The tequila boom is over. The tequila price war has begun.

Sales of the Mexican liquor soared over the past decade, making it the second-most popular spirit in the U.S. after vodka. But demand for tequila has cooled, and drinkers are looking for cheaper pours.

High-end brands including Diageo’s Casamigos and Bacardi’s Patrón have been lowering prices for more than a year, according to an analysis by equity research firm Bernstein. Until recently, a 750 milliliter bottle of Casamigos Blanco typically sold for more than $45, according to industry tracker IWSR. Now it sells for as little as $40, depending on the location.

U.S. sales volume of tequila, mescal and other agave-based spirits were roughly flat in 2024, according to IWSR. Sales fell in ultra-premium tequila, priced between $45 and $99.99, and grew in the middle tiers priced between $22.50 and $44.99.

Diageo said that to meet different consumer needs, it is now positioning Casamigos at a lower price point than its Don Julio brand. Pricing for Casamigos “got out of whack from where it needed to be," in part because of out-of-stock problems during the Covid-19 pandemic, Chief Executive Debra Crew said.

“In stores where we have actually implemented the right pricing strategy, we are seeing improvements," she said Tuesday on a call with analysts.

The move by consumers away from pricey tequila marks a reversal of a yearslong trend. Until recently, many consumers had been trading up to more expensive wine and spirits. Tequila, once associated with sugary margaritas and eye-watering shots, grew in popularity thanks to celebrity endorsements, increased interest in craft spirits and a shift toward drinking less but better.

Spurred by these trends, Diageo in 2017 agreed to pay up to $1 billion to buy Casamigos, the tequila brand co-founded by actor George Clooney.

President Trump’s threat of a 25% tariff on Mexican imports—currently on hold for a month after a deal he struck with Mexican President Claudia Sheinbaum—has added more uncertainty for tequila makers and importers. Tequila and mescal must be made in Mexico, just as sparkling wine can be labeled as Champagne only if it is made in a certain region of France.

Diageo on Tuesday withdrew its medium-term sales forecast and said U.S. tariffs on goods from Mexico and Canada could amount to a $200 million hit on its annual operating profit. Imports from the two countries represent about 45% of Diageo’s U.S. sales. The company’s shares are down more than 5% since Monday’s close.

Max Murphy, founder of Tozi Imports, an importer and distributor of Mexican mescal, gin and wine, said Trump’s promise in January to enact tariffs in February made it difficult for him to plan for the year.

His Woburn, Mass., company normally places its biggest orders in January and February so that the wine and spirits can be shipped before temperatures begin climbing in May. Murphy held off on placing orders this year because he wasn’t sure if or how new tariffs would affect his company.

“It’s just my wife and I," Murphy said. “And if all of our inventory suddenly jumps 25%, there’s a good chance it could put us out of business."

Tequila until recently has been a bright spot for the alcohol industry, which is struggling to retain drinkers. U.S. alcohol sales are declining because of consumer health concerns, expanding legalization of cannabis and a generational shift toward less alcohol consumption. The U.S. government is considering lowering the recommended limit of drinks a day that people can safely consume.

The looming tariff threat could give tequila makers a temporary bump in sales.

Knowing that prices could soon rise, Brian Harrison in January stocked up on his favorite tequila and splurged on a couple of fancy bottles he hadn’t tried before. Harrison, a 35-year-old systems engineer at a technology company, said he worries what tariffs could mean for the tequila industry.

“I know one of the best things I can do," Harrison said, “is keep buying it."

Ruth Simon contributed to this article.

Write to Laura Cooper at laura.cooper@wsj.com.