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Diageo Vows To Retake Tequila Leadership And Mulls All Options—Including A New Product

Diageo is parting ways with Jose Cuervo, but Diageo North America president Larry Schwartz says his company will look to regain leadership of the Tequila category—either by creating its own brand or acquiring another one.

“We’re number-one in 10 categories in North America, and our goal is to regain the number-one spot (in Tequila),” Schwartz said to analysts earlier today. “We have an innovation machine, which will be focused on figuring out how we can compete with a 100%-agave product in the premium Tequila segment.”

Schwartz, who also spoke about Diageo North America’s fast-rising super-premium entry Don Julio, added that the company will also consider acquisitions and partnerships in order to return to prominence in Tequila once its partnership with Jose Cuervo ends in June 2013.

It’s been widely speculated that Diageo is interested in adding Sauza, the world’s second-best selling Tequila brand, via an acquisition of Beam Inc. Over the weekend, reports surfaced that Diageo had held talks with Japan’s Suntory regarding a joint offer for Beam Inc., valued at around $10 billion. The Cuervo brand, meanwhile, is valued at approximately $3 billion.

Schwartz began this morning’s analyst call by saying “premiumization is alive and well,” both for Diageo and the spirits industry overall. He said more than half of his region’s top spirits brands have taken price hikes over the past 12 months, and that Diageo has been no exception. The market leader raised its prices by an average of 2%-2.5% during that period and is also succeeding in trading up consumers, Schwartz said. He added that Diageo North America will enjoy a positive price mix of 3.5 points for the current fiscal year (ending June 30, 2013), and expects a “positive price environment going forward.”

With Diageo North America just weeks away from concluding its fiscal first half, Schwartz projects overall net sales growth of approximately 5%, with the spirits side rising by 6.5%. He added that Diageo has recently undergone a major shift in marketing investment, moving much of its spend from below-the-line to above-the-line activity. As a result, Schwartz said, Diageo’s media spend on strategic brands is up by more than 50% this year, with allocations more than doubling on brands like Crown Royal, Johnnie Walker and Tanqueray. Schwartz added that Crown Royal’s recently launched Maple extension is outpacing expectations.