Tariffs might not happen but tequila is already paying the price

By Emma Rumney

LONDON (Reuters) - Even if U.S. President Donald Trump's tariffs on Mexico are not imposed, the threats and uncertainty caused by on and off-again levies have already cost the tequila sector money and could drive a temporary slowdown in sales, producers, investors and analysts told Reuters. 

The 25% tariffs, initially due to be applied from February and briefly in place on March 4 before being suspended on both occasions, threatened billions of dollars of imports from huge producers like Diageo and Becle alone. 

They prompted businesses and consumers to stockpile tequila, which can only be made in Mexico, freeze expansion plans and divert resources elsewhere. 

Some producers, restaurants and drinkers accumulated hefty tequila stock, sometimes of up to six months - a bet which will pay off if tariffs are imposed. But producers say this also has a cost, hurting 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% 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 in favour of the United States.

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 destocking 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."

(Reporting by Emma Rumney in London, Jorge Garcia in Los Angeles and Justin Nathanson in New York; Additional reporting by Alban Kacher in Gdansk, Lizbeth Diaz, Brendan O'Boyle and Natalia Siniawski in Mexico City)