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Cuervo’s Sales Rise, But Agave Costs Cut Into Earnings

July 25, 2019

Grupo Cuervo’s sales continued to increase in the second quarter, but the Tequila giant warned that the rising cost of agave is holding down profits. Cuervo’s net sales rose 3.8% to MX$6.97 billion ($365m) on a comparable basis in the second quarter, with volume up 6.4% to 5.6 million nine-liter cases. However, operating profit fell 24.9% to MX$1.2 billion ($63m), as the increasing price of raw materials ate into margins.

Cuervo said the profit squeeze “continues to reflect strong consumer demand for super-premium Tequilas, which has led to record third-party agave prices, as well as lower production efficiencies due to industry-wide sourcing of younger agave plants, affecting our distilling efficiency.”

In the U.S. and Canada, Cuervo’s sales were up 2.4% to MX$4.7 billion ($246m) in the second quarter, on a volume increase of 1.8% to 3.5 million cases. The company said “strong consumer takeaway and depletion trends” drove gains for its Tequila portfolio in the region. In control states, the Jose Cuervo and 1800 Tequila brands saw volume increase 7% and 10.5% respectively in the year-to-date through May, and they posted slightly faster growth in IRI channels.

Cuervo’s U.S. business is also getting a boost from the whisk(e)y category, where its Pendleton brand is up by double-digits year-to-date in both NABCA and IRI data, and newcomer Proper No. Twelve Irish whiskey, a partnership with Conor McGregor’s Eire Born Spirits, has seen a fast start out of the gate. The Kraken rum is also contributing to growth.

Last month, Cuervo unveiled new multi-million dollar campaign backing its higher-priced Jose Cuervo Tradicional tier ($23). The push includes 15- and 30-second TV spots set at a party hosted by the “Father of Tequila.” The company is emphasizing its 100%-blue agave offerings like Tradicional as consumers continue to move upmarket. The 100%-blue agave segment accounted for only 8.6% of Tequila volume in the U.S. in 2000. By last year, it numbered more than 11 million cases, to comprise a 57.2% share. That growth, however, has been straining agave supplies, leading to the higher input costs that have been cutting into earnings.—Daniel Marsteller

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