VIVA TEQUILA

Jimmy Buffett's popularity notwithstanding, margaritas and their chief ingredient, tequila, have not had a large following until recently.Now, bars and restaurants are having difficulty keeping up with the exploding demand for more and different kinds of tequila drinks, and supermarket sales are starting to reflect the same trend."Tequila sales have been on fire for us," said Mark Endress, category

Jimmy Buffett's popularity notwithstanding, margaritas and their chief ingredient, tequila, have not had a large following until recently.

Now, bars and restaurants are having difficulty keeping up with the exploding demand for more and different kinds of tequila drinks, and supermarket sales are starting to reflect the same trend.

"Tequila sales have been on fire for us," said Mark Endress, category manager for Save Mart Supermarkets, Modesto, Calif. "I just got in some expensive Patron, and it is flying off the shelf." Save Marts' 82 stores in California cross-merchandise tequila with snacks and Mexican food. Large displays are prevalent within the stores' liquor section.

Tequila's popularity has climbed steadily over the past few years, and in 2005, dollar sales growth in food, drug, convenience and liquor chains leapt ahead of that of other liquor, according to Information Resources Inc. Tequila sales were up 9.7%, followed by rum, 9%; cognac, 8.4%; and vodka, 7.5%.

Tequila trails other spirits in terms of dollar volume, but at the pace it's growing, sales will eclipse Canadian whisky in two years, and gin and scotch by 2011, predicted Bob Watson, liquor category manager at Schnuck Markets, St. Louis.

As is the case with other spirits, it's premium tequila that's driving growth of the liquor, which by law is produced in only a few specific areas of Mexico.

While sales of value brands were flat last year, sales of premium brands were up 7.5%. High-end brands rose 17.4%, and super-premium brands rose 25.4%, according to the Distilled Spirits Council of the United States.

"Small bottles of Patron go for $30 and the 750 milliliter goes for $50," Endress said. "But sales of all tequilas, including the high-end ones, are up 18% in dollars and 22% in units for us just since summer, and that is phenomenal. Tequila even did better than brandy in the fourth quarter, which is amazing."

Endress predicted big sales jumps again this spring, when Jose Cuervo is set to come out with tequila in three new flavors: orange, lime and tropical fruit.

Watson at Schnucks, which has 102 stores in seven Midwestern states, agreed.

"There is no doubt that tequila is high on the list of spirit alternatives for party revelers," he said. "While sales in general begin to escalate with the arrival of spring and taper in early fall, sales spikes are highest for all major holidays: Fourth of July, Memorial Day, Labor Day, Cinco de Mayo, Thanksgiving, Christmas and New Year, and, of course Super Bowl."

Both agreed the popularity has less to do with the influx of Hispanic immigrants to the United States and more to do with consumption among affluent consumers.

"Tequila attracts a higher-end consumer," Watson said. "However, household penetration in our trade geography is relatively low - barely over 1% of households - which compares to liquor household penetration around 19% for the same geography. Expanding household penetration would further enhance the growth trend for the category."

Jose Cuervo, the most well-known producer with a 47% share of the market, is among the brands trying to increase that penetration rate. The company is introducing a super-premium liquor called Black Medallion this year with on-premise and off-premise advertising campaigns aimed at making a summer splash. The off-premise campaign will include shelf-talkers and point-of-sale displays to promote the brand and the high-end product. Black Medallion also will be promoted on national television and in national magazines, according to the website of Tequila Aficionado magazine.

Expecting another jump in sales this summer, retailers are planning to add variety and cross-sell tequila.

"There will be a push in the spring to get ready for summer, when we may add some new brands. The potential for good sales is there," said John Ryan, liquor buyer for Foods Etc., Clear Lake, Calif.; and Susanville Superette in Susanville, Calif., both IGA supermarkets. "We have Patron, Jose Cuervo and a few others, but we may add more."

Michael Riffert, liquor buyer at six Treasure Island Food Marts in the Chicago area, agreed that summer is the popular time for tequila, when increased sales in restaurants and bars should carry over to supermarkets. He plans to cross-merchandise them with snacks, mixers, and fruit juices to tap into the seasonal interest.

"It is a little slow now, but for summer we will have 15 case displays, which is pretty big," he said.

Riffert expected high-end products to sell the best.

"Patron has two that go for $42.99 and $49.95 that we carry, and we will have Jose Cuervo gold and white," he said. "We will increase our stock even more if the market demands it."

After its sales growth, perhaps the next reason for retailers to like premium tequila is that it doesn't require massive displays in the store to make an impact.

Watson at Schnucks said tequila would remain among the smaller displays at his stores, despite its high sales volume.

"Tequila is among the highest-priced spirits, second only to scotch, so you are not apt to find a 200-case display - such as you would for beer - next to the tortilla chips and salsa," he said. "More than likely, five to 10 cases would effectively send the message."

Deal Keeps Tequila Flowing

International politics recently became as important an ingredient as lime juice and salt in margaritas, as the United States and Mexico hammered out an agreement that will permit tequila to keep flowing to supermarkets, restaurants, liquor stores and bars north of the border.

Two years in the making, the agreement guarantees the import of the potent liquor in bulk containers to the United States, where bars and restaurants are already reporting skyrocketing demand for all types of tequila, and sales in supermarkets are expected to follow suit.

The argument centered for the most part on the control, or lack of it, that was exercised over the tequila once it reached distributors in the United States. Regulations that predate the North American Free Trade Agreement guarantee Mexico the exclusive right to produce tequila.

Tequila is produced only in certain parts of Mexico, and by law it has to contain 51% spirits distilled from the blue agave plant, a spiky-leafed plant related to the lily. It can contain up to 49% distilled sugars. Tequila labeled 100% agave is supposed to be made purely from the lily plant, with no distilled sugars. It is the high-end, 100% agave tequila that is seeing the biggest surge in demand.

Producers want to make sure the tequila, particularly the premium products, is distinguished from those used to make "well drinks" and from the less-premium mezcal, a related liquor which is often made under less strict production guidelines although it has become well-known for its worm in the bottle.

Mexican officials argued that tequila shipped in bulk to the United States was not only being diluted to less than 100% pure, but that cheaper brands were being diluted to less than the minimum 51% agave. The trade agreement sets up a registry for American bottlers and includes guarantees that handlers in the United States will assure the liquor is not diluted. In return, the United States can continue to receive bulk shipments and bottle the liquor here rather than having those jobs done by Mexican factories, which U.S. officials argued could not keep up with the increasing demand here.