Are the opportunities endless for Western firms in China or should they be looking over their shoulders?

Are the opportunities endless for Western firms in China or should they be looking over their shoulders?

So, how big is the opportunity for foreign drinks firms in China? And, are people getting a bit too over-excited by the lure of the East?

At a debate hosted by the Worshipful Company of Distillers in London last night, the tone was predominantly optimistic. Three of the four speakers bombarded guests with a variety of stats, illustrating the potential rewards.

A selection of these show the monumental shifts occurring in China: the population consists of 1.1bn people of legal drinking age; 430m Chinese will make up the 'middle class' by 2015; 20 airports are currently under construction, including the world's largest; 195m Chinese are using Weibo (the country's version of Twitter).

These mind-boggling figures were used to press home the message that, as the Chinese economy surges, seriously big bucks can be made by foreign firms that get it right.

There are, of course, already companies such as Pernod Ricard, Moet Hennessey, Remy Cointreau and Diageo doing the business in the region. A timely note issued by Morgan Stanley yesterday suggested imported spirits already generated more than EUR500m (US$656.1m) of EBIT and that could double by 2015. 

However, the penetration is tiny compared to the continued dominance of local products. “Western-style spirits” currently account for only 1% of the market in China.

Scotch whisky and Cognac remain the “in demand” products as the thirst for luxury goods among China's upper echelons shows little sign of abating.

But, for the vast majority of Chinese, Baijiu - a traditional distilled liquor - is still the drink of choice. As Martin Riley, Pernod's chief marketing officer, said: “It's a phenomenon and plays a pivotal role in society – 900m cases are sold a year.” In comparison, just 4m cases of international spirits are sold every 12 months. 

What might be read into this is, aside from China's rich who like to buy into the idea of luxury, most of the population are still wedded to a very traditional drink.

As Riley pointed out, 85% of alcohol consumption in China is with a meal, with the on-trade playing less of role – even though it has developed significantly in the last ten years. Like Western consumers, China's drinkers are becoming more sophisticated and wise to the big sell.

But what of other categories? Budweiser has proved a success, with its regal overtones (the King of Beers) and the Budweiser Ants somehow endearing themselves to China's beer drinkers.

Vodka has “yet to establish” itself, Riley added, although Absolut has made inroads. This is likely to stay the case, according to Morgan Stanley. “With around EUR400m of marketing spend devoted to Cognac and Whisky and already several decades of dominance for these categories within imported liquor, the barriers to entry to any other categories are high,” it says. 

But, beyond all the hand-rubbing opportunity lies a twist in the tale.

Again, presciently, as yesterday's debate began, news broke that Chinese firm Bright Food had bought a controlling stake in UK-owned Weetabix.

This neatly illustrated a point from Redburn's Chris Pitcher that it might not be all one-way traffic for Western firms looking to cash-in in China.

He pointed out that Chinese companies will start to look outside the country as opportunities present themselves. But, he said, all this would be is a “natural rebalancing of the world economy” - based on the fact India and China were the world's economic powerhouses up until two centuries ago.

Now, there's food for thought.