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Pop quiz: What two types of liquor make up a combined 40 per cent of the global spirits market by volume and 90 per cent of global growth by volume?If you were thinking vodka, rum or gin, think again. Indian whiskies and baijiu, a Chinese white liquor, are powerhouses in the global spirits market, and international liquor giants are anxious to cash in on the success of the fast-growing, profitable tipples.
“There’s been a big change in perception at the international spirits players,” said Alex Molloy, Credit Suisse’s Head of European Consumer Staples Research. “I think there was a bit of a tendency to see local spirits as low-growth, low-margin… There’s been a reconsideration of that, driven by China.”
Baijiu is far and away the world’s largest local spirits category, making up about 36 per cent of the market compared with the next largest group. Local vodka brands, mostly from Russia, take up just 18 per cent of the market by volume. India, meanwhile, is the largest producer of local whiskey and accounts for nearly half of global whiskey sales by volume.
The most famous Scotch and Irish whiskies are premium international brands, but Indian whiskies dwarf them in terms of sales by volume. Nine of the top 10 best-selling brands are Indian – only Johnnie Walker, the third-largest seller, places on the list.
Both Indian whiskey and baijiu have seen tremendous growth in recent years. Baijiu sales have risen more than 20 per cent a year since 2008, while Indian whiskey has seen growth rates of between 15 and 20 per cent a year for the past five years, according to a recent research note Molloy authored entitled, “Local spirits: dispelling preconceptions.”
The forces driving the success of these two liquor categories are familiar. China and India both have enormous populations and a growing middle class that has been increasingly eager to trade up to more prestigious, expensive brands, Molloy said.
In China, Molloy said, a sense of national pride may combine with favourable economics to drive the popularity of baijiu in general and the emergence of ultra-high-end brands such as Moutai and Wuliangye, which have average profit margins higher than 50 per cent, in particular. Premium and ultra-premium brands, in fact, are growing faster than lower-end brands.
“I think it’s probably about a little bit of the cultural renaissance that has taken place to some extent in China,” Molloy said. “It’s a local spirit – it’s not drinking whiskey or vodka. It’s drinking something that’s purely Chinese.”
In India, which remains a relatively poor country compared with China, customers are also trading up.
“GDP per capita in India is still incredibly low, but you have a much more vigorous, media-driven society,” Molloy said, noting that sports heroes and Bollywood stars are revered. “So, it does open itself up to the branding that is available within spirits at a mass level.”
Major international spirits companies, particularly Pernod Ricard and Diageo, have traditionally viewed markets such as India and China as places to sell their own, Western brands to the local population. Now, the two major spirits companies are eager to tap into the high-growth local brands, but high tariff barriers in India and obstacles to buying stakes in Chinese companies pose a challenge, Molloy said.
A mixture of good judgment and good fortune gave Pernod an advantageous position in Chinese and Indian liquor markets. The French drinks giant acquired The Seagram Co. Ltd.’s Indian whiskey business and Martell cognac in 2001.
“They were small and relatively uninteresting at the time,” Molloy said of the brands. “A decade later, Pernod finds itself a No. 2 player in the Indian spirits market. That is just an unbelievable business for them – it’s only 5 per cent of their revenues, but it’s 20 per cent of their growth.”
The Martell acquisition has also served the company well in China, where cognac is enjoying a popularity boom.
“They have actually ended up with what I think are fantastic positions in those two markets,” he said.
Diageo has also been acquiring stakes in local spirits companies, including a Brazilian cachaça company last year and Turkey’s largest raki producer in 2011 – proving that while China and India are the biggest local spirits markets, companies are eying a number of emerging market liquors thirstily. China, however, is proving to be more impermeable for the British liquor behemoth. It took Diageo several years just to acquire a 22 per cent stake in a “relatively small local player” in baijiu, Shui Jing Fang.
But Diageo scored a major victory in its bid to catch up to Pernod in India last week, when the Competition Commission of India approved its bid to take over United Spirits, the country’s largest independent spirits company, in a two-phase transaction in which Diageo initially will take a 27 per cent stake in the Indian company.
Despite their considerable success, there is no indication that either baijiu or Indian whiskies are on the verge of becoming true international brands that appeal to large numbers of people outside the domestic markets, Molloy said. But they’re nowhere near done growing, either. In India especially, many consumers have quite a few rungs left to ascend on the value ladder as the country continues to grow.
“In India, it’s only now that companies are really trying to push consumers up through a brand and into multiple variants of a single brand,” Molloy said. “You can really see that, structurally, the runway is incredibly long—in fact, the end of the runway is out of sight.”
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