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Tequila sector faces costs from tariff threats,

stockpiling

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Producers like Diageo ( DEO ) and Becle front-loaded inventory

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Potential price hikes due to storage costs, even without

tariffs

By Emma Rumney

LONDON, March 17 (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 ( DEO ) 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 ( DEO ), 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 ( DEO ) and Becle, the world's largest tequila producer,

previously told investors they front-loaded inventory ahead of

tariffs. Diageo ( DEO ) 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."