Middle East is ‘polarised market’ for spirits
While the Middle East is currently marked by strife and conflict, its great contradiction is its potential for spirits businesses, both in the high-end market and at entry-level.
Even without the recent tensions in the region, the Middle East has long been a part of the world synonymous with conflict and contradiction. These are lands that have spawned great civilisations, but also brutalising violence.
For international spirits businesses too, the Middle East is awash with paradoxes: a playground for the super-rich, but also a significant consumer of entry-level products. They are expanding markets which, if those tensions can be eased, provide great promise for the future – but which are also restricted by religious doctrine and tight rules on the promotion of alcohol.
Let’s start with the positives. The United Arab Emirates (UAE), set to strengthen its position as the leading spirits market in the region in the next few years, has one of the world’s highest GDP per capita figures, recording an economic growth rate of 5.2% in 2013.
That’s translated into a 5-8% growth rate for the luxury goods market across the GCC (Gulf Cooperation Council) states, mainly driven by tourism growth, according to a Bain & Company study quoted by David Freeborn, managing director of Pernod Ricard Gulf.
Dubai continues to be the main driver of this growth, accounting for 30% of the Middle East luxury market and 60% of the UAE luxury market, but there are signs of change here, with Freeborn highlighting the emergence of Abu Dhabi as a new beacon for luxury travel.
And travel is the key here; while the domestic luxury market is growing, it is being comfortably outstripped by travel retail, in turn driven by the billions spent on transport infrastructure across the Gulf in recent years.
“It is a key market for luxury brands and especially for luxury whiskies,” Freeborn says, noting a doubling of volumes in the UAE for luxury blended Scotch Royal Salute between 2010 and 2014.
This current buoyancy and the potential for the future is driving companies to maximise distribution opportunities, with Edrington developing a new Middle East joint venture, Edrington-Fix, and about to launch a global travel retail arm.
“In the Gulf region airlines and airport infrastructure are growing rapidly, so travel retail is a key part of the market,” says Edrington-Fix managing director Igor Boyadjian. “Proximity to this fast-growing market was a key element behind the establishment of Edrington-Fix.”
It’s the kind of work that Diageo has been putting in for some years now, reflected in Johnnie Walker’s leadership position in whisky, the number one spirits category in the region. But beyond Scotch, Marwan Badri, regional director for Middle East and North Africa, highlights “strong double-digit growth” in all categories – Baileys and Cîroc being stand-outs – and sales up 19% for Global Travel Asia and Middle East (GTME) in the year to June 2014, with the Middle East the main driver of that growth.
“An interesting point to note is that we are seeing markets largely influencing each other,” Badri adds. “As domestic sales grow, we find that consumers increasingly have more finely attuned radars for duty free shopping. In fact, duty free in particular is a market we see lots of opportunity in, both currently and for the future.”
At the luxury end, it’s all about ex-pats and travellers, with communities from the Middle East, the Indian sub-continent and Asia all driving rising sales, says Freeborn. For Royal Salute, polo is used as a catalyst to engage luxury consumers, part of a global association which finds local expression in the Royal Salute Nations Cup in Dubai – a leading event in the global polo calendar for the last five years.
Opportunities at entry-level
But the Gulf isn’t all about luxury. Ian Macleod Distillers has recorded excellent sales in the region for its entry-level blended Scotch King Robert, says director of marketing Iain Weir. “There are a lot of Indian workers on large construction projects who enjoy purchasing King Robert and bringing it back to India – we’re seeing a lot of that,” he says.“It’s not really a brand for the seven-star hotels, but there’s definitely a demand out there.”
Parallel trading from the Middle East into India and North Africa is also a factor. Jeremy Cunnington, senior alcoholic drinks analyst at Euromonitor International, agrees that the UAE is a “polarised market, with quite a lot of volumes sold in entry-level spirits such as Scotch, as well as a sizeable market for Indian whiskies”.
Beyond the UAE, violent conflict and political strife currently characterise the other leading markets of the region: Israel and Egypt. Cunnington says it’s “too early” to tell what longer-term impact these tensions will have on the region, but adds: “Spirits consumption is sensitive to the economic performance of the country, particularly in developing markets in the Middle East and other regions.”
In general, the favoured approach is to watch and wait, mindful of the pressures brought by the security situation, but also of the longer-term potential. “Some of these very unstable countries have the potential to be sizeable markets for the future, so it’s very important to keep them on the radar,” says Boyadjian.
“In terms of future opportunity, though Egypt has been badly affected by political instability and that has had a big impact on tourist numbers, we currently expect to see recovery over the next couple of years.”
This patient approach is extended to the ways in which companies navigate the manifold regulations affecting alcohol consumption and advertising. For Boyadjian, there’s at least something to be said for clarity: “There are varying levels of sensitivity around alcohol, ranging from being completely forbidden to strictly regulated, but generally we find that there is a clear framework of rules within which we can operate,” he says. “Travel retail also acts as a great opportunity to showcase our brands in a more neutral environment.”
In Turkey, the tightening of rules on advertising and promotion has made life tougher for marketers, although Badri says Diageo’s leading position prior to the introduction of these rules has given the company an advantage.
Meanwhile, the use of new media can help to continue a dialogue with consumers, although by its nature it encourages a deeper contact with fewer people, which can delay mass consumer penetration.
But whatever the longer-term growth prospects of markets in the region, in 2014 the focus is squarely on the Gulf and, in particular, luxury spirits and travel retail. Can the growth here help take up some of the slack from the downturn in China?
“They’re not comparable in terms of volume, but the Gulf airports are driving more and more passenger traffic and the beauty of these airports is that they capture a global audience,” says Boyadjian.
“Eighty to 85% of travellers are transit passengers in the Gulf, which is as much as double the rate you’d find in Europe. These are passengers heading to the Far East, the US, Russia, Europe. Airports are by their nature global places, but the Gulf airports are in a class of their own.”
Local tensions and difficulties, but global impact and potential – this region of contrasts and contradictions is continuing to weave its magic.