Rich pickings to be had by all

The Far East, led by China is a positive cauldron of activity for both Scotch whisky and Cognac – but competition has grown, in tandem with the rapid expansion.

It’s becoming more and more obvious that Asia – notably China, India and the emerging markets like Vietnam –  holds the future of the drinks industry in the palm of its hands.

That may sound a tad dramatic but certainly for Scotch whisky and Cognac it is a vital and throbbing lifeline, moreover taking into consideration the sheer numbers of potential consumers, coupled with the burgeoning middle class armed with disposable income, plus an increasing desire to travel the world – well it all adds up to a pretty heady cocktail for both domestic business and duty free.

China, now the world’s second biggest economy, is the hub of the Far East, it used to be Japan of course – but those days are long gone. China’s GDP is set to grow by 10% this year and 9% in 2012 – in short the earning power of a vast band of consumers is increasing all the time. It’s a similar story in Taiwan and Hong Kong, South Korea and Vietnam – which  “is very, very dynamic” at the moment.

In the last nine years total Scotch in the Asia Pacific region has grown by 3.6 million cases and within this single malt has grown by 900,000 cases, with Taiwan accounting for the lion’s share – that is already double the growth of the Americas – so to call the region dynamic is no misconception.

Both Diageo and Pernod Ricard’s first half financial results further highlight the growing significance of the region and while the French multinational has the advantage with its luxury blended Scotch whiskies headed by Royal Salute and Chivas Regal together with the Cognac Martell – Diageo is mounting a serious charge in the region, particularly when it comes to key selling periods like the Chinese New Year.  This the company sees as a “cultural opportunity” to engage with consumers in markets across the Asia Pacific region and invite them to celebrate with Diageo brands – but of course.

Its flagship Scotch Johnnie Walker was up in volume by 9% over the first six months and the brand made share gains in both the key deluxe and super deluxe segments. Additionally there was an increase in marketing spend behind super deluxe Scotch in order to capture the growing preference of Chinese consumers for super premium lines – which helped drive net sales of 22% as well as share gains in this segment.

Johnnie Walker is also leading the charge in South East Asia. In Thailand the economic recovery and increased brand building activities behind Johnnie Walker led to a 19% net sales growth and across the region it was all double digit increases.

The multinational has further strengthened its presence in the ‘dynamic’ market that is Vietnam. It has formed a strategic partnership with the country’s number one drinks force, the Hanoi Liquor Joint Stock Company (Halico). In addition Diageo has agreed to acquire a 23.6% stake in Halico from VinaCapital Vietnam Opportunity Fund Limited, for approximately £33 million.

Halico is the largest domestic branded spirits producer in Vietnam.  The strategic partnership agreement with Halico represents a significant venture by Diageo into the fast growing Vietnamese branded spirits sector.  Halico is well-positioned to benefit from this growth given its significant distribution scale and recent investment in a new state of the art production facility.

As Halico’s strategic partner, Diageo will assist Halico in enhancing its capabilities across a range of functions, including innovation, branding, supply, distribution and corporate relations.  In return, Diageo will become a long term equity investor in Halico and its main brand Vodka Hanoi.  In parallel and separately, Diageo will continue to develop its international premium spirits portfolio, led by Johnnie Walker, Smirnoff and Baileys, through its wholly owned subsidiary Diageo Vietnam.

Over in Korea Diageo outperformed a broadly flat Scotch market. Windsor extended its position as the leading brand by 1 percentage point driven by the strong performance of Windsor 12. A price increase on the brand taken in September 2010 drove 5 percentage points of positive price/mix. Diageo Korea continued its strategy to grow the brand range beyond blended Scotch whisky, launching super premium products: Classic Malts, Ketel One vodka and Zacapa rum.

Korea is of course the prime stamping ground for Pernod Ricard’s Ballantine’s Scotch, which with its aged range particularly 17, 21 and 30 Year Olds is making good progress. Its sponsorship of the Ballantine’s Golf Championship is beginning to pay dividends too, in terms of visibility for the brand, and has even spawned a Ballantine’s Championship Limited editions Scotch whisky. “It’s much better than 18 months ago – Korea took a nosedive but it’s pulled out of it quickly,” says global brand director Peter Moore.

Outside Korea, China Taiwan, Japan and Travel retail are the prime stamping grounds and “things” are starting to happen in Vietnam – considered by many as an up and coming mini China. As in Korea 17 and 30 Year Olds are the figureheads in Japan, while in China it tends to major on Ballantine’s 12 Year Old – the company has also introduced a 15 Year Old which is exclusive to the market.

In Taiwan, which has become something of a Scotch malt whisky stronghold – and that’s quite possibly the understatement of the year so far – Ballantine’s blended malt “has done very well”.

Taiwan is the exception in Asia in terms of its predilection for single malts and it is the Edrington Group and its flagship The Macallan leading the way.  The company’s commitment across the region, along with its distributor the Shanghai-based Maxxium is “very, very serious” and considering the region now accounts for 50% of its business this is not surprising.

Things are going well with “very healthy double digit profit growth”. The Macallan 12 Year Old Sherry wood, the 18 Year Old and the Fine Oak 12 are the main drivers.

“We are very bullish about the region,” says the company’s Ken Grier, “and we are on course to double the size of the Macallan business over the next 10 years.”

China, Hong Kong, and Taiwan – where the Macallan is racing ahead by 27% are the key markets but the brand is beginning to make gains in South East Asia. “We are flaring strongly and very healthily in Singapore, Malaysia, and Vietnam it’s all look very good,” says Grier. “And we’ve had a stellar performance in South Korea with volume advancing  over 30% year on year – we’re right on the coat tails of Glenfiddich – across the whole region the Macallan is very, very strong – it’s considered to be the Rolls Royce.”

Over in the Glenfiddich, that is the William Grant’s camp, things are also very positive. “We’re doing very well – more than matching our expectations – it’s very competitive but everything is growing,” says managing director Asia Kevin Fong.

William Grant’s activity in Asia is fronted by the single malts Glenfiddich and the Balvenie, which are positioned above the big super deluxe blends fielded by the likes of Diageo and Pernod Ricard. Combined the two single malts contribute over 90% of the revenue for Asia Pacific, and only  William Grant’s US business does more – but that will change. “In about three or four years Asia will be the number one, and if you factor in travel retail – it will be even sooner,” says Fong.

So across the region it’s a very positive picture for both Scotch whisky producers and for the big Cognac houses too – but there are still rich pickings to be had by the smaller players though the cost of entry can be prohibitive.

“The Far East is the most exciting market for Cognac at the moment, in terms of value. Asian consumers are ready to pay a lot for ultra-premium goods, among them cognac,” says Dupuy’s Hervé Bache-Gabrielsen.

“We have started to promote our brands in China, and we have a historical importer in Taïwan. Japan is also demanding more Dupuy Cognac at the moment, which is strange as this market is declining for many years,” says Bache-Gabrielsen.

The company is currently “working on some new partnerships” in Vietnam – where 10% of its turnover comes from. “We are investing most of our time, efforts and money in this part of the world to reach 20% within the next 12 months. Vietnam seems to be the new Eldorado for Cognac but again big brands are making costs of distribution and promotion unaffordable.” Apparently some top night clubs in Hanoi are asking for US$1million listing fees a year and they are getting it.

“In general demand for less known brands is increasing as it’s a way for importers to guarantee themselves against fake products and counterfeiting is very common for the big brands,” says Bache-Gabrielsen.

There’s a high price to get into the duty free arena as well, with the big brands pushing costs even higher as they are fighting for the best awareness and position in the market. But overall there is a strong demand for VSOP as well as exclusive Cognacs above XO. “We can see also a very strong interest for Limited Edition Cognac, which is a very interesting niche market for medium-sized companies.

“In mainland China, the potential is more on regional cities, where competition is less aggressive compared to big cities like Shanghai and Beijing,” says Bache-Gabrielsen.

The route to market may be expensive in Asia but in terms of growth it has to be worth it. The demand for high end lines is steaming ahead, for starters the Scotch whisky entry level is 12 Year Old and that makes for some interesting calculations on the Scotch whisky production front, but it also makes for a good return on investment.

Furthermore with the burgeoning economies, notably  China, Hong Kong, Taiwan and Vietnam to name but a few the region is likely to remain a “very, very dynamic marketplace”.