The Future for Drinks - Part III: Emerging Markets Develop Expensive Tastes
The penultimate part of this month's management briefing considers the emerging markets, and the position they will take in the future of our industry.
With average incomes in the major urban areas of the world’s emerging markets starting to approach western levels, drinks companies are catering to increasingly expensive and refined tastes.
China is a case in point, with consumers gravitating more towards expensive wines, and foreign brands are recognising this, according to China Market Research Group’s (CMR) senior analyst James Roy. French winery Domaines Barons de Rothschild, for example, has announced plans to launch its first Chinese vineyard-made Château Lafite Rothschild, which will be sold exclusively in China. Imports will dominate higher-end China wine markets for the foreseeable future, says Roy, as few China-made wine brands are priced over CNY80 (US$12.30) per bottle.
Wine is set to show most growth among alcoholic beverages in China for next 20 years according to market research firm Euromonitor. The company further predicts that the national market size for wine will reach 3.9bn litres by the end of 2011, already up 12% from 3.4bn litres in 2010. Beer will remain the most popular alcoholic beverage with Chinese consumers however, according to Euromonitor: its estimated market size of 48.1bn litres in 2011 was 6% above 45.3bn litres in 2010.
Further research from Euromonitor shows that Chinese brands are dominating lower end China beer and wine markets, with beer sales in 2010 being led by the Snow Beer joint venture between SABMiller and China Resources Enterprise Ltd..
Looking ahead, opportunities for foreign companies are mostly in higher end, western-style drinks market, says Roy. “At the higher end, and in western-style spirits like whisky and vodka, there is really no Chinese brand that competes with imported wines and liquor brands like Jack Daniels and Absolut.”
Looking at South Asia, Kaustubh Pawaskar, research analyst with Mumbai-based broking house Sharekhan, says that beer currently accounts for 28% of the total Indian alcohol market, while Indian-Made Foreign Liquor (IMFL) accounts for 32% of the market. The remaining 40% is attributed to so-called ‘country liquor’, cheap spirit distilled from fermenting fruit, palm, food grains, or sugarcane, such as Taadi, procured by making an incision on the palm tree trunk, collecting the secretion in an earthen pot and allowing it to ferment.
Within the IMFL segment, which clocked a compound annual growth rate (CAGR) of 12% between 2005 and 2009, whisky and brandy consumption has risen at 15% respectively, while vodka saw a massive growth of 38% CAGR in the same period. Pawaskar says that white spirits, such as vodka and gin, are gaining momentum among young people and women, who regard them as fashionable. This is why NV Group of Distilleries in the country has revamped its Blue Moon premium vodka to create a “new and young look”, notes NV Group spokesman Gaurav Prakash. Earlier this year, the distiller made Blue Moon’s carton packaging more colourful and targeted young consumers with point-of-sale signs sporting the brand’s new 'break free’ slogan. This summer, Diageo's Smirnoff vodka brand has introduced a Masala Marke packet, which pays homage to the unique and spicy flavours of India: the pack includes a 75cl bottle of Smirnoff vodka with a 60cl bottle of lemonade and a 50g sachet of chatpata chaat masala spices.
“Premiumisation is happening because Indian consumers with disposable income are graduating to premium brands,” says Pawaskar.
“There is a need to open up the market,” says Pramod Krishna, director general at the Confederation of Indian Alcoholic Beverages Companies (CIABC), the Delhi-based body for India's wine and spirits industries. “Liquor consumption in India will rise but how much of [higher] quality will be consumed is a question if the draconian taxation continues.”
High taxation in this government-regulated industry remains a concern, notes Pawaskar, but, “with an estimated 5m new consumers reaching the legal drinking age each year, overall, the liquor industry is poised to grow strong in the coming years”.
Looking towards South America, Marcel Motta, Euromonitor's research manager for Brazil, says that "both domestic and imported premium beers are expected to gain substantial market share from the massive standard lager market in the next ten to 20 years." Turning to Brazil, Motta says that high import duties deter international rivals to domestic lager, although domestic companies have begun producing a wider variety of beers in the premium segment: "If you want to make it in Brazil, you have to produce [the product] locally," he says.
Euromonitor predicts the alcoholic drinks market in Brazil will grow from 14.48bn litres in 2010 to 17.58bn litres in 2015. Wine, although a niche market in Brazil - with only 453,000 litres sold in 2010 - is expected to grow markedly during this time in volume terms. The soft drink market will expand from 22.96bn litres in 2010 to 30.05bn litres in 2015, with sports and energy drinks growing the fastest, followed by juices, according to Euromonitor data.
In terms of soft drinks, Motta and his research team forecast that products in the 100% juice segment will experience major growth in the next two decades. “With incomes improving [in Brazil] there should be room for a trade up from nectars to 100% packaged juice," he says.
Meanwhile, Mexico’s National Association of Producers of Soft Drinks and Carbonated Water (ANPRAC) predicts that CSDs will continue to grow at a good pace in the country, but not as fast as other soft drinks such as juices, functional drinks and bottled water. Mexico is the largest consumer per capita of CSDs in the world, but the market is already rather mature, with growth expected to flatten out somewhat in the coming years. Instead, a growing interest in health in Mexico will push the market towards CSD alternatives, according to Euromonitor. The market research firm predicts the overall soft drink market will expand from 39.36bn litres in 2010 to 48.54bn litres in 2015, with bottled water growing the fastest, followed by juices.
Taking a look at Mexico’s alcoholic beverages market, Euromonitor research predicts that rum and Tequila sales will grow at a steady pace over the next 20 years, and that whisky, a relatively newly-acquired taste in Mexico, will continue to see rapidly growing sales. Wine is seen as a niche market in Mexico, too, with only 63.5bn litres sold in 2010, according to Euromonitor, although it is expected to outpace all other alcohol segments in growth in the future, reaching 91.4m in 2015 and set to expand further in the years to come.
Euromonitor predicts that, overall, the alcoholic drinks market in Mexico will grow from 6.81bn litres in 2010 to 7.74bn litres in 2015, with wine growing the fastest, followed by beer.
There is less dynamic change however in Russia, where consumers are predicted over the next 20 years to continue their love affair with vodka: According to data from the UK-based analysis service Business Monitor International, vodka already comprises 70% of the alcohol market, and any fall in that number will only come through anti-drinking political action. “The issue is how severe any crackdown by the government is,” says Shonil Chande, food and drinks analyst for Business Monitor International.
There are a few factors, however, that may at least dilute vodka’s domination of the alcoholic sector. Russia’s population may be ageing, but is likely to get much richer by 2030, with average annual per capita incomes by then to be around US$35,000, says Chande. “That means people may move more towards wine, which hasn’t done so well in Russia in the past.”
Despite being the latest target of anti-excess legislation, beer is set to benefit from any Government squeeze on vodka, according to Chande. That'll sit well with Carlsberg, which owns the leading national brand, Baltika. “Beer will do well in the long-term," Chande says. "Per capita income was 55 litres in 2002 but should be 86 litres by 2015."
He also believes that the soft drinks sector in Russia is leaning towards greater diversification into health and functional beverages in years to come. “Pepsi and Coca Cola have been focusing on soft rather than carbonated drinks,” said Chande. “Functional drinks sales are set to accelerate.”
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The Future for Drinks - Part III: Emerging Markets Develop Expensive Tastes