Why Diageo Is Seeking to Buy Jose Cuervo

The attraction is likely two-fold for Diageo: Not only does the company see a great deal of growth potential for Tequila in developing markets like China and India, but if the Beckmann family is looking to cash out, Diageo wants to make sure the No. 1 Tequila brand in the world goes to its portfolio and not that of Pernod Ricard or Brown-Forman. The Beckmann family, according to The Times of London, has retained Barclays Capital to explore a possible sale of all or part of Jose Cuervo.

The global Tequila market grew by a compound annual growth rate of 6.5 percent between 2003 and 2008, according to Just-Drinks. But things slowed in 2009 as a result of the global economic downturn. The US and Mexico stand at 11.4m and 8m cases respectively. U.S. Tequila consumption is about half that of rum. Jose Cuervo saw sales drop 15 percent in the year ending June 30, 2010, compared with the previous year. Some of that was due to a decline in bar business overall because of the sluggish economy, but it was also due to a proliferation of new Tequilas grabbing shelf-space in stores and behind the bar.

One of the tasks to tackle for Diageo or any other owner of Cuervo is that tequila is still a pretty cheap drink anywhere but the U.S. where there has been some growth in high-priced aged tequilas. Cuervo's Especial Gold and Silver are the top selling Tequilas in the world, and cost between $16-$20. Jose Cuervo Black, aged over a year in a charred Spanish oak barrel, is about $19. But the distillery has also had success, mostly in the U.S. as well as in the Mexican city centers, with Tradicional ($33.00), Platino ($46) and Reserva de la Familia ($125-$175 per bottle depending on the retail source).

White Tequilas, like Jose Cuervo Silver (a "mixto" of 51 percent blue agave Tequila and the rest made up of sugar-cane spirit) that is commonly used in Margaritas, as well as 100 percnt blue agave Tequila like Cuervo's Platina, have potential, some industry analysts believe, of being a "new vodka." "The challenge for Tequila, I think, to really grow is that a lot of people do not know about Tequila beyond the margarita, and they see the margarita as a drink for an occasion," says Mark Bayardo Wernette, a marketing communications executive at Cuervo. "One of the most import things we do is work with bartenders and mixologists to show them great recipes for cocktails beyond the margarita." Cuervo also makes the margarita as easy as possible for the home bartender; not only selling Cuervo branded margarita mix in bottles, so that all you need is Tequila and ice and blender, but it also markets a premixed margarita in a Cuervo bottle.


It's worth noting that Mexicans, ironically, do not much drink margaritas. The preferred way to drink Tequila in Mexico is neat, or in a simple cocktail, such as the Paloma--1.5 oz Cuervo Tradicional, 4.5 oz grapefruit soda, garnished with a lime. Tradicional Silver is just being launched in the U.S. after being available just in Mexico for many years. The launch of the $33 white Tequila is a bold attempt to provide alternatives to premium and super-premium vodkas. It is also meant to play a role in slowing the growth of Patron Tequila, especially in the U.S.

Can it really be the new vodka? While vodka is mostly tasteless (though there are slight differences among vodkas distilled from grain, potatoes and grapes), Tequila, even white Tequila that has not been aged in oak, showcases the distinct taste of the blue agave. It is a grassier, more bodied drink experience than vodka, and generally, to many palates, much mow interesting. Diageo, which already controls most of Cuervo's worldwide distribution, wants to have the top selling brand for the lower end of the price ladder, as well as seeing potential in growing the premium tequila business in the U.S., Europe and Asia especially as the world economy climbs back. Besides the up-market Jose Cuervo brands, Cuervo and Diageo also jointly own Don Julio premium Tequila, which is a line of premium and super-premium 100 percent blue agave Tequilas.

Cuervo also makes the Maestro, 1800 and Centenario brand tequilas as well as Matusalem rums. It is still not clear if all these business would be in a potential sale.

Cuervo dominates the town of Tequila and the Jalisco region as the oldest and largest producer. Juan-Domingo "Dobel" Beckmann, 43, is son of Don Juan Beckmann and the sixth-generation leader of the company. He has led the company since 2009.

Cuervo, despite the scale on which it makes Tequila, follows a traditional unique distilling practice--slow-roasting the agave for three days, making a honey-like juice from the raw material, turning that into an agave wine, and then double-distilling the wine into spirit in copper pots. Some Tequil producers, such as Sauza, have taken to skipping the slow-roasting process in favor steaming the agave in autoclaves.

A sale of Cuervo to Diageo should not adversely impact the economy of the Jalisco region of Mexico because Tequila, to be called "Tequila," must come from blue agave grown in he region's volcanic soil, as well as be distilled there. What would remain to be seen, if a sale happens, is whether an ambitious plan to turn the town of Tequila into more of a tourist destination would come to fruition. Cuervo, as the oldest and biggest producer, has had a plan, called Tequila 2020 to build a modern hotel, a Tequila museum shaped like an agave, as well as a rodeo arena. Today, Tequila, about 45 miles from Guadalajara is more of a day-trip excursion from the city, or a pass-through destination, rather than a place to stay for a few days. Indeed, Cuervo has just begun running its own "Tequila Train," from Guadalajara to Tequila and back, with food and drinks to be had along the way, as well as visits to some distilleries.

Cuervo has been seeing lost of new competition, and from other brands besides Patron. Dozens of brands have popped up in recent years--Casa Noble, Hornitos, Familia Camarena to name a few. And some of the big drinks companies are investing more marketing money into some of Cuervo's rivals: Beam Global bought Sauza in recent years and Brown-Forman bout Herradura.

Some might say that since Cuervo is the biggest, it can't be the best, which is a marketing challenge for the brand going forward. So-called "craft" Tequilas are already having somewhat the same effect on Cuervo as craft beers have had on big breweries. Every new brand takes a little bit of market share. And when there are so many new entries, the market share adds up.

But make no mistake: Cuervo Tequilas are high quality. And a run up the ladder from the bottom priced Especial to the top of the line Reserva de la Familia bears that out.

Especial Gold: The top selling Tequila in the world is a blend of white Tequila and Reposado, which is white Tequila that is aged for a few months in oak barrels. Ideal for cocktails that involve fruit and mixers.

Especial Silver: Un-aged white Tequila. A blend of blue agave derived spirit with sugar cane spirit. Ideal for margaritas. When it comes to "mixtos," hard to beat for quality and consistency.

Jose Cuervo Black: Tequila that has been aged for about a year in charred oak barrels, it doesn't take long in the hot climate of Jalisco to take on rich flavor notes and color of the oak barrels. At $19 or so a bottle, inexpensive enough to use in mixed drinks, but unique enough to drink neat or n the rocks.

Tradicional Silver: Just released in the U.S., and costing around $33, this 100% blue agave Tequila has great mouth feel, and is full of the taste of grass, limes, honey and tropical fruit. Drink neat, on rocks, frozen or with a garnish of lime.

Platino: A white, or silver, Tequila that is crafted from specially selected blue agave plants, and using only the hearts of the agave "pineapple." The quality and roundness of flavor, above that of Tradicional Silver, is evident. Sip this neat, on a bit of ice, frozen, or with a garnish of mint, apple, cucumber.

Reserva de la Familia: Three-year old Tequila aged in oak blended with older aged stock of 30-years and older, this is a special Tequila that is as deserving of a snifter as any brandy, cognac or 30-year old whiskey.