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Diageo and Sean "Diddy" Combs Team Up on Tequila

By Matthew Luke - Jan 18, 2014 at 9:00AM

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In 2007, Sean "Diddy" Combs turned Diageo's struggling Ciroc vodka into one of the company's best-selling brands. Can Diddy do the same with DeLeon Tequila?

Rapper, music producer, and business mogul Sean "Diddy" Combs is one of the most successful examples of a celebrity product endorser. In 2007, Diddy agreed to become the chief marketing officer and brand ambassador for Diageo's (DEO -1.63%) (DGE -0.76%) Ciroc vodka.

Before Diddy, Ciroc had been struggling to create a brand presence as it sold just 50,000 nine-liter cases of Ciroc in 2007. Under Diddy's brand ambassadorship, Ciroc's sales increased to 2.2 million cases in 2013. Today Ciroc is one of Diageo's most strategically important brands in the high-growth, ultra-premium vodka category. With that kind of track record, it is no wonder that Diageo is collaborating with Diddy again on a new project.

Sean "Diddy" Combs. Source: Diageo.

Loss of Cuervo
Diageo's 2013 could have gone better. For one thing, shares of the company underperformed the U.K. benchmark FTSE 100 index. More important than the company's 52-week share performance last year was the loss of Diageo's long relationship with the world's best-selling tequila brand, Jose Cuervo. Diageo had been responsible for distributing Jose Cuervo throughout much of the world for 16 years. Unfortunately for the world's largest liquor company, there will not be a 17th year.

When Diageo's distribution contract with Jose Cuervo owner Tequila Cuervo La Rojena neared its June 2013 expiration, Diageo attempted to acquire the 218-year-old family owned company for a reported $3 billion. When terms were unable to be reached, however, the world's largest liquor company found itself without a major tequila brand in its portfolio.

With the Jose Cuervo partnership no more, many viewed U.S. liquor company Beam (BEAM.DL) and its world's No. 2 tequila brand Sauza as a likely acquisition target. This was despite Diageo's insistence last year that the company wished to expand organically in the tequila space and that it was uninterested in a tequila brand that was not 100% agave (which makes up a large portion of Beam's Sauza tequila sales). With Monday's announcement that the Japanese beverage giant Suntory is purchasing Beam in a deal worth $16 billion, those Diageo buyout rumors can finally be put to rest. Instead, Diageo's CEO said in early 2013 that he wanted to employ a strategy similar to what made Ciroc the No. 2 ultra-premium vodka brand in the United States.

Bottle of DeLeon. Source: DeLeon Tequila.

Rise of DeLeon
DeLeon is Diageo's solution for returning to its past tequila glory. In an equal-equity joint venture between Diageo and Diddy's Combs Wine & Spirits, the two companies completed the acquisition of DeLeon Tequila earlier last week. If you have never heard of DeLeon Tequila, that is not too surprising. Last year DeLeon sold fewer than 10,000 nine-liter cases in a distribution area of just 18 U.S. states and the District of Columbia. That compares to the 4 million cases of Jose Cuervo Diageo previously distributed worldwide each year.

Even with access to Diageo's distribution network, which is second-to-none in the industry, do not expect to find DeLeon Tequila at your local discount department store. An ultra-premium brand, DeLeon's price points start at $120 and go all the way up to more than $1,000 a bottle. That compares to $20 for a 750 ml bottle of Jose Cuervo Especial. Instead of being the average person's tequila like Jose Cuervo, DeLeon Tequila is instead positioned as a high-price, high-margin, luxury product for a very wealthy, upscale, and exclusive clientele. Case in point: DeLeon Tequila is a favorite at L.A. celebrity parties, Hollywood movie premieres, New York fashion events, and private music concerts. 

Glasses raised
For 16 years, Diageo helped to make Jose Cuervo a dominant global brand that had about a 35% share of the worldwide tequila market. Replacing Jose Cuervo will be no small feat. The loss, however, does offer Diageo the opportunity to develop its own brand rather than simply distribute another company's products.

Obviously, DeLeon will not become an international, or even national, powerhouse brand overnight. However, DeLeon Tequila has already done a fine job of cultivating an aspirational brand image in a very short amount of time (since 2009). If Diageo and Diddy can replicate the success of their Ciroc vodka partnership, DeLeon Tequila could be a major strategic brand for Diageo in the not-too-distant future.

Fool contributor Matthew Luke owns shares of Diageo. The Motley Fool recommends Beam and Diageo. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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