Strong outlook for luxury spirits in Middle East

A region plagued with war, political tension, advertising restrictions and blanket bans on alcohol still presents an opportunity for spirits brands who know how to play the market.

Doha in Qatar is a leading city in the Middle East region

There’s something incongruous about drinks company executives discussing the untapped potential of markets such as Syria, Afghanistan and Iraq. Torn apart by civil strife and humanitarian crises, they’re not exactly part of the emerging market template encapsulated by the commonly mentioned BRIC or MINT economies.

They also illustrate the contrasts and paradoxes of the broader Middle East region. When I was growing up, Beirut was a byword for wanton destruction and desolation, its crumbling, blasted cityscape a nightly fixture on our news bulletins. Only a decade ago, a planned Chivas Brothers press trip there was abandoned after former Lebanese PM Rafic Hariri was killed in a bomb blast. Now it’s a key destination for luxury spirits brands, regaining its historic status as “the Paris of the Middle East”.

This is also a region where lucrative travel retail markets exist in countries where the consumption of alcohol is severely curtailed, and where taxes and rules on advertising can make trading extraordinarily difficult – but it doesn’t seem to put people off.

Luxury ’emphasis’

“We continue to see solid growth across the region,” says Jim Perry, MD India, Middle East and Africa at Brown-Forman. “Markets like Lebanon and Iraq are growing, and Egypt appears to be regaining some momentum. Luxury continues to be an emphasis in many of the Middle Eastern markets, particularly those that have a large number of tourists.”

“Diageo Reserve Brands in both Gulf domestic and travel retail are performing very well and form a major part of our premiumisation strategy,” adds John Kelly, GM Gulf markets at Diageo. “We are particularly pleased with the growth of exclusive products such as [Johnnie Walker special edition] Gold Bullion and our regional Johnnie Walker Blue Label pack.”

And, from Mahesh Madhavan, Bacardi’s regional president of Middle East & Africa: “For Bacardi, the main markets for the Middle East are UAE and Lebanon. We also see future potential in the markets of Iraq, Afghanistan and Syria, which at present are not at their full potential.”

For luxury brands, he adds, the focus narrows to the Gulf Co-operation Council (GCC) member countries and Bahrain, Doha and Dubai in particular – where Grey Goose, and single malts Aberfeldy, Craigellachie and Aultmore are doing particularly well. “We also see a trend of acceptance for our super-premium labels in the Facundo Rum Collection, Grey Goose VX and D’Ussé Cognac,” Madhavan says.

In addition to luxury, super-premium spirits such as Grey Goose VX are witnessing a “trend of acceptance” in the Middle East

High prices

Likewise, Perry namechecks higher-end products such as Jack Daniel’s Gold No. 27, Sinatra Select and Woodford Reserve, but adds a caveat: “It is equally important to serve customers who are not looking for high-priced luxury, but are looking for excellent whiskey. Consequently, we are still focusing on Jack Daniel’s Tennessee Whiskey and Tennessee Honey.”

Market strategies tend to zoom in on particular urban hotspots, rather than trying to cover an entire country. “Cities are definitely the focus, especially in the Gulf, where big cities are the home of our target consumers,” says Igor Boyadjian, MD of Edrington-FIX. “Beyond Dubai, which is the obvious example, our approach is to focus on Beirut for Lebanon and Tel Aviv for Israel. We need to approach the right homes for our brands, and those are the key cities, especially for luxury brands like The Macallan.”

Michel Aboujawdeh, country manager, MEISC and north Africa at William Grant, also acknowledges that the company is becoming more “city-led as opposed to country-led”, adding: “Main cities would include Dubai, Beirut and Marrakesh, which are considered either business or tourist hubs, or both. We also know that Tel Aviv is undoubtedly where trends for Israel begin.”

Economic pressures

Despite a burgeoning luxury market in Dubai and beyond, the region still has many challenges, from geopolitical volatility to rapid changes in taxation and import duties – not to mention the more immediate economic pressures.

“Some of the challenges for the short term in the Middle East include the decline of oil prices, which certainly impact spending in the luxury segment and, of course, the constant conflict in areas like Syria and Iraq,” says Madhavan.

Centring your operations on the Gulf markets has the obvious benefits of increased stability and fewer market barriers, says Kelly, but he adds: “That said, we are experiencing some slowdown in passengers and tourists due to concerns on oil prices affecting income; [and a] reduction in Russian and European passengers due to declines in the rouble and the euro.”

But not all changes are necessarily for the worse. “Whilst Israel is a relatively developed market, the spirit mix has changed of late somewhat,” says Gareth Douglas, country manager, South-East Europe and West Africa at William Grant. “The taxation changes in 2013, moving to a flat rate duty, has seen a trend towards premium products and from white to brown spirits. This trend continues in earnest,” he says.

In markets such as Marrakech, spirits producers are driving the premium-and-above sector

Draconian restrictions

Longer-term challenges include often draconian restrictions on marketing and advertising. “We need to be more conservative and generally avoid any ATL activities, as most of these are either grey or dark markets,” says Aboujawdeh. “Most of the activations are below-the-line and in-store.” But brands are finding their way around some of these barriers. “In the absence of any sampling opportunity, we have worked hard to overcome this by bringing our brands to life through on-shelf and BA [brand ambassador] education,” reports Kelly. “This has really set ourselves apart from the competition and has helped our shoppers understand our brands better from a flavour perspective and given them confidence to purchase or up-trade.”

Parallel trading is another perennial bugbear, says Perry. “One of the biggest challenges is making sure that brands are appropriately built, and not simply imported by traders who source product from other markets.

“Diverted product is becoming a larger problem, often coming from a handful of duty free retailers with operations outside of the region. Political instability is also the other main challenge in the region. There are no easy answers to help solve either challenge,” he says.

Potential in Iran

But, while all acknowledge the challenges of operating in the Middle East region, most companies believe the potential rewards outweigh the downsides. “These are definitely constraints for the industry to grow,” says Madhavan. “However, with Iran opening up, there is an opportunity for luxury brands to enter the country over the next several years.”

Iran? Again, it seems strange to be discussing the marketing plans of luxury spirits brands in a country which currently blocks its population from accessing Youtube and Twitter. But the imminent lifting of economic sanctions following the landmark nuclear deal with Tehran will spark a multi-billion dollar international investment frenzy, and that will provide opportunities for all manner of international consumer brands.

Paradoxes and huge contrasts there may be, but a combination of established luxury markets, urban hotspots and markets with bags of potential will conspire to make the Middle East a vital part of any international spirits player’s global strategy for many years to come.