China has launched a crackdown on prostitution

Pernod Ricard calls it “a short-term pause in our long-term growth”. But despite the optimism, the French group must be getting increasingly nervous about its performance in China.

Yesterday, Pernod's Asia head Pierre Coppéré warned the company is expected to post a drop in underlying operating profits for China come the end of the fiscal full year in June. As has been the case with most of the bad news in Chinese spirits over the past year, the declines have been blamed on anti-gifting measures that have impacted international firms such as Diageo and Remy and also China's baijiu makers.

However, in a twist, Coppéré highlighted a new wave of measures targeting China's prostitution industry. China has a well developed, and illegal, network of venues where sex is for sale - from streetside “barber shops” through karaoke parlours to high-end hotels where guests are offered late-night “massages”. 

The result of this ubiquity is that the vice crackdown is closing down bars and nightclubs that are on the periphery of the sex trade, though slap bang in the middle of the international spirits market. According to Pernod's own China intelligence, KTVs (karaoke bars) have seen volumes for Pernod products drop by double digits in the company's fiscal YTD. Bar volumes have dropped by high single digits over the same period.

It shows that the influence of the crackdowns, previously restricted to the on-trade and gift-giving, is spreading to other channels. Unfortunately for Pernod, these are channels that are of more importance to the company and its once-flourishing Cognac category, according to Bernstein analysts.

“Unlike previous anti-corruption campaigns, which focused on government-related expenditure and entertainment, where baijiu is dominant, this is focused on private consumption and business entertainment which is much more oriented towards Western-style spirits and especially high-end Cognac,” Bernstein wrote in a note today (28 March).

All of this means that China's “glory days”, as Bernstein puts it, may be behind us, as consumers shift to more “modern” retail channels, and premiumisation opportunities, that abounded in gift-giving, lessen. As a Constellation Brands executive told me at wine trade show, ProWein, this week, regarding the extended distribution of its mid-range Robert Mondavi label in China: “We can no longer expect to be selling as many US$1,000 bottles of wine in China”.

Welcome to the new normal.