Grupo Industrial Herradura, S.A. de C.V

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Grupo Industrial Herradura, S.A. de C.V.

Comercio 172
Guadalajara, Jalisco 44100
Mexico
Telephone: (52) (33) 3942-3900
Toll Free: (800) 710-9868
Fax: (52) (33) 3614-0175
Web site: http://www.casaherradura.com.mx

Private Company
Incorporated: 2000
Employees: 1,100
Sales: $200 million (2005 est.)
NAIC: 312140 Distilleries; 424820 Wine and Distilled Alcoholic Beverage Merchant Wholesalers; 551112 Offices of Other Holding Companies

Grupo Industrial Herradura, S.A. de C.V., better known as Tequila Herradura or Casa Herradura, is the third largest producer of tequila, manufacturing and marketing this Mexican spirit under the Herradura and El Jimador labels. It also makes New Mix, consisting of canned drinks that combine tequila with fruit juices and other ingredients. Traditional in outlook, the company continues to make its Herradura brand tequilas without adulteration, fermenting and distilling the sap of its only raw material, the blue agave plant. It maintains three facilities on its property in Amatitán, Jalisco, where millions of agave plants grow in the fields. A privately owned company, Grupo Industrial Herradura announced its forthcoming purchase by Kentucky-based Brown-Forman Corp. in 2006.

A CENTURY OF TEQUILA
PRODUCTION: 1870–1975

Tequila is derived from a species of the agave genus (usually called maguey in Mexico). Wine from grapes was unknown in pre-Columbian Mexico, and the Spanish conquistadors soon ran low on their own stores. They regarded pulque, the native alcoholic beverage derived from the fermented sap of agave plants, as unpalatable. When distilled from pulque, however, the colorless liquid called mezcal or mescal proved popular. In time, the mezcal from the area around the village of Tequila in Jalisco gained a reputation as the best and gave rise to the name of the liquor itself, like other alcoholic drinks taking the name of a particular area, such as scotch, bourbon, and cognac. Tequila properly called by that name comes, by law, only from the state of Jalisco or certain areas of four other states and must derive from the species known as blue agave for the silvery-blue color of its spiky leaves.

The process of making tequila begins when a field laborer called a jimador cuts the leaves off a mature blue agave plant with a machete. The 200-pound core of the plant is heated in an oven to convert the starches in the sap to sugars. The sap is then extracted from the pulp in a mill, fermented in tanks, and distilled twice in copper stills. Distilled water is then added to reduce the alcoholic content of the fiery product.

Members of the Romo de la Peña and Peña Rosales families owned Tequila Herradura into the 21st century. They traced the company back to its founding in 1870 by Feliciano Romo. According to another account, Ambrosio Rosales, one of the forebears of the two families, acquired a distillery in 1870 on the outskirts of the municipality of Amatitán, about 25 miles from Guadalajara. Descendants are said to have acquired lands here for the cultivation of blue agave, forming a hacienda named San José del Refugio. Rogelio Luna Zamora's detailed history of tequila confirms that there was a distillery on this sizable property of 5,452 hectares (13,366 acres) in 1892. There were 13 distilleries in Amatitán at the time, but the tequila trade suffered a crisis of overproduction in the early 1900s, and the ensuing revolution disrupted the business for another decade. By 1931 only six distilleries remained in Amatitán, one of them on the San José del Refugio property, which was owned by Aurelio López. Luna Zamora's book first mentions the Herradura name (which means "horseshoe") for the distillery in 1938, when López still owned the San José del Refugio hacienda but had lost perhaps one-fifth of it to land reform. Herradura was one of the only three remaining tequila distilleries in Amatitán. Cipriano and Emiliano Rosales owned distilleries in nearby Tequila at this time. Since there was also a hacienda in Tequila in 1938 named San José del Refugio, and the proprietor was listed as the mother of Jesús López y Rosales, perhaps the later owners of Tequila Herradura were also descendants of Aurelio López.

The classic Herradura tequila is Herradura Blanco, or, as it is called in English, Herradura Silver, dating from the company's inception. With an alcoholic content of 92 proof, it was noted for robust flavor and strong nose, and it made an appearance in a number of classic Mexican films. Blanco, or white, tequila, is the rawest and cheapest, bottled without aging, although Herradura later added a softer version by storing it for 36 days. Añejo is tequila with the bite tempered by being stored in white oak barrels or casks for at least 12 months. This also turns it golden in color and imparts a woody flavor to the beverage. Herradura's añejo, introduced in 1962 or 1963, was originally stored for at least two years.

In 1975 Herradura brought about a major change in the industry by introducing Herradura Reposado, which was "reposed" or stored in the barrel for about a year, resulting in a tequila that was highly praised and proved popular as a happy compromise that eschewed the rawness of the basic product without aging it so much that it lost its authentic character. Herradura's reposado was the only one on the market for six years and quickly became the company's most popular product.

A 1949 law required tequila to be distilled exclusively from the fermented liquid of blue agave plants. Because of a shortage of mature blue agave plants, this law was amended in 1964 to allow a certain proportion of the liquid to derive from the fermentation of other plants, such as sugarcane or corn. During the 1970s, the law was again revised to allow tequila producers to reduce the content of their product from fermented agave sap to as low as 51.5 percent. The rest generally came from fermented sugarcane and, to some, had a slight favor resembling that of rum. The big two producers, Casa Cuervo, S.A. de C.V., and Tequila Sauza, S.A. de C.V., took advantage of the change, but Herradura refused to adulterate its product. The company was not a major producer of tequila at the time, ranking only 15th in 1983.

SUDDEN SURGE TOWARD THE
TOP

When Alan Richman visited Amatitán for a story on tequila that appeared in Gentlemen's Quarterly in 1989, he reported that Herradura was still making tequila only from the juice of the blue agave plant, although almost all other producers were also using cane sugar. The company's adobe-walled hacienda combined modern equipment such as a chromatograph with traditional labor intensive processes such as hand washing of returned bottles. (Cuervo and Sauza, by contrast, were sending U.S.-destined tequila over the border in tanker trucks prior to bottling.) Gabriela de la Peña de Rosales, the 72-year-old matriarch of the family and majority owner of the firm, was a traditionalist who opposed replacing the adobe brick or stone ovens in which the agave core was "cooked" with more efficient modern ones and preferred Herradura's Silver tequila to the Reposado, which accounted for 90 percent of the firm's output.

COMPANY PERSPECTIVES

Mission: Being the best option for the national and foreign consumer of Tequila, Wines, Liquors and derivative products, creating value for our providers, clients, shareholders and employees.

By 1992, after a decade in which it doubled its output of tequila, Herradura had moved up to 11th place among producers. The following year it introduced El Jimador, reposado tequila that was cheaper to produce and buy because it spent only three months in the barrel. In its first year, 10,000 nine-liter cases were sold. When capital flight led to the devaluation of the Mexican peso in late 1994 and a subsequent deep recession, El Jimador, at about half the price of Herradura, became a worthwhile bargain for many tequila drinkers. Sales increased tenfold in 1995, and the brand later introduced añejo (1998) and blanco (2000) versions.

For traditionalists, the company introduced Herradura Antiguo in 1995. This reproduction of a 1924 tequila produced by the firm but never released to the general public was a reposado aged in the barrel for four months. For lovers of quality tequila, the company also had been producing, since 1990, Herradura Selección Suprema, a premium añejo aged for 47 months. When aged for five years, presented in a specially designed bottle inside a specially designed case, Selección Suprema sold for as much as $275 a bottle. It was named the best tequila in the world in both 2000 and 2001 in a competition held in San Francisco.

Larry Luxner visited Amatitán for an article that appeared in Américas in 1995. He reported that Herradura expected to produce around 300,000 cases of tequila during the year, bringing in an estimated $34.5 million. The firm ranked seventh among tequila producers. Some 10 percent of the product would be exported, mostly to the United States. Guillermo Romo de la Peña, head of the firm and one of Gabriela's sons, told him, "The plantations belong to the company, but not the land. We plant agave on the owner's land and give him a share of the crop."

El Jimador introduced, in 1997, New Mix, a canned combination of tequila and a soft drink based on grapefruit juice, and Sangrita, a canned drink combining tequila, orange juice, tomato, and spices. The company had only one competitor in this field and easily surpassed it. By 2000 New Mix was selling 1.2 million cases a year and accounting for 30 percent of the company's profits. A third product, Toronja Rojo (red grapefruit), was later added. Herradura was also distributing Don Q rum in Mexico and some products of the Spanish firm Grupo Osborne S.A. It had just acquired the right to distribute wines (Coppola and La Playa) produced by Francis Ford Coppola, the film director. Later it added Skyy vodka and Skyy Blue ready-to-drink products, Magno brandy, the liqueur Disaronno, Osborne brandy, and the energy drink Red Bull. In 2001 Osborne bought 25 percent of Herradura's shares from Guillermo Romo and his brother, Pablo.

NEW CENTURY, BIG CHANGES

Herradura sold more than 850,000 cases of El Jimador in 1999. However, the tequila industry fell into crisis the following year because of a new shortage of mature blue agave plants, partly due to disease. Herradura was not as affected as some other firms. It was spending about $1 million a year on research to augment the yield, reduce the ten-year span needed for agave to mature, and improve the plant's genetic resistance to disease. Like other tequila producers, it had to pay out much more money for agave from independent growers. The price rose 15fold in a year and a half. In 2000, rather than raise the price, it abandoned its policy of producing El Jimador from 100 percent blue agave juice. Consumers were not concerned; in fact they backed up Herradura's decision by purchasing 1.2 million cases of El Jimador in 2000. By 2002 it was the best selling tequila in Mexico; with 1.4 million cases a year sold, El Jimador was accounting for about 22 percent, by volume, of all tequila sold in Mexico and 62 percent of Herradura's revenues, which came to $220 million in 2001 (compared to only $43 million in 1996).

Grupo Industrial Herradura, S.A. de C.V. was established as a holding company in 2000, absorbing Tequila Herradura and distribution and service companies also operating under the Herradura name. Although as conservative and tradition bound financially as operationally, Herradura borrowed $105 million from the Dutch bank Rabobank in 2002. This bank had extended the firm a credit to buy, in 1998, the shares held by two sisters of Guillermo and Pablo Romo who had been threatening to sell their stock to Juan Domingo Beckmann Vidal, the proprietor of Casa Cuervo.

KEY DATES

1870:: Tequila distillery is founded in Amatitán, Jalisco, that is later called La Herradura.
1975:: Herradura introduces reposado: tequila stored in the barrel for about a year.
1989:: Herradura Reposado accounts for 90 percent of the firm's output.
1993:: Herradura introduces El Jimador, a cheaper reposado that becomes extremely popular.
1997:: The firm introduces New Mix, canned combinations of tequila and soft drinks.
2002:: El Jimador has become the best selling tequila in Mexico.
2006:: Purchase of Herradura by Brown-Forman Corp. for $876 million is announced.

The shortage of blue agave, the resulting leap in prices for the mature plant's core, and the subsequent price increases of tequila itself led to a 22 percent decline of consumption within Mexico between 1999 and 2003. To maintain its market share within the liquor industry, Herradura, which had formerly depended on word of mouth to sell its tequila brands, devoted 4 percent of its annual revenue to advertising in magazines, on television, and at live events. The advertising campaign was directed at young professionals perceived to be searching to better their social position. Herradura Reposado was queen of the premium (all-agave) segment, although possibly displaced by Cuervo's Don Julio. Herradura Antiguo was a midmarket alternative. In 2002 the company introduced Herradura Auténtico, a reposado stored in the barrel for four months.

Where Grupo Industrial Herradura was coming up short was in export sales, which accounted for 72 percent of the tequila industry's output in 2003, compared to 49 percent in 1999. Herradura was selling tequila to 63 countries, but, despite its alliance with Osborne in Europe, the company's foreign sales accounted for only 17 percent of its revenue. In the United States, its chief export market, Herradura Blanco and Reposado were being distributed by Sazerac Inc. The Dallas Cowboys of the National Football League were selling El Jimador in their stadium. Herradura enjoyed 20 percent of the Mexican market for premixed drinks and 80 percent of the market for premixed drinks in cans. The company also began producing, in 2003, Sky Blue, a bottled drink that combined Skyy vodka imported from the United States with citrus based soda. Herradura was also building a modern bottling facility at its quarters in Amatitán.

By 2004 the production of blue agave had entered a new boom period, far in excess of the industry's needs. Prices had dropped from MXN 16 (about $1.50) per kilo to only MXN 2 or 4. Herradura had some 4,500 hectares (over 11,000 acres) in blue agave plants and experimental seedlings. Its production facilities were being quadrupled in size. It also supported a thriving tourist trade that arrived at its doors from nearby Guadalajara. The tourists visited the original distillery, which displayed log fed ovens in which the plant was cooked, millstones that squeezed the juice from the heart of the plant, subterranean tanks in which the liquid was fermented, and the copper stills in which it was distilled.

About 380,000 cases of Herradura tequila were sold in 2005, of which 70,000 were sent to the United States. Nearly 1.4 million cases of El Jimador were sold during the year, of which 150,000 were sold in the United States. Some four million cases of New Mix were sold, all in Mexico.

Tequila Herradura had 16 products listed on its web site in 2006. In addition to Herradura Blanco, Reposado, Añejo, and Antiguo, its tequilas made with allagave sugars were Hacienda del Cristero, introduced in 2000, El Jimador Especial Aniversario, and Herradura Suave 35, a reposado which included variants with citrus and mandarin orange flavors, the first flavored tequilas in Mexico. In addition to its flagship reposado, plus the latter añejo and blanco versions and the all-agave Especial Aniversario, El Jimador remained in charge of the three New Mix versions.

In August 2006 Tequila Herradura announced its pending purchase by the Kentucky liquor distributor Brown-Forman Corp. for $876 million, filling a market niche for the U.S. company, whose holdings included Jack Daniels and Southern Comfort bourbon whiskies and Finlandia vodka.

Robert Halasz