Diageo: Scotch and baijiu will not recover soon

China’s Scotch and baijiu sectors will “not rebound quickly” but confidence in the region’s long-term prospects remains high, Diageo’s Africa and Asia Pacific president has said.

Diageo expects to see its Scotch and baijiu business improve in the mid- to long-term

On a recent conference call, Sam Fischer, Diageo’s Africa and Asia Pacific president, said despite challenges faced by the spirits industry in the wake of China’s clampdown in extravagant spending and gifting, the region has strong potential for mid- to long-term growth, with improvements expected in the first half of fiscal 2016.

“The challenges faced by the industry as a result of the government’s anti-extravagance measures have been well covered and our performance in both baijiu and Scotch have been impacted by the consequences of these measures,” he said.

“While I don’t expect to see baijiu and Scotch reboubnd quickly, I do remain confident in China in the medium to long-term.

“GDP is expected to grow at 6 to 7% CAGR in the next five years, and the number of affluent consumers is expected to more than double by 2020.”

Diageo, along with a number of other multinational drinks firms, has seen its profits take a significant knock since the policy was introduced in 2012.

While sales of the group’s Shui Jing Fang baijiu brand fell by 78% in 2013/14, forcing it to write down the value of the business by £264m, Diageo also halted a £1 billion expansion of its Scotch whisky business as global demand for the spirit – led by China – stalls.

Despite this, Fischer said that as China becomes more urbaised and the number of middle class consumers grows, Diageo is in a prime position to capitalise on future opportunities.

“In key markets such as Southeast Asia and China, the number of affluent consumers in the region is also expected to grow, expanding the already large pool of high net worth individuals in Asia Pacific.

“As a result of these growth trends, in the next three years, approximately 45% of total volume growth in TBA across the world is expected to come from Asia Pacific, excluding India.

“And with super and ultra-premium brands expected to grow even faster and inflation led price increases across brands, value growth is expected to be even greater.”

Fischer added that Diageo already has a 19% share of the market in international spirits across China, Southeast Asia, North Asia and Australia due to the popularity of its Scotch brands.

He said 25% of net sales for the region have been derived from the super-premium and above segment compared with 15% three years ago.