‘Diversified business’ pushes China rebound

The anti-extravagance drive in China is a well-documented tale. But big producers are now forming a more nuanced approach to the Asian market, and it seems to be taking hold.

Producers have been forced to radically rethink their tactics in China over recent years

Asia-Pacific – or more particularly China – has been the source of some pain for the leading spirits players over the past two or three years. Now there are signs that the worst of the agony may be over – but it looks equally certain that the trading environment will never be the same again.

The “new normal” in China is one devoid of the rampant gifting culture that persisted in the past – at least where government officials are concerned. Most observers believe this more puritanical attitude will last for at least a decade, if not longer. Now companies that spent much of the five years prior to late 2012 vying to outdo each other with increasingly extreme luxury offerings have had to redirect their efforts towards something rather more mundane.

Interest in younger vintages

“The high inventory level of Cognac in this market appears to be going down,” says François Le Grelle, CEO of Hine. “The current demand for younger expressions may give an indication of future trends.

“Chinese consumers are starting to move away from the XO and above categories to more affordable and less ‘ostentatious’ alternatives. We believe that we will see a progression of the younger products within our range.”

Pernod Ricard’s reliance on Martell in China has proven an Achilles heel in the recent past, but a relative resurgence around Chinese New Year (CNY) in 2015 has eased at least some of the tension.

The company estimates that Martell CNY sales were up by about 13% in the crucial Tier 1 and Tier 2 cities, helping lift brand sales by 5% in the financial year-to-date.

But volume and value growth tell a contrasting story. Martell Noblige, which sits between VSOP and XO, has enjoyed double-digit growth in the year-to-date, and now accounts for roughly one-third of Martell’s business in China. Martell Distinction, an inhabitant of the new (to China) sub-VSOP segment, is also growing strongly, although neither can make up in value terms for the losses incurred by XO, Cordon Bleu and other high-end expressions.

Johnnie Walker Blue Label has been impacted by a changing trade environment in China

New drinks landscape

The Chinese puzzle is not just about government anti-extravagance measures, but also a rapidly changing trading environment. Sam Fischer, president of Diageo Greater China and Asia, says the closure of declining traditional on-trade outlets – particularly KTV lounges – has led to increased brand competition in the modern on-trade, squeezing Scotch and impacting volumes of Johnnie Walker Blue Label whisky.

Pierre Coppéré, chairman and CEO of Pernod Ricard Asia, says modern bars and the off-trade are “growing nicely” and have now moved to account for a combined 70% of the company’s business in China, while KTVs only account for 15%, down from 20% a year ago. But don’t be misled by this talk of a burgeoning off-trade; Chinese consumers are not, for the most part, going out and buying Cognac or Scotch to drink at home. Instead, the typical pattern is to buy a bottle, then take it to the restaurant, particularly in the south of the country.

Scotch sacrificed for Cognac

The market squeeze has impacted Scotch whisky in particular, as companies with a foot in both camps have sometimes sacrificed Scotch pouring contracts in favour of their struggling Cognac brands. Responses to this trend have been mixed – Pernod reports growth for Ballantine’s Finest, but Diageo continues to push the luxury line through its Johnnie Walker House initiatives in Beijing, Shanghai and Chengdu – the latter being described by Fischer as “a gateway to luxury Scotch for western China”.

“Our strategy in China is to create a stronger and more diversified business, and part of this strategy is to create a laddered Scotch portfolio from premium to super-deluxe and beyond,” Fischer adds.

The company’s efforts are multi-faceted and increasingly the result of some lateral brand thinking: a luxury finishing centre in Shanghai to assemble complex packaging and provide personalised engraving; Scotch food pairing dinners to tap into the fact that more than 85% of alcohol consumed in China accompanies meals; using the routes to market already enjoyed by Diageo’s baijiu brand, Shui Jing Fang, to boost whisky sales.

China remains the big target in the region, but it’s far from being the only one.

The Chinese consume the majority of their alcohol alongside a meal

Beyond China

Le Grelle scents “a lot of opportunities” in South-East Asia, but is cautious about potentially volatile trading conditions. “It is important to focus on countries where the political and economic environment is sound in order to develop on a more solid basis,” he says.

“The main issue at the moment remains long-term visibility and a good example is Indonesia, which still looks a very promising market on paper; however, a complete anti-alcohol law has been proposed.”

Market performance is also patchy. Scotch sales are down in Thailand – although Fischer claims market share gains for key product Johnnie Walker Red Label. And in the Philippines, Diageo is keen to expand its offer beyond market leader Johnnie Walker, launching VAT 69 to target the vast numbers of entry-level consumers.

Japanese promise

But don’t forget the most mature of all the Asian markets: Japan. Whisky has been growing here for the past four years now, ending the grim deflationary climate that persisted for so long. For Pernod, Chivas has enjoyed positive sales, particularly for its Mizunara (Japanese oak) expression, and the company has high hopes for its recently launched Beefeater G&T RTD. And even if the big players still have their eyes on China as the main prize, it’s useful to keep some perspective on the long-term nature of that prize.

“China is a compelling long-term opportunity for us (5-10 years),” says Fischer. “It represents only 1% of our business, but we are confident this will grow in the long term and we are investing in the right areas to create a stronger, more diversified business in this exciting market.”

More diversified, perhaps, because the old China was built on the fragile foundations of oiling business deals and extravagant gifts to the right official. If the new China is constructed instead on individuals buying products and then drinking them, then the dramatic changes of the past few years may be no bad thing.