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Falling demand leaves Mexico with a 500mn-litre tequila lake
The Tycoon Herald > Economy > Falling demand leaves Mexico with a 500mn-litre tequila lake
Economy

Falling demand leaves Mexico with a 500mn-litre tequila lake

Tycoon Herald
By Tycoon Herald 6 Min Read
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Mexico is sitting on greater than half a billion litres of tequila in stock, nearly as a lot as its annual manufacturing, because the fast-growing business reckons with slowing demand and the prospect of tariffs on exports to the US below Donald Trump.

By the tip of 2023, the business had 525mn litres of tequila in stock, both ageing in barrels or ready to be bottled, based on information shared with the Monetary Occasions by the Tequila Regulatory Council. Of the 599mn litres of tequila produced final 12 months, about one-sixth remained in stock, based on the figures.

“Much more new spirit is being distilled than is being sold, and inventories are starting to accumulate,” mentioned Bernstein analyst Trevor Stirling, attributing the build-up to falling demand and new distillery capability that has just lately begun working in Mexico. “The tequila industry is set for a very turbulent 2025.”

Customers’ thirst for Mexico’s nationwide drink grew quickly over the previous decade because the spirit went mainstream within the US, partly because of celebrity-backed manufacturers resembling George Clooney’s Casamigos.

However demand has fallen again over the previous 18 months because the pandemic spirits growth subsided and shoppers reduce on their consuming in response to larger costs. 

The quantity of spirits bought within the US within the first seven months of the 12 months shrank 3 per cent in contrast with the identical interval final 12 months, based on drinks information supplier IWSR. Tequila consumption fell 1.1 per cent, in contrast with a 4 per cent rise in 2023 and a 17 per cent rise in 2021, the peak of the tequila surge.

Although among the stock is within the means of being aged, slightly than simply awaiting bottling, tequila evaporates quickly in contrast with different ageing spirits — partly due to Mexico’s heat local weather — that means that almost all tequila just isn’t left in barrels past three years.

Falling demand leaves Mexico with a 500mn-litre tequila lake
Demand has fallen again over the previous 18 months because the pandemic spirits growth subsided © Hector Guerrero/Bloomberg

So as to add to the business’s woes, Trump has threatened Mexico, the US’s largest buying and selling associate, with a 25 per cent tariff on its items. That will be devastating to the business and to Mexico’s financial system, which depends on its northern neighbour to purchase 83 per cent of its exports.

“It would be shooting themselves in the foot because their consumers would have to pay much more,” mentioned Tequila Regulatory Council president Ramón González. 

Two-thirds of all tequila produced in Mexico was exported in 2023, and 80 per cent of that was shipped to the US, based on the group, which ensures merchandise adhere to specs and protects the spirit’s designation of origin.

Tequila’s largest export markets after the US final 12 months had been Spain and Germany, which every made up simply 2 per cent. 

González mentioned there was broad concern concerning the potential tariffs however performed down their probability, pointing to the elevated funding in tequila by US firms and to Trump’s earlier threats that didn’t materialise throughout his final time period in workplace.

“When he was president . . . he said exactly the same thing, that there would be tariffs et cetera,” he mentioned. “Not only did he not put taxes on alcoholic drinks, he lowered them,” he mentioned, referring to 2017’s Tax Cuts and Jobs Act, which diminished tax charges on alcohol produced or imported to the US.

Two of the most important tequila manufacturers, Bacardi-owned Patrón and Casamigos, which is now owned by London-listed Diageo, have been reducing costs for greater than a 12 months in response to weaker client demand, based on analysis by Bernstein.

On the similar time, tequila producers have gained from cheaper uncooked materials costs, together with for agave, the plant from which tequila is made.

“There is oversupply at the moment of several times what the industry needs, and probably some of these plantations won’t be sold looking at the industry numbers,” González mentioned.

The worth of agave has plummeted from about 30 pesos per kilo to between six and eight pesos for suppliers with contracts, or as little as two pesos on the spot market, based on producers and farmers.

“It would be a big blow to category economics if the financial upside from falling agave prices were competed away by high-end pricewars,” mentioned Stirling.

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