The world's biggest liquor company, Diageo, has been busy buying up the local liquor brands. In June, the London drinks giant became the sole shareholder in SJF Holdco in China, a leading producer of the traditional Chinese tipple baijiu, and in July, the major shareholder in United Spirits, India's largest spirits company, specializing in locally made whiskey, brandy and rum.
"In the emerging markets, our leading brands in scotch and vodka give us leadership in international spirits, and we have expanded this scale with our acquisitions of leading local brands," said Andrew Morgan, president, new businesses at Diageo.
Over the past three years through the end of June, Diageo had invested more than $4 billion to acquire leading local brands, deals that offer strong routes to market and local brands that can be premiumized.
On top of this year's acquisitions, Diageo—whose global portfolio includes Johnnie Walker, Smirnoff, Baileys, Crown Royal and others—has in recent years added the Turkish raki producer, Mey İçki; Brazil's largest cachaça producer, Ypióca; a total equity stake of 45.53 percent in Hanoi Liquor Joint Stock Co. in Vietnam; and Meta Abo Brewery in Ethiopia.
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Diageo isn't alone, as fellow Western spirits houses including Pernod, LVMH and Campari have gotten in on the act, albeit to a lesser degree. Pernod is active in baijiu with the Jian Nan Chun brand, and is a serious player in Indian whiskey with its Royal Stag, Blenders Pride and Imperial Blue labels. LVMH owns a stake in Wenjun baijiu, and Campari acquired Brazil's Sagatiba cachaça in 2011.
The target of all this activity is the new middle-class consumer, whose growing presence is altering spirits consumption in the emerging markets. And if the local players don't premiumize, they run the risk of being drunk under the table by the global luxury brands. Local spirits still dominate by volume in these countries—baijiu alone makes up a whopping 98 percent of spirits consumption in China—but Western spirits are eating into their market share.
The middle classes don't just want a better moonshine, but are trading up—to the top shelf—gradually tasting Western beer, and then spirits like scotch, cognac and vodka. (The exception to this model is India, where, according to a report from Nomura, middle-class consumers move from standard local spirits like rum, whiskey and brandy to premium local spirits or even the lower end of international spirits, without making the transition to beer.)
In Brazil, where cachaça is largely consumed in the Caipirinha—the national drink—its perception as a lower-class beverage underlies the spirit's volume decline. "Caipirinha literally translates to 'little hillbilly,' the reason being it was so bad you had to add limes and sugar," said Trevor Stirling, an analyst at Bernstein. "A middle-class Brazilian will never ask for a Caipirinha, but a Caipiroska [a Caipirinha made with vodka]." Stirling said that 96 to 98 percent of the cachaça sold in Brazil is lower-grade varieties, and that this segment is likely to continue to suffer. By contrast, Brazil has emerged as a key market for global vodka brands like Diageo's Smirnoff and Pernod's Absolut.
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