As agave costs in Mexico proceed to fall and demand for premium-and-above tequila moderates in the USA, alcohol market analysts IWSR says model house owners have a possibility to enhance product high quality at lower cost factors.
Agave costs in Mexico hit a file MXP32/kg 18 months in the past, however by February 2024 they’d plunged to MXP5/kg, and costs are set to maintain falling due to the big variety of crops which have gone into the bottom lately. Planting elevated by 10 per cent between 2021 and 2022 and the variety of registered agave growers has greater than quadrupled since 2018 as effectively.
Jose Luis Hermoso, IWSR Analysis Director for Central and South America, mentioned these components will see agave proves proceed to fall.
“The very giant stock of agave crops, coupled with slowing demand of premium tequila segments within the US after years of speedy development, has sparked a panic sale amongst novice agave growers who’ve not too long ago joined the trade in a bid to money in on the agave spirits growth,” Hermoso mentioned.
“With such large numbers of recent crops going into the bottom in 2021 and 2022, it’s solely attainable that pricing is not going to hit the underside till 2026.”
The cycle of peaks and troughs in agave pricing is nothing new because of the lengthy lead time for agave maturity, which causes and unbalanced manufacturing cycle. When costs improve growers are inclined to plant extra, as seen lately, which after they mature drives down costs, after which as costs drop growers underplant, which sees provide dwindle and costs improve.
After a number of years of strong double-digit will increase, general tequila consumption volumes grew by solely 4 per cent within the US in the course of the first half of 2023, based on IWSR information.
“Logically, we’d anticipate to see an inflow of cheaper 100 per cent agave tequila into the market within the close to future – so, probably, a higher-quality product at a lower cost, which could appeal to new customers and/or encourage trade-down,” says Richard Halstead, IWSR COO for Shopper Analysis.
“The final time we noticed a provide glut much like this was round 2009/10, when quite a few new manufacturers got here to the market utilizing the 100 per cent agave description, however at costs considerably decrease than nearly all of incumbent 100 per cent agave manufacturers.”
Adam Rogers, Analysis Director for North America, added: “Declining agave costs give main model house owners the chance to enhance their margins and/or improve promotional exercise with a purpose to construct class share. However these skilled, marketing-led organisations will likely be cautious of damaging their model fairness by widespread discounting.
“We don’t foresee any race to the underside in pricing phrases, with premium-and-above merchandise remaining dominant because the market leaders will likely be decided to protect margin.
“Model house owners may additionally look to reinvest a number of the margin windfall they’ve gained from decrease agave costs into extra aggressive awareness-building campaigns across the class, significantly in rising development markets throughout Asia Pacific, Jap Europe, the Center East, Africa and Latin America outdoors Mexico,” mentioned Rogers.
IWSR additionally mentioned that many multinational tequila model house owners are securing long-term grower contracts and dealing on extra built-in farm-to-bottle manufacturing fashions to assist scale back provide and pricing volatility.
“Whereas newer entrants are nonetheless falling into the strategy of ‘shopping for on the peak/promoting on the trough’, established gamers try to tame the cycle by underplanting throughout pricing peaks and overplanting throughout pricing troughs,” says Hermoso. “This may solely be good for the agave spirits class in the long term.”
