There's a Tequila Sunrise in Your Future

The Eagles sang about a tequila sunrise. Shelly West talked about shooting out the lights after a night with Jose Cuervo. The Champs sold 6 million records in one year singing nothing but the word "Tequila!" Former Van Halen front man Sammy Hagar took it a step further and makes his own tequila, Cabo Wabo.

Tequila is an evil, evil drink, but oh so good! As La Quinta Estacion sang, "After several tequilas, the clouds go away, but the sun doesn't come back."

Considering its musical roots and popularity (according to this Wikipedia entry, there are at least 66 songs about tequila, not including remakes of The Champs' classic), it should be no surprise that tequila is the fastest-growing liquor in the country today. Nielsen Scantrack & LiquorTrack data says tequila sales grew 12.5% in 2006 -- the largest of any alcoholic beverage and almost three times as much as spirit sales growth overall.

Tequila nation
Also unsurprising is tequila's popularity among Hispanics. The Food Marketing Institute's "Facts, Figures, & the Future" points out that the growth of the Hispanic population nationwide is fueling the growth in tequila sales. In Chicago, the Latino population was responsible for 17% of all tequila sold, while they accounted for 43.2% in Los Angeles. For what it's worth, I can say I've tried to do my part to boost the proportion of Caucasian sales of tequila.

There are about 100 distilleries in Mexico making more than 600 brands of tequila. The country exported 140 million liters last year, a 19.7% increase over 2005. The U.S. was the largest importer, taking in 106 million liters, while the next closest importer was the European Union at a practically teetotalling 16 million liters. (Fun fact: Tequila is distilled from the fermented juice of the agave plant. To make that volume of export, more than 778,000 tons of agave were fermented in 2006.)

Is that with or without the worm?
By the way, that thing about the worm in tequila bottles really only applies to what is called mezcal. To truly be known as Tequila, the drink can really only be made in the state of Jalisco from the blue agave cactus (sort of like Champagne, only not as strict). Mezcals, on the other hand, are liquors distilled from any agave plant and can be manufactured anywhere. Only mezcals have that odious agave worm included in them; tequila purists would never allow such a heresy.

The most popular tequilas by sales are Jose Cuervo, which is distributed by Diageo (NYSE: DEO  ) , Sauza from Fortune Brands (NYSE: FO  ) , and Brown-Forman's (NYSE: BF.A  ) recently acquired Casa Herradura. Other distributors have tequilas, though they may not be as well known. Constellation Brands (NYSE: STZ  ) sells three different types under the labels of Montezuma, El Toro, and Capitan. Apparently, a reference to something Mexican is important in marketing your tequila.

So many brands, so little time
For my money, the one to watch here will be Motley Fool Income Investor recommendation Diageo. Jose Cuervo had a market share of 43% in 2005, according to Impact Databank, and it's also been one of the first to market with brand extensions like flavored tequilas, which allows for greater sampling of the liquor. Cuervo has also brought out new and innovative marketing campaigns. For example, it has partnered with Spanish TV giant Telemundo to film a telenovela -- a Spanish-language soap opera -- on the grounds of its distillery. While Sauza will also be featured, it exposes both brands to large numbers of Hispanics who watch these shows not only in Mexico and Latin America, but also throughout much of the U.S. Cuervo also runs a number of tequila bars called Taberna del Tequila that are set up in airports around the country and run in conjunction with HMSHost. Jose Cuervo, through Diageo, is a market leader in many ways besides sales.

While Diageo sells at a slight premium to both Fortune Brands and Constellation, it is discounted against Brown-Forman. It has a tough-to-beat distribution network similar to the exclusivity enjoyed by Anheuser-Busch (NYSE: BUD  ) , owns a portfolio of "global priority brands" including Smirnoff vodka, Captain Morgan's rum, and Bailey's Irish cream, and continues to enjoy growth both here and abroad.

Now that's something to sing about.

Diageo is a recommendation of Motley Fool Income Investor. Anheuser-Busch is a recommendation of Motley Fool Inside Value. A 30-day trial to either allows you to take a sip of all the market-beating recommendations at no cost. Bottoms up!

Fool contributor Rich Duprey does not own any of the stocks mentioned in this article. You can see his holdings here. The Motley Fool has a disclosure policy.


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