The rise (and hard fall) of tequila

So tequila has been on an absolute tear over the past 30 years. And to put in perspective, it's gone from basically nothing in the early 1990s to having over 20 million cases a year of the stuff consumed in 2022. Just insane. Along the way, it became the number one premium spirit. So you think of whiskeys and all that kind of stuff, tequila, they're all spirits, right? These highly distilled things. Along the way, it became the number one premium version of that in the US in terms of consumption. And the interesting thing about it is it didn't all happen by accident. It was all orchestrated and planned and part of a bigger strategy. And just as things for tequila hit the very top of the market, you look up in the past couple of weeks and there's been articles that are just showing a totally bleak picture for everything. There's price wars going on, there's too much supply, and potentially some of these makers of tequila are going out of business. So totally fascinating story, a ton for us to learn, and I'll share some insights along the way. That's what this video is about. If you're new here, my name is Michael Girdley. I like to give myself an excuse to go for walks and get some exercise by learning about businesses and telling stories around the world of well, kind of business and what we can learn from it. And the stuff I share here is ideally for entrepreneurs trying to figure out, you know, how to be successful in the future and now in terms of building and creating businesses that hopefully can do good things for our lives. And if you like that kind of stuff, subscribe, stick around. We'd love to have you. Oh, spring break is coming up and today's video is to talk about the absolute tear and rise and fall of the tequila market. And if you haven't been following it, tequila has been a wild story over the past 30 years. It basically went from a nothing spirit that nobody really drank. So to explain how we got here, our story starts back in the '80s and '90s of the 1900s. And back then, tequila was seen kind of as a, well, just kind of not sophisticated and kind of garbage beverage. When people drank it, it was basically used typically as a mixto, is what they called it in Spanish, which is just part of mixing into other stuff. It was a cheap, easy alcohol that nobody really paid much mind to, especially American consumers. At that time, José Cuervo was really the number one brand. You've probably seen that in gas stations and grocery stores. It wasn't a fancy thing at all. It was just kind of an everyman alcohol. And most people knew it because it was alcohol we bought when we were at college and did shots with and tasted kind of funny. And you had to have a lime and some salt with it to drink it. And it was just kind of, well, as my ancestor would call it, rotgut, not fancy or good alcohol. And so when you have something like this that's produced in Mexico and not consumed much and, well, was kind of largely ignored, and that presented an opportunity. We have the supply, we have Americans who are interested in interesting stuff, and capitalism is the name of the game. So some smart people started to see ways to make money from all this. Very first smart move that they did was the Mexicans themselves got together and trademarked the word tequila. And much like if you go to France, right, you can't get champagne from anywhere except for the Champagne region of France. The Mexicans did the same thing. They own the trademark for the word tequila, and that enabled them to basically control the production of the stuff, right? And distribution. If you wanted to call it tequila, you had to go through and be one of these states and one of these permitted suppliers in Mexico. And it's smart, right? You start to brand stuff and you can control that brand. And then once you control that brand, you you can start to craft it and position it the way you want to. So very first smart move from the Mexicans to do that. Trademarking the name tequila. Well, that's really not enough to solve the problems. Consumption lagged. People would still gravitate towards things that were maybe easier drinking or they were already familiar with, like fancy vodkas or whiskeys. And so the Mexicans and the producers, they still had a problem. Even as late as 1997, Americans basically knew tequila from these college parties I talked about or from having it put into a margarita. And the interesting thing about margaritas, by the way, they were supposedly invented in 1948. There's about a dozen people who claim to have invented them. It turns out if you're going to have a good idea, somebody else is going to try to take credit for it. But our story takes a turn here. There is one thing that is proven to change consumer behavior, and it does it really well. And that thing is marketing. And, you know, tequila languished for years and then something changed. And that thing that changed was the introduction in 1989 of a brand most of us who have, you know, had familiarity with tequila know about. And that brand is called Patrón. And so in Patrón, there was an opportunity, you know, Patrón by itself, the facts of the difference with it as a product where that it was nicer. It was higher quality than some of the stuff that was just kind of cut with vodka or some of the nastier, bad-tasting spirits that you would find in a low-end José Cuervo type thing. And Patron was smoother and potentially tasted better. And this difference, well, it could be highlighted and it could be changed in terms of, well, reshaping how the public perceived tequila. So enter this guy, Jean Paul de Georgia, and I am totally killing his name. I'm sorry, but I only read about him. Jean Paul de Georgia. Anyway, he had a history and familiar with, with marketing, and he came from the Paul Mitchell world where, you know, if you're not familiar with Paul Mitchell, it's a bunch of shampoo and stuff like that, but it's a total branding exercise where you create something special out of a very commonplace thing. And he saw, and the Patron owners saw an opportunity to change the game and how people thought and talked about tequila. And so they copied the playbook that's been done with tons of other brands. If you're familiar with Grey Goose and some of the other kind of fancy Absolut vodka and stuff like that, they managed through marketing to get the consumer to believe there was huge kind of differences between the different vodkas. And here's kind of the secret: all vodkas are actually the same. You can go, you can go research that. The cheap stuff and the good stuff, it's all distilled so much that nobody can tell the difference. But the thing that does change the difference for consumers and the perception of value and the perception of luxury in a thing, that's marketing. So Jean-Paul and the team at Patrón, they saw an opportunity to do the same thing that had been done with vodka, but to do that with tequila. And so they went in for Patrón and they actually tried to change the game. In fact, they went in and tried to change the entire category of how to think about tequila. And they didn't even call it tequila. They called it the world's most luxurious Jurious Spirit, basically trying to create an idea that this wasn't tequila that you were familiar with anymore. This is something entirely new and different. And when you change the category like that, you change the placement of the idea of that, that thing in people's mind. And suddenly Patron and those types of things like that, those different types of high-end spirits, high-end tequilas, they became a luxury or a status symbol. And just like rappers are quoting $10,000 bottles of Ciroc and stuff like that in their rap videos, you know, you see the same thing happening with Patron. It suddenly becomes a luxury item and Luxury items are something people will pay up for big time. By Patron pioneered an opportunity for the entire tequila category to get rethought. You suddenly have a situation where tequila is a status symbol, where wealthy people are buying it and people are willing to spend money to get a fancier or nicer tequila. It's work by Patron and some of the other premium brands of tequila set the stage for today's boom, right, of massive consumption increases in tequila and especially premium tequilas. And so at this point in the early 2000s, we have tequila, which is suddenly cool. It's hip, it's a luxury thing, and it presents an opportunity for this thing to get even cooler with the growing demand as a backdrop and a tailwind for it. So how do you do that? How do you make something cool already cooler? Well, there are people that can do that for you. So that person that can help you make that thing even cooler is a movie star. And then George Clooney. George Clooney in 2013, he launched his own tequila brand called Casamigos. If you remember at the time, George Clooney had been one of the biggest stars in movies and TV. Kind of in the United States and in the world. And he was the epitome of cool. He was the heir apparent to Gary Cooper, and he'd been on ER and in Ocean's Eleven. And they found tequila and the perfect person to make it hip and sophisticated. Change with George was subtle but big. We had a situation where before, a lot of the marketing around Patron and the other tequilas was really about kind of craft and specialty and scarcity. But when George got involved, suddenly it was about lifestyle and cool and being attractive and hip and a big star. And look, a lot of ladies really found George Clooney super attractive. Heck, they still do. I find the guy attractive. He's a good looking man. But all that kind of shifted and changed the game yet again for tequila. The addition of George at the very right moment and the ripeness of all the stuff going on in the US, we were just ready in the 2010s for George Clooney to show up and tell us this was the tequila for us, that it would change our lives. And people noticed and sales went like crazy. So much so that just 4 years later, Diageo, one of the biggest spirits makers in the world, came in and bought the brand for $1 billion. From nothing to $1 billion in 4 years. Capitalism. So you can imagine what happens next. That billion dollars, it sent a shockwave through the industry. And suddenly every celebrity and their mom was launching their own branded tequila and their own branded vodka. Uh, if one thing capitalism hates is one person getting all the glory and all the money. So copycats, they're just part of the deal. And a few years later, you looked up and everybody and their mom had their own tequila brand. Michael Jordan had one. Kendall Jenner had one. The Rock had one. Man, I was kind of surprised that Carrot Top didn't have one. Well, he might have, but anyway, you see what I'm saying? Look, pushed by all those celebrities and pushed by the amount of kind of money flowing around, the good times in the economy, through those years up until 2023, demand totally exploded. It kept growing year after year. From 2020 to 2022, tequila sales grew 30% year over year. Just incredible growth for, well, by then, a spirit that was already number one in terms of this premium spirit category in the US already. And in Mexico, we had something go horribly wrong with the tequila industry around this time, which was agave, the plant behind tequila. Well, it became in short supply. And suddenly it wasn't just the premium brands that were charging top-tier prices for tequila. Suddenly every brand was, just because there wasn't enough of it to go around. And that's when the good times, well, they started to end, starting in 2023. Uh, the thing about booms is they tend to always be followed by busts. And as I'll explain a little bit later in the video, uh, tequila for many reasons is subject to bigger booms and busts than virtually every other spirit. And that's because of the way Mother Nature does stuff with the agave plant. Por this boom and bust cycle that happens at tequila is because of this agave plant. And unlike other spirits, say like vodka or something based off of kind of sugarcane like rum, you have at its core for tequila, the agave plant. And the problem with the agave plant is unlike sugarcane or grain, agave plants take 4, 5, 6, 7, depending upon the varietal, years to come to maturity. So if you're a farmer, you're planting an agave plant for now that will hopefully ripen and be ready, uh, to do production of tequila nearly half a decade from now. See what this does to the whole market, right? So whereas whiskey makers, or let's say, Let's say vodka makers are thinking 9 to 12 months from now. Tequila producers are thinking 9 to 12 years from now. And while demand is high, you have situations where prices go way up. So lots more people plant agave plants, and then you look up and then 5 years later, when all those plants are ready and come to market, you potentially have a flood of tequila entering the marketplace. Farmers and producers, well, they really have no choice. Like, what are they going to do, throw it away? Well, they can't, so they push at the market and they already have invested capital, so they just take whatever they can get for it. Because of this long lead time from planting to production, you have a situation where, like, the tequila market experiences boom and bust that no other spirit manufacturer experiences, uh, such that the swings can be incredibly wild. And that's starting to see what we're seeing now. Starting in early 2023, that's where we started to see the cracks start to show in the market. Market. Because of the shortage of agave and the shortage of supply and the high demand brought by all these celebrities, uh, we suddenly had a situation where many people were getting priced out of the market. So they were going and considering other types of spirits rather than their tried and true tequila. That year, something happened that had never happened before. In 2023, sales of premium tequilas, the super premium ones that are over $50, well, they dropped for the first time in history. Uh, and then the second thing that happened, which was really bad for the industry, is Mexico Mexico started to reap what it sowed year before. In 2023, massive amounts of supply came on the market and Mexico ended up with just a huge surplus of tequila. And that amount was half a billion liters of oversupply, which is just about equivalent to what Mexico would produce in tequila in a typical year. Just crazy. So you look what we have here at this point in 2023, right? We have a massive oversupply. Because of the boom time and people overplanting. And then at the same time, you have inflation from the post-COVID era, and you have people basically getting priced out of the tequila market because so many brands are pushing themselves over the $50 amount. And so in the face of declining demand and overarching supply that's too heavy coming out of Mexico, you can see where all this leads to a crisis. But wait, there's more. The crisis gets worse. And early in 2025, a new president entered the United States. and the White House and Donald J. Trump. One of the first things he did was put a 25% tariff on products from Mexico. And unlike other products, whiskeys and that sort of thing, which can come from a bunch of different places, tequila has to be made in Mexico. Because remember, these guys went and basically cornered the market by registering the brand name. You can't make tequila anyplace else. So now we have a place where, well, Basically 25% tariffs and there's no way around them. Danger here that basically tequila demand could go down even further, uh, by this artificial increase in prices and tariffs. Because remember, tariffs are taxes paid by the importers, uh, to bring those tequilas into the United States. And, uh, if you add 25% onto their cost, well, in order to stay profitable and stay in business, they have to put that cost onto somebody. And the way they do that is to raise prices. Byproduct of all this that is kind of some of the wisdom and panic of crowds, which is anticipating these tariffs made things even worse because what happened was people started going out feeling fear that the tariffs were going to make their beloved tequila even more expensive. So it started off a wave of panic buying. Shelves were getting cleared of all the tequilas. You can see what people's logic was. They said, if I'm going to have to pay $75 for a tequila in the future, why don't I get it for $50 now? And it started all kinds of second markets too, where people were buying and flipping high-end tequilas in advance of the tariffs coming online. Just totally crazy. No, that's not— And the irony is of all this, that this has the potential to make things even worse and putting even more suppliers of tequila out of business. Because once all this demand subsides and people start to work through their supply, well, they're not going to be buying as much tequila in the near term. Part of the reason why small business people like us, we generally hate tariffs. And the tariffs we really hate are the ones that keep changing all the time. Because if one thing businesses hate, it's that they can't predict the future. That's already hard enough. So if you have a situation where tariffs are changing all the time, changing your demand, changing your supply, changing your costs, that makes business even harder than it is already. And let's be real, running a business is already life on hard mode. None of this changes the fact that there's still half a billion liters of tequila on the marketplace. And that is far outceding, far exceeding the amount of demand that's out there. So you can see what's happening next, right? Between the tariffs and the slowing demand and the increased supply, brands, like, they're potentially in a lot of trouble. And for the first time, you're seeing the premium tequila brands go and start to cut prices. And leading the way, well, it's our friend Casamigos, George Clooney's brand. And they went and recently cut all their prices by 20%. The price cuts by leading vendors like this, well, they go and they start Exactly what you imagine. Price wars. Suddenly people are competing on price, uh, and look, price wars are good for consumers. Uh, they're not as great for, uh, vendors as you think they would be. Actually, they're not good at all. It sucks. And you can see where things go from here, right? Suppliers are going to be struggling to stay in business. Different vendors and different retailers of all this stuff, like, these price fluctuations, boom and bust. It's not good. And there'll be a shakeout and we'll see who survives. But, you know, just as we go back to our friend in the agave plant, remember all this boom and bust stuff, it's perfectly normal. And these massive boom and busts, they're specifically what tequila goes through all the time. Businesses are cyclical, meaning they, you know, all the prices go up and they do well and then they do bad and they do well and they do bad. That's just the nature of, you know, a byproduct of how we are as humans. We're not perfectly logical animals and we tend to do things that are stupid when things are, when things are going up and we tend to do things that are stupid when things are going down. Um, and that's just the nature here. And it's just because of our friend, the agave plant, that things are especially worse in the tequila world. A friend who's a real estate investor, and, you know, one day we were talking about the cyclicality of his business, which is real estate is a classically cyclical business. Good times happen for a while and then there's a crash and then things get reset and then it all happens again. And the trick is like, you never really know when the crash is going to happen. Uh, there's a lot of pundits on the internet and on TV who have been famous at predicting 130 30 of the last zero market crashes and corrections and that sort of thing. It turns out fear really sells. But, you know, I think that's a reality of any market, right? Tequila, real estate, virtually anything you're in, like it's going to go through cycles when there's good times and there's bad times. And when people get in trouble is when they don't expect the bad times to come because then, well, you're not prepared for them. The other hero of this story, let's shout out to our man George Clooney. Like, dude got in early, took his profits at the top, and when all the other celebrities tried to jump on the bandwagon, like, he was well gone and counting his billion dollars in his, uh, in his house in Lake Como in Italy, where supposedly he has a house and hangs out with other cooler people than me. But yeah, total baller. And then of course, in terms of continuing the path of that brand being forward-looking, it was the first one to cut prices, uh, when the bust happened in 2023. Me. By then he was long gone, but, uh, pretty cool. And kudos to the man. Uh, besides being good looking, he appears to deserve the money. And I think the second takeaway from all this story for sure is that marketing works. Positioning works. I mean, people like to think that you don't need to market your product or you don't need to try to influence how people think about it, but you look at so many of the things that become really huge businesses around us, and frankly, like, marketing is what created Coca-Cola, Listerine, Crest toothpaste, and tequila. Like, you know, our Grey Goose vodka. These are all things that were manufactured through the power of marketing. Paul Mitchell hair products. They're just the same crap from the same factory as other places, but they've made us all believe that there's something there that we really need to have. So is all this good or bad? Look, the older I get, the less I feel like you really need to make a judgment on it. You know, there's a bunch of different games to play in the world. Tequila is one of them. And, you know, some people can decide to sign up for it or not. My only recommendation is if you are going to play the tequila game, make sure you know what you're getting into. You know, every business to some extent is a roller coaster. Tequila, just because of the nature of the way our friendly neighborhood agave plant works, well, that roller coaster just runs steeper, faster, and a little more rickety than the other ones. So producer and buyer beware.