Diageo predicts bright future for premium tequila

Following the purchase of George Clooney’s Casamigos Tequila for up to £800m, Diageo’s CEO believes the brand will follow in the footsteps of its Don Julio tequila, which has now topped the one million case mark.

“We don’t comment on our competitors’ performance”, Diageo’s finance director Kathryn Mikells says with a wide smile when asked about the latest data from Becle, the company that owns the Jose Cuervo brand of tequila.

Cuervo is the world’s biggest tequila brand with 33% market share and was distributed globally by Diageo until 2013 when it declined to renew the arrangement with the owning Beckmann family and went its own way by developing Don Julio. Diageo decided that it wanted to own the key brands in its stable and the Beckmann’s wouldn’t sell.

In February 2017 Becle (including Jose Cuervo, which sells some 3.5m cases a year) was listed on the Mexico stock exchange. Investors clamoured for shares in what, to date, was Mexico’s largest flotation, and the price was set at the high end of expectations at 34 pesos.

But those shares have now slumped below 30 pesos because sales to the US, which account for about 73% of Jose Cuervo’s revenues, fell in the second quarter of this year.

Yet the US market for tequila is booming, but mainly at the premium and super-premium end, not for commodity products where Cuervo is dominant.

At the upper end of the market soaring demand goes a long way to explaining why Diageo is paying up to £800m (depending on performance) for Casamigos, the super-premium brand in which actor George Clooney was a founder-investor.

The brand is already selling more than 100,000 cases annually and Diageo’s chief executive, Ivan Menezes, has great hopes for it, dismissing criticism of the high price he is paying.

He points to the progress made with Don Julio, which has topped the 1 million case mark from virtually a standing start only a few years ago.

In fact, the super-premium 1942 version of Don Julio is now so much in demand in America’s fashionable outlets that Diageo is temporarily unable to keep with demand for a product selling in clubs for up to $125 a bottle.

Menezes is convinced that Americans are “drinking better” and are willing to pay a premium for a superior product, the category that both Don Julio and Casamigos occupy.

But he does not see them as direct competitors and is keeping the sales and marketing teams separate, at least for the time being.

The potential for both brands is huge, he believes, and is only just starting to be realised. A good reason for the knowing smile of his finance director’s face.