Brands must view Middle East as ‘split market’

To meaningfully gauge the potential for international spirits in a region as uncertain as the Middle East, it’s essential to look beyond the headlines, writes Tom Bruce-Gardyne.

The Middle East is bundled up and presented to us as one big intractable war zone

*This article was first published in the September 2016 edition of The Spirits Business

At the height of the Troubles in Northern Ireland, more people were killed on the roads than by terrorists – something you would never have guessed from media reports. Such was the perception of danger that Americans landing at Belfast International could sometimes be seen running head down for the safety of the terminal, lest they be gunned down on the tarmac. And so it is with the Middle East, which, for all its huge diversity, is bundled up and presented to us as one big intractable war zone.

“I am sure that is the image,” says Ziad Karam, who is based in Beirut as Diageo’s corporate relations director for the region. “But you have to split the market in the Middle East. Lebanon is a completely free market with freedom of communications, advertising and a vibrant on-trade. Everything is permitted, and culturally that’s the way we like it here. It’s pretty vibrant, even crazy sometimes.”

Diageo’s flagship brand is Johnnie Walker, which, according to Karam, was unknown in the early 1990s when ‘whisky’ meant J&B and Dewar’s. “We began in the on-trade and then started using the Keep Walking campaign,” he explains. “All of what the Lebanese went through was reflected in a few local campaigns.” Last year’s Keep the Flame Alive was the most-awarded campaign at the Cannes Lions Festival.

Martin Murdoch, the newly appointed MD for Edrington FIX, as Edrington’s Middle East division is known, is clearly impressed by the ease of advertising in Lebanon. “You can do TV, billboards and print, which makes it more open than most of Europe.” he says. “You can’t do that in France. And Israel is relatively open as well.”

Israel has become an attractive market for premium brands like The Macallan, since the government replaced the old ad valorem system of duty that penalised premium spirits with a flat rate in 2013. “It has significantly reduced the gap between single malts and standard blends,” says Murdoch.

Israel and Lebanon are also key priorities for Amber Beverage Group’s vodka brands, Moskovskaya and Riga Black, and its Balsam Black Bitters, reports CMO Valters Kaže. “We’re doing well in the Israeli on-trade, particularly in Tel Aviv with its developing cocktail culture,” he says.

The Macallan has grown in popularity in Middle East markets, particularly Israel

Beyond these bright lights, much of the Middle East has gone ‘dark’ or is in the process of doing so. “It’s very much restricted when it comes to communication,” says Frederic Soulignac, Pernod Ricard’s MD in the region.

“We invest in innovative PR to communicate outside traditional media, and for a few years we’ve been investing in digital media. We have a marketing team of seven, with three purely dedicated to brand activation, and the others managing 26 sites across the area on Facebook and Instagram.”

These are platforms that Soulignac plans to expand, while respecting regional sensitivities. Pernod’s brand websites are inaccessible from within Egypt, for example.

Asked whether there might be a clamp-down on digital platforms in the Middle East, Karam admits: “It’s a possibility. We are all active on social media, but are we using it to build brands and communicate with consumers in dark markets? Am I targeting you as a consumer in the Gulf? No, I’m not.” Yet even in Turkey where digital media is restricted and where state censors blur film and TV images of alcohol, Karam is struck by what can be achieved. He points to the team behind Turkish raki Mey Icki, bought by Diageo in 2011, saying: “The ways the guys are building the brand there is just amazing.”

A new structure

Within the Middle East, the Gulf is a separate entity and often combined with global travel retail by the big spirits companies. That was the case with Diageo until July when the two sides were split to give each more focus.

Diageo has launched its Keep Walking campaign in Lebanon Among other things it was about “leveraging global functions, expertise and presence”, says Karam. “It’s proven very successful at this stage, though we are still in transition.”

Much of the consumption in the Gulf is by ex-pats and revolves around five-star hotels and restaurants. There are the construction workers from Asia and India who built them, and whose love of whisky is legendary. And there are the western oil executives who sit in the plush hotel bars sipping their Macallans and Johnnie Walker Blue Labels. Of course, they may be drowning their sorrows at present given the plunge in world oil prices. “I’m hearing that a lot of the oil companies are sending their ex-pats home from cities like Abu Dhabi,” says Murdoch.

Brown-Forman’s Middle East director, Robinson Brown, mentions “some immediate and more long-term effects” from the slump, and says: “In the short-term, as oil prices have dropped, we’ve also been affected by the strengthening of the US dollar versus the euro and rouble. This has caused a decrease in European tourism in some Middle Eastern markets whose local currencies are tied to the dollar.”

To compound the problem, the Gulf states are beginning to raise taxes on alcohol to compensate for lost oil revenue. Karam mentions a so-called ‘special tax’ in Dubai that has already been copied by Bahrain, and says the prospect of some VAT equivalent is imminent.

Add in the strength of the greenback, and life won’t be easy for brands like Jack Daniel’s, but Robinson Brown insists it enjoys “a very premium image” here, which means “we are not subject to the price sensitivities to the same degree that some of our competitors face on a daily basis”.

Diageo has launched its Keep Walking campaign in Lebanon

As category leader, Jack Daniel’s is benefiting from what he calls “the Bourbon renaissance” that is making its ways into the region, “creating further demand and interest for Bourbon and Tennessee whiskeys”. At Dubai International Airport the whiskey has its own unofficial embassy in the shape of Jack’s Bar and Grill. “It is a Jack Daniel’s themed restaurant and bar bringing a little bit of Lynchburg, Tennessee, into our region,” says Brown, with evident pride.

Then there are the manual labourers in the Gulf from Bangladesh, Thailand and the Philippines. “They are avid drinkers,” says Leonard Russell, MD of Ian Macleod Distillers. “And they’re drinking King Robert.” While some may also be enjoying the odd bottle of VAT 69 or White Horse, it is certainly a big market for Russell’s competitively priced blend.

“The reason such Scotch sells so well in the Gulf is because duty rates are so much lower compared to India,” he says. A bottle of King Robert in Dubai might cost 30 dirhams (£6.25), compared with 20-25 dirhams (£4.20 – 5.20) for a relatively premium Indian brand like Royal Stag. Of course, plenty prefer a taste of home, which is why the Gulf receives big shipments of Indian whiskies from Pernod Ricard and Diageo’s United Spirits.

Unfortunately the construction industry is in the doldrums and workers are being sent home, although the prospect of World Expo 2020 in Dubai offers some respite. Meanwhile across the region tourist numbers are down, especially among Russians who flocked to the Red Sea resorts like Sharm el-Sheikh until recently. The downing of Metrojet flight 9268 full of Russian holidaymakers over North Sinai in October dealt a blow to Egyptian tourism. However within the Middle East, Frederic Soulignac says “apart from Egypt I would say the impact has been relatively small”.

His domain excludes the Gulf, but stretches from Algeria to Iraq – once Pernod Ricard’s biggest market in the region. Syrian sales were also quite strong before the Arab Spring of 2011, but have since collapsed to just a few thousand cases, according to Soulignac. Of course the war’s impact has mushroomed well beyond Syria with vast numbers of refugees on the move, including 1.5 million in Lebanon alone. Meanwhile so-called Islamic State has dominated the headlines for its atrocities from here to Iraq.

“Iraq is a big whisky market,” says Diageo’s Karam. “It was much bigger, but it has dropped because of everything going on and the disruptions in the route to market.” Diageo’s brands are shipped to the Turkish port of Mersin from where they are trucked into Kurdistan, and then taken by wholesalers inland to Baghdad.

Dangerous trade

Ian Macleod’s Russell is also aware of the Iraqi taste for whisky, particularly among the Kurds, but says: “Our distributor fled the country because he was top of the list for beheading.” He also feels nobody really knows the size of the market given the extent of parallel trading and smuggling.

“When we listen to our importers in Sulaymaniyah and Erbil in Iraqi Kurdistan, we only know that the business is more difficult in the south, in Basra,” says Soulignac. In the less troubled northern parts, sales of Chivas Regal and Absolut are holding up remarkably well, it seems. Meanwhile Iraqis have developed a surprising fondness for Tequila, which is enjoying double-digit growth, according to Soulignac. And if Israel is now his top market, Iraq is still number two despite the best efforts of IS.