BRIC countries hold key to Scotch’s future

From the vast untapped potential of India to booming sales in Russia, the BRIC economies hold the key to Scotch whisky’s future, as Tom Bruce-Gardyne discovers.

Scotch’s presence has expanded throughout the world in the last decade

In 2003 the prospects for blended Scotch were mixed to put it mildly. In the mature markets blends were failing to recruit the next generation of whisky drinkers, while excess stocks put a serious squeeze on margins.

Among the emerging economies, the Chinese and their well-publicised thirst for Chivas and Johnnie Walker provided the greatest hope.

Ten years on, the talk has moved way beyond China, and the industry can barely keep up with demand. What a difference a decade makes.

Wetake an in-depth look at what the future holds for Scotch, both blends and malts, in the world’s largest emerging economies, Brazil, Russia, India and China.

Brazil’s middle class and soaring population is discovering more imported spirits

Brazil

Brazil is the biggest market for the world’s biggest brand of Scotch – Johnnie Walker Red Label. In Diageo’s interim results for the second half of 2012, reported net sales for the PUB nations of Paraguay, Uruguay and Brazil were up by just 1%, following sharp price increases caused by the devaluation of the Brazilian Real which particularly hurt cross-border trade.

Yet “despite some destocking ahead of route to market and taxation charges” business in Brazil is described as “robust” and Diageo claims to have grown its market share of Scotch by 2.6%.

“One of the reasons we have done so well in places like Brazil, is that they have been pretty stable and less volatile than in the past,” says Nick Morgan, Diageo’s head of whisky outreach.

He also cites the ‘Keep Walking Brazil’ campaign as a classic example of tailoring a global message to the market and making it relevant to consumers.

Johnnie Walker’s rivals are some way behind. “Yes we’re competing with a formidable brand,” says Paul Scanlon, international commercial director at Chivas Brothers. “If Red Label is on 1.2-1.3 million cases and Black Label is at about 200,000 cases, we sell just over 100,000 cases of Chivas.”

The brand is “targeted at more urban, sophisticated cities like São Paulo, Rio and Brasilia,” while Ballantine’s is “mainly in the north-east of the country.” The company’s biggest-selling standard blend is “definitely starting quite a bit behind Red Label”, concedes Scanlon, “but we have put in a lot of investment over the last two years”. Much of this has revolved around music with the Loud Blue campaign involving top DJs.

With a population pushing 200m and a surging middle class keen to express their new-found wealth through international spirits, Brazil is a very attractive market for Scotch, though not everyone has yet made the move.

“It’s a Diageo market,” says Stephen Marshall, Bacardi’s global marketing manager for single malts and recently brand ambassador for Dewar’s. “I like Brazilian funk, but we don’t really sell any whisky there.”

A Russian duty hike has closed the price gap between blended Scotch and vodka

Russia

Russia, by contrast, has definitely not been stitched up by Diageo. With barely concealed glee, Marshall claims that William Lawson’s is “now the country’s biggest imported spirit” having gone from a standing start to almost a million cases in five years.

Asked how, he says: “Because we went in with a good, fresh attitude, and a young team. We shouldn’t take much credit for it in Scotland – it’s the local team that did the work.”

After launching in the off-trade, Lawson’s was rolled out into the on-trade two years ago with a training programme involving some 600 Russian barmen and regular distillery visits in Scotland.

Shipments of bottled-in-Scotland blends were worth almost £33m in 2011, according to the Scotch Whisky Association (SWA). Scanlon predicts that in four or five years “Russia will probably be one of the two top markets in terms of margins”, which he says, are already twice that of China, India and the

US. “It’s because it’s quite a closed market. Nothing goes in or out of Russia without proper strip stamps – so it doesn’t suffer from parallel trading.”

The market is described as “extremely competitive and very vibrant” by Rob Bruce, head of global PR at Whyte & Mackay. “I was there in October, and I’ve never seen so many blends and brands competing for share of space and share of the night.”

Leonard Russell, managing director of Ian Macleod Distillers, whose whiskies are distributed by Russian Standard, talks of “excellent further potential for Scotch,” while Chivas Brothers and Diageo report double digit growth.

Apart from Russian red tape and the country’s lax intellectual property laws, the only downside is that the market has gone “dark” following a crackdown on alcohol advertising. According to Scanlon, “It means you can only really do print and some digital ads.”

But the recent hike in duty aimed at reducing alcohol consumption has actually benefited Scotch, by narrowing the price gap between standard blends and domestic vodka. In 2015, there is the prospect of a 30% cut in import tariffs now that Russia has finally joined the WTO.

India remains a challenging market for Scotch

India

India is potentially the biggest prize of all with its fast expanding middle class and a proven love of ‘whisky’. Most of it is produced from molasses and tastes like a badly made rum, but what matters is the name. Drinkers of Bagpiper or Black Dog do not aspire to drink Bacardi.

They aspire to Teacher’s, Ballantine’s, Chivas Regal and that ultimate statement that you’ve made it – Johnnie Walker Black. What holds them back is the eye-watering 150% import tax. This would slowly disappear if and when the Indian government signs up to the EU free trade agreement.

After years of lobbying, “the SWA is hopeful of an agreement in the next two or three months”, Pete Wilkinson, the SWA’s director of international affairs told The Spirits Business.

For now, “A bottle of Chivas that you can buy in most countries for US$30 costs you $65-70 in India,” says Scanlon. Not that his brands are suffering unduly. “Across the piste, there is double digit growth from 100 Pipers to Ballantine’s Finest to Chivas Regal.”

At the top end sales of Royal Salute are up by almost 50% apparently, despite a price tag of $200 or more. And if that wasn’t enough, the company has a 15m case Indian spirit in Royal Stag – making it by far the biggest spirit in Pernod’s drinks cupboard.

Meanwhile Diageo is gearing up to complete its majority buy-out of United Spirits announced in November. This will enhance the company’s distribution network no end, and perhaps give it more leverage over the authorities and their foot-dragging response to import tariffs. To gauge the scale of pent-up demand for Scotch in India you only have to visit a country like Dubai where Indian expats have helped turn Leonard Russell’s King Robert blend into a 800,000 case brand.

Whether there will ever be a level playing field on tax remains to be seen, but if the tariffs came tumbling down tomorrow the Indians could drain every Scotch whisky warehouse in one gulp. Perhaps luckily, things move slowly in India.

China’s undying love for Cognac is not bothering the Scotch brands

China

China now imports more Cognac than Scotch thanks to the success of brands like Martell. That news would have sent a severe chill through Scotland a decade ago, but the fact it went largely unreported speaks volumes.

Today, the rest of the BRIC economies can more than take up the slack and that is before you mention Mexico, Eastern Europe, Taiwan and the untapped potential of Africa. Besides, Chinese demand for Scotch is still growing, just not as quickly as before.

“I see the Scotch market being roughly 3-5% up this year,” says Paul Scanlon whose brands enjoy a market share of almost 60%. “Ten years ago Chivas 12 built the Scotch category [in China].”

Today he reckons 12-year-old sales are “flat or in slight decline”, while standard blends like Ballantine’s Finest and top-end whiskies like Chivas 25 and Royal Salute, now pushing 50,000 cases a year, are showing good growth. In other words the market has polarised.

“The emergence of Scotch in China has only been in the last 10 years, and focused on a small number of big cities,” says Morgan. Diageo and Pernod Ricard have certainly built powerful brands there, the question is whether they have really built the category.

Morgan admits that “there isn’t a great deal of whisky culture at the moment in China” and without creating one, the success of whisky brands “will probably be great, but short-lived. We want sustained growth and sustained business which is exactly why we’re making the sort of investment we are in education to build that awareness and understanding which of course builds the entire category”.

“What’s making it difficult,” adds Scanlon, “is a slowing down in KTV’s (Karaoke bars) and in gifting. Culturally in China there has been a shift away from too much conspicuous consumption. It’s not good for some of these business people to be seen drinking these very expensive premium Cognacs and whiskies.”