The Tequila business has seen plenty of acquisition activity lately, with Diageo buying Casamigos last June and Pernod Ricard gaining full control of Avión in January of this year. But Pernod’s move was followed just a few days later by the biggest blockbuster of them all: Bacardi’s agreement to acquire 100% of Patrón Spirits—a transaction that values the luxury Tequila giant at $5.1 billion. The deal, which is expected to close in June, comes a decade after Bacardi first took a 30% stake in Patrón for an undisclosed sum.
Adding Patrón is a game-changer for Bacardi, as it will expand the company’s super-premium spirits portfolio by 2.85 million cases in the U.S. market. Patrón is among just six spirits brands with U.S. retail sales above $1 billion—the others being Hennessy Cognac, Jack Daniel’s Tennessee whiskey, Smirnoff vodka, Tito’s vodka, and Crown Royal Canadian whisky. According to Impact Databank, the Patrón deal will make Bacardi the second-largest U.S. spirits marketer in annual retail sales at roughly $4.5 billion. Only Diageo, at nearly $9 billion in 2017, is bigger.
The U.S. Tequila market’s luxury tier—defined as brands retailing at $40 and above a 750-ml.—totals about 3.7 million cases, with more than two-thirds of that volume coming from Patrón. Bacardi will now hold a dominant share—estimated at just under 70%—of that luxury space. And despite an influx of competition in recent years, Patrón has continued to grow. Over the past three years, the brand has added about a half-million cases, helped by its higher-priced Roca Patrón range.
Roca Patrón, which debuted in 2014, was up 9% to 48,000 cases last year. Featuring Silver, Reposado, and Añejo entries retailing between $70-$90 a 750-ml., Roca Patrón is made in the traditional process using a two-ton volcanic stone-milling wheel called a tahona, which crushes the cooked agave and extracts its juices. The Reposado and Añejo rest in single-use Bourbon barrels for five and 14 months, respectively.
Last September, Patrón made the first permanent new addition to its core range in 25 years with the launch of an Extra Añejo Tequila. Retailing at $90 a 750-ml., Patrón Extra Añejo is made from 100% blue agave and is aged for more than three years in a combination of new and used American, French, and Hungarian oak barrels. Extra Añejo joined Silver, Reposado (aged at least two months), and Añejo (aged for more than 12 months) in the core Patrón lineup. The Extra Añejo expression was preceded in 2015 by Patrón’s first-ever limited-edition offering, Patrón Extra Añejo 7 Años. Retailing at $299, the expression was aged seven years in 30 French oak barrels.
Other upscale labels in the Patrón portfolio include the Gran Patrón collection, the distillery’s top tier. Within the collection is Gran Patrón Piedra ($400 a 750-ml.), made using the tahona and aged for four years in French Limousin and new American oak, as well as Gran Patrón Burdeos ($500), a triple-distilled Añejo Tequila finished in Bordeaux barrels and packaged in a Cognac-like crystal decanter. The third entry in the Gran Patrón series is Platinum ($200), a triple-distilled Silver Tequila.
Beyond the flagship Tequila franchise at 2.5 million cases, the Patrón Spirits portfolio includes a number of other spirits labels. The largest among them, Patrón Citrónge orange liqueur, was up by an estimated 5.3% to 174,000 cases last year, while Patrón XO Café slipped 8% to 118,000 cases. Pyrat rum was down about 6% to 33,000 cases, while Ultimat vodka was up 8% at 26,000 cases.
Bacardi thus far hasn’t revealed specific plans for Patrón, except to note that “for the foreseeable future, it’s business as usual” at both companies. Following the closing of the deal, the Patrón leadership team, including CEO Edward Brown, COO David Wilson, and CMO Lee Applbaum, will continue in their roles. Brand founder John Paul DeJoria will serve as an ambassador for Patrón in the role of chairman emeritus, and he intends “to work with Bacardi in further advancing their combined dedication to philanthropic projects and environmental consciousness,” according to a statement from the company.
Back in 1995, global exports of Tequila were at 65 million liters, and 100% blue agave Tequilas comprised only 1.2 million liters of the total. Last year Tequila’s global exports were at 213.3 million liters, and almost 101.4 million liters of that total were made from 100% blue agave. In the U.S. market, 100% blue agave Tequila took a majority share for the first time ever in 2016, accounting for 50.3% of the category, and upscale brands have been driving the growth in recent years. According to the Distilled Spirits Council, supplier gross revenues of Tequila hit $2.73 billion last year, up 9.9%, with high-end and super-premium offerings accounting for about $1.5 billion of that total.
Patrón’s success in building the luxury Tequila segment over the past two decades has been so pronounced that it now faces a host of competitors eager to make their own mark. Most of Patrón’s rivals are owned by multinational spirits companies that, like Bacardi, have ample resources to bring to the fight. Diageo is a notable example. In addition to Casamigos, which it acquired in a $700 million deal last summer that includes a further $300 million in performance-based payouts, the company is active in luxury Tequila with the Don Julio brand. Don Julio is now above 500,000 cases in the U.S. market, and Casamigos is estimated at 170,000 cases for 2017. Meanwhile, Brown-Forman Corp. has been carving out strong growth with its Herradura brand, which sold around 180,000 cases last year. Pernod Ricard is angling for a bigger piece of the action with Avión, which sold roughly 125,000 cases in the U.S. market in 2017.
While Patrón is heavily focused on the U.S. market, Bacardi also sees ample upside in leveraging its global network to expand the brand around the world. Currently, the U.S. is by far the world’s largest market for Tequila, accounting for over 80% of all exports, according to the Consejo Regulador del Tequila (CRT) trade group. “Adding Patrón to the Bacardi portfolio creates a tremendous opportunity for the brand outside of the United States as Bacardi’s international distribution network will help grow Patrón around the world, increasing scale in the U.S. and globally,” said Bacardi Ltd. CEO Mahesh Madhavan in a press release.
Indeed, Patrón already has been showing an ambition to establish a more global footprint. “The U.S. still has a long way to go, and when you look at the global stage, there are very large countries with substantial per-capita consumption of ultra-premium spirits that are nascent markets for Tequila,” Patrón’s chief marketing officer Lee Applbaum told Market Watch sister publication Impact last year. “So it’s not just about the U.S. opportunity. Tequila is an amazingly versatile spirit that in many parts of the world is either not understood or misunderstood. The opportunities are massive.”
Bacardi’s blueprint to achieve full control of Patrón could potentially be repeated with a number of other promising brands in which it now owns minority stakes. In 2014, Bacardi took a minority interest in Compass Box Scotch whisky, and last year it followed with minority stakes in Teeling Irish whiskey and Ilegal mezcal.