Tequila! But not for spring breakers

May 31, 2013: 11:11 AM ET

DeLeón Tequila is $90 a shot, it turned down a celebrity spot, and it's one of the fastest growing luxury liquors in America. An inside look at a flourishing market.

By Erika Fry and Daniel Roberts

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The DeLeón Tequila bottle was designed to appeal to women and looks a bit like perfume.

FORTUNE -- Shortly after Brent Hocking launched his high-end spirit, DeLeón Tequila, his friend Doug Ellin, the creator of HBO's hit show Entourage, called with a big break. Ellin offered DeLeón a bit part on his show, as the new favorite tequila of the party-loving character called Turtle.

There is, however, a difference between exposure to a huge young male audience (which Entourage would certainly provide) and a more elite exclusivity. Hocking quickly told Ellin, "I'm out." The tequila that did score a spot on the show, Avión, sold 55,000 cases and grew 22% in 2012. Still, DeLeón has made its own mark in Hollywood.

Hocking's blends, which sell for $140-$825 a bottle, now turn up at some of the most elite L.A. events: during fashion week, at movie premieres and private concerts, or parties thrown by Harvey Weinstein. Hocking's red carpet clientele is particularly striking given that just seven years ago he was working as a mortgage banker at places like Countrywide and Coast Capital, and that he launched his tequila in 2009, in the depths of a recession.

But Hocking, who looks a bit like a professional bodybuilder, is not your typical entrepreneur. And he's not trying to build your typical tequila brand. A oenophile and lover of nightlife, Hocking in 2006 decided to leave his career in mortgage lending to bring a wine-lover's touch to tequila.

Determined to find his own distillery, he traveled to Jalisco -- the tiny state in Mexico bordering Guanajuato that is tequila's equivalent to the Champagne region in France. (The DeLeón website instructs drinkers to compare its Diamante blend to any other clear tequila by placing it "in a champagne flute.") In Jalisco, tequila production is highly regulated and limited to 134 distilleries. Hocking, through a combination of good timing and great luck, bought his distillery after learning that the young D.J. from his wedding was the grandson of a recently deceased tequila distillery owner. Hocking claims to be the "only Gringo" in Mexico operating his own tequila distillery.

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Singular as Hocking's story may sound, he is hardly the only entrepreneur to have started a boutique tequila brand in recent years. In fact the tequila market, which accounts for just 7% of the U.S. spirit market, has become an especially crowded and competitive one. Since 2008, the number of tequila brands has ballooned from 832 to more than 1,600, many of them small-batch players (like DeLeón and Avión) that have tried to seize upon the growing premium market. Justin Timberlake owns a label. So does George Clooney.

Spiros Malandrakis, an alcohol analyst with Euromonitor, compares the trend in spirits to the craft beer boom and says the premium sector is the most promising path toward growth in, and a natural consequence of, a domestic market that is already saturated. "Consumers are going for drinking less, but higher quality," he says.

But there may be a limit to how many premium tequila brands can succeed. Sales of tequila have increased moderately -- 6.4% in 2011, 3.8% in 2012 according to Technomic, a food and beverage research company -- at a rate that slightly outpaces the spirits industry (3.2%), but which trails behind those of vodka (5.8%) and whiskey, categories that have grown with the proliferation of flavor-infused products.

While you shouldn't expect PB&J-infused tequila soon, many of the new premium tequila brands have played with the flavor in an effort to set their tequilas apart. Once confined to salt-rimmed shot glasses and slushy margaritas, tequila-makers are on a mission to make the drinking experience purer, richer, stronger -- in short, fancier.

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With DeLeón, Hocking is doubling down on purity. The tequila contains no chemicals (many add caramel or other chemicals for flavor and sweetness) and is made from 100% blue weber agave. It is distilled with what Hocking claims is the purest water in Mexico. While other distilleries pump in their water, Hocking says his tequila draws its supply directly from three natural spring wells located on the DeLeón land. He distills the tequila only twice -- brands have fooled consumers, he believes, into thinking that three, four, or five times distilled means higher quality, but in fact it's the opposite: "That's just stripping it down and you're moving toward rubbing alcohol," he says. DeLeón then ages its tequila in old wine barrels, a method that gives the spirit a smoky flavor unique to the particular barrel's vintage.

The resulting product has earned DeLeón high marks from the spirit industry. In 2010 and 2011 it was recognized as a top spirit at the World Beverage Competition in Switzerland, while the Robb Report, a luxury review site, called DeLeón's añejo (aged) variety "one of the most extraordinary añejos to come out of the Jalisco highlands." (Hocking also promises you'll wake up "feeling good" and gym-ready after a night of partying with his tequila; and do none of the puckered-up grimacing that usually follows a shot of other, lesser tequilas.)

But where DeLeón has perhaps most distinguished itself is a property you don't often associate with tequila: restraint. Hocking didn't just turn down Entourage, which he feared would turn his brand into a gimmick (And Doug Ellin tells Fortune, "It's a hard leap for a brand to hand over to creative and let [someone else] do whatever they want with it"), he has also charted his business strategy to start small and grow slowly, a combination that he hopes will keep his premium brand around in the long term.

"The textbook plan in alcohol is to put out a ton of cases and see how much you can sell and if you can make a mark," Hocking tells Fortune. "But we kept it really tight, small production, focused on the brand. Entering this business with something that's supposed to be high-end is a very scary proposition if you don't have the goods to back it up."

Instead, Hocking focused on "pinpoint branding," using connections to target certain exclusive populations. In one of the brand's only ad campaigns, Hocking hired a National Geographic photographer to take photographs that became a buzzed-about ad in The New York Times style magazine T. He also admits designing his product to appeal to women -- if they order it, his logic goes, so will the men pursuing them -- and so DeLeón comes in an elegant, square bottle that looks like it might contain perfume.

DeLeón is also making an aggressive move into untapped overseas markets. While 85% of tequila is sold in the U.S. and Mexico, premium brands are trying to lock up jet-set clubbing types in locales like Hong Kong. (Along with the Mexican government, Patrón, the tequila brand that pioneered the premium space decades ago, is lobbying China to allow tequila, most of which is banned in the country due to its higher methanol levels.)

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When Hocking conceived of DeLeón, he wanted the product to emanate four pillars: "luxe, sex, edge," and a certain je ne sais quoi attitude. A swagger. He calls it "motherfucker." He resents the pomp and pretension of those who approach alcohol with their snifters ready, noses upturned. He says the term "sipping tequila" -- a notion often associated with premium brands -- is ridiculous: "It's tequila. We know why we're drinking this. Let's get to it."

Four years in, Hocking's strategy appears be working: Though DeLeón posts low volumes, the brand says that it is growing an average of 200% in revenue and volume every year. He's also started going after the 1% of alcohol drinkers -- and head to head with premium competitors -- with a wider array of products. In December DeLeón released its private reserve Leóna, which fetches $825 a bottle.

Later this summer, the company will launch Café de León, a bottle that mixes coffee with DeLeón tequila, plus 2.5% sugar (the minimum to qualify as a liqueur). Patrón and Avión both have coffee-tequila blends. DeLeón will also announce two swanky new partnerships this month: It will be the exclusive tequila at a celebrity chef's chain of high-end restaurants, and the other is with a Hollywood big shot. Analyst Malandrakis posits that DeLeón is "exactly on trend" and that he suspects it is the sort of super-premium brand that larger spirits companies would want to acquire.

That's not to say DeLeón will ever become a market leader. The pricing is prohibitive for most drinkers: A shot of the Leóna blend will set you back $90 at the bar. Though the premium brands like DeLeón are chipping away, there's a reason that the old spring break standard, Jose Cuervo is still #1.

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