Opportunities on offer in Asia Pacific but no easy pickings
Economic growth and rising personal incomes in the Asia Pacific region may make it an exciting growth area for international brands but the potential for international spirits varies considerably from market to market. Jeremy Cunnington of Euromonitor International assesses the opportunities on offer for premium spirits brands across the region's key markets.
With consumers in Asia Pacific countries already consuming large quantities of spirits, and seeing their disposable income increasing rapidly, it is hardly surprising that international spirit companies have started to invest in these markets, as witnessed by Diageo's recent moves in both South Korea and China.
The local spirit market in China is showing great potential according to research from Euromonitor International. Chinese premium local spirits grew by over 7% in 2006, to reach volume sales of 21m cases, driven by local producers launching new variants to take advantage of trading up, and spurred by the developing social entertainment market and rising disposable incomes.
On the back of the rising purchasing power of the economic elite, classified by Euromonitor International as those who have been educated to at least undergraduate level, premium local spirits are expected to grow by a further 12m cases between 2006 and 2011.
A key challenge for foreign spirits companies is ensuring good national distribution. Diageo's move of gaining a minority stake in a local producer and setting up a joint venture, in December 2006, is shrewd. As international brewers found due to the size of the country companies may need more than one joint venture.
India's most popular spirit is Indian whiskey which should facilitate moves by multinationals to drive demand for blended Scotch. India's next two most popular spirits are rum (especially dark rum) and brandy.
In 2006, Indians were the biggest consumers of brandy and dark rum in the world, consuming 14.6m and 18.9m cases respectively. Both sectors are dominated by locally produced brands. Euromonitor forecasts growth in the India brandy and rum sectors of 34% and 25%, respectively between 2006 and 2011, driven once again by growing sales among the economic elite.
However, foreign companies face large difficulties in entering the Indian market. The most prohibitive barrier is the very high import duties charged by the Indian government, despite reductions in 2005. In addition, companies also face further intra-state taxes, poor infrastructure and a dominant market leader, UB Group, which had 52% of market volumes in 2005.
However, circumstances are beginning to change. In December 2006, the EU and India held a two-day meeting to discuss the reduction in Indian tariffs for imported spirits and wine following the European Union's appeal to the WTO about the unfairness of these tariffs. A number of large hurdles remain however.
Although Diageo has launched the premium shochu/soju brand Jajaknamu (Birch Tree) in South Korea, Euromonitor International believes this market does not look particularly propitious for foreign companies to develop premium products, despite rising incomes and expected volume growth of around 8m cases between 2006 and 2011.
The South Korean shochu/soju market only has standard and economy variants, due to weak economic conditions in the country. The country's biggest selling brand in 2005 was Jinro's economy brand Chamjinsulro which accounted for 50% of volume sales. In addition, the market is very concentrated with local companies performing well in their local region. As the OEDC forecasts that the poor economic performance will continue until at least 2008, any company wishing to enter the market with a premium shochu/soju would struggle to develop a sizeable premium brand.
The market for premium local spirits in Japan is very limited, with the vast majority of sales either economy or standard-priced products. Due to the poor economic conditions in Japan over the past decade, consumers have continued to trade down in all alcoholic drinks categories.
Boosted by consumer perception that shochu/soju is healthier than other spirits due to its lower alcohol content, sales grew by 36m cases between 1997 and 2006 driven further by demand for standard and economy brands. Strong growth is expected to continue and an improved economic outlook could see consumers trading up. The increased popularity of shochu/soju has led to a rise in number of specialist shochu/soju bars, especially in urban areas.
The market is relatively fragmented with no brand having more than 10% of volume sales in 2005 which offers multinational companies a good opportunity for market entry.
Thailand also has a large local speciality spirits market of 63m cases but is made up of just economy products such as Sura Khao and mixed spirits like SangSom. These products are very price sensitive. When Thai Beverage increased the price of SangSom brand in late-2005, volume sales declined sharply, by over 54% compared to the same period in 2004. Consequently the potential for market entry into premium local spirits seems limited.
Euromonitor International suggests that opportunities lie in imported spirits, especially blended Scotch whisky, as these are the most popular products for Thai consumers who can afford to trade up.
Taiwan has a large market for 'other spirits' which accounts for over half of its entire 4.2m case market in 2006. 'Other spirits' is made up of Chinese spirits and Chinese herbal spirits, and predominantly consists of economy and standard brands. Euromonitor's research records a decline in demand for these spirits in 2006, following duty increases which were passed on to consumers.
The spirit markets in Singapore, Hong Kong and Vietnam are small and have no sales of speciality local spirits, with consumers already used to western spirits such as Scotch. The Vietnamese market has potential for growth, but with the combination of high import duties and low disposable income, contraband sales are rife and growth is therefore limited.
Philippines, Malaysia and Indonesia offer little potential for premium launches. All three countries' spirits markets are dominated by economy brands due to the low disposable income of consumers. As in Vietnam, they all impose very high import duties for western spirits, thereby creating a booming trade in contraband spirits. Hence any brand imported legally into these countries is prohibitively expensive to all, bar the wealthy.
Overall, opportunities remain limited for local speciality spirits in Asia Pacific, according to Euromonitor International. Currently China and Japan offer the most potential in the short term. Any company wanting to move into China would do well to act soon, as the premium local spirits market is consolidating quickly. In 2000, the top nine brands accounted for less than 17% of volume sales, but by 2005, this had increased to just under 30%.
Market improvements in Japan are likely to take time and patience as the economy improves. Euromonitor believes India and South Korea offer growth potential over the next few years, but improved trading conditions and domestic consumption respectively will be crucial for any rapid improvement.
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