Focus - China growth cannot hide US meltdown
Both China and the US have in different ways been exciting growth markets for the drinks sector in recent years but for obvious reasons neither is quite what they were. Chris Losh looks at how both markets are faring in the downturn and assesses what we can expect from each in the year ahead.
There are, broadly speaking, two markets that have been exciting the drinks trade for the last three years or so: China and the US. Sure, brand owners or export managers could usually manage a token nod towards more mature markets like Spain, Germany or the UK. But give them free rein and it was never long before the scent of money drew them either East or West.
This, we are told repeatedly, was where the real opportunities lay: the chance not just to shift some serious volumes (albeit a few years down the track in the case of China) but to make decent margins as well. They were the engines that fired the imagination and drove value upwards.
But, with the global economy short of fuel, how are these two engines holding up?
Let's take China first. While it remains a market where potential far outstrips the actuality, there have been signs of real progress over the last five years. Significant increases in premium spirit consumption are probably not unrelated to the 2005 WTO agreement that saw a huge reduction in the price of imported spirits. It's become a major battleground, with Diageo and Pernod Ricard engaged in a big-money fight for supremacy, particularly in the Scotch whisky market.
The last year, in fact, has proved tough for Scotch. Volumes of the premium blends like Chivas and Johnnie Walker are both down, though profits are up, and not everyone is convinced that the super-top end variants will have it any easier.
"Macallan could have some interesting figures coming back this year," says one observer. "They've positioned themselves as the world's most expensive malt, and their figures have been exponentially huge."
However, while the Chinese economy may have slowed, the market still seems to be in reasonable shape. Indeed, China and Singapore are the only two Cognac markets to show growth in 2008, and Jerome Durand of the Bureau National Interprofessionnel du Cognac is cautiously optimistic. "Sales to the end of December are often quite flattering because of Chinese New Year, so we'll see whether there's a problem of demand later," he says. "But for the moment the figures are quite good. All the forecasts we have for China are for strong growth. Cognac is a luxury product, and demand for these products is still quite strong."
Certainly, there's no sign of the kind of economic implosion that destroyed the category's prospects in Japan 15 years ago.
"The contexts are very different," says Kathie Wang of Pernod Ricard Asia Pacific. "China's economy is, and will remain, dynamic in the coming years compared to many other countries, and the XO category has a large base of consumers whose loyalty is strong."
For wine, things are rather shakier. Locally produced still wine is growing nicely, but the 35% growth of imported wines for 2008 looks rather less impressive when compared to a doubling in size in 2007. Sales over RMB70 look vulnerable, and that's the stamping ground for imports. Chinese consumers are increasingly wine savvy and sophisticated, but premium wine is a movement that still only has shallow roots, and one that looks fragile in a time of economic slowdown.
Still, while the Chinese 'engine' might have throttled back a gear or two over the last 12 months, it is at least still generating power. Not so the US, where ten years of growth and high-spend have come to a shuddering halt. No coincidence that Diageo, while continuing to up their ad spend in China, have cut it in North America by 6%.
The American Spirits producers' group, DISCUS, is, officially at least, faintly optimistic, with CEO Peter Cressy saying that consumers are 'trading around, not trading down' and 'being more discerning'.
But volume growth of 1.5% only tells half the story. While the start of 2008 was positive, sales fell sharply in the fourth quarter, with prestige on-trade brands like Tanqueray, Beefeater, Johnnie Walker and Absolut all down.
"Growth," says Diageo, "has shifted from the super- and ultra-premium segments to value and premium brands." A challenging time, then, to be taking charge of Ketel One and Zacapa… The on-trade has been particularly hard-hit, though Pernod Ricard, at least, remains defiant.
"Although on-premise is down, it is where brands are built, so we will continue with our targeted efforts," says a company spokesman.
Still, it's no surprise that Cognac, the most obvious bellweather of economic health, should be suffering. After 14 years of steady growth, sales tumbled 18% last year - most of it at the tail end of the year, with December shipments down an astonishing 35%. Whisky has fared slightly better (value flat, volumes down 3.5%) but the trade remains nervous.
In President Obama's new responsible America, ostentatious 'bling' is out. So along with Cognac, Champagne has been hit, too. In truth, following growth from 1993 to 2005, sales had been more or less flatlining for the last three years, but signs are that shipments are down 20%, which would take the US below 20m bottles for the first time in five years.
The trends continue into still wine. Diageo's volumes are down 8%, while Californian wine sales are the lowest for five years. Hardest hit have been the small and medium-sized high-end producers, as consumers trade down through the price bands. Only Spain and Australia grew their sales in the US last year.
"In this economy, the 'best value' accolade is more important than the cellar selection accolade," says Stephen Brauer, general manager, Pernod Ricard USA Wines and Champagnes.
This is particularly bad news for super-premium producers, since the US has always been seen as the Holy Grail: a wine-knowledgeable, wine-literate market where price was less important than in the mature, supermarket-dominated European markets. With US$12 the new $20, how long before we see a renaissance of Two Buck Chuck?
The US, in other words, is the blackest cloud hanging over the drinks industry: a high-volume, aspirational market that has suddenly caught a nasty cold. The on-trade is hurting, the off-trade is down-trading. To continue the 'engine' metaphor, it has stalled. The Chinese market is better, but measured growth here can't remotely compensate for recession in the States and Europe.
The drinks industry plane is heading for earth. The most we can hope for is a soft landing and as few casualties as possible.
Pernod Ricard USA has today (11 August) launched its off-premise value added pack (VAP) line up for the company's core wine and spirit brands for the next season....
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