Indian budget blow should not dampen Scotch spirits
In spite of the news that the Indian government has once again eschewed tariff reform, Richard Woodard sees plenty of export growth potential for Scotch whisky, both in emerging and established markets. However, worries remain over the decline in the blended whisky category and the spread of cut-throat discounting from the blended sector to malts.
The news that India is still refusing to reform its punitive import duty tariffs has come as a bitter blow to the Scotch whisky industry in particular. Distillers had been optimistic that the Indian government would lower the barriers to entry, with spirits attracting a maximum duty levy of 550% on the sub-continent.
But their frustration will be tempered by the bright prospects for the category in a number of other core and emerging international markets. As growth continues at breakneck pace in Asia in particular, producers are also optimistic that there is still potential for growth in a number of core Western markets, not least in the US.
That overriding optimism is fuelling accelerated investment and innovation in Scotch whisky. The major news early in 2007 has been Diageo's planned investment of GBP100m (US$194m), including a new distillery on Speyside, plus expansion of grain distillation, bottling and warehousing operations.
This is clearly a strategy for growth, investing now to feed the market expansion of the future, but Diageo is not alone in this. At the other end of the scale, single malt whisky distiller Bruichladdich is set to revive malt distillation at Port Charlotte on Islay, using equipment from the defunct Inverleven distillery.
Others are trying to maximise their existing assets, with Chivas Brothers currently in the midst of overhauling blended brand Ballantine's, with a view to prioritising profitability and higher-priced bottlings.
Chivas has also revamped single malt Longmorn, relaunching it as a 16-year-old, rather than 15-year-old, offering. Meanwhile, Inver House has revived Balblair as a vintage-dated single malt, re-packaging in a bid to target the premium market.
Most of these moves have only been announced in the past couple of weeks, illustrating the pace of change and activity in the sector. So which markets are these producers targeting, and why?
Before looking at the emerging markets of Asia, let's consider the more mature export destinations of the West for a moment. It's all too easy to dismiss Europe, for example, as stagnant and lacking in potential.
Not so, say some of the industry's leading players. Nick Morgan, malt whisky marketing director at Diageo, dismisses as "nonsense" the notion that Europe has no potential, seeing strength in France, Germany, the Nordic countries and Sweden in particular.
Neil Macdonald, brand director for malts at Chivas Brothers, agrees that it is easy to dismiss Europe, mainly because of the rampant optimism around the US and Asia. But he points out that markets like France and the UK are core to the malt sector - even if they are often less profitable than Asian markets.
However, there are problems. The UK remains a major market in terms of volume, but heavy discounting has migrated from the blended sector to malts, particularly in the crucial pre-Christmas trading period.
Most producers treat cut-throat supermarket pricing as the cost of entry to the market, but Morgan for one is worried about repeating the commoditisation of blends with single malts, which should be the jewel of the category. "I think (malt discounting) is short-termism by people who forget to look at what has happened to blended Scotch whisky in the UK," he says. "It has been completely commoditised. When you talk to young people, they consider blended Scotch to be a lost category because it's cheap."
This has had an impact on consumer behaviour, leaving people with the vague aspiration to become a single malt drinker in their 30s, but without following the traditional path of buying blends first.
Such behaviour is not confined to the UK, however. Taiwan, one of the top-performing Asian markets for 20 years or more, has evolved into a prime market for single - and, more recently, blended - malts. Here blended malts, led by Edrington's The Famous Grouse and Suntory's Prime Blue, have captured two-thirds of the market in the past year or so, with single malts, led by The Macallan, selling at a premium.
Elsewhere, Japan has matured into a facsimile of a mature European single malt market, to the detriment of blends, which are in long-term decline. And then there is China…
Ask senior whisky executives about the future in China and many will respond, even if only privately: "I don't know". Blends have continued their dynamic growth, with estimated sales at the end of 2006 for Chivas Regal of about 400,000 cases a year, and Johnnie Walker Black Label sitting at about 200,000 cases.
However, Morgan is less certain about the prospects for malts, which he believes will take time "to bed down", but points out that consumption may well be driven by the number of people travelling through China to and from other Asian countries and the rest of the world. "Those consumers will also drive malt growth," he says.
And yet, despite the knock-back of the latest Budget announcement, for many the most exciting potential market for Scotch whisky remains India. Economic growth, including a burgeoning middle class, strong cultural links with the West and massive existing consumption of Indian, molasses-based 'whisky' are all factors in its favour.
"I think people fail to realise that India is in probability the biggest whisky market in the world, where Scotch awareness, if not consumption, amongst consumers is huge, absolutely huge," says Morgan. "Consumption and sales volumes are constrained by current, well-known problems. The potential for growth in India is quite remarkable."
Whatever the disappointments of this year's Budget, the likelihood is that India will start to relax that prohibitive duty system sooner rather than later. It has too much to gain from doing so in terms of adherence to WTO regulations and the quality of its relationship with the EU and other key trading partners, to continue to hold out for long.
So, for the moment at least, distillers will have to remain patient. Fortunately, there is more than enough potential in other markets to encourage investment and innovation in the sector. And when the Indian market finally does open up, they may find themselves in need of even more production capacity simply to keep pace with demand.
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