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Tequila grows up, gets more expensive

Image: Chinaco tequila
Chinaco Blanco is a rarity — a super-high-priced tequila that actually tastes like tequila.  But is it worth $100 a bottle?BusinessWeek
/ Source: Business Week

You've come a long way, chica! And you too, chico!

To borrow the sentiments, if not the exact words, of that old Virginia Slims advertisement and apply it to tequila today seems particularly appropriate. Over the last few years this outlaw beverage favored by the less-than-salubrious denizens of Margaritaville has really come of age.

Only a generation ago, tequila was little more than a frat party intoxicant, the ingredient of "lick, shoot, and suck," that college rite of passage involving the consumption of a shot of cheap tequila along with a lick of salt and a wedge of lime. So downmarket was its image that the very thought of a super-premium tequila was an oxymoron, and the idea that a bar might charge $20 for a shot was unimaginable.

Given its previously déclassé reputation, the transformation of tequila into the sophisticated drink of today's hip urban professional is even more remarkable. As Andrew Floor, senior brand director for Sauza and El Tesoro tequilas, points out, "People are getting their eyes opened to the fact that tequila doesn't have to be challenging, it doesn't have to be about pinching your nose, throwing it down, and hoping it stays down…and a massive headache the next day."

This image makeover has proved highly profitable, too. Americans can't seem to get enough of Mexico's native spirit. According to the Distilled Spirits Council of the U.S. (DISCUS), since 2002 U.S. imports of tequila have grown 46%, to just over 10 million cases, producing gross revenue of $1.55 billion.

More telling is the fact that imports of super-premium tequila during the same period have dramatically outperformed the category as a whole. As DISCUS points out, "While value and premium brands are the backbone of the U.S. market, the fastest growth has been in high-end and super-premium brands," with high-end averaging 15.6% and super-premium averaging a robust 30.8% annual growth since 2002.

For Tom Herbst, reserve-brand director at spirits giant Diageo, the last five years have been "a very exciting time…especially for ultra-premium tequila, including Don Julio, which has seen tremendous growth, with a 54% sales increase. In fact, Don Julio has grown more than 35% in the last year alone."

This trend is also borne out on an anecdotal level. Take my recent trip to the bar of Dos Caminos, a cheerful and unpretentious Mexican restaurant in Manhattan, with Eben Klemm, senior manager of wines and spirits for the BR Guest Restaurant Group, the owner of Dos Caminos and about 20 other restaurants.

Dos Caminos has over 100 different tequilas listed in a hardbound menu more extensive than most restaurants' wine lists. Many of the tequilas sell for $15 and even $20 a shot, and one is listed at $200. A shot.

Pricing in the tequila business follows the model common in the rest of the spirits business, but which is most successfully exploited by the vodka people. The consumer associates price with quality, whereas in reality price is set by the producers' perception of what the market will bear, and has little to do with the cost of production.

It really doesn't cost that much to make a bottle of tequila. The agave plant from which it's distilled does take from 8 to 12 years to mature, but labor costs in Mexico are low and the aging is minimal — the recently introduced super añejo category requires a minimum of just three years aging, and that's the most for a tequila. When you consider that the Scotch producers can turn a good profit on a bottle of 12-year-old single malt that sells for $45, it makes you wonder what's going on with $75 bottles of blanco, or unaged, tequila.

Keeping up with the Cuervos
As Klemm observes, "People in the liquor business develop their prices not on what their product costs but how that price is perceived next to existing products. If there's one product out there at $40 and you don't charge $40 you are admitting that your product isn't as good.

This, of course, applies to all spirits, but seems to be particularly true of tequila because it is such a new category. As Klemm observes "I think that a lot of what's happening with tequila is that the producers are still figuring out what the business is and where it can go."

That direction seems to be up — in terms of quality, which is improving all the time; price, sales and yes, even image.

That tequila has truly come of age and joined the ranks of sophisticated, high-end spirits is shown by the wide selection of different styles and ages now available, and not one of them needs a lick of salt and a wedge of lime to help it down the hatch.