'Who would have thought that hotels would suddenly close like this?'
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Julián Luna has been in the mezcal business since 2015, when he cofounded a small company named Cordón Cerrado. He ventured into the industry right when sales of the smoky, agave-based spirit were starting to boom outside its native Mexico. Mezcal exports had seen a whooping 79% increase between 2011 and 2014, most of the bottles going into the U.S., according to data from the Mezcal Regulating Council. The beverage gained a dedicated following that fueled the traditional beverage’s rise in popularity.
Despite heavyweights like Pernod Ricard, Diageo, and Bacardi investing in their own mezcal brands, the promising category offers plenty of room for competition. National production of mezcal—which is under appellation of origin status in 10 Mexican states— is largely concentrated in small-batch, artisanal brands like Cordón Cerrado, and depend on a head mezcalero master that prepares and cooks the maguey plant, often based on family-owned or traditional recipes.
Luna, who is CEO of his company, has seen nothing but good business for Cordón Cerrado. By 2019, mezcal production in Mexico topped 1.8 million gallons, up from 391,044 in 2015. 600 brands are produced only in the state of Oaxaca, home of almost 90% of the mezcal production. In this setup, Luna got his award-winning Espadín 39 variety into restaurants and bars in Mexico and the United States. Of the 1,500 mezcal boxes Luna’s company produces per month, almost 40% go to the U.S. The rest is sold duty-free shops, restaurants, and as amenities to hotel chains.
But the pandemic has brought Cordón Cerrado’s sales to a sudden halt. Not one, but three of the company’s distribution channels have closed, with no clear date of reopening soon. Fortune spoke with Luna for a new series, The Coronavirus Economy, to talk about COVID-19 has affected the mezcal industry, the way his company is holding on, and how he’s planning to recover when and if things go back to normal. The following interview has been translated, condensed, and edited for clarity.
What is the biggest impact the crisis has had for you?
Our largest sales usually come from duty-free port shops in cruise line destinations, specifically Cozumel (an island about 52 miles from Cancun). Every day, four or five cruise ships dock there, each with an average of 4,000 passengers. That makes 20,000 tourists passing by the duty-free shops every week, through the shelves of liquor stores and our mezcal displays.
But the cruise line industry was one of the first affected by the coronavirus. Since the pandemic started, our retail sales went down to zero. On March 12, the cruise company we worked with canceled all their cruises. On the 13th, Cozumel closed the port. Our sales completely halted from one day to the next. And since the 15th, we haven’t received any news of when the will industry be back on track.
The hospitality industry is also key to your business. How has that been affected?
We also sell amenities to hotels. They’re specialty bottles that go straight to hotel rooms. But by late March, all our customers from this industry closed up shop, from big hotel chains like to small boutique ones. It’s been tough. Who would have thought that 1,200-room hotels would suddenly close like this? Invoices and payments are halted and restocking will not be made anytime soon. Hotels don’t know either when this will go back to normal. The uncertainty makes it a six-month problem, at least.
Restaurants were also big for us, but when the quarantine was implemented (on March 16), many of them closed or only stayed open for take-out or deliveries. Closed bottles, mainly beer and wine, are also delivered with food orders, but unfortunately we don’t have 1.6-ounce bottles available for this. All other clubs, bars, and mezcalerías are closed. Sales and payments are halted, so we’re now keeping busy with other distribution channels, like online sales in Amazon and big box retailers, like Sam’s Club. They’re helping us out by not penalizing for delays in restocking.
How do you plan to get back on your feet when this is over?
Fortunately, we have some product in the U.S. right now. We had sent some boxes for restocking in late December and early January. Our main customers are in L.A. and other cities in California, and we expect that when all of this is reactivated, we’ll be ready to sell, which gives us an edge against other colleagues in the sector. Some of them have their bottles stuck at Customs.
The good thing is that mezcal is a product that stores well, but when the stores are open again, we’re going to see a fierce competition for the consumer. Every type of spirit or liquor will be out there: wines from Chile, pisco from Guatemala, Italian liqueurs. A couple of years ago we still had the backing of ProMexico, a government-funded exporting agency that supported small producers like us. Now they’re gone. Our advantage is that we get paid in U.S. dollars, so when we finally collect those stalled invoices, the exchange rate will allow us to offer quality alcohol with a price that doesn’t blow up.
What about your employees?
As it happens with most mezcal companies, Cordón Cerrado has its own small-batch producers who plant the agave, extract the alcohol, run the palenque (distillery) and produce the mezcal. Then we bottle it, label it and send it to the U.S. with a distributor.
We have a 1,585 gallon capacity operation supported by almost 30 workers. Seven people are in Oaxaca, three in Mexico City, two in the duty-free stores and 15 full-time workers in the fields. We also have eight temporary workers, but we’re not employing them right now since we’re not producing. We still have some mezcal to bottle and that is what we’ve been doing in the fields, but we’re not producing more of it. There’s no certainty in our current customers, nor we can go out to find new ones. Only the office workers can work remotely. We haven’t dared to think what would happen to the field workers, who are mostly indigenous and rely on the production to support their families.
To support us, the local government in Oaxaca announced a 50% discount to payroll taxes and -3% to the occupation taxes for hotels. But there’s simply no tourism right now. Oaxaca is closed; Mexico City is almost fully closed, too. We just have to hold on and see what happens.
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