The looming threat of tariffs on Mexican imports proposed by former U.S. President Donald Trump posed a significant risk to the tequila and mezcal industry, potentially impacting billions of dollars worth of imports from leading producers like Diageo (DEO) and Becle (BCCLF), the owner of Jose Cuervo. Mexican customs data reviewed by Reuters revealed the extent of this potential disruption.
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Tequila and Mezcal: Uniquely Mexican and Vulnerable
Trump’s proposed 25% tariffs on imports from Mexico and Canada, along with additional duties on Chinese goods, were intended to bolster domestic industries. However, these tariffs would have inadvertently impacted sectors reliant on uniquely Mexican products. Tequila and mezcal, like French champagne or Italian parmesan cheese, are geographically protected designations, meaning they can only be produced in Mexico. This leaves major players like Diageo, the world’s largest spirits maker, and Becle, the largest tequila producer, particularly vulnerable. Both companies heavily depend on U.S. tequila sales for growth.
Quantifying the Potential Impact
Data provided exclusively to Reuters by ImportYeti illustrated the scale of Diageo’s tequila exports from Mexico to the U.S. In the previous year, Diageo subsidiaries shipped over 25 million liters of tequila, encompassing brands like Don Julio, Casamigos, DeLeon, and 21 Seeds. This translates to approximately 33.7 million 750-milliliter bottles. Based on retail prices at major U.S. spirits retailer Total Wines & More, these imports were estimated to be worth nearly $1.6 billion.
A similar analysis of Becle’s U.S. shipments of eight tequila and mezcal brands revealed a comparable sales value of approximately $1.6 billion. In contrast, Campari Group, another major spirits maker with a popular tequila brand in the U.S., had significantly lower tequila import values, totaling around $122 million.
Industry Concerns and Potential Mitigation Strategies
The Distilled Spirits Council of the United States (DISCUS) expressed concerns that these tariffs could lead to job losses, highlighting that U.S. tequila and mezcal imports had surged to $4.6 billion in 2023, a 160% increase since 2019. DISCUS planned to lobby for an exemption from the proposed tariffs.
Diageo, with significant Canadian whisky sales in the U.S. as well, faced double exposure to potential tariffs. Both Diageo and Becle were already grappling with slowing demand for premium spirits as the pandemic-era boom subsided. The rise of cheaper tequila brands further complicated the market landscape.
While a 25% tariff on $1.6 billion in sales could theoretically amount to a $400 million impact, tariffs are typically calculated on import value rather than sales prices. Companies would likely implement strategies to mitigate the impact, such as raising prices. Jefferies analysts projected that a 10% price increase might be necessary to offset a 25% tariff.
Uncertainty and Consumer Behavior
The critical question remained whether U.S. consumers would accept higher prices for tequila and mezcal. While tariffs would level the playing field for producers, a potential decrease in consumption due to price hikes could significantly impact the industry.
Ultimately, the proposed tariffs presented a significant challenge to the tequila and mezcal industry, with potential ramifications for both producers and consumers. The industry’s ability to adapt to these potential changes and the response of consumer demand would determine the long-term impact of these trade policies.
