SB Interviews… Gilbert Ghostine, Diageo Asia Pacific

Within international spirits, Gilbert Ghostine – president of Diageo Asia Pacific is the most powerful figure in the region. In an exclusive interview with Tom Bruce-Gardyne he discusses Asia’s vast untapped potential.

Gilbert Ghostine, president of Diageo Asia Pacific

Beyond the world of casino banking, football and Formula 1, the words ‘only’ and ‘£6 billion’ don’t often sit next to each other in the same sentence. But this is Gilbert Ghostine’s estimate of the net revenue for international spirits in Asia Pacific where the total alcohol market is said to be worth a staggering £94bn.

“This gives you an idea of how much upside potential there is for leading brands here.” The 53-year-old president of Diageo Asia Pacific and his team are credited with reinvigorating the company’s performance in the region since his appointment in July 2009.

Born in Beirut, Ghostine joined the business in 1993 while working for its Lebanese distributor. He then began his steady ascent of the corporate ladder which led to running large swathes of Europe, the US and Africa, before settling in Singapore which also happens to be the home of Diageo’s Reserve Brands and its Global Travel & Middle East division. It is a pretty full-on job in other words, and attracts plenty of attention from head office.

Our conversation had to wait until a certain Paul Walsh had left town. “Yeah, I’ve just had the boss here for two weeks – it’s very exciting to have Paul in the region.” Later Ghostine tells me it was following his five-week Asian tour last year, that Walsh “went back to Europe and decided to invest a billion pounds in new facilities in Scotland”.

Brown spirits country

Not that the decision was made on the flight home on the back of an envelope, nor that burgeoning demand for whisky in countries like Mexico and Brazil played no part. But there is something special about Scotch in Asia, and the sheer scale of opportunity in emerging markets like greater China and India.

“The great news about China is that it’s a brown spirits market for international spirits. Cognac started the journey and now we’re starting to build the right foundations for Scotch,” says Ghostine. “If you think back to the European days when we were building the category, we used to bring Spanish, Portuguese and French consumers to Scotland.”

VIPs would have been given the full Scots baronial treatment at Drummuir Castle near Dufftown which Diageo has leased since 1994. With no direct flights from Shanghai and a seven-hour time difference, it was never practical to bring Chinese visitors there. “So what we’ve done is brought Scotland to China though our Johnnie Walker House”.

Entry to the inner sanctum of the Johnnie Walker House in Shanghai, China is extremely selective

Johnnie Walker House

The first of these temples to the brand opened in Shanghai in May 2011, Diageo having spent US$3.2 million (£2m) converting a villa in the city’s fashionable French Concession district. Ghostine calls it the company’s “most successful experiment in marketing and commercial innovation in Asia to date” and explains that the aim is “to help consumers understand the Scotch whisky category and immerse themselves in the art of blending whisky which is not very different from blending tea”.

Speaking of which, it’s a good place to wean the Chinese off their preferred mixer – sweet, green tea, which tends to drown any spirit. “It’s been very successful. We hosted 4,000 high-networth individuals in the first year and this gave us the confidence to open the Johnnie Walker House in Beijing in December which is four times the size.” A third is set to open in Korea later this year.

Entry to the inner sanctum of the Johnnie Walker House is strictly by invitation. The chosen few can request master blender Jim Beveridge to fly out and create them their own personal blend. Prices start at RMB 800,000 (£84,800). Lesser mortals can purchase one of the limited release bottlings such as the 1910 Edition with its 23 carat gold stopper for RMB 22,800 (£2,400).

What the original Johnnie Walker would make of it all one can only guess – it’s certainly a far cry from his grocery store in Kilmarnock where the brand was born.

Scotch in China

Ghostine believes the initiative has been crucial to the success of super-deluxe versions of Johnnie Walker like Blue Label whose Chinese sales have grown by 45% in the last two years.

However overall Scotch sales in China have been hit following the crackdown by newly elected president Xi Jinping on conspicuous gift giving and feasting by businessmen and party officials. After a frugal Chinese New Year, Paul Scanlon, international commercial director at Chivas Brothers, told The Spirits Business in March that 12-year-old sales were “flat or in slight decline”.

By contrast Cognac, with its long established roots in Hong Kong and eastern China, appears more resilient. Ghostine is undaunted by this, or by the fact Johnnie Walker is still eclipsed by Chivas Regal in China. “I wouldn’t use the word eclipsed,” he retorts. “You cannot be ‘eclipsed’ with a 35% market share.”

For all that, international spirits account for barely 2% of alcohol in a market where the fiery white spirit baijiu reigns supreme.

After 18 months of tough negotiations with the Chinese authorities, Ghostine’s team gained full control of the top-end baijiu Shui Jing Fang (SJF) in April 2012. “You cannot be the world’s biggest spirit’s company and not participate in the biggest category of spirits,” he says, by way of justifying the £600m deal. “It’s a win-win for everyone. It’s a win for the baijiu category because we’re taking SJF to the world.” Initially it will be aimed at Chinese travelling abroad, whose numbers are set to treble to 150m within 15 years. “In time we will get foreigners to enjoy SJF in Chinese restaurants where it’s really good with Sichuan cuisine,” says Ghostine.

Will Diageo’s baijiu brand Shui Jing Fang catch on in the west?

The Baijiu benefit

Whether it will ever catch on in the West remains to be seen, but it will certainly help Diageo penetrate deeper into the domestic market and Chinese meal times when baijiu is drunk. With SJF quoted on the Shanghai stock exchange, “we will be able to do more acquisitions in baijiu,” he adds. “None of our key competitors have a similar platform.”

For something completely different, he has high hopes for Bailey’s in China which could be “around a million cases in 10-15 years” and Guinness, up “20% over the last two years”. But Ghostine is keen to move the conversation on. “Lots of people who don’t understand Asia well only talk about India and China, but we see South East Asia as equally important. When you look at the profile of consumers, they are younger than the Indians and richer than the Chinese.”

Success here has given Diageo pole position in Scotch at all levels – standard, deluxe and super-deluxe, and reinforced Johnnie Walker’s position as the leading international spirit in Asia Pacific where its net sales grew 17% in the second half of 2012. Meanwhile North Asia contracted by 13%, thanks to a depressed whisky market in South Korea where Diageo’s leading Scotch brand Windsor fell by a quarter following a price hike in September. So far not even the threat of annihilation from Pyongyang has reversed the trend.

Size matters

Ghostine believes Diageo’s sheer size helps as “it gives us the right leverage with retailers and customers, which is especially important in building categories that are small scale in an Asian context”. As for the downsides of being a giant with 45 offices and nine production facilities in this region alone, he insists the company can be quick to react and seize opportunities.

“We have strong competence in building brands and in luxury marketing, but we have partners who bring consumer insight and a strong route to market. For Diageo it’s not solutions created in the UK, but solutions made close to the market that we work on fleshing out with our strategic partners.”

These include the Japanese brewer Kirin, Halico – Vietnam’s biggest distiller, as well as the longstanding joint venture with Moët Hennessy in China, now in its 22nd year.

All being well, this list will soon include the world’s biggest spirits producer as Diageo’s £1.28bn bid for 53.4% of Vijay Mallya’s United Spirits in India reaches its conclusion.

Unlike the Chinese middle classes who are slowly acquiring a taste for international spirits, India is already “a Western-style spirits market”, says Ghostine. “With Indian-made foreign liquor (IMFL) you have Indian whiskies, Indian gins, Indian vodkas and Indian rums. All these categories are well-established Western categories.” In other words, consumers already aspire to drinking international spirits which are unaffordable for many thanks to the 150% import tariffs their government has imposed.

Ghostine believes this protectionist wall will come down. “The Indian authorities are more open to a deal on this today than they were a few years ago. Our understanding is that it’s not held back by spirits and wine, but by other categories which gives me confidence that it will be resolved.” For now “the bulk of Scotch whisky shipments in India go to duty free”, he says. It won’t happen tomorrow, but if the tax barrier disappears pent-up demand for Scotch among Indian consumers could drain Diageo’s warehouses in one gulp.