Foreign spirits companies eye China as the promised land

Foreign spirits companies eye China as the promised land

While 2009 was a difficult year for premium baijiu sales, the recent announcement of the increased investment by Diageo in the Quanxing group confirms the company’s position as the most successful foreign player in the baijiu category.

Diageo’s approach to the development of the Swellfun baijiu brand has been well thought-out, deliberate and carefully executed. The firm has developed a baijiu brand which is now neatly positioned behind the big three premium national brands in China and is well ahead of the baijiu offerings from other foreign-owned entities.

From a consumer marketing perspective, the real strength in the Swellfun brand revolves around the astute leverage of the brand’s history. The brand is named after a famous ancient fresh water spring in Chengdu, the capital of Sichuan province and the heartland of Chinese baijiu. Water from this spring is used in the production of Swellfun and this communicates quality, purity and heritage to consumers.

Throughout multiple research projects conducted by Data Driven Marketing Asia (DDMA) over the last five years on the baijiu category, the Swellfun brand's packaging, history and communication has consistently resonated in a very positive manner with premium baijiu consumers. The Swellfun packaging is considered to be very attractive and premium and offers consumers a balanced blend between contemporary style and traditional Chinese values.

In contrast, the approach to the baijiu market adopted by Moet Hennessy with the Wenjun brand is far more challenging. Wenjun is an old baijiu brand from the city of QiongLai in Sichuan province. Research conducted by DDMA over the past several years indicates that consumers perceive Wenjun to be a lower end, value brand. To overhaul the current consumer perceptions of the Wenjun brand so that it is capable of competing against other premium brands in the market is an extremely complex, expensive and time consuming task. To do this, Wenjun will have to re-educate consumers and change the perceptions of its history and heritage. One of the key issues that Wenjun faces is that the region which it comes from is not famous or recognised for the production of high quality baijiu. This is very different to the leading baijiu brands that all come from famous baijiu-producing regions. The difference this makes in the eyes of the consumer is similar to differences in consumer perceptions between sparkling wine and Champagne or between brandy and Cognac. There is no doubt that Moet Hennessy has the capabilities to make this brand a success - the resurgent success of the Hennessy brand in China over the past several years is proof of the company’s marketing nous and skill. To work the same magic on the Wenjun brand, however, will be a huge achievement.

Compared to Diageo and Hennessy, Pernod Ricard has the best strategic deal from a brand perspective in the baijiu category by virtue of their joint venture with JianNanChun. The Chinese firm is the third largest baijiu company in the market in terms of revenue and is a brand which has very high awareness and a premium and positive image across all markets in China. The JianNanChun brand is considered to be premium and is widely respected as being one of the original baijiu producers. The ability to use JianNanChun-produced baijiu in the production of joint venture brands and to use the JianNanChun name in marketing provides the Pernod-owned joint venture with a potential advantage over its competitors.

Aside from the baijiu play, other recent activities by Diageo suggest that the company has much bigger plans for the Sichuan Quanxing group. The partial divestment by Swellfun from the Quangxing liquor group, a subsidiary of Swellfun and a producer of lower level baijiu brands, confirms that Diageo’s focus will remain on the high-margin premium and super premium segments of the category. The recent launch of Shanghai White vodka, which is produced and bottled by Swellfun in Chengdu, combined with the Quanxing group's specialisation in bottling, packaging and the production of packaging materials, suggests that the Swellfun Company may be being considered as a future bottling hub for other Diageo brands.

The long-term benefits of basing regional bottling and distribution in Chengdu would be enormous to the company as they could service their all of their Asian markets from a single location. Chengdu is a perfect distribution hub due to its close proximity to domestic, north Asian, south-east Asian and Indian markets and by virtue of its modern infrastructure. Preferential tax treatment and additional government incentives designed to encourage companies to locate to western Chinese markets would also make Chengdu an attractive location for an operation of this nature. At a minimum, it is highly likely that the Quanxing group will be a lead provider of packaging and POSM materials for Diageo brands.

The outlook for Swellfun in China is good. The company struggled to maintain growth in 2009 as the global economic crisis led to a reduction in business entertainment in the country. This had an impact on the premium baijiu category with many of the premium baijiu brands reporting a decline in volumes of between 15% and 20%. DDMA estimates that the Swellfun brand also experienced a decline in volumes sales of 12% last year compared to 2008.

However, the gradual conversion of the Swellfun brand from a regional baijiu brand to a national brand continued. In 2009, an estimated 11% of Swellfun volumes came from sales in Chengdu and Sichuan province. This reduced dependency on the Sichuan market indicates that the national expansion of the brand is being achieved.

Overall, Diageo has developed a successful baijiu brand through the careful activation of the latent value inside the Swellfun brand by leveraging the history and heritage of the water source used in its production. This, combined with a strong packaging offering, has created a brand which Chinese consumers consider to be premium, high quality and authentic. Overall, the Swellfun baijiu brand is very well-positioned to grow on a national basis as the premium baijiu category rebounds from a difficult period in 2009.

Data Driven Marketing Asia is an independent research and consulting group based in Shanghai.