While there are clearly huge rewards on offer to international players in emerging markets, local spirits companies are also reaping the dividend of economic growth and rising personal wealth, and are themselves responding to increasing consumer sophistication, according to a new report from The IWSR and just-drinks. Ben Cooper reports.

There is no doubting the significance of emerging markets to the growth strategies of international spirits companies, as the virtually continuous stream of investment testifies, but it is not only global players that stand to reap the benefits of growing wealth in developing markets. As a new joint report from just-drinks and The IWSR points out, local companies are well placed to capitalise, and are becoming increasingly assertive and sophisticated as these markets develop.

The IWSR/just-drinks report, Growth opportunities for spirits in developing countries - forecasts to 2012, suggests that while there is undoubted growth potential for international brands, they now face far more serious competition from local companies, even in premium price categories.

Imported brands will always have a certain cachet but local products are not necessarily the shabby poor relations that they once were. "The premiumisation evident in many of these emerging markets clearly presents considerable opportunities for international brands. But they won't have the market to themselves," the report states. "National producers in markets, such as China and Russia, are now marketing premium and super-premium brands that successfully rival those of the multinationals in terms of packaging, presentation and even liquid."

The same is true in Asian markets. The report puts to rest a common misconception that local Asian brands are all sub-premium, citing companies such as Wuliangye and Mao Tai in China as examples of local producers who have added premium and super-premium tiers to their portfolios.

Meanwhile, in the mainstream market, local players will always have scale on their side. As the report points out, historically, import penetration in these markets has been very low. For example, in China, imports represented just 0.8% of total spirits sales in 2007 though it should be borne in mind that this was up from 0.2% in 2003. In India, the figure was just 0.05%, up from 0.02% in 2003, while in Brazil imports accounted for 0.15%, up from 0.12%. Import penetration in Russia, while rising, remains at around 4.7%, up from 1.8% in 2003.

"National producers continue to meet most of the demand in these large emerging markets," the report says. "The importance and power of local products is sometimes forgotten in a world full of heavily marketed international brands. Yet, in many countries, local brands continue to massively outsell the top imported brands."

Moreover, the report contends that while many consumers in developing markets will aspire to move on to well known international brand names, and increasingly have the spending power to do so, many others will prefer to continue consuming the brands they are familiar with, particularly if the packaging and the quality of the liquid has improved. "Some may dabble with international spirits only to later return to their own more familiar products," the report states. "The assumption has been that, when these markets reach a certain point of evolution, consumers will naturally gravitate towards premium imports," the report states. "Many certainly will, but local companies are also capturing much of this premium and mid-priced growth. This has the potential to inhibit the development of the import sector."

With that in mind and given the scale that local brands enjoy, international companies are faced with a choice between focusing on their imported products or moving into domestic production through acquisition or partnership, in the pursuit of scale.

"One of the main issues facing the multinationals in these developing markets is whether to partake in this local brand market, or focus solely on their international brands," the report contends. "Many companies have acquired sub-premium brands in order to give themselves distribution strength in these emerging markets for their more premium brands. Not only does it reduce the cost of distribution by filling the containers, but also helps even out the economic cycles. When emerging market economies turn down, as they tend to do with some volatility, this will typically lead to large swings away from imports. Under these circumstances the local spirits business can help cover overheads and keep the operation functioning until the import sector recovers."

Nevertheless, for international liquor companies the emerging market opportunity is clear and simply too big to ignore, the report concludes. In 2007, emerging countries accounted for 58% of the world's population and 47% of global population growth. The growth of the middle classes is equally dramatic. In China, the middle class population is estimated to be approaching 200m, and India around 100m people.

The figures for spirits consumption in emerging markets are equally attractive. The so-called BRIC markets (Brazil, Russia, India and China) account for some 47.5% of global spirits consumption. When other prime emerging markets are included, such as South Korea, Thailand, Ukraine, Philippines, Poland, Mexico, Romania, Sri Lanka, Kazakhstan, South Africa, Belarus, Venezuela, Czech Republic, Bulgaria, Turkey and Vietnam, the share of global spirits consumption rises closer to 70%.

The global spirits market grew by 98.5m cases between 2003 and 2007, with Asia and Eastern Europe providing the main growth markets. In fact, seven out of the top ten growth markets of the past five years are essentially developing markets, the report states.

However, for those who may have qualms about multinationals aggressively boosting alcohol consumption in developing countries, the report makes an important qualification about the nature of increasing consumption in these markets. "It should be pointed out that actual consumption growth is less than the figures suggest," the report states. "Much of the gains in countries such as Russia are attributable to a move away from unregistered sources to registered producers, encouraged by greater government control over the trade."