Diageo calls shots over tequila

 
Marc Sidwell
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JOSE Cuervo isn’t on the rocks, but losing its distribution deal with drinks giant Diageo must be a blow. Yet, like the notorious tequila hangover, it shows every sign of being a self-inflicted injury.

Negotiations between Diageo and the Beckmann family, which owns the tequila brand, are understood to have been ongoing for well over a year, in a deal that could have been worth $3bn (£1.9bn). Diageo has evidently concluded, as it warned it would, that without an ownership stake at the right price it could not afford to continue.

That’s partly because of shifting patterns of tequila consumption. Like champagne in France, tequila can only be made in a small area of Mexico by agave distillers. The best is 100 per cent fermented from agave. Jose Cuervo includes some 100 per cent products, but it mostly sells 51 per cent agave tequila. In the US, which accounted for 76 per cent of tequila exports in 2011, tequila consumption is still growing, but the trend has been towards super-premium, all-agave spirits. That is also where Diageo wants to be – boosting its margins and profits. And without more of a say in the future of Jose Cuervo, it wasn’t in a position to drive the brand as upmarket as it wanted.

The deal’s failure is not just bad for Cuervo. It leaves Diageo with a thirst for top tequila. Speculation last weekend that it was renewing its interest in US-based Beam makes even more sense after this news, for Beam owns the world number two tequila brand, Sauza. The all-agave Sauza Blue brand is the most likely cure for Diageo’s tequila headache.