Among all the emerging markets, a new IWSR/just-drinks report identifies China and India as particularly critical to the future success of the blended Scotch whisky category. But there are some important distinctions between the two which will have a bearing on how companies go about exploiting their massive potential.

Growth in emerging markets is said to hold the key for the future prosperity of many spirits categories and this is certainly the case for blended Scotch whisky. But a new report from just-drinks/IWSR suggests that for blended Scotch two emerging markets stand out, namely India and China.

As it has faced long-running declines in its key export markets of Spain, Portugal, Greece, the US and Japan, the report states that it is “increasingly evident that the best future growth prospect for the blended Scotch industry will increasingly rest in two markets in particular, China and India, as the world’s two most populous nations and both culturally open to alcohol”.

The growth figures set out in the report, Global Market Review of Blended Scotch Whisky – Forecasts to 2014, underline the assertion. Since 2003, shipments to China have increased from 278,000 nine-litre cases to 1,756,300 cases in 2008. Volumes are forecast to reach 1,766,000 cases in 2010, up from 1,694,800 cases in 2009. By 2014, they are forecast to reach 2,294,000 cases, according to IWSR forecasts.

The growth in India came off a slightly higher base in 2003 but has been equally impressive. Exports stood at 397,500 cases in 2003, rising to 1,139,000 cases in 2008. They are forecast to reach 1,454,000 cases in 2010, up from 1,301,800 cases in 2009. By 2014, shipments to India will total 1,850,000 cases, says IWSR.

While the report suggests China offers the greatest opportunity for immediate gains, in the longer term, it says India could become equally or even more attractive than China, because of the unusually high proportion of younger adults coming into the market with a leaning towards Western prestige products. However, it adds that this would be contingent on a change in tax levels, taxes and regulation becoming harmonised across the country.

Rapid economic development and their population sizes naturally mean both countries will soon become hugely important markets. China will overtake the US to become the world’s biggest economy by 2020, while India could overtake Japan to become the world’s third-biggest economy this year. More importantly, both countries maintained economic growth in 2009 despite the global crisis

In addition, China and India are among the largest spirits markets in the world. In fact, the report points out that if all consumption, registered or unofficial, is taken into account, only Russia would rival them.

In both countries, newly affluent consumers are seeking a prestige lifestyle in which alcohol can, and usually does, play a part. But while both giants are changing and opening up, the report contends that “much remains to be done before the potential of either market can be fully realised”.

It goes on to suggest that India “possesses several strengths”. While it began the process of economic liberalisation a decade later than China, the report states that India is now “far more advanced in its corporate structure and institutional infrastructure”. And this is reflected in direct foreign investment by liquor companies, which is considerably higher in India than in China.

However, the report does warn that India “remains hamstrung by bureaucracy at all levels”, and that while corruption undoubtedly flourishes in both countries, India has the greater problem in this regard.

On the other hand, the report also warns that the Chinese Government has a history of periodically and arbitrarily singling out companies and individuals as a way of controlling the industry. For instance, the last import boom was effectively extinguished in the mid-1990s after the Government launched a campaign against conspicuous consumption, which was targeted at business leaders and local politicians. That said, this time the Government’s liberal approach seems to be more permanent, the report states.

Another factor which appears to weigh in India’s favour is Indians’ familiarity with Western-style spirits. Indians consume IMFL (Indian-made foreign liquor) whisk(e)y, rum, brandy and country liquor (usually molasses-based), with the vast market for local Indian whisk(e)y coming in at 75m cases a year, the report points out. “So it is more a case of importers encouraging trade-up from local whiskies to international brands in India.”

In China, on the other hand, rice spirits and wine are by far the largest drinks categories. “There is a big job to be done by foreign investors in educating consumers about Western categories and brands,” the report contends.

Where China appears to score better is in its more developed retail infrastructure. Both countries suffer from inadequate distribution systems, but China has a growing network of hypermarkets and supermarkets which can sell alcohol, in addition to the traditional channels.

By contrast, India has no supermarkets that can sell alcohol, the report points out, and in most States there are very few modern liquor outlets, and relatively few bars. While neither country has developed a network of independent importers capable of launching international brands not wishing to work with multinational subsidiaries, China is more developed than India in this area, although most of the independent importers are regional.

However, as is so often the case in the alcohol market the critical difference between the two countries from the industry’s perspective comes down to tax. In China, the import duties and other taxes are comparatively low, at 15% cash-in-freight (CIF). But in India imports are subject to 150% CIF, as well as many State and local taxes.