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Western brands seeing a recovery in the Chinese spirits market

A visitor looks at Johnnie Walker bottles at the luxury goods fair in Shanghai China.
Lucas Schifres | Getty Images

Western spirits are starting to see a recovery in China, driven by demand from the growing middle class for premium and iconic American brands.

Following the Chinese government's sweeping anti-extravagance crackdown in 2013, which led to shrinking demand for the high-end liquor, premium brands are indicating that retail demand is returning, as distributors are seeing renewed interest in international whiskey labels.

That demand is being boosted by whiskey bars and tasting clubs, which have focused on imported spirits. Meanwhile, more Chinese restaurants are stocking premium imports.

Whiskey auctions are likewise becoming more prevalent, as spirits are once again being gifted more frequently. That's particularly true of super-deluxe Scotch and malts.

Still, the market remains dominated by traditional drinks such as baijiu, which accounts for an estimated 90 percent share of the spirits market, according to Credit Suisse.

"In places like China we think there's a huge opportunity there to win within the refreshment occasion," said Greg Hughes, U.S. General Manager of Beam Suntory, whose leading American brands include Jim Beam, Maker's Mark and several others.

One spirits category that's particularly strong is single-malt whiskey, which "is increasingly seen as the spirit for connoisseurs," according to IWSR, which tracks consumption and trends in alcoholic beverages.

Despite Japan being one the strongest overseas markets for Scotch by volume, it has struggled in China and Taiwan. But Diageo — the world's largest premium drinks company — sees opportunity in the super-premium end of the market, where cases usually go for upwards of $200. Growth in that segment is being driven by the middle class and a nascent recovery among wealthy consumers.

"The number of whiskey bars or collectors clubs are…increasing in tier-one cities in China, with now over 100 new bars opening up last year," Sam Fischer, Diageo's president of Greater China and Asia, told analysts at a presentation this month.

"And we also see the growing trend of single-malts, as consumers look for brands of quality and heritage."

Overall, China's spirits industry is forecast to generate $143.2 billion in sales in 2016, up 8.3 percent from the prior year, according to Euromonitor International. That would be the best annual growth since 2011, when sales growth paced in the double digits. Euromonitor predicts the industry will bring in $183 billion by 2020.

Increasingly, American brands are playing a larger role in that growth. U.S. spirits exports to China reached an all-time high of $15.1 million in 2015, up 35 percent from 2013 levels, according to the Distilled Spirits Council of the United States, a trade group.

"We had stability with on the one hand China improving but on the other hand Africa, Middle East getting tougher," Gilles Bogaert, managing director of finance and operations for Pernod Ricard said last week while discussing the French distiller's financial results to industry analysts. Pernod, the world's second-largest spirits company after Diageo, has global brands including Chivas Regal and Jameson.

Even some of the cognac business in China, a category that has been challenged in recent years, has started to improve.

"We are positively also surprised by the acceleration we are experiencing in Greater China," Luca Marotta, chief financial officer of France's Remy Cointreau, said last week.

In September, the company's Remy Martin division opened a boutique store in a luxury mall in Beijing. The store allows customers to taste pricey Louis XIII Cognac, and dine on caviar and iberico ham. There are miniature bottles as well as the Le Mathusalem version, a larger six-liter size that can cost around $3,000 per bottle.

When asked if the Chinese market was seeing a softening or relaxation in consumer attitudes towards extravagant consumption, Marotta said "there are a lot of rich people that not only want to be pleasured and to buy and drink something very special."

But "it is more the fact that Louis XIII is no more a product of the extravagance habits; it's a more normal upscale product for everybody. Which is good, because it seems that the demographics can be very profitable for this product."

Yet while China's spirits market offers opportunity to Western brands, challenges remain. Almost three-fourths of the alcoholic beverage consumption in the world's most populous nation is for the local baijiu drink or beer, according to Credit Suisse.

To grow their share of the market, a group of American distilled spirits products will be showcased at a Hong Kong International Wine and Spirits Fair in November. A separate marketing event will be held in Shanghai.

A total of 16 leading American distiller brands will be featured, ranging from Beam Suntory's Maker's Mark and Jim Beam to Brown-Forman's Jack Daniel's and Woodford Reserve brands, according to a release by the Distilled Spirits Council of the U.S.

The U.S. craft spirits industry continues to grow, and reached 1,315 distilleries as of August 2015, according to the IWSR. The group predicts the number of distilleries could surpass 2,800 by 2020, or what it called "near-Prohibition status of an estimated 3,000 registered distilleries."

"Given bourbon's fast growth and the specter of M&A, the number of new craft spirits entrants is not surprising," RBC Capital Markets analyst Nik Modi said in a research report Thursday. Nonetheless, the analyst questions whether we could be seeing "a bourbon bulge."

Hughes, the Beam Suntory executive, concedes there are a lot of new entrants and brands emerging, and not just in Kentucky's bourbon country.

"We can't rest on our laurels as there are great distillers out there all over the country laying down great whiskey, and we need to do the same to keep up with what competitors are producing," he said.