Casa Cuervo, S.A. De C.V. Business Information, Profile, and History

History of Casa Cuervo, S.A. De C.V.

Casa Cuervo, S.A. de C.V. is the leading manufacturer and distributor of tequila, the best-known of the distinctive Mexican alcoholic beverages made from the sap of agave (called maguey in Mexico), a genus of desert plants. It is also the oldest existing producer of tequila. Casa Cuervo's tequila brands, all under the Cuervo name, rank second to Tequila Sauza in sales in Mexico but first in total because of the company's success in marketing the drink abroad. Casa Cuervo is a subsidiary of Grupo Cuervo, S.A. de C.V., a privately owned company that manufactures or imports and distributes rum, whiskey, gin, liqueurs, wines, and mixed drinks as well as tequila.

A Family Business: 1758--1940

Pulque, fermented from the sap of agave, was the only alcoholic beverage of the Aztecs. With their own wine stores in short supply, the Spanish conquerors tried the brew but found it unpalatable. When they distilled the sap, however, it yielded an acceptable spirit called mezcal. The production method that Spanish colonists passed to their descendants was to lop off the leaves of the mature agave with a long knife, leaving the 200-pound heart of the plant to be heated in a stone furnace to convert the starches of the sap into sugars. The sap then was extracted from the pulp in a mill, fermented with yeast in a tank, and distilled in a copper still.

The preferred plant species for making this spirit came to be 'blue' agave--so-called for the silvery blue hue of its spiky leaves. Blue agave grew best in the state of Jalisco, particularly in the area surrounding the village of Tequila. The brew made from this plant, after being fermented, distilled twice, and aged in oak barrels, was called the 'wine' of Tequila.

The family Cuervo y Montaño was the third known to have produced tequila, having founded a distillery on the hacienda deeded to José Antonio Cuervo in 1758. The Spanish government, in 1785, banned Mexican liquors to protect the home industry but ten years later recognized that this decree was ineffectual and extended to José Antonio's son José María Guadalupe Cuervo permission to produce tequila.

After his death, his son-in-law, Vicente Albino Rojas, renamed the Cuervo distillery La Rojeña. Under his management the business thrived, and the hacienda came to include three million agave plants. Rojas's son-in-law, Jesús Flores, moved the distillery to another location and was the first to bottle tequila as well as to sell it in wooden casks. Other Cuervo family members also were involved in the cultivation of agave and manufacture of tequila. (Cenobio Sauza, a Cuervo employee at this time, founded his own distillery in 1873; Tequila Sauza became Cuervo's great rival.)

By the early 1890s Cuervo family members were growing some 2.5 million to five million blue agave plants (along with other crops) on what, in 1905, totaled 10,145 hectares (about 25,000 acres). José Cuervo Labastida, who married Flores's widow, Ana González Rubio, in 1900, was the first to call the tequila produced at La Rojeña 'José Cuervo.' The tequila produced under this name won some international awards, including prizes given in 1907 in Madrid and 1909 in Paris. But this first tequila boom, which included the first sales of the beverage in the United States, ended in 1902--03, because of general economic hardship and dry weather. Other cited factors were adulteration with cheaper forms of alcohol and possible overproduction of the drink.

The tequila sales slump continued into the 1930s. Moreover, the land reform of this period broke up many large estates, including the hacienda San Antonio del Potrero, which covered 9,398 hectares (more than 23,000 acres) and was owned solely by Ana Gonzalez Rubio after José Cuervo Labastida died in 1921. Other such enterprises in the Tequila region were also hard hit, so much so that the number there of agave plants--which take about a decade to mature--dropped by two-thirds.

Boom and Bust: 1940--85

The Cuervo and Sauza enterprises came to dominate the tequila industry in the 1940s, a decade that saw a second tequila boom. Tequila production doubled in the 1951--55 period, leading to a crisis of overproduction and no growth for the rest of the decade. In the 1960s and 1970s, production grew by an average of between seven to eight percent a year. Quality, however, was allowed to decline. The official standard established in 1949 required that the sugars in the beverage come 100 percent from blue agave. In 1964, however, tequila producers were allowed to obtain up to 30 percent of the sugars from other sources--such as sugarcane and honey--and in 1970, up to 48.5 percent.

Mechanized transport in the agave fields did not become the rule in the tequila industry until the 1970s. The practice of mixing agave with corn, and sometimes beans and soybeans as well, for the sake of the soil and to prevent the spread of disease, made mechanization impractical before then, and as a consequence the plants tended to grow too large. The 1970 legal revision that allowed tequila producers to obtain more sugar from other sources was due to a shortage of usable blue agave. The Cuervo and Sauza enterprises were producing 60 percent of all tequila in 1976, when a strike of both laborers and transport personnel paralyzed both firms for 20 days. The two companies then agreed to buy their agave from the union representing the strikers and to pay one percent of the value of their finished product.

Ana González Rubio died in 1934 and left her estate to a niece, Guadalupe Gallardo, who died in 1966. She left the business to her sister, Virginia Gallardo. One of Virginia's four sons, Juan Beckman (or Beckmann) Gallardo, was managing the business at this time. In 1970 the enterprise, Casa Tequila Cuervo, S.A., passed, in part, into the hands of Distribuidora Bega, S.A. de C.V., the largest bottler and distributor of alcoholic beverages in Mexico. This firm was owned in part by Grupo Kentucky Fried Chicken--the Mexican subsidiary of the U.S. company--and in part by Guadalupe Sánchez Rubio and Antonio and Diego Gutiérrez Cortina.

The part of Casa Tequila Cuervo not sold to Distribuidora Bega was shared by Juan Beckman Gallardo, his son Juan Beckman Vidal (who later succeeded his father as head of the firm), José Luis Campos, and the U.S. firm Heublein, Inc., which already held distribution rights abroad. (Kentucky Fried Chicken and Heublein merged in 1971.) This pooling of resources established a company, named Grupo Cuervo in 1979, that produced or imported and distributed a wide range of wine and spirits in Mexico, not only tequila.

Tequila Cuervo's exports increased from 300,000 liters in 1961 to 4.24 million liters in 1971, when it was exporting to 51 countries and spending $500,000 a year on advertising abroad. The company was sending the beverage overseas in 200-liter stainless steel barrels to two bottling plants in the United States (in Hartford, Connecticut and Menlo Park, California) and one each in Australia, Belgium, El Salvador, and Switzerland. (It saved on taxes by having the beverage bottled abroad rather than in Mexico.) Tequilera de Los Altos, a subsidiary, was established in 1972 to run a new distillery supplying bulk tequila exclusively to the parent company.

The severe Mexican economic crisis of the early 1980s resulted in sales of what one industry executive called the 'national aperitif' dropping from 34 million liters in 1980 to 13 million in 1986. Forty percent of all tequila enterprises went out of business during this period, and Tequila Cuervo's Los Altos distillery even closed for a year. The large tequila companies suspended dividends and laid off workers. Another common measure was to cut the alcoholic content from 45 percent to 38 percent, the minimum allowed by law. The continued growth of the overseas market was the only bright spot for Cuervo, and for the tequila industry as a whole.

Relying on Export Sales: 1987--99

In 1987 Cuervo was leading Sauza in tequila production, 18 million liters to 16 millions liters, even though the latter had 65 percent of the Mexican market, because Cuervo was exporting 70 percent of its production. Nevertheless, the tequila industry as a whole was working at only 40 percent of capacity. The continued scarcity of usable agave would have been a problem if not for the fall in production. Another problem for the big producers was that cheap 'pseudo' tequilas now ranked second in liquor volume in Mexico, trailing only brandy. Rum was third and 'real' tequila only fourth. Bogus tequila was being produced in Europe and marketed there as tequila, despite Mexican protests.

R.J. Reynolds Industries purchased Heublein in 1986 and sold it the next year to a British company, Grand Metropolitan plc. Heublein remained the exclusive importer and marketer in the United States of José Cuervo, which in turn was the Mexican distributor for the wines and spirits of Heublein's immediate parent, International Distillers & Vintners Ltd. In 1991 Heublein's Mexican affiliate agreed to acquire a 45 percent stake in José Cuervo y Cia, S.A., which was described by a Cuervo spokesperson as a sister company of Casa Cuervo and Grupo Cuervo. The agreement also allowed International Distillers to expand Cuervo distribution worldwide. These supplies of tequila continued to be exported in bulk to avoid the 44.5 percent Mexican alcoholic beverage tax and the 15 percent value-added tax on final sales.

Grand Metropolitan was renamed Diageo plc after merging in late 1997 with Guinness plc. José Cuervo contributed more than $80 million to Diageo's gross profits that year. Grand Metropolitan had held the U.S. rights to distribute Cuervo products until 2010, but in 1998 José Cuervo challenged in court Diageo's right to continue this distribution agreement as Grand Metropolitan's successor.

Amador de Carvalho, who became director general of Grupo Cuervo in 1998, drafted a new strategic plan for the firm that, in part, called for winning back lost tequila customers. Although Casa Cuervo was the leader in production, with 37 million liters in 1997, it still ranked second in sales within Mexico to Tequila Sauza. José Cuervo had scarcely any sales presence in the Guadalajara metropolitan area, which must have been highly embarrassing to the firm since Guadalajara is the capital of the state of Jalisco, heartland of tequila. By contrast, Cuervo continued to be well ahead abroad, with half the world market. Its tequila was being sold in 85 nations. Export sales accounted for 76 percent of the company's production, which in 1998 grew to an estimated 46 million liters. Cuervo's plantations held about 40 million blue agave plants in 1999.

By this time Cuervo was upgrading its image by introducing new, expensive brands of tequila. La Reserva de la Familia, an aged tequila with all-agave sugars, introduced in 1995 and retailing in the United States for $75, sold out its first edition in weeks. In 1998 the company introduced 1800 Coleccion Añejo in a bottle made of Belgian crystal, housed in a hand-sculptured pewter decanter encased in suede and leather. This limited edition of 347 specimens was priced at $1,000 a bottle.

The José Cuervo portfolio of tequilas in 1999 consisted of Cuervo Blanco, Cuervo Oro, Cuervo Tradicional, Cuervo Añejo, and Cuervo Reserva de la Familia in the José Cuervo line; 1800 Reposado, 1800 Añejo, and 1800 Coleccion in the higher-priced 1800 line; and Plata, Reposado, Añejo, and Agavero in the highest-priced Gran Centenario line. Reposado indicates that tequila has been aged for at least three months in oak barrels and añejo that it has been aged for at least 12 months.

Principal Subsidiaries: José Cuervo International (United States).

Principal Competitors: Tequila Sauza.

Chronology

• Key Dates:

• 1795: José María Guadeloupe Cuervo receives royal permission to produce tequila on his property.
• 1909: The firm's tequila wins an international award in Paris.
• 1970: The Cuervo family sells part ownership to outsiders.
• 1995: Cuervo introduces a $75-a-bottle premium tequila.
• 1997: Cuervo's output reaches 37 million liters of tequila, of which 76 percent is exported.