One product already paying the price of Trump's tariff threats

Independent

17-03-2025

The threats and uncertainty caused by President Donald Trump 's on-again and off-again tariffs on Mexico have already cost the tequila sector.
The 25 percent tariffs, initially due to be applied from February and briefly in place on March 4 before being suspended, threatened billions of dollars of imports from huge producers like Diageo and Becle alone.
The tariffs prompted some producers, restaurants and consumers to stockpile up to six months worth of tequila, which can only be made in Mexico, in a gamble that would have paid off if the tariffs had been imposed.
But it's a move which producers say hurts the sector even if the tariffs are rolled back.
"No matter what happens ... a price has been paid," said Mike Novy, chief executive officer of Calabasas Beverage Company, which operates the tequila brand founded by Kendall Jenner, 818 Tequila.
The company asked its distillery to work flat out, with workers on overtime through the holidays in December, in order to be able to ship around six months' worth of product to the U.S. ahead of tariffs, Novy said, adding this cost up to $2 million, while storage fees would add about 10 percent to its costs.
The company had also put planned hiring and product launches on hold, he said, costing opportunities, as well.
Brian Rosen, founder of InvestBev, an investor that partners with early-stage spirits brands to help them grow, said tequila companies in his portfolio had also built up six months' supply, and are paying up to $20,000 per shipping container for storage.
Such storage costs alone could push some brands to raise prices - another anticipated effect of tariffs that could now occur even if they are not applied, he said.
The impact on tequila - a bright spot for the U.S. spirits industry amid a sharp downturn in broader spirits sales - shows the collateral damage of Trump's effort to rip up and remake global trade relationships.
It comes at a time when businesses reliant on tequila, from top liquor maker Diageo, whose Don Julio tequila brand is driving performance, to small restaurants whose margarita sales help keep them afloat, are struggling with prolonged high interest rates and inflation.
Diageo and Becle, the world's largest tequila producer, previously told investors they front-loaded inventory ahead of tariffs. Diageo declined to comment, and Becle did not respond to questions.
A lot of tequila
To be sure, Novy and other businesses Reuters spoke to said the disappearance of tariffs, which threaten to derail tequila's growth, would be a blessing for the industry.
While some wholesalers have built up inventory, this is unlikely to drive the kind of painful de-stocking cycle recently seen with other spirits like cognac, as this was driven by low underlying demand and tequila remains popular, said Michael Bilello, senior vice president for communications and marketing at Wine & Spirits Wholesalers of America, a trade body.
Larger companies also may not hold such high levels of stock. Top distributor Republic National Distributing Company (RNDC) operates with inventories far lower than six months' worth even in the face of tariffs, said Sean Halligan, chief supply chain officer, adding holding too much carries its own risks.
But any stock build-up in the supply chain could drive an initial bump in sales for big producers, which will fall back as customers normalise their levels, Fitch Ratings said.
La Contenta Oeste, a Mexican restaurant in New York, ordered 120 cases of tequila and 80 cases of mezcal since January - about six months' supply, owner and chef Luis Arce Mota said. He normally only buys around 20 cases at a time.
"I'm going to have a lot of tequila (if tariffs are not imposed)," he said.
Drinkers have done the same. Richard Paige, a communications professional in Indianapolis with a taste for tequila, said he had made sure his selection was stocked for at least a few months.
Such behavior could make for a "very quiet" second quarter for the big tequila producers, said Trevor Stirling, analyst at Bernstein.
In Mexico, meanwhile, representatives of tequila brands and industry bodies said companies will look to new markets - signs of shifts in investment that could make the U.S. tequila sector less vibrant, 818's Novy said.
"It's already happening," he continued. "If (tariffs) are permanent, then the outcome is just magnified."