Diageo defends faith in beleaguered baijiu business

Diageo CEO Ivan Menezes has defended the group’s decision to write down the value of its beleaguered baijiu, Shui Jing Fang, claiming investment in the brand was not a mistake.

Sales of Diageo’s super-premium baijiu Shui Jing Fang fell by 78% last year

Sales of the super-premium sorghum-based spirit fell 78% in 2013/14 as a result of the Chinese crackdown on gifting, prompting Diageo to write down the value of the brand this week by £264 million.

The decline impacted Diageo’s overall net sales for the fiscal year, which fell by £1.1bn to £10.2bn.

While Menezes admitted 2014 had been “tougher than I expected”, he argued that the downturn was “unexpected”, and despite the dramatic decline in sales, which were impacted by more expensive brands reducing their prices, baijiu is still “a very profitable category”.

“The question for me is did we make the right decision and is this the right category to be in?” he asked. “It is the right category. It was very tough for us to get into it; it took seven years of persistent effort. We are the only multinational that has a terrific brand in what is 60% of the china beverage alcohol market. Could I predict that the anti-extravagance stuff would happen? No. But we will rebuild from here.”

Diageo increased its stake in Shui Jing Fang owner SJF Holdco to 100% in 2013, giving it a 40% share of the baijiu brand.

Menezes revealed Diageo has a growth plan to rebuild its baijiu business in China, beginning with introducing two new variants at lower price points.

However, Shui Jing Fang, which retails for around US$100 for 500ml, will remain a super-premium brand.

This is high margin, high value business,” he said. “We will keep the full ladder… but we fully expect the high end of the market to be there. It will be in a different consumption occasion and less in gifting and banqueting, but there are still a lot of wealthy Chinese who when they entertain for private purposes, really want a high quality baijiu.”

With the majority of baijiu consumed in a “in meal” setting, Diageo intends to reap its losses by introducing its new single grain Scotch whisky brand Haig Club, launched this year in partnership with retired footballer David Beckham, as a mealtime whisky.

“Our goal with Haig Club is to build it into the at home ‘in meal’ occasion, and in parts of southern China we will be going in together with Shui Jing Fang in distribution.”

The part of the baijiu market impacted the most by cutbacks in corporate and government entertainment spending, is restricted mostly to the ultra- and super-premium end of the spectrum.

Diageo expects the baijiu category to recover by the end of the year, although “destocking in Asia will continue through 2015”.