Scotch, Irish whiskey, cognac and tequila have been four of the biggest growth drivers in spirits over the last quarter of a century.
These liquids command a hefty price premium thanks to protected geographical indicators (PGIs) which guard the product’s name from misuse or imitation. Any distiller wanting to trade off scotch’s heritage must distil and mature their spirit in Scotland in oak casks for at least three years. Similarly, tequila has to be made in one of Mexico’s five tequila-producing states from at least 51% blue weber agave.
However, amid rising trade tensions and tariffs, PGIs risk becoming a millstone around the neck of major spirits suppliers, undermining future growth prospects.
So, which companies are most at risk, and how could they mitigate the impact?
The value of PGIs
In an age where consumers are increasingly concerned about where the food and drink they buy comes from, it’s easy to see why multinational drinks companies have been keen to acquire PGI spirits producers.
PGI status offers “clear authenticity and product differentiation in consumers’ eyes”, and plays “a crucial role in premiumisation”, say Bernstein analysts Nadine Sarwat, Trevor Stirling and Matthew Cheung. Only 25% of spirits at ‘standard’ price points ($11-$23/75cl) enjoy PGI status, compared to 40% of those defined as ‘super-premium’ ($32-$45) and around 50% for ‘ultra-premium’ ($46-$100), they note.
This has helped PGI spirits make an outsized contribution to recent global spirits growth. Between 2000 and 2023, they accounted for 60% of absolute growth in the category, according to analysis of IWSR figures by Bernstein.
Meanwhile, multinational spirits companies are increasingly reliant on these tipples – sales of PGI spirits made up 56% of collective revenues at Brown-Forman, Campari, Cuervo, Diageo, Pernod Ricard and Rémy Cointreau in 2023, up eight percentage points from two decades prior.
Tariff risk
But “spirits’ association with, and increasing reliance on, PGIs is ultimately a double-edged sword”, the Bernstein analysts warn.
“In a globalised world, PGIs can be a clear asset,” they say. “But in a deglobalised world, they can be a liability. Distillers have no flexibility to meaningfully adapt supply chains or hubs of production. This exposes them to the risk that comes with tariff wars.”
The ever-evolving tariff situation makes it tricky to know which suppliers will be hit hardest by levies on products they are unable to make elsewhere. However, Rémy Cointreau, Cuervo and Brown-Forman are highlighted by Bernstein as being most exposed, with Pernod Ricard, Diageo and Campari less at – but not immune from – risk.
Tariffs certainly look like bad news for Rémy, which generated 38% of its sales in FY24 from the Americas. Thanks to its overexposure to cognac, it also sells 62% of its PGI spirits outside the market in which they enjoy this status. Meanwhile, any change to tequila’s present exemption from US import tariffs would be a blow to Cuervo, which sells 57% of its PGI spirits outside of the market in which they are protected.
Local production possibilities
One possible solution to the threat posed by tariffs is to localise some elements of production. For example, temporary tariffs on Chinese imports of EU brandy imposed in October prompted Hennessy to consider bottling its cognac in-market.
Whilst technically within the PGI rules governing cognac production, the proposal was suspended after a mass walkout at Hennessy’s bottling site in south west France. Depending on the outcome of an ongoing probe into dumping by the Chinese government, Hennessy owner LVMH may revisit the plan in future.
Other PGIs governing single malt scotch and 100% agave tequila are stricter and do not allow for bottling in-market. Suppliers could lobby trade bodies like the Scotch Whisky Association and The Tequila Regulatory Council for rules to be loosened in light of tariffs, but given the importance of scotch and tequila production to the economies of Scotland and Mexico respectively, it feels unlikely they would entertain such a proposal.
Could spirits brands ditch PGIs?
A more left-field solution could be for brands to follow the example of Smirnoff, Captain Morgan and Tanqueray. The Diageo-owned trio have all brought ‘spirit-drink’ innovations to market in recent years which cannot be called vodka, rum or gin as they do not meet the minimum abv requirements set out in EU and UK legislation.
In a similar vein, brands like Rémy Martin, Jose Cuervo and Jameson and could circumvent both PGI rules and tariffs by producing liquid in-market and relying on the strength of their brand name to maintain sales, as Penfolds sought to during Chinese tariffs on Australian wine.
The prospect of a US-distilled Jameson may feel far-fetched in the short term, but many previously imported continental beers including Stella Artois and Peroni are now brewed domestically in the US.
“Never say never,” says Laurence Whyatt, head of European beverages research at Barclays, on the possibility of Pernod Ricard distilling Jameson in the US in the future. “There are brands that have done these sorts of things in the past. Could Jameson do it? Theoretically yes.”
But before producers commit to wholesale production changes – especially those that could risk undermining premiumisation efforts of the last two decades – they “have got to believe these tariffs are permanent”, he argues. The decision to produce Jameson in the US would be “a huge investment”, he cautions.
“If Trump gets voted out at the next election or changes his mind, and the tariff goes away just as you finish building your distillery or ageing your product, you may as well have just made it in Ireland all the while.”
Therefore, the likelihood of Pernod Ricard – or any other spirits major – undertaking such a move “depends where we end up” with tariffs, he says.
And right now, that still feels like anyone’s guess.
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