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Tequila 'demand is so high' it's leading to supply constraints: Diageo North America President

Diageo North America President Debra Crew joins Yahoo Finance Live to discuss the demand for tequila and other spirits, the company's sales rising by 16%, supply chain challenges, expectations for the hard seltzer market, and the state of the liquor market.

Video Transcript

BRIAN SOZZI: All right, despite rising costs for packaging, energy, and shipping, liquor giant Diageo said this week that pre-tax profits rose 22% for the six months ended in December. Company saw notable strength in tequila, where sales rose 61% on the back of brands Don Julio and Casamigos.

Joining us now for more is Diageo North America president Debra Crew. Debra, nice to see you here. I want to start on tequila. It's almost happy hour. It's a Friday. How do you explain the ongoing strength in tequila? There are a lot of other liquor options out there, as you know full well. But how do you explain tequila?

DEBRA CREW: Yeah, I think for tequila, there's just-- it's just broad-based occasions. And a lot of different consumers are also very interested in tequila more and more so. I think years ago, it used to be about the margarita, and there was sort of one occasion. And what we're seeing now is it crosses across all day parts, all different consumers geographically. It's very broad-based growth.

And of course, for us, Don Julio and Casamigos both gaining a lot of share. And both of these are super premium, plus-priced tequilas. And we had-- Don Julio was up 43% in the half. Casamigos was up 87%. So really great momentum on both of our brands in tequila. And then, of course, tequila's stealing shares from vodka, from whiskey. So we're really seeing just a lot of momentum across the entire category.

JULIE HYMAN: Debra, I will admit to being a particular Casamigos fan myself. One of the things with tequila and with many of your other premium liquors is, it takes a while to make it, right? It needs to be aged. In addition, you have the issue when it comes to tequila with agave, in some cases, being in short supply. So talk me through how that's working for you guys, what the supply of tequila looks like, and as a result, how much you expect perhaps prices to go up in the next year.

DEBRA CREW: Yeah, I mean, we've already taken some pricing on tequila, and we took that pricing and really didn't see any momentum change at all. But you're absolutely right, particularly on the aged kind of variants, the Anejos, the reposados, things for us like 1942 Don Julio, we have faced some constraints on it just simply because the demand's so high. With that kind of demand change, and fundamentally, it is based on agave and really high quality agave, so for us, it does take some time in the ground.

And so we have had capped volumes. So, you know, if you see that 1942 out there, go and grab it. But definitely, you know, these are still very, very high growth numbers. So we see a lot of continued momentum going forward.

BRIAN SOZZI: Debra, we are at that point because of this, the supply chain challenges, that we may walk into a liquor store and we just don't see some of these liquors on the shelves because it does take a while to make them. Debra, you know, just real quickly, you know, are we at that point, you think, that we might see shortages? You know, we walk into our liquor store, we may not be able to find those liquors we were looking for just because they take so long to make.

DEBRA CREW: Yeah, I mean, I think for us, we've been able to do a really good job. I'm very proud of the team for being able to work through the various supply chain disruptions that we've had. Some of these are kind of short-term disruptions. And so you may see something out because of a short-term glass issue like we've had on Bullet. Some of these because of the aged variants take a little longer to work through.

But even on something like Crown, where we have some constraints, we were still able to grow Crown 12% this half. And so, once again, these are very high volumes. And so sometimes, you'll see stores that will limit the number that you can purchase as an example. And of course, we're very careful about how we use that liquid to put them in really the best, most premium expression.

BRIAN SOZZI: Debra, when do you see this Bullet-- these Bullet supply chain issues going away? And what is it about the bottle that you just can't find in the marketplace right now?

DEBRA CREW: Yeah, I think it's a very unique packaging. And so there's only a few folks that make this glass for us. And so we're working with our strategic glass suppliers to work through it. I mean, glass in general has-- you know, is-- you're hearing about a lot of shortages. You've heard certainly some of the beer folks talk about it for a while. And you'll be hearing more about it. But there's just very few glass suppliers really out there.

But that being said, we've got strategic partners, and we've been able to effectively work through it. And we gained volume this year on top of double digit volume last year. So for us, we feel like we're in a good situation to work our way through it.

JULIE HYMAN: Debra, finally, I want to circle back to the question of demand. You started by talking about the strong demand that we're seeing. We tend to see styles of alcohol sort of be cyclical, right? And different things trend at different times. In terms of a visibility that you have for 2022 and even beyond, what do you expect to be the strongest category? And do you think liquor overall as a category is going to continue to be strong versus, say, beer and wine?

DEBRA CREW: Yeah, we've been seeing-- and this was present before COVID and certainly accelerated during COVID. And even as bars and restaurants are reopening, we're seeing this. There is a shift going on, but-- people shifting away from beer and wine into spirits, which certainly benefits us. We're also seeing people even within spirits, things premiumizing.

So examples for us that really benefited us in the half, you talked about tequila and sort of the strong growth there, but also in places like scotch. We're seeing a lot of momentum on scotch. Our scotch volumes were up 11%, driven by Johnnie Walker. And even within Johnnie Walker, it was driven by things like Johnnie Walker Blue. So really shows the premiumization there as well.

And then also categories like vodka, which tequila has been sourcing a lot from vodka, but we're also seeing a lot of momentum in vodka, especially as bars and restaurants open up. It's a classic sort of cocktail out there for-- people want to socialize. They want to get out there, and vodka is perfect for that. Our vodka was up 8%. And it was driven-- once again, it's the higher end. It's Ketel One, Ciroc. Ciroc was up 16%. So we're really seeing some momentum again in categories like vodka.

BRIAN SOZZI: Debra, real quickly, settle this debate for us. Should we be sipping tequila or still shooting it?

DEBRA CREW: Sipping, especially if you're drinking the right tequila. Don Julio and Casamigos, you definitely want to sip.

BRIAN SOZZI: All right, well, we came to the source. We got the right answer. Diageo North America president Debra Crew, good to see you. Have a good happy hour. Have a good weekend. All right, coming up, Yahoo Finance columnist Rick Newman pops in with a look into people running out of money. It's a thing. And we'll be right back.

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