What to think of a Washington entrepreneur who made a bundle in the defense industry only to get into manufacturing high-end tequila?
My initial reaction pegged it as a vanity purchase somewhere between launching your own record label and bankrolling your kid’s movie.
Rock star Sammy Hagar (Cabo Wabo Tequila), singer/actor Justin Timberlake (901 Tequila) and hair-care mogul John Paul DeJoria (Patron), have all crashed the tequila banquet. Even actor George Clooney recently announced he is jumping on the bandwagon.
Getting into the tequila business is no joke for Otto Hoernig III. He even has lined up his own celebrity partner, Carlos Santana.
Hoernig attacked his tequila project with the same intensity that made him, his sister and his father wealthy when they sold their family business — a Dulles-based satellite communications company called Spacelink International — about eight years ago for more than $151 million.
(They made enough to buy their father, Otto Jr. — an Air Force veteran and frustrated astronaut — a $200,000 ticket on Richard Branson’s Virgin Galactic spacecraft, which has yet to make its first commercial launch.)
A tequila company isn’t where I would stash my windfall, but Hoernig taught me a lot about the tequila business — including that the worm in the bottle was a 1970s gimmick. The other thing I learned is that when it comes to selling booze, packaging is everything. More about that later.
Hoernig didn’t just throw money at his tequila project. He closely consulted with his financial adviser, Paul Pagnato, every step of the way, from touring tequila factories to lining up potential acquisitions, estimating how much to invest and structuring the deal.
“Reading financial reports is boring, and I didn’t want all my eggs in one basket,” Hoernig said. “When Paul was educating me about alternative investments, I thought what better alternative investment than my own business, where I can block and tackle and build myself.”
The Texas Tech graduate was fresh off the sale of Spacelink and looking for opportunities when he was on a bass-fishing trip in Mexico’s Sierra Madre in 2006 with his father and Pagnato. Driving past the fields of blue agave, the plant from which tequila is made, reminded him of Napa Valley.
“I was overwhelmed,” he said. “Anybody who goes to the Napa Valley has got to be overcome with emotion. I had that same feeling. These people [tequila makers] have a great lifestyle. Reflecting on it, I thought: ‘Gosh. Why can’t I be in this business?’ ”
Hoernig began researching, calling analysts, buying books, crunching numbers on sales of premium tequila in the United States and mining online bulletin boards for expert input.
Bottom line: the premium tequila segment was expanding in the United States, and there was room for a new brand.
“Right or wrong, I made that decision” to get into the business, he said.
His blog search yielded a consultant who flew to Washington to discuss the economics of the business over a meal at Oyamel, a Mexican restaurant in Penn Quarter.
Visits to a dozen tequila distilleries led him to invest in a small company called Casa Noble, which had annual sales of only 3,000 cases.
“The idea was to find a brand that was scalable and with the right marketing and financial infusion, could become competitive in the premium landscape,” said Hoernig, who, along with his father and sister, invested several million dollars in the company. The distillery’s three original founders remain equity partners and are actively involved in the company, he said.
Liquor companies love to talk about ancient recipes and secret aging techniques, but a lot of distilled spirit sales comes down to marketing — and in particular having a distinctive bottle.
“The package is everything.” Hoernig said. “The contents . . . have to be awesome to have staying power. But people buy the package.”
The first couple of years were spent shoring up the Casa Noble brand, which sells five different tequilas based on how long they are aged. Hoernig hired a design firm to create a unique bottle. He hired trademark attorneys to make sure no one ripped off the design.
“If you want to trademark a three-dimensional bottle, you have to have 13 points of differentiation,” said Hoernig, who created Tequila Ventures to serve as parent to Casa Noble. “So there is a little icon on the bottom. The shape of the lip is different. The cap. The shoulders, height, width.”
Hoernig also went to work on the taste.
“We migrated from used bourbon casks made from American oak and went to new French oak casks, which allows us to age the tequila longer without overpowering it with the characteristics of the barrel,” he said.
Hoernig and his partners relaunched Casa Noble in 2008 with an expanded marketing campaign that included an updated Web site, a free iPhone app, magazine advertising and new salespeople.
A friend introduced Hoernig to Santana, who was looking to invest in a tequila company. A meeting in Las Vegas followed.
“I thought . . . we ought to be able to do well with one of the best-known Mexican celebrities,” Hoernig said.
Santana is now a part owner and Casa Noble’s chief spokes-man.
The new bottle, the new casks and Santana’s presence have combined to boost sales from 3,000 cases a year before 2008 to more than 30,000 last year. The tequila is now available in 10,000 locations around the United States and is sold in Europe, Asia and even Iraq. Hoernig’s goal is to sell 100,000 cases a year by 2014.
“Selling 100,000 cases is an industry benchmark,” said Hoernig, adding that he reinvests Casa Noble’s small profit back into the company. “Then who knows? What started as a fun idea turned into a hobby and now is a real business.”
By the way, the entrepreneur also is running a new defense-technology company called Trace Systems, which now has 175 employees and $30 million in annual revenue.
That idea was launched over a cup of coffee at the Starbucks on Dupont Circle rather than a glass of tequila. He has the napkin to prove it.
For previous Value Added columns, go to postbusiness.com.