International spirits ‘back on the rise in China’
Extravagant gifting may be a thing of the past in China, but a new consumer landscape offers a more stable and level playing field for international brands.
*This feature was originally published in the May 2018 issue of The Spirits Business
The world’s two largest economies have been stumbling towards an all-out trade war in recent weeks. A showdown between US president Donald Trump and his Chinese counterpart, Xi Jinping, has seen everything from aircraft parts and blood to soya beans and Bourbon caught in the firing line.
China responded to US plans to levy a 25% tariff on Chinese imports worth US$50 billion with its own measures “of equal strength and scale”. Washington said it is seeking to force changes in Beijing’s intellectual property practices, while China has accused the US of “unilateralism and trade protectionism”. With international spirits so reliant on free trade, it all feels depressingly retrograde.
Only last December, the Chinese took a step forward by halving import duties on spirits to 5%, in contrast with the staggering 150% levied by India. That and the country’s burgeoning middle class help explain why China remains such a tantalising prospect for western spirits. The collective share of such brands in the market is still tiny – less than 1% by volume and 5% by value, according to 2016 IWSR figures – yet even the slightest shift upward would mean significant gains. “China is the single largest beverage-alcohol market in the world, with 21 million legal drinking-age consumers entering the market every year,” says Sam Fischer, president of Diageo Greater China and Asia. “This, combined with strong urbanisation trends, means that emerging middle-class consumers are getting more exposed to branded products and international-style spirits. By 2022, 75% of the nation’s urban population will be classified as middle class.”
The International Monetary Fund forecasts that China’s gross domestic product per capita will exceed US$10,000 by the end of this year, and this could be a real turning point. When Taiwan passed that milestone in 1992, demand for spirits took off, and within five years had soared by 700%, according to the IWSR.
Of course, the Chinese market suffered a painful contraction in the years since 2012 following Xi’s crackdown on corruption. Any luxury brand linked to excessive gifting or state banquets was hit hard, and that aspect hasn’t changed. “Today, people who used to do very expensive banqueting would not even think of putting expensive spirits on the table,” says Irving Holmes Wong, Bacardi’s managing director for Greater China. “Gift-giving is still a very important part of the market, but many multinationals have policies that gifts should be of a certain value and not be construed as any kind of bribe.”
Glen Brasington, marketing director for strategy, business development and services at Chivas Brothers, says consumer interest in international spirits is “back on the rise in China” and is “returning to levels we saw in 2013”.
He adds: “This means we’re seeing a bigger base of drinkers who are drinking more often. That’s impressive growth, and we don’t expect it to slow anytime soon.” Pernod Ricard’s improved performance in its latest half-year results was partly attributed to an 8% rise in China, with better figures for Martell Cognac.
Looking back, the pre-2013 boom in high-end spirits seems almost unreal, as Rémy Martin’s global executive director, Augustin Depardon, explains: “In a way, what happened in the past was a bit abnormal and not always linked with customer demand. But for the past three or four years, the growth has been very healthy.”
Ostentatious luxury has given way to more solid and sustainable trends of consumption. In whisky, Fischer has witnessed a shift from style to substance, and says: “The heritage, provenance and craft credentials of Scotch are important factors in the locals’ love of the liquid, with Chinese consumers showing a thirst for whisky knowledge and a desire to refine their appreciation.” As evidence, he points to the 100plus new whisky bars that opened in China last year.
“The changes we made to our business as a result of the anti-extravagance campaign have opened up the Scotch opportunity for us,” he says, referring to the super-premium category that Diageo claims to lead in China with Johnnie Walker Blue Label and a trio of malts – Singleton, Talisker and Mortlach. But there’s no mention of Black Label and its prolonged bid to wrestle the 12-year-old crown from Pernod’s Chivas Regal. That battle raged in Chinese nightclub chains and KTV (karaoke) bars, where both sides would seek to lock out the competition with an exclusive supply deal. But in this pay-to-play environment, the stakes proved too high – both companies cut investment and saw Black Label and Chivas decline as a result.
“Some brands continue to buy distribution,” says David Pattison, Edrington’s commercial director for Hong Kong, Macau and Japan, who has seen the Scotch market polarise. “Looking at 12-year-old blends – and I think it’s backed up by IWSR data – that market has really been squeezed. We’re seeing consumers trading up to single malts, or trading down to standard blends like Famous Grouse and Johnnie Walker Red.”
In Hong Kong, rising property prices have shrunk disposable income, making value brands more attractive, and not just in retail. “When I arrived here seven months ago, I assumed Grouse would follow a typical western model, but in fact it’s two thirds through the on-trade and it’s growing,” says Pattison. “We’ve certainly seen a change in channel trends over the past three years,” he continues. “Historically, Hong Kong was heavily reliant on the traditional on-trade, but there’s now a trend towards modern cocktail bars, with younger consumers less likely to go to KTV lounges and hostess bars.” While Hong Kong Island has long enjoyed an international on-trade, “there are now some real, cuttingedge bars on the mainland side”, says Pattison, pointing to the towering Ritz-Carlton in Kowloon, whose Ozone bar is currently the world’s second-highest.
‘CRACKDOWN IS BEHIND US’
For Edrington’s flagship single malt, the territory remains an important shop window. “You might not have Chinese buying Macallan in Hong Kong, but seeing it in key outlets and bars is a definite source of influence,” says Pattison. Meanwhile, in Macau, where more money is gambled than in Vegas, life is returning to normal. “The fact that high-net-worth Chinese are happy to come back to Macau and flaunt their wealth is an indication that the crackdown period seems to be behind us,” Pattison adds.
Diageo’s Fischer says: “Our ambition is to make Scotch the number-one international spirit in China.” But as of 2016, whisky (essentially Scotch) was on 1.2m cases, while brandy (essentially Cognac) was on 2.4m, to quote the IWSR.
“Cognac has the highest margin of any imported spirit, and that’s due to the very high level of investment by brand owners, with Cognac ads everywhere in China,” says Guillaume Deglise, outgoing CEO of Vinexpo Hong Kong. “It’s the most known among international spirits, but it can be viewed as slightly old fashioned by younger consumers.”
Rémy Martin hopes to counter such impressions with its young brand ambassador – the Chinese actor Huang Xiaoming – and its Maison Rémy Martin pop-up in Shenzen and Shanghai this year. The brand has also invested in e-commerce, as has Bacardi, for which the channel now represents more than 25% of its Chinese business. “In e-commerce, which is predominantly a market of younger people, you’ll see white spirits punch above the weight of the national average,” says Holmes Wong. “That leads us to believe that young Chinese are moving into vodka, gin and white rum.”
Even with youth on their side, these categories are barely a blip on the radar, but digital sales are changing Chinese consumption habits. Holmes Wong explains: “We don’t have numbers, but a lot of e-commerce, which is growing at 40% a year, is thought to represent drinking at home. Now, more and more people are hosting their own home parties or dinners.” Chivas Brothers’ Brasington quotes a recent survey in which 61% of Chinese consumers said they ‘appreciate drinking alcohol at home’, an increase of 9% on 2015.
Nevertheless, the on-trade still accounts for 80% of international spirits sales. Bacardi has struggled to enter the club market, not having that all-important Cognac in its portfolio, but some outlets are making space for its rum, even if Diageo or Pernod Ricard control the rest of the back bar.
That said, Holmes Wong clearly prefers modern digital channels. “E-commerce actually levels the playing field because we’re talking direct to consumers, who are free to choose,” he says. Companies such as T-Mall and particularly JD.com offer brand owners an alternative distribution system if they don’t want to use traditional channels. “That helps because it means the power shifts a little bit,” adds Holmes Wong. However his contention that Chinese consumers are “moving away from blended Scotch to more ‘crafted’ single malts or smaller brands, and into white spirits through cocktails” cannot go unchallenged by Diageo.
The company has been recruiting drinkers through David Beckham-backed Haig Club, as well as its Johnnie Walker Blenders’ Batch programme, its support for whisky boutiques in Guangzhou, Xiamen, Shantou and Shenzhen, and much else besides.
Despite that, Diageo’s global giants have been eclipsed by a brand that few consumers in the west have heard off. Kweichow Moutai, China’s leading baijiu maker, is now the world’s most valuable spirits business.