Why unaged spirits brand owners should – finally – consider China – comment

For international alcohol brand owners, the early promise of China’s burgeoning economic growth in the first decade of the 21st Century was all about brown spirits, spearheaded by Cognac, with blended Scotch hot on its heels. Martell, Hennessy and Louis XIII, with Chivas Regal, Johnnie Walker and Royal Salute just behind. The use of high-value spirits as what might euphemistically be termed 'gifts' - or, more accurately, lubricants to oil business deals - created a market bubble that burst when the Communist Government came down hard on corruption a decade ago. Since then, the market in Greater China has acquired some degree of normality, with the luxury segment complemented by an emerging middle class that’s more into Ballantine’s, The Singleton and The Glenlivet. But, one factor has remained constant: The emphasis on aged brown spirits, and specifically Cognac and Scotch. It’s not hard to understand why. Baijiu dominates white spirits consumption in China to such an extent that imported, unaged spirits constitute no more than a microscopic speck in the market. There’s also a circularity at work here: the scale of baijiu deprioritises white spirits for international brand owners, and they’d rather devote their marketing dollars to pushing Cognac and Scotch. Understandably so. Now, though, there’s a whiff of change in the air. Pernod Ricard’s recent strong performance in China - sales jumping 44% to top EUR1bn (US$1.06bn) in fiscal-2021, then up by 14% in the first six months of fiscal-2022, translating to a 22% hike on pre-COVID levels - was driven mainly by the usual suspects of Martell, Royal Salute, The Glenlivet and Chivas Regal. Bubbling below the surface, however, were less familiar brand names in the Chinese context: Beefeater, Perrier-Jouët - and Absolut. The Swedish vodka’s dynamism in China helped it post a 5% increase in global sales in fiscal-2021. In the first half of fiscal-2022, Absolut’s global performance was even stronger, with sales climbing 23% (+35% outside the US), and some 8% above pre-COVID levels. Announcing the results, Pernod CEO Alex Ricard took time out to highlight the brand’s “very strong development” in China. Expanding on this, Philippe Guettat, CEO of Pernod Ricard Asia, told me a few months ago: “Vodka [in China] is exciting, and we’re making a lot of progress with Absolut with Gen-Z and Millennials.” Intriguingly, he added that growth was “more about the brand than the category”. The implication is that Chinese consumers are not so much buying into vodka per se as being wowed by Absolut’s individual brand proposition. In some ways, this mirrors the earlier boom in demand for Chivas Regal, which famously dominated China’s whisky market before the Government crackdown. All about the brand; less about the category it inhabits. The reasons for consumers turning to Absolut are, of course, less important than the fact that they’re buying it in the first place, and I’d be wary of drawing too many parallels between the dynamics driving China’s spirits market of more than a decade ago and those that shape it today. Younger, emerging middle-class consumers have become increasingly important as a customer base in recent years, and their significance will only grow in the future. As Alex Ricard said during an analyst call for Pernod’s fiscal-2021 results announcement: “[I hear that] the intent of the country is really to support the emergence of middle-class households”. It’s perilous to generalise about large demographic groups, but the consensus is that such consumers are less turned on by established spirits brands as status symbols, and more curious to explore new categories and consumption occasions - as well as finding out more about the products they buy. COVID has also changed sensibilities, most obviously in terms of the occasion and location of consumption - something that's only likely to be reinforced by China’s current struggles with the re-emergence of the virus in Shanghai and Beijing. The pandemic has accelerated and magnified a pre-existing trend of rising home consumption, rather than in the on-premise, leading to a notable rise in retail and e-commerce sales, and lots more home entertainment as friends gather to socialise. This shift in the mode of consumption also changes attitudes, promoting the savouring of products and piquing curiosity to find out more about them, especially among younger Gen-Z and Millennial consumers. To date, this phenomenon has fuelled strong growth for single malt Scotch, but there are signs that it's increasingly pervading other spirits categories too, including not only vodka in the form of Absolut, but also gin and, in the Tier 1 cities that tend to be early-adopters of nascent trends, Tequila too. It’s early days. Baijiu is - and will remain - the hugely dominant segment of the white spirits category in China. But, in such a vast market, there’s plenty of space for everyone and ample headroom for growth for imported unaged spirits in the years to come. That’s true on a broader regional, as well as national, basis. Beam Suntory, for instance, is making positive noises about the performance of its Japanese gin, Roku, in Singapore, with a focus on the on-premise. It’s also apparent from a glance at the images of Campari Group’s new 'Rare Attico' high-end tasting area, located in the company’s regional HQ in Singapore with dramatic views of the city skyline. Sure, there’s lots of attention given over to high-end expressions from Bisquit & Dubouché Cognac and Glen Grant single malt - but there’s also room for Aperol, Skyy vodka and Bulldog gin. Ten years ago, I’d wager they wouldn’t have got a look-in.