The threat of tariffs on Mexican tequila, which has been a major concern for the industry, may be off the table. However, the uncertainty caused by these threats has already taken its toll on the sector. Producers, investors, and analysts have told Reuters that even if the 25% tariffs are not imposed, the damage has been done.
The tariffs, initially set to take effect in February and briefly applied on March 4 before being suspended, had prompted businesses and consumers to stock up on tequila, which can only be made in Mexico. This has resulted in a buildup of inventory, with some producers accumulating six months’ worth of product. While this may seem like a good strategy if tariffs are imposed, it also comes at a cost.
Mike Novy, CEO of Calabasas Beverage Company, which operates the tequila brand 818 Tequila, said that his company had to work overtime during the holidays to ship out six months’ worth of product. This cost around $2 million, and storage fees added another 10% to their costs.
Brian Rosen, founder of InvestBev, an investor that partners with early-stage spirits brands, said that tequila companies in his portfolio had also built up six months’ supply, and were paying up to $20,000 per shipping container for storage. This could push some brands to raise prices, which was another anticipated effect of the tariffs.
The impact on the tequila industry is a sign of the collateral damage caused by President Trump’s effort to remake global trade relationships in favor of the United States. The industry has already been struggling with prolonged high interest rates and inflation, making it harder for businesses reliant on tequila to stay afloat.
While some wholesalers have built up inventory, this is unlikely to drive a painful destocking cycle like the one seen with other spirits like cognac. Tequila remains popular, and larger companies may not hold such high levels of stock.
However, any stock buildup in the supply chain could drive an initial bump in sales for big producers, which will fall back as customers normalize their levels. Fitch Ratings said that this could make for a “very quiet” second quarter for the big tequila producers.
In Mexico, representatives of tequila brands and industry bodies said companies will look to new markets, signs of shifts in investment that could make the US tequila sector less vibrant. As Novy put it, “It’s already happening. If tariffs are permanent, then the outcome is just magnified.”
The uncertainty caused by the threat of tariffs has already taken its toll on the tequila industry, and even if they are not imposed, the damage will still be felt. The industry will have to navigate this new reality and find ways to adapt to the changing market conditions.
Source: Reuters
