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Fancy a paloma? As growth slows and the stock slumps, Debra Crew pushes tequila beyond the U.S. and margaritas

LONDON—Shortly after taking the helm at the world’s largest spirits maker, Diageo DEO 0.96%increase; green up pointing triangle CEO Debra Crew made a bold proclamation: She plans to take tequila global.

Following a surge in popularity in the U.S., tequila is on track to become the country’s largest spirit this year, an extraordinary milestone for a drink once associated mainly with sugary margaritas and eye-watering shots.

Crew believes she can replicate that success beyond the U.S. and Mexico, which make up 85% of tequila’s sales.

“My ambition is simple: I want to take tequila around the world,” Crew, a former U.S. Army captain, told Diageo investors in August.

The company, which owns tequila brands including Don Julio and Casamigos, has been trying to boost the liquor’s popularity abroad, in part by pushing the paloma, a grapefruit soda-based cocktail it says is easier to make than a margarita.

It sees the paloma as a way to shift perceptions in Europe about tequila being just a shot-based drink and convince drinkers to choose it rather than wine with their food.

But even as Crew sets her sights overseas, she is facing a tougher environment in some core markets, including the U.S. and Mexico. Some analysts have questioned whether Diageo’s fortunes are too closely tied to tequila, leaving the drinks giant more vulnerable than rivals to a slowdown.

The pressure on Crew intensified on Friday, when the company delivered a surprise profit warning, saying consumption in Latin America was weaker than expected. Shares dropped 12%.

The company’s London-listed stock has declined more than 20% so far this year, and Crew is scheduled to face investors for the first time on Wednesday at Diageo’s capital markets day.

Crew, a 52-year-old Texas native, was catapulted into the top role in early June, after Diageo’s former CEO, Ivan Menezes, died after emergency surgery for a stomach ulcer. He had announced in March that he would retire, with plans for Crew to take over in July.

Menezes, who worked at Diageo for 26 years and served as its CEO for a decade, turbocharged sales by moving the company into more upscale products and tapping into a trend by many consumers to drink less but better.

Last week, RBC analyst James Edwardes Jones, who has covered Diageo for 20 years, flagged “management risk” at the company, saying Menezes was one of the best CEOs he had ever encountered and “a difficult act to follow.” He also warned that Diageo could be facing “a widespread retrenchment” in upscale spirits consumption.

Diageo declined to make Crew, who now lives in London, available for an interview.

Crew graduated from the University of Denver’s cadet training program, where she met her husband, and went on to serve in the U.S. Army for four years, including a deployment to Bosnia.

After leaving the Army, Crew worked for Kraft Foods, selling frozen pizza, and later worked for Mars, Nestlé and Pepsi.

She then became the CEO of Reynolds American, which owns the Camel and Newport brands, taking over as the tobacco company was struggling with declining cigarette volumes and slowing sales of e-cigarettes. She stepped down a year into the role after Reynolds was acquired by rival British American Tobacco.

Crew became Diageo’s North America head in 2020.

One of Menezes’s biggest bets was on tequila, which made up just 1% of Diageo’s net sales in 2014 shortly after he became CEO and now accounts for 12%. Tequila contributed about a third of Diageo’s growth over the past four years and the company, which also owns Johnnie Walker scotch, Smirnoff vodka and Tanqueray gin, is now the world’s largest tequila maker by sales.

Menezes acquired a string of tequila brands, including paying up to $1 billion for Casamigos, co-founded by actor George Clooney.

“Casamigos changed the game,” says Ivy Mix, co-owner and head bartender of Leyenda bar in Brooklyn, N.Y. “Patron made tequila mainstream for young people but with Casamigos suddenly the Midwestern soccer mom is drinking tequila.”

By the end of this year, U.S. sales of tequila will hit $13.3 billion, outstripping vodka and U.S. whiskey to become the biggest-selling spirits category in the country, according to drinks industry tracker IWSR.

Diageo still sees a long runway for tequila in the U.S. It says the drink is in only half the number of households that buy North American whiskey and vodka.

But tequila’s U.S. sales growth peaked in 2021 and has since decelerated, a trend that reflects a bigger slowdown in pricey booze. Pandemic-era savings are winding down and consumers have gone back to drinking at bars and restaurants where cocktails typically cost three times as much as making them at home.

Now the second largest tequila by sales in the U.S. behind Don Julio, Casamigos has lost some of its buzz by going mainstream, says Mix. Casamigos also lacks the strong Mexican heritage that many other tequilas have, which appeals to consumers looking for authenticity.

In the four weeks to Oct. 7, sales of Casamigos in U.S. liquor and grocery stores dropped 5.1% from a year earlier, according to Jefferies. It sells for about $50 a bottle.

Diageo is also facing rising competition. A growing number of tequilas are marketing themselves as additive-free, aimed at consumers looking for healthier alternatives, and other celebrities are trying to mimic Clooney’s success. Last month actor Matthew McConaughey announced that he was launching his own tequila brand, Pantalones Organic Tequila.

U.S. demand had been so strong in recent years that Diageo and other tequila makers say they haven’t had enough capacity to meet it. The agave plant takes seven years to grow. Now a wave of agave plantings is maturing, growth is slowing and prices have fallen to 18 pesos per kg from a high of 32 pesos.

“Finally we’ve got the capacity to not only be able to take tequila around the world but also be able to launch innovation,” said Crew.

As it pushes overseas, Diageo is taking a big city approach to expansion, targeting London and Glasgow in the U.K. as well as European cities including Paris and Milan. While those places don’t have large Hispanic populations, they are home to a number of affluent and well-traveled people, says Diageo’s Great Britain head, Nuno Teles.

At the ADE festival in Amsterdam in October, Diageo teamed up with Belgian DJ Charlotte de Witte to promote Don Julio at a pop-up club, selling palomas and ceviche tacos. At London liquor stores, the company has been promoting Don Julio next to grapefruit soda.

Other booze makers are also looking abroad for growth. Brown Forman in August launched a new ad campaign for its El Jimador tequila in the U.K., and Davide Campari-Milano will kick off an international expansion campaign for Espolòn tequila starting next year.

“Tequila is starting to become, I think, a global phenomenon,” Campari Chief Executive Bob Kunze-Concewitz told investors in May. “Consumers are yearning for it.”

At Vogue World, a star-studded event held recently in London’s Covent Garden, guests drank tequila cocktails made from Don Julio 1942, which sells for around $220 a bottle, or sipped it neat, and Diageo sponsored the afterparty held at a swanky private club in Mayfair.

But so far tequila isn’t widely available in supermarkets or corner shops where most Britons buy their liquor. “Tequila is in the stage of expansion here,” says Diageo’s Teles. “You start with high-end restaurants, clubs, liquor stores and then you gradually increase the availability of the product.”