Rocketing sales of Scotch whisky in the Far East are changing the face of the market and encouraging firms to invest in new distilleries, reports Ian Fraser
When Ian Macleod Distillers launches its latest Scotch whisky brand in China next month, 75,000 people are expected to congregate in a Shanghai football stadium to celebrate the event.
Leonard Russell, managing director of Ian Macleod Distillers — whose existing Scotch brands include Glengoyne, Lang’s and Isle of Skye — cannot believe his luck. He says people can be expected to attend not just because of the prospect of a free dram.
He says the crowd will also be wanting to catch sight of some of their favourite film stars, some of whom are coming along to taste and endorse the new range, which has been put together especially to suit Chinese tastes.
The range will include 12- and 15 year old blends as well as 17- and 21-year old single malts. “When I launch a new brand in the UK, the event is usually so poorly attended I end up eating the buffet myself,” jokes Russell. “In China they do things on a different scale.”
“The Chinese market could become enormous. Within ten years it could have overtaken the US to become the biggest individual market for Scotch whisky,” adds Russell. “The success of Scotch has a lot to do with conspicuous consumption.”
He said the use of the colour gold on labelling has strong appeal to Chinese consumers who often choose a brand that will make a statement about their new found affluence.
However given the country’s size, Russell warns that distribution remains very difficult and that counterfeiting remains a significant problem. He also warns the market in mainland China may not continue to expand at quite the pace that some in the industry are predicting.
The prospect of rising sales in China — together with the potential in other emerging markets such as Mexico, Venezuela, Brazil and Russia — is prompting Scotch whisky distillers to invest for the future in a way that has not been seen for a generation. The expectation that India will succumb to World Trade Organisation pressure and open its market has reinforced this optimism.
Diageo, owner of brands including Johnnie Walker, J&B and Bell’s, recently said it would invest £100m in a new distillery at Roseisle in Speyside and expansion of its Cameronbridge grain distillery in Leven, Fife. Today’s announcement from privately-owned William Grant & Sons — the makers of Glenfiddich, Grant’s, The Balvenie and Hendrick’s Gin — that it is building a new single malt Scotch whisky distillery at its Girvan site capped a remarkable week for the industry.
Figures issued on Wednesday by the Scotch Whisky Association (SWA) revealed that export growth continues to surge. Global exports grew by 4% in 2006 to £2.5 billion and shipment volumes were 6% up on the previous year to more than a billion bottles.
Richard Burrows, the SWA’s chairman, said: “Building on a record year in 2006, the prospects for Scotch whisky are brighter than they’ve been for many years. I’m greatly encouraged that distillers, large and small, are investing in facilities in Scotland and taking advantage of opportunities worldwide, with markets in Asia, North and South America offering strong potential for growth.”
According to the SWA, the fastest growing regional markets were Latin America (exports up 24% to £326m), Africa (exports up 17% to £114m) and the United States (exports up 7% to £400m). But sales to Asia rose by just 2% to £546m. This was partly because of a collapse in exports to South Korea.
However within Asia, sales to China continue to grow fast, with total sales to China increasing 27% to £58m in 2006. This growth, which gathered momentum after China reduced import tariffs following its admission to the World Trade Organisation in 2001 , is expected by industry insiders to continue for the foreseeable future.
And they are rubbing their hands with glee, since Chinese consumers have expensive tastes, with a strong penchant for so-called deluxe blends such as Chivas Regal and Johnnie Walker Black Label and may yet acquire a taste for single malt.
Pernod Ricard’s Chivas Regal (formerly owned by Seagram) was lucky to have a head start in the Chinese market and is now approaching a Chinese sale of one million nine-litre cases per year, well ahead of Diageo’s competitor product, Johnnie Walker Black Label, which is estimated to be selling some 300,000 in the People’s Republic.
Meanwhile exports of Scotch to continental Europe have plateaued at £839m. A big rise in sales to the emerging markets of central and Eastern Europe was last year outweighed by a 19% slump in sales to Spain.
Russell says the fact the two biggest-selling Scotch whisky brands in China are both 12-year-old deluxe blends has created a ripple effect on the supply side of the market: “In view of anticipated demand for these products in China, both Diageo and Pernod have become net buyers of stock, which has sucked a huge amount of whisky from the market. Three- to five-year old malt is particularly tight at the moment.”
Roland van Bommel, the Dutch-born chief executive of William Grant & Sons, agrees that Scotch whisky companies’ desire to set aside stock to meet future anticipated growth in the emerging markets of Asia and Latin America — where Scotch can command higher retail high prices than in some developed markets — has transformed the dynamics of the industry.
He says distillers are, for the first time since the 1987, on the front foot when it comes to entering pricing negotiations with the supermarket chains.
Van Bommel believes the industry allowed Sctch whisky prices in the UK market to fall “ridiculously low” because in leaner years certain industry players were prepared to compete on price for contracts to supply own-label Scotch whisky to chains of supermarkets including Sainsbury’s, Tesco and Asda.
Van Bommel says: “Now we have the opportunity to rebuild all the equity that has been lost in the UK Scotch whisky market. Given the market circumstances, it is now us who will be walking in the door to see Tesco buyer with a smile, whereas it has been him who has had he smirk over the past five years.”
IMD’s Russell says that, much to the supermarkets’ chagrin, distillers are becoming increasingly reluctant to supply own-label or branded Scotch to supermarkets at knockdown prices. “Own label has traditionally been a conduit to clear out excess stock. But given the shortages of supply and the growth of new markets distillers increasingly want to keep this for themselves.”
And the Scotch whisky industry, which has become increasingly foreign-owned in recent years, is continuing to attract the interest of overseas drinks players — partly because stocks of single malt whisky are becoming so valuable again.
Pernod Ricard and Fortune Brands have become the second and third largest companies in the sector through a string of recent acquisitions.
And Bangalore-based entrepreneur, Vijay Mallya, is expected, by the end of this month, to have finalised the much trumpeted acquisition of the Glasgow-based distiller Whyte & Mackay. Mallya will gain control of brands including Whyte & Mackay, Dalmore single malt, Vladivar vodka, Glayva liqueur and the Invergordon own-label business.
Industry insiders are particularly impressed by the price that Mallya has been prepared to pay. The United Breweries chairman is widely expected to pay the company’s owners, Vivian Imerman and Robert Tchenguiz, more than £550 million for a business that they acquired for about £209m in 2001. The near trebling of the company’s value in the space of five years is seen as yet another indicator of the industry’s strength.
There are some sceptics who warn the current bullishness in the sector may be based on over-optimistic interpretations of future demand from China. But if 75,000 people can be persuaded to attend a launch event in that country, it looks like Scotch will be a happening phenomenon there for some years to come.
This article was published in Sunday Times Scotland on 8 April 2007