LITTLE ROCK — Echo Hopkins’ love of tequila began with a happy hour margarita at the Blue Moon Mexican Cafi in Bronxville, New York. Four years later, her tastes have matured, and she now eschews cheap margaritas in favor of tequilas costing $10-plus a shot meant to be sipped and savored.

“As you move on from college you begin to realize you can enjoy tequila slowly,” said the 25-year-old art researcher.

Hopkins is the kind of consumer that spirits giant Diageo Plc is counting on as it revamps its tequila business. With U.S. consumption of the fiery Mexican tipple climbing and more drinkers shifting upmarket, the London-based distiller last month said it would terminate a distribution deal with Jose Cuervo after 16 years.

As Diageo prepared to release results, analysts said abandoning the deal with Cuervo, the world’s top-selling tequila, was a smart move - even if it meant losing $470 million in annual sales.

“It probably makes sense that Diageo walked away,” said Trevor Stirling, an analyst at Sanford C. Bernstein. “Diageo perceives that all the growth in tequila has been in premium brands. Cuervo isn’t premium.”

Larry Schwartz, Diageo’s North America president, in December said any replacement for Cuervo would have to be premium. Without naming any brands, Schwartz said the company was mulling whether to develop a high-end tequila, acquire a small brand pricier than Cuervo, or find a partner.

Diageo, which posted $16.8 billion in sales last year ofbrands ranging from Smirnoff vodka to Guinness beer, had been in talks to buy the Cuervo brand, which analysts say would have fetched some $3 billion. In December, Diageo said those negotiations had failed, and that by June Diageo would no longer distribute Cuervo. Diageo stock has since declined 1.2 percent.

Tequila, distilled from the roasted hearts, or pinas, of the spiky blue agave plant in Mexico, is gaining in popularity, especially in the United States, its biggest market. American consumption rose at an average annual rate of 4.1 percent from 2006 to 2011, according to researcher International Wine & Spirit Research, almost double the growth of the total U.S. liquor market.

More important for Diageo, pricier varieties are expanding the fastest. The market for tequilas that sell for morethan $20 a bottle has increased more than 10 percent over the past five years, IWSR reports, attracting global distilling companies.

In 2007, Davide Campari-Milano SpA bought 80 percent of Cabo Wabo, a premium tequila, and it acquired San Nicolas, another upscale brand, the next year. In 2011, Pernod Ricard SA signed a joint venture with upmarket Tequila Avion.

Tequilas priced under $20, which make up over half of the U.S. market by volume and the bulk of Cuervo’s sales, have slid 1.1 percent over the past five years. Cuervo’s market share in the U.S. has fallen to 34 percent from 45 percent over the same period, Liberum Research estimates. The majority of tequila consumed is in cocktails like margaritas, according to Kevin Vanegas, Master of Tequila at WirtzBeverage Nevada, a Las Vegas liquor distributor.

After Diageo announced it would no longer sell Cuervo, speculation mounted that it was looking at Beam Inc., which makes Sauza, the third-biggest tequila brand in the U.S. The buyout speculation has sent Beam’s shares up 5 percent since then.

The high end of the tequila market is dominated by Patron, part-owned by Bacardi Ltd. Patron sold 1.66 million cases in the U.S. in 2011, double that of its next competitor, Grupo Cuervo’s 1800 brand, IWSR estimates. Potential targets abound: There are more than 150 tequila distilleries in Mexico producing more than 1,500 brands, according to Vanegas.

All tequila is made from agave, but Jose Cuervo and Sauza are “mixtos,” containing as much as 49 percent alcohol made from nonagave sugars.

Business, Pages 62 on 02/03/2013