China holds key for global spirits brands

China is the key for any global company and it is as important now as the US was in the past, according to speakers at the inaugural Worshipful Company of Distillers' city debate.

The topic was 'China is the Heart of Asia'.

Martin Riley, chief marketing officer of the Pernod Ricard Group said premiumisation is important and that the starting point for scotch is higher than in other parts of the world - it starts at Chivas Regal 12 and Johnnie Walker Black Label. He also said that China would overtake Japan as the number one purchaser of luxury goods this year.

Riley said there are an estimated 1.1 billion consumers of legal drinking age in China. He also said there are "no negative associations with alcohol".

Though the whole panel admitted that statistics from China were hard to quantify, Riley said there could be 900m cases of alcohol sold per year. Of which, only 4m were international spirits brands.

He said that although spirits exports to China have been growing 20% per year for the last ten years, it was 17th in the world for international spirits.

Riley said cognac has a greater margin than scotch because of its historical relevance and association with French luxury. Hennessy, Martell and Chivas Regal share 50% of the imported spirits market.

"We traced the first shipment of Martell back to 1848. Cognac has an established role in Chinese society," he said.

Understanding drinking occasions, route to market and communication are important factors in being successful in the Chinese market, according to Riley. For example, consumers drink with food, buy expensive whisky or cognac to take to clubs and rarely entertain at home.

"The emerging middle class uses brands as a sign of status," he said, adding that there will be an estimated 430 million middle class consumers by 2015.

But he also warned that the cost of business is high in China and the number of on-trade outlets is limited, making competition fierce. The laws of intellectual property can also cause problems and media costs are as high in Shanghai as they are in London or Paris.

"To be effective, you have to have local talent that understands the market," he added. He also said that there are around 70m Chinese living outside of China and it is important that prestigious international brands are available to them, too.

Bill Farrar, group sales and marketing director of The Edrington Group and chairman of the Edrington-Beam Alliance said that 45% of Chinese consumers believe well-known brands are a sign of quality. This number was considerably lower in the US.

Farrar said the challenge for scotch is that the demand in China is for older expressions. Though he admitted that stock limitations create demand.

But Farrar warned that China is not predictable. "There's a chance China might go its own way," he said. "China may look to its neighbours in the early years but do its own thing in the long term."

Baijiu was regularly cited by Riley and Farrar as a dominant domestically-produced spirit.

Chris Pitcher, a partner at equity broker Redburn likened China to the Internet.

"The City didn't get the scale of the Internet wrong, just the pace of it," he said. Pitcher warned that although China is rich at the top end, it is not rich to the core. House prices are high and there is unrest in some areas, he said. He emphasised that it was important to build a brand over time, rather than absorb more immediate funds from credit and expense accounts. He also said China had some decent brands of its own and was not a "dry savanna waiting for western brands".

The debate was held on May 3 at JP Morgan in London. It was chaired by Andrew Morgan, president of Diageo Europe. Also on the panel was Sir David Brewer, former Lord Mayor of London and current chairman of the China-Britain Business Council.