Spirits in the EastBy Chris Mercer
Would anyone care to name the fastest growing spirits market in the Far East over the past five years?
Step forward Vietnam. It might not match China’s scale, but a surging economy has put the country in the mood to drink, and drink well.
Foreign distillers are happy to oblige. Spirits sales in Vietnam reached US$425 million in 2011, up by 120% since 2006, according to Euromonitor International. While the country remains one of South East Asia’s smallest spirits markets, its glittering growth has attracted big names. Diageo is on board via a joint venture deal with the country’s leading branded spirits player, Hanoi Liquor Joint Stock Company, offering an instant distribution network.
What price for a Diageo takeover within five years? Pernod Ricard is also at the party. “You really can’t underestimate the strength of Scotch in Vietnam,” says Peter Prentice, vice president for Asia-Pacific at Pernod Ricard’s Chivas Brothers business.
What’s driving the growth? “The Vietnamese are extremely perspicacious,” Prentice tells The Spirits Business. “Vietnam was like a goldfish bowl with a one-way mirror: you couldn’t look in, but they could look out. They’re aware of what’s going on in China.”
What’s going on in China and other emergent powerhouses across South East Asia is that affluent young consumers, officials and business leaders are developing a taste for the finer things in life. Why else would Diageo transfer the headquarters for its superpremium Reserve Brands portfolio to Singapore, as it did last year?
Centre stage for Scotch
Even Japan, an old head, is rediscovering its love for whisky thanks to the Highball phenomenon. The figures show this super-premium trend is now being replicated in Vietnam.
Total whisky sales in the country are up 91% in value versus five years ago, while volumes have risen by a relatively paltry 40%. No wonder that Prentice picks out the US$70-a-bottle Chivas Regal 18 Year Old Gold Signature as a key performer. Scotch whisky is already taking centre stage in this piece. It’s nigh-on impossible to chart South East Asia’s emergence on the international spirits scene without raising a dram in Scotland’s direction. Beyond the Cognac superlatives, old colonial ties and trading routes have provided fertile ground for Scotch distillers to build a Far East empire in their own right.
To add some context, the wider region of Asia-Pacific, which includes India, accounted for almost a quarter of global Scotch sales by value in 2010, according to Sanford Bernstein analysts. “Asia-Pacific and Latin America have accounted for over 70% of the growth in premium Scotch over the last 10 years,” the analysts note. In the Far East, Singapore, Taiwan and South Korea are in the top 10 Scotch markets by value in the world. In 2011, Scotch Whisky Association (SWA) figures show that exports to Taiwan jumped by 45% on 2010, to £155m (US$250m), overtaking Germany.
Scotch exports to Singapore, which acts as distribution hub for the rest of the region, rose by 44% to £318m, maintaining its position as the third-largest destination for Scotch behind the US and France.
For now, it is very much about high-end blends, spearheaded by the likes of Royal Salute 62 Gun Salute or The John Walker. Single malts, though, could cash in as markets mature. “In markets like Singapore and Malaysia, there’s an interest in richer malt products, for example,” says James Sykes, marketing director for Beam Inc’s Asia-Pacific operations. “Those with a healthy Scotch category where consumers already understand the brands and products are of particular interest,” he adds.
Ronnie Cox, brands director at Berry Bros & Rudd’s spirits division (The Glenrothes, No 3 Gin), is similarly optimistic. “At the moment, [markets such as Hong Kong and Singapore] are fledgling, but in the next five to 10 years they will be serious markets for single malt,” he predicts. “There’s a growing tendency of the younger generation to get to know Scotch whisky.”
Prentice, meanwhile, sees a single malts “explosion” in Taiwan, but he concedes that it is working off a small base. “The Glenlivet is doing spectacularly well after many years of seeding, but we’re not in a hurry,” he says.
For Cox, the signs are promising. “There are a growing number of people becoming pretty well-read on single malts,” he reports. “One of the things the Taiwanese have always done is drink quite a lot. It’s a place where karaoke bars and a bottle of whisky on the table is completely normal.”
More generally, work to lower the import barriers is a big part of the international spirits story in South East Asia. Cutting tariffs will continue to be important in laying the foundations for further growth. The European Commission has consistently made spirits tariffs a “red line” in its negotiations on Free Trade Agreements (FTAs) with countries in the region.
For example, last year’s FTA with South Korea will see tariffs on European spirits imports reduced by 5% per year, starting this July. In 2011, both the US and EU forced the Philippines to agree to cut tariffs via a complaint to the World Trade Organisation.
A spokesperson for the SWA told The Spirits Business that advanced FTA negotiations are taking place between the EU and Singapore, with Malaysia talks also under way.
Moving into 2013, the European Commission plans to turn to Vietnam and Indonesia, with the possibility of FTA talks with Thailand and the Philippines within the next couple of years. “It definitely helps,” says the spokesperson. “It also means we know more about what’s going on in, for example, South Korea, such as any [proposed] regulations.”
Counterfeiting remains something of an unknown quantity, particularly in China. Authorities, however, are getting tougher on the cheats, backed by the country’s legal recognition of Scotch as having a protected geographical indication. “It’s still an issue, but it’s becoming less of an issue,” says the SWA spokesperson. “The Chinese authorities have been very helpful in helping us deal with it.”
The SWA works with two law firms in China, alongside local authorities and individual companies. Stamping out fakes will continue to be a challenge as distillers stretch into the country’s hinterland. So-called “third-tier” Chinese cities – most of them larger than some Western capitals – are the next step for big players. “There are hundreds of them – so many other places,” says Prentice.
It is this depth of opportunity that makes China impossible to ignore, despite tales of Vietnam’s raging thirst or Taiwan’s discovery of single malts.
If the country is to meet its projected spirits sales growth of 60% between now and the end of 2016, to US$79.7 billion, distillers will need to find ways of serving third-tier cities.
Back in the biggest cities of China, and across the Far East, foreign white spirits are seeking to dilute the region’s brown-coloured horizon. Is there any hope for them? China, after all, is predominantly a white spirits market thanks to its native baijiu. Diageo is seeking to capitalise on the super-premium end of China’s US$41bn baijiu market, via its recent deal to take control of native producer Shui Jing Fang.
Asian cocktail culture
What prospects, though, for international white spirits in China and neighbouring countries? Key cities are showing signs of life, according to some. “What’s changing is that people are becoming more interested in cocktails,” says James Hayman, director of Hayman Distillers. The family-held distiller visited Vinexpo Asia-Pacific in Hong Kong, where it presented its long-standing namesake gin, among other spirits. Hayman says there is already a taste for gin in South East Asia. “A lot of people forget that the Philippines is the biggest gin market in the world,” he points out. In China and Hong Kong, he says, it is a case of starting with top hotel bars and working outwards. “It’s not an overnight thing – we’ve got to be patient.”
Cox believes that gin has a “considerable future” in Hong Kong. “Many cocktail specialists who have trained in London’s modern classic bars have gone out to Hong Kong,” he says. “And, of course, Hong Kong is a gateway to China.”
Hayman and Berry Bros are not the only gin brand owners intrigued by the region. Sipsmith has recently launched in China and Chivas Brothers is pushing Beefeater 24, which contains Chinese green tea. More and more it seems that, whatever the colour, if it’s super-premium, it has a chance.
In March, Patrón Spirits launched its Tequila-based coffee liqueur, XO Café, in China. “Asia-Pacific continues to be one of our strongest growth regions,” says company spokesperson Greg Cohen. As the Far East holds up the world economy, distillers are salivating at the opportunities.