Tequila Sector Braces for Aftershocks of Tariff Threats, Regardless of Implementation
Even if the United States refrains from imposing tariffs on Mexican imports, the mere specter of such levies, repeatedly raised and then suspended by the Trump administration, has already inflicted financial wounds on the tequila industry. Producers, investors, and market analysts are warning of a potential slowdown in sales and disrupted expansion plans, regardless of whether the tariffs materialize.
The proposed tariffs, a hefty 25% on all Mexican goods, were initially slated to take effect in February and then briefly implemented on March 4 before being suspended on both occasions. These actions sent shockwaves through the tequila sector, threatening billions of dollars in imports from major players like Diageo and Becle. The uncertainty created by the on-again, off-again nature of the tariffs has prompted a series of reactive measures that are now creating their own set of challenges.
Businesses and consumers, fearing the increased cost of tequila, began stockpiling the product, which can only be legally produced in Mexico. This surge in demand led some companies to freeze their expansion plans and divert resources towards managing inventory and storage. The practice of accumulating significant tequila reserves, sometimes enough to last for six months, was a calculated gamble. If tariffs were implemented, those who stockpiled would be well-positioned to profit. However, producers are now realizing that this strategy has a cost, even if tariffs are ultimately avoided.
Mike Novy, CEO of Calabasas Beverage Company, which operates Kendall Jenner’s 818 Tequila brand, emphasized the price the industry has already paid. To prepare for potential tariffs, 818 Tequila ramped up production, with workers clocking overtime throughout the holiday season in December to ensure sufficient supply for the U.S. market. This surge in production cost the company approximately $2 million, and storage fees are expected to add another 10% to their expenses. Moreover, the company was forced to postpone planned hiring and product launches, representing lost opportunities.
Other tequila companies have experienced similar disruptions. Brian Rosen, founder of InvestBev, an investor specializing in early-stage spirits brands, confirmed that companies within his portfolio had also built up six months’ worth of inventory. The cost of storing these large quantities of tequila is substantial, with shipping container storage costing up to $20,000 each. These costs may ultimately force brands to raise prices, an outcome that was initially anticipated as a direct result of the tariffs, but could now materialize even if the tariffs are never implemented.
The situation in the tequila sector highlights the broader collateral damage of trade disputes. The tequila industry has been a bright spot for the U.S. spirits market, especially at a time when overall spirits sales have been experiencing a downturn. The instability caused by the tariff threats undermines this success, adding to the challenges already faced by businesses reliant on tequila, from major liquor producers like Diageo, whose Don Julio tequila brand is a key driver of performance, to small restaurants that rely on margarita sales. These businesses are already grappling with high interest rates and persistent inflation, making the tariff-related disruptions even more difficult to manage.
Both Diageo and Becle, the world’s largest tequila producer, had previously informed investors that they were accelerating inventory ahead of the potential tariffs. While Diageo has declined to comment on the current situation, Becle has not responded to requests for information.
Despite the challenges, businesses remain hopeful that the tariffs will not be imposed, as their implementation would severely derail tequila’s growth trajectory. Michael Bilello, senior vice president for communications and marketing at Wine & Spirits Wholesalers of America, a trade body, believes that the existing inventory build-up is unlikely to trigger a painful destocking cycle, unlike the one recently experienced with cognac, as tequila demand remains strong.
Larger companies may also be less vulnerable due to lower inventory levels. Republic National Distributing Company (RNDC), a top distributor, maintains inventory levels far below six months’ worth, even in the face of potential tariffs. Sean Halligan, chief supply chain officer at RNDC, noted that excessive inventory carries its own risks.
Fitch Ratings anticipates that any stock build-up in the supply chain could lead to an initial surge in sales for major producers, followed by a decline as customers normalize their inventory levels.
Luis Arce Mota, owner and chef of La Contenta Oeste, a Mexican restaurant in New York, reported ordering 120 cases of tequila and 80 cases of mezcal since January, equivalent to approximately six months’ supply. He normally only purchases around 20 cases at a time, expressing concerns about the potential excess if tariffs are not imposed.
Consumers have similarly adjusted their purchasing behavior. Richard Paige, a communications professional in Indianapolis with a preference for tequila, has stocked up his home selection to ensure he has a supply for at least a few months.
Trevor Stirling, an analyst at Bernstein, predicts that this behavior could result in a "very quiet" second quarter for major tequila producers.
Meanwhile, in Mexico, industry representatives are exploring opportunities in new markets, signaling a potential shift in investment that could diminish the U.S. tequila sector. 818 Tequila’s Novy noted that this trend is already underway, emphasizing that the consequences would be amplified if tariffs become permanent.