Chivas China success riles Walsh

If there is one thing calculated to annoy Paul Walsh, Diageo’s chief executive, it is being reminded that the biggest producer of Scotch whisky ranks only second by volume in the Chinese market.

Pernod Ricard’s Chivas Bros arm was the Chinese market leader last year, accounting for 37.5% of Scotch volume, while Diageo was in second place with 27%, according to Euromonitor.

Diageo has a bigger presence across the whole Asian-Pacific region and entered the Chinese market with Johnnie Walker as far back as 1910. However, it is the relative newcomer Pernod Ricard – which had not much more than a token presence 20 years ago – that has made better inroads in China as well as India, the second most coveted Asian market.

The reason for Walsh’s angst is not hard to fathom. It is not just the prospect of capturing a future massive market for a mature product line; it is also to cash in on today’s swiftly growing consumer demand for premium spirits.

Since China began to embrace a mild form of capitalism, the country’s middle class has grown from 65.5 million in January 2005 to 80m in January 2007, and it is forecast to expand to 700m by 2020. That’s equivalent to more than double the whole population of the US, Diageo’s single largest market.

This substantial and rising middle class, with its growing incomes, is transforming the market. And where there is wealth, there is ostentation, so Diageo is targeting the nouveau riche.

Scotch accounts for about 80% of the group’s sales in China and it needs to maximise its volumes and brand recognition in order to leverage the prospects of the rest of its portfolio in the country.

That is why last week Diageo opened the "House of Johnnie Walker," a permanent four-storey retail and entertainment outlet in downtown Shanghai, where Diageo will sell Johnnie Walker 1910, a limited-edition whisky, for US$2,000 a bottle. This is the flagship of its marketing drive, but it is dwarfed by the potential of being able to coat-tail the baijiu market.

While the Scotch market in China is worth less than US$5bn a year, baijiu is 45 times bigger and accounts for 32% of China’s alcoholic drinks market, having climbed to US$124bn last year, a 13% increase on 2009. Baijiu is widely drunk, unlike Scotch. Both LVMH and Pernod Ricard are in the market, with the LVMH brand selling for about US$70 a bottle.

Diageo has been waiting over a year for regulatory approval to take indirect control of Sichuan Swellfun Co., which makes the baijiu brand Shui Jing Fang.

Diageo already has a 49% stake and Walsh is confident of getting the control that would give him a massive advantage in terms of routes to market in China.

However, until Beijing gives the thumbs up there are nagging doubts that it could invoke “crown jewels” provisions similar to those used to block Coca-Cola’s bid for juice giant Huiyuan in 2009. Beijing is taking its time and until it decides Walsh’s frustration will not diminish.

Finance on Friday, 20.05.2011