrored in the overall spirits market is well: volumes of agave-based spirits increased by +12% in 2022, and are forecast to grow by volume CAGR of +11%, 2022-27.
“The flavour profile of agave plays well in both full-strength cocktails and light, refreshing hard seltzers,” says Chris Budzik, Market Analyst, IWSR.
“A convergence of taste, convenience and consumer appeal means agave-based RTD products are in prime position to continue to carve out a significant niche in the RTD landscape.”
Mark Anthony Group recently released White Claw Tequila Smash in the US and Canada. The new 5% ABV launch will be available in four flavours: White Claw Tequila Smash Strawberry Guava, White Claw Tequila Smash Pineapple Passion Fruit, White Claw Tequila Smash Mango Tamarind and White Claw Tequila Smash Lime Prickly Pear.
Last year Pernod Ricard announced its award-winning Olmeca Altos Tequila brand would debut range of ready-to-drink Margaritas.
“Today’s time-pressed consumers are looking for easy ways to enjoy their favourite cocktails, and the ready-to-drink market is booming,” said Michael Merolli, CEO at House of Tequila – Pernod Ricard. “But quality perceptions aren’t always positive in this segment.
“We’ve already successfully challenged those perceptions with the launch of larger format Altos Margarita ready-to-serve bottles in Lime and Strawberry flavours last year. And now we’re on a mission to push this further by making this classic serve accessible on-the-go – showcasing that quality and convenience can go hand-in-hand.”
Good news for the Asia Pacific
Lower prices and increased supply offers an opportunity for boosting supply in emerging growth markets across Asia Pacific, Eastern Europe, the Middle East, Africa and Latin America outside Mexico,” says Rogers.
Agave spirits grew in 15 out of the world’s top 20 beverage alcohol markets in the first half of 2023, according to IWSR data, recording double-digit volume increases in 11 of them.
Australia is now one of the world’s top 10 markets for tequila, with the spirit nipping at the heels of long-term favourite gin.
“Strong interest in agave outside the US has been boosted by growing interest in Mexican culture, celebrity influence and the popularity of cocktails,” said Jose Luis Hermoso, Research Director, IWSR. “The category is also continuing to gain traction thanks to the increasing appreciation of tequila as a quality spirit, a revival of the on-trade and tourism in Asia, and the recovery of the duty-free channel post-pandemic.
“Strong performance in the US has meant some brands were on strict quotas in secondary markets, with many of these undersupplied for years as allocations could not fulfil existing demand.”
The Australian agave industry
Top Shelf International released the first batch of its Australian agave spirit, Act of Treason, in January. It sold out online within 24 hours and the next release of the product will have national ranging in June 2024.
Located between Airlie Beach and Bowen in Queensland’s Whitsundays region, Top Shelf International’s farm and distillery is home to more than 600,000 Agave tequilana, the same plant that has been used in the distillation of tequila for centuries in Mexico.
According to the company, Queensland dry tropics, unique terroir, unprecedented agronomy, and a distillery and production facility powered by renewable energy contribute to give Act of Treason its unique flavour and character. Located 20 degrees south of the equator the location is a mirror image of tequila’s home in Mexico.
Top Shelf International CEO Trent Fraser said: “Act of Treason symbolises the pioneering spirit of a project that will create a new region of agave spirit. The dry tropics of north Queensland are the ideal place for that to occur.
“Like many others producers, we feel there is an opportunity for agave to be shared with the world and for others to put their distinctive imprint on a category that continues to surge in popularity in Australia and overseas.”
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