Last of the tequila giants set for foreign ownership

Tequila may be Mexico’s national drink, but if the anticipated sale of Jose Cuervo to British multinational Diageo goes through, not one of the country’s major tequila companies will remain in Mexican hands.

Diageo, which owns Smirnoff, Johnnie Walker, Baileys and Guinness, already has an international distribution deal with Cuervo and is now looking to acquire ownership of both the Cuervo and 1800 brands owned by Mexico’s Beckmann family since their foundation over 200 years ago.

Takeover talks are ongoing, but the deal for Cuervo – the world’s largest tequila producer – is reportedly worth up to 3.4 billion dollars. There is an air of inevitability about the sale, with this being the last big tequila producer to fall from family hands into the arms of a foreign corporation.

“All the world’s major brands are controlled by the five biggest multinational consortiums,” says Luis Margain Sainz, a lawyer with 42 years of experience in the tequila industry. “First they associate with a company, then they control it, then they expand it and finally they buy it out.”

Margain represents 18 small and medium tequila distilleries, the biggest of which is Productos Finos de Agave, and he has sat on the board of directors of the Tequila Regulatory Commission, as well as working with the Chamber of Commerce of Tequila.

The industry most emblematic of Mexico’s cultural heritage is being “exploited by foreigners,” he feels. “Its very sad, Mexicans should be profiting from this but they’ve not been able to.”

After Cuervo, the next biggest tequila producer is Sauza, which was  bought out in 2005 by U.S. company Fortune Brands, which also owns Jim Beam. The third biggest is Casa Herradura, which in 2007 was sold for 776 million dollars to U.S. liquor giant Brown-Forman, the owner of Jack Daniels, Southern Comfort and Finlandia Vodka, among others. The fourth largest is Bacardi Limited, which is best known for its rum but also purchased Cazadores in 2002 and bought around 40 percent of Patron in 2008.

If the Cuervo takeover is completed, the largest remaining Mexican-owned companies  will be Reserva de los Gonzalez, Tequilas del Señor, San Matias, 7 Leguas and Tapatio, most of which have been operating for over 100 years. While Cuervo controls between 25 and 30 percent of the tequila industry, these companies are now reponsible for no more than two percent of the market.

At any given time there are normally around 150 registered tequila companies in Mexico. From January to June 2012 there were 145 in operation, of which 13 are classified as large businesses, 13 are medium, 22 are small and 97 are microbusinesses.

Production figures are split between mixing tequila, a harsh, impure spirit intended for use in cocktails such as margaritas; and pure tequila, a smoother tasting variety made from 100 percent agave, which is more suitable for drinking straight.

Mexico’s 13 large companies currently produce 84.5 percent of the world’s mixing tequila, much of which is made for exportation, and 72.7 percent of the world’s pure tequila, which is generally more popular in the domestic market.

Medium-sized businesses tend to produce roughly equal quantities of the two, small businesses produce more pure tequila and microbusinesses focus almost exclusively on tequilas that are 100 percent agave.

Without major partners handling marketing and distribution, it is impossible for these smaller companies to compete with the likes of Cuervo and Herradura. As Margain says, the tequila giants “kill you, they don’t let you grow.”

“These big companies have a stranglehold on the market,” agrees David Ruiz, a Mexican-American who has lived in Guadalajara for seven years. Ruiz’s grandfather worked in the tequila industry and he maintains a scholarly interest in what was once the family business.

“Anyone in the industry can most likely make a good tequila,” he says. “They just can’t sell it because they don’t have the necessary marketing or distribution partners.”

So instead of trying to compete by exporting large volumes, they focus on using traditional methods to produce smaller quantities of high-quality tequila for regional Mexican markets.

While small businesses lack the funds to promote their products in urban restaurants – which tend to demand free products and merchandise in return – they focus first on small pueblos in states such as Jalisco, Aguascalientes, the State of Mexico and the Pacific coastal areas. Once they have established themselves, these companies can go to small urban liquor stores and negotiate with foreign investors interested in exporting smaller independent brands.

Although there remains at least some room in the market for traditional, Mexican-owned tequila producers, this may come as little consolation to those dismayed by the hijacking of the nation’s cultural heritage by multinational consortiums.