Diageo Is Bullish On DeLeón, But Is Also Open To More Tequila Deals

Diageo North America president Larry Schwartz is intent on quickly replacing the profitability lost with the departure of Jose Cuervo from the company’s Tequila portfolio, and while he’s extremely bullish on the prospects of both Don Julio and new acquisition DeLeón, he says that more moves may soon be on the way.

“We’ve always had the goal of regaining our leadership position in Tequila, and this joint venture marks our latest step toward achieving that goal,” Schwartz told Shanken News Daily. “Additionally, our aim is to replace the profit we lost in the Tequila category when we ended our partnership with Jose Cuervo within two years, so the clock is ticking. We’re planning on accomplishing these goals through a mix of organic growth, innovation and acquisitions—if the right deal comes along.”

Schwartz and Diageo clearly felt the DeLeón purchase was just such a deal. When asked why, Schwartz’s response was succinct: “What excited me about DeLeón was that Sean Combs was excited about it.” Schwartz added that the entertainment mogul showed similar enthusiasm when discussing Cîroc vodka in 2007. Since Combs and Diageo began partnering on Cîroc that year, the French vodka has grown from a 50,000-case brand into a 2-million case player that continues to enjoy double-digit growth.

DeLeón sold around 10,000 cases in 2013, according to Diageo, but with five variants ranging from $120 to more than $1,000 a bottle, the brand is firmly entrenched in a luxury Tequila segment that has enjoyed remarkable expansion in recent years. Tequilas priced over $60 a bottle have achieved annual growth of nearly 50% since 2010, according to Nielsen. Additionally, Schwartz believes that “DeLeón will transcend Tequila and become recognized as a luxury spirit product.”

Both Schwartz and Combs said it was too early to reveal specifics about marketing plans for DeLeón. However, they agreed that their success with Cîroc provides a road map. “A lot of people can talk about creating a global brand, establishing a market leader, defining a new lifestyle and culture,” says Combs. “I have done it before and we’re going to do it now with DeLeón.”

Before adding DeLeón, Diageo’s presence in the Tequila category was filled solely by Don Julio, an ultra-premium entry that continues to achieve impressive growth in the U.S. market. The brand was up by 22% through the first 11 months of 2013 in control markets. Diageo co-owns Don Julio—which sold roughly 200,000 cases in the U.S. in 2012—with Mexico’s Grupo Tequila Cuervo. The two companies were also longtime partners on Jose Cuervo before ending their alliance last June. “We wanted to be in the Tequila category on our own terms and build a portfolio positioned to capture a greater share of the higher-value growth segments that we see as critical to driving future growth,” says Schwartz.

While the Tequila category has enjoyed solid growth in the U.S. over the past few years, Jose Cuervo has struggled. The brand’s U.S. volume declined by 10% from 2007-2012 and dropped another 2% last year, according to Impact Databank. Still, with sales of around 3.4 million cases in 2013, Jose Cuervo (currently handled by Proximo Spirits) is nearly twice as large as any other Tequila brand, and one of the U.S. spirits market’s top 10 brands. Replacing it will be no easy feat. But Diageo is intent on doing just that, and even after yesterday’s acquisition of DeLeón, it clearly sees more deals on the horizon.

Tagged : Cîroc, DeLeón, Diageo North America, Don Julio, Larry Schwartz, Sean Combs, Tequila

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