Mexico’s Tequila Lake: Challenges and Opportunities

Mexico is grappling with an unprecedented surplus of tequila, sitting on a staggering 525 million liters—nearly equivalent to its annual production capacity. The surplus, dubbed a “tequila lake,” underscores the dual challenges of declining demand and looming tariff threats from the United States, Mexico’s largest tequila export market. However, this situation also presents an opportunity for strategic market diversification and preparation for future recovery.

A surplus fueled by demand decline

The tequila industry, after more than a decade of explosive growth driven by premiumization and celebrity-backed brands, has encountered a significant slowdown. By the end of 2023, 525 million liters of tequila were in inventory—aging in barrels or awaiting bottling—according to the Tequila Regulatory Council (CRT). Of the 599 million liters produced last year, approximately one-sixth remained unsold.

“Much more new spirit is being distilled than is being sold, and inventories are starting to accumulate,” said Trevor Stirling, an analyst at Bernstein. The pandemic-era spirits boom has dissipated, and higher prices have led consumers to cut back on alcohol spending. In the U.S., tequila consumption fell by 1.1% in 2023, following a 17% rise just two years prior.

The tariff threat

Compounding the issue is the potential for a 25% tariff on Mexican goods proposed by Donald Trump. Such a move could be catastrophic for the tequila industry, as the U.S. accounted for 80% of tequila exports in 2023. Mexico’s reliance on the U.S. market is profound; two-thirds of all tequila produced is exported, and the U.S. is its primary buyer.

“It would be shooting themselves in the foot, because their consumers would have to pay much more,” said CRT president Ramón González. He remains skeptical of the tariff’s implementation, citing Trump’s track record of unfulfilled threats during his previous presidency. Still, the prospect underscores the need for Mexican producers to explore alternative strategies.

Market diversification: a timely solution

Market diversification has long been a prudent strategy in business, and for the tequila industry, expanding into other regions like Europe, not only could mitigate the risks posed by U.S. tariffs, but also diversify their opportunities. While Spain and Germany were Mexico’s largest tequila export markets after the U.S., they represented just 2% each of total exports in 2023. Increasing penetration in these and other European markets, could provide a vital buffer against U.S.-centric risks, especially, for smaller, independent brands.

Expanding into Europe is not only a defensive move, but also an opportunity to cultivate new audiences for premium tequila and mezcal. European trade shows and events, offer excellent platforms to showcase brands. Companies like Master Distillers, can assist producers in promoting their products to European buyers, distributors, and venues, further easing their transition into these markets.

Holding stock: a Resource-Driven strategy

For companies with the financial resources to hold inventory, another option is temporarily renting tanks to store blanco tequila, until the situation improves. Unlike aged spirits, which are subject to higher evaporation rates in Mexico’s warm climate, blanco tequila can be stored for longer periods without significant loss. This strategy allows producers to weather the current turbulence while waiting for demand to rebound or for clarity on U.S. trade policies. Get in touch with us, as our contacts might have certified tanks to rent.

Standing out in a crowded market

To navigate this challenging period, tequila and mezcal brands must focus on strengthening their identity and boosting their marketing efforts. Here are key strategies for brands to stand, out and increase sales:

1. Brand Development: Invest in creating a compelling brand story that resonates with consumers. Highlight unique selling points such as traditional production methods, sustainable practices, or heritage.
2. Enhanced Marketing Efforts: Step up digital marketing campaigns, leverage social media platforms, and collaborate with influencers to reach broader audiences. Engaging video content, virtual tastings, and interactive promotions can help create a stronger connection with customers.
3. Premium Experiences: Offer exclusive products or limited-edition releases, to attract attention and cater to high-end consumers.
4. Collaborations and Partnerships: Work with bars, restaurants, and mixologists to showcase tequila in creative cocktails or during events. These collaborations can create buzz, and drive trial among new customers.
5. Export-Focused Promotions: Tailor marketing strategies to appeal to European tastes and preferences. Participation in European trade shows and events can significantly enhance visibility and credibility in new markets. Master Distillers can exhibit, or promote your products at those trade shows.
6. Direct-to-Consumer Channels: Expand e-commerce capabilities to reach customers directly, offering convenience and exclusive online deals.

Opportunities amidst challenges

While the tequila industry faces a turbulent period, these challenges also present opportunities for strategic growth and adaptation. Expanding into international markets, leveraging promotional platforms like Master Distillers, and adopting strategies, are steps that can help the industry navigate this crisis. By diversifying, enhancing brand identity, and preparing for future recovery, spirits producers can position themselves for long-term success in a rapidly evolving global market.