Get out the lemons and diversify your portfolio with an investment in tequila companies

When life gives you lemons … get out the tequila. I bet you thought I was going to say “make lemonade”. The truth is, how you deal with lemons depends entirely on you. Some people will toss them out, some will complain, some will make lemonade and others will reach for the tequila.

The point is that it’s different strokes for different folks. Yes, this article is going to be full of funny tequila quotes. While tequila is typically associated with fun nights you never want to remember (“Hakuna tequila – it means ‘no memories for the rest of the night’”), it can also provide an interesting way to diversify your investment portfolio.

“I’m well aware I’m not someone’s cup of tea. I’d rather be someone’s shot of tequila anyway.”

While tequila is not as common as beer, its popularity is definitely on the rise. The Distilled Spirits Council (DSC) of the United States reports that over the last 20 years, beer’s market share of liquor revenue has, in fact, declined from 54% down to 41.9%, while spirits increased from 30% to 42.1%. Over the past 20 years, the DSC reports, the spirit industry’s annual growth was 5.4% compared to an annual growth of 7.5% over the last five years. And most of that growth is attributable to tequila and whiskey. 

“We should all believe in something and I believe it’s time for another shot of tequila” — Justin Timberlake

When a celebrity endorses a product, chances are high that their fan base will at least try the product. It’s the reason brands pay celebrities millions to endorse their products. Over the last 10 years, it’s become quite the thing for celebrities to launch their own alcohol lines.

James Hayward, global equity analyst at Flagship Asset Management, points out that George Clooney was the first, and so far, the most successful celebrity to enter the tequila market after founding Casamigos tequila in 2013 with his friend, Rande Gerber (married to Cindy Crawford). The pair wanted to create a tequila that would not carry a hangover. While you will have to make your own discovery about whether it causes a hangover or not, there is no doubt that the pair hit success. So much so that they sold Casamigos to British alcohol giant Diageo in 2017 for $1-billion. Other celebrities that have launched their own brands include Dwayne “The Rock” Johnson (Teremana Blanco tequila) and Kendall Jenner (818 tequila).

“When life gets too salty, add a little tequila and lime.”

The global alcoholic beverage industry can be broken down into three main segments — beer, spirits and wine. Hayward points out that South African investors have always had access to at least one beer brewer, previously via SABMiller and more recently via Anheuser-Busch InBev (ABI). 

“They do, however, have very limited access to spirits listings, and post the Heineken takeover of Distell, even less so. This means they are potentially missing out on a major secular shift in the industry,” he says.

Hayward suggests that investors look towards Diageo, which is listed on the London and New York stock exchanges. Besides the downward investment in tequila, benefits include geographic and currency diversification in an investment portfolio. Currency diversification may be top of mind for investors, given the dismal performance of the South African rand in recent weeks. 

“No one just drank one shot of tequila.” 

In the US, tequila has now increased its market share from 7.2% to 10.6% over the last five years and while it still lags behind American whiskey and vodka in terms of volume, it is set to overtake vodka this year to become the best-selling spirit, by value. 

Hayward says although tequila volumes are only about one-third that of vodka, its sales value is already at 83%. “This indicates the premium price tag tequila commands,” he says, adding that this spike in popularity is not confined to the US market. 

Statista reports that the global tequila market is expected to exceed pre-Covid levels by 2025. Patrón tequila alone sold about 3.2 million 9-litre cases in 2021.

A Becle investor presentation in February showed that tequila is the second fastest-growing major spirits category in the world at 7.2%, behind only gin. Becle, probably better known as the producer of Jose Cuervo, is the undisputed industry leader — controlling almost 30% of the global market, more than double that of its closest competitors, Patrón parent Bacardi, and Diageo.

“I’m on the tequila diet — so far, I’ve lost two days.”

Although Becle is diversifying its portfolio, it still generates about 70% of its sales from tequila. 

“Becle also has the major advantage of vertical integration by virtue of being the largest producer of blue agave within the Appellation of Origin Tequila,” says Hayward. Just like you can only call it Champagne if you made it in Champagne, France, tequila is a word restricted to alcohol made from the blue agave plant specifically grown in Mexico.

“Contrary to what one might think, the incredible boom in tequila has not been good for profitability. Demand has increased at such a rate that prices of the blue agave plant, tequila’s main ingredient, have shot the lights out — leading to plummeting gross margins for tequila makers,” Hayward cautions. 

Unfortunately, there is no quick fix, as the blue agave plant takes at least seven years to mature and can only be harvested once. 

“In other words, there is a substantial lag between supply catching up to demand, but there should be strong margin recovery once it does,” says Hayward. DM