How To Invest In Tequila
Probably wishing they’d packed more brandy for their New World exploration trip, conquistadors were the first to distill fermented agave juice into what we now know as tequila. It was a rougher version than most would welcome today, but tequila it was. Over the next few decades, however, that rough around the edges distillate got a bit smoother, more refined. Tequila soon became less of a fill the brandy gap sort of spirit and more of a liquor appreciated for its own distinct qualities, including its investment potentials.
In the early 1600s, Don Pedro Sánchez de Tagle opened the Jalisco region’s first factory and began mass producing tequila. With that, a new industry – and investment opportunity – was born. By 1608, Don Pedro’s investment was paying off pretty well. His tequila sales were making enough money that the Spanish crown’s regional colonial governor began taxing Don Pedro’s earnings. The tequila industry continued to grow, capturing the regulatory interest of the crown and the investment interest of those with capital, as all money-making industries seem to do.
King Carlos IV of Spain issued the first license for the commercial production of tequila to Don José Maria Guadalupe de Cuervo in 1795. The José Cuervo brand is still owned and controlled by direct descendants of Don José. In fact, with a solid hold on just over one third of both the American and the global tequila market, José Cuervo continues to be the world’s best known and top selling tequila brand. However, José Cuervo isn’t the only well known name in the tequila business.
Celebrity And High-End Tequilas
Celebrity tequila seems to have become a thing lately, with big names such as Sean Combs, formerly known as Puff Daddy and P. Diddy, Carlos Santana, Justin Timberlake and George Clooney getting into the tequila game. There’s a reason for that. Today, high-end tequila is a growing market, expanding significantly faster than the less pricey, more pedestrian tequila brands (no offence, Don Jose, quantity is your strength). During the past few years, internationally known brands, including Patron, Sauza and Don Julio, as well as the leading small-batch artisan labels have enjoyed a remarkable increase in sales.
According to industry data, after a period of brisk growth between 2009 and 2013, tequila saw record sales in 2014. The United States buys just over half of the tequila sold each year. Between 2009 and 2013, tequila sales in the U.S. experienced a compound annual growth rate (CAGR) of 5.56 percent. However, it wasn’t the standard tequila market driving that rate of growth. Sales in that market during the 2009-2013 period increased by a CAGR of just 0.8 percent.
What seems to be driving growth in the tequila market are celebrity and high-end tequilas. Premium tequila sales in the U.S. saw a CAGR increase of 13.5 percent during that time period. Super premium tequila experienced a 5.4 percent CAGR increase and ultra-premium sales went up by a CAGR of 9.6 percent. That growth has encouraged some big names to invest in higher end tequilas, despite the fact that investing in tequila, an alternative sort of investment, should be considered to be a high-risk investment.
Diageo, trading on the London, New York and Irish Stock Exchanges, is the biggest spirits producer in the world. In February of this year, Diageo completed its effort to obtain full ownership and control of Don Julio, one of the original luxury tequilas. Last year, the details were finalized for a joint partnership between Diageo and Sean Combs for another luxury tequila brand, DeLeon. Diageo also owns Peligroso, another high-end tequila.
For the investor looking for a starter tequila investment, one that is a bit lower in risk than many of the other options, Diageo could be a good place to start. Of course, Diageo does own a variety of liquor brands, but they are focusing a good part of their attention on growing their high-end tequilas. Diageo’s earnings per share increased 16.8 percent over the past five years.
Another company to consider is the Brown-Forman Corporation, an American spirits company founded in 1870 that also trades on the New York Stock Exchange. Brown-Forman has four tequila brands, including premium and standard market tequilas, and has experienced an earnings per share growth of 23.5 percent from 2011 to 2015.
Those seeking to keep their tequila starter investment numbers a bit lower may find the higher risk but lower cost penny stocks or over the counter pink sheets markets more to their liking. Smaller companies, like International Spirit & Beverage Group, Inc. (OTCPK: ISBG) trade there. ISBG recently launched a new premium tequila brand, Besado.
When investing, it is always wise to familiarize yourself with the business you are investing in. The first step, then, to investing in tequila is understanding what it is and what it isn’t. In the most literal sense, all tequilas are mezcals, also an agave distillate. What differentiates tequila from mezcal is the blue agave. Tequila is made from the blue agave grown in a specific region of Mexico. The altitude and soil composition of Jalisco, Tamaulipas, Nayarit, Michoacan and Guanajuato yield a high sugar content blue agave. Only agave based liquors made from the blue agave grown in those five areas can be called tequila.
There are multiple classes of tequila sold in the retail market. The low-grade, inexpensive brands that many say give tequila a bad name may reference being made from blue agave on their labels. What is noticeably absent from their labels is the phrase 100 percent blue agave. To fit the legal definition of tequila and identify themselves as such on their labels, those tequilas must be made of at least 51 percent blue agave. The other 49 percent can include other types of agave, corn sweeteners, caramel coloring and flavorings. Tequila of this sort is often referred to as mixtos.
Gold tequilas are often mixtos, not made of 100 percent blue agave. They are young, or joven, not aged before bottling and typically have added color to give the mixto its golden color. However, there are some gold tequilas that are 100 percent blue agave. They are made by mixing silver tequila with aged or extra aged tequila. Silver tequila, sometimes referred to as blanco or white, is clear, clean 100 percent blue agave tequila that is typically bottled without aging. There are some makers that do let silver tequila rest in casks for a few weeks before bottling. They say that those few weeks add smoothness.
Reposado tequila is rested or aged before bottling in wooden barrels for between two months and a year. This allows the flavor of the tequila to develop, taking on wood notes from the barrel as well as color. Different woods produce slightly different flavors and colors. White oak and French oak barrels are among those commonly used. These are smoother tequilas. Añejo tequila, also called extra-aged or vintage, is aged for at least one year and usually no more than three years. The additional aging produces a still smoother tequila with deeper wood notes and a more complex flavor. Extra añejo or extra aged tequila is a recent addition to the market. This tequila is aged for a minimum of three years.
Other Ways To Invest
Farmers have first hand knowledge of the risk involved in direct investment in the tequila markets. The blue agave is a slow growing succulent, taking eight to 12 years to mature. Price fluctuations and increasing demand for tequila have resulted in an upcoming shortage of blue agave ready for harvest. When the tequila market began to grow, farmers and investors increased agave planting, producing an agave glut that pushed prices downward.
Small independent farmers, those supplying tequila makers that don’t have their own agave plantations or solid production contracts with bigger farms, couldn’t afford to harvest and plant until prices moved up again. That contributed to the currently growing gap in the availability of mature, ready to harvest agave and is expected to lead to a dramatic increase in the cost of blue agave between now and 2018. The price is expected to double during that time.
The raw material price increase is likely to see many small and medium sized distilleries struggling to stay afloat and ride out the temporary shortage. That will open up investment opportunities for the adventurous investor with a high tolerance for risk. Direct investment in a struggling distillery is a high risk, high capital move for the individual. However, doing so via a group investment fund or as a part of a crowdfunding or peer-to-peer lending group can reduce the risk and the cost.
Circle Up is one of the companies offering a crowdfunding platform to connect investors with private companies seeking investors. Riazul Tequila is one of the tequila companies available to those seeking to invest in tequila. Due diligence is essential for this type of investment, because while the risk is shared with other investors, it should still be viewed as high risk.
Companies like Mexico Business to Business connect potential investors with a variety of tequila investment opportunities, such as distillery partnerships. Other opportunities to invest in tequila include investing in the experience of tequila, such as in high-end tequila bars and clubs, tequila distillery tour companies and hotels catering to tequila tourists in the tequila producing region.
Some Opportunities Riskier Than Others
Consider your tequila investment a high risk alternative investment and only invest money you can afford to lose. Always investigate your potential investments as thoroughly as possible. After all, not only are there shaky start ups, high volatility penny stocks and assorted other poor investment options to weed out of your list of potentials, but there are also outright scams. Take your time and don’t ever allow yourself to be rushed into anything with pushy hard sell tactics.