Far East: Taming the Dragon

The drinks industry’s efforts to gain a foothold in the Far East resembles the Far West gold rush in the 18th century, observes Spiros Malandrakis. But who will emerge victorious?

The scene resembles some kind of marketing pilgrimage – hordes of corporate devotees almost religiously following the winding trail leading away from the stagnant West and into the promised land of the Far East. Missionaries from the Napa Valley, disciples from Bordeaux and messengers from Australia mingling with Scottish representatives to converge in the region that has come to epitomise opportunity in the post-recessionary world. For the wine, spirits and beer industries, this is no longer merely a choice. As underlying maturity along with a toxic cocktail of tightening fiscal conditions and stubbornly unyielding unemployment rates continue to take a toll on Western alcoholic drinks’ bastions, the Far East of the 21st century is becoming eerily reminiscent of the Far West during the 18th. Anything seems to be possible, but dangers inevitably lurk around every corner.

The rise
The writing had of course been on the wall for a while. The gravitational pull of Asia Pacific – and its Chinese powerhouse – had been simmering under the surface at the same time as the upcoming financial storm was already brewing on Western horizons. After all, following nearly three decades of uninterrupted growth the world had become accustomed to China being seen as manufacturers’, marketers’ and managers’ Eastern El Dorado.
It has not all been plain sailing. The seemingly unstoppable Chinese economy stumbled in 2009 when real GDP rose by 9.2% – hardly disappointing by Western standards but still the slowest pace in nearly a decade. In 2010, growth bounced back to 10.3% as the economy recovered, driven by fiscal stimulus and a massive increase in credit and public investment. China’s rates of real GDP growth should remain above 9% per year over the medium term and the number of urban households earning more than the annual benchmark of US$5,000 will grow substantially, creating millions of new consumers. Other Southeast Asian flagship markets such as Vietnam and South Korea are following the same path, while trade agreements and a gradual liberalisation of their taxation regimes are opening the floodgates for imported products to pour in.
From throwing drinks parties to trawling night markets and from sending children overseas for an education, niche consumers in the Asia Pacific region are both an interesting and savvy bunch, not to mention affluent. While the nouveau riche embrace conspicuous Western extravagance and the advancing middle classes make their voices and aspirations heard, the alcoholic drinks industry has virtually no other choice but to join the new gold rush.

Far Eastern promises
According to Euromonitor International, the regional alcoholic drinks market in Asia Pacific posted more than 5% total volume growth in 2010. China, the Far Eastern heavyweight, witnessed undiluted levels of buoyancy with the third consecutive 6% annual total volume increase, while other usual regional suspects such as South Korea and Vietnam posted respective growth rates of 7% and 13%. These figures would surely be a cause for celebration under any circumstances, but considering the sobering state of the industry in Western Europe and North America, where 2010’s underwhelming 1% total volume decline barely came as a surprise to anyone, they are all the more interesting. So much so in fact that industry representatives are arriving in their droves, establishing networks, building routes to market and making contacts. Napa Valley Vintners (NVV), the trade association which promotes the US’s most widely recognised wine-growing region, completed a week-long trade mission to China in April, ceremonially making stops in both Shanghai and Beijing. It was not alone. Its French counterparts had already done that and are currently reaping the rewards at the same time as Australian wine producers are desperately attempting to make inroads. Despite Australia’s logistically helpful proximity to the region and the affordable nature of its offerings, Australian and US producers have in fact underperformed compared to their French counterparts in recent years.
Aspirational consumption and the luxury associations of “brand France”, commanding prestige and status references and perceptions, have proven to be instrumental in the category’s embrace in both China and the wider region. According to Euromonitor International, total wine volume sales in the country grew by an awe-inspiring 13% in 2010. Fine wine, in particular, seems to consistently break all-time sales records in the auctions taking place in the buzzing Hong Kong hub, spearheaded by Lafite’s monumental success and its implicit nod towards the rising Eastern dragon through the adoption of Chinese characters on the label of its now legendary 2008 vintage.
However, wine is not the only alcoholic drinks category intently flirting with Far Eastern promise. In 2011, A-B InBev has reiterated the beer industry’s hopes and expectations by buying Chinese-based Weixue Beer Group Co and Liaoning Dalian Daxue Brewery Co. The reasoning could not be more straightforward. According to Euromonitor International, Chinese and Asia Pacific beer volumes posted more than 5% total volume gains in 2010, in stark contrast to still haemorrhaging sales in Western Europe and North America.
Nevertheless, the brief overview of the Far Eastern alcoholic drinks goldmine would be surely incomplete without a mention of Cognac. While all major spirits categories retain their rocketing momentum in China and the wider region, it is the Far East’s passionate love affair with Cognac that can clearly showcase the importance of the regional sales footprint in manufacturers’ struggling bottom lines. Much like Champagne, Cognac has always been quintessentially higher-end oriented, revered for its heritage and offerings steeped in tradition. However, unlike Champagne, which summarily paid the price for its luxurious positioning by facing plunging global sales in 2009 while failing to enter positive territory in 2010, Cognac proved much quicker in recovering from recessionary headwinds. Largely brushing aside the dead weight of mature markets that are still holding Champagne captive, Cognac basked in the heat of the proverbial dragon’s breath. Sounds like a great fairy tale, but will everyone live happily ever after?

The Year of the Dragon
Euromonitor International expects the Asia-Pacific alcoholic drinks market to achieve more than a 6% total volume CAGR over the 2010-2015 period, leaving the global figure of 3% looking positively glum in comparison. But, as with any gold rush, jumping on the bandwagon should not be considered a panacea. Inflationary concerns in China are mounting as the economy starts showing signs of overheating. At the same time, copy-pasting the Western marketing and promotional template into the Far Eastern paradigm – a direction many key players have a tendency to adopt – is doomed by definition. Intriguingly, 2012 happens to be the Year of the Dragon. Cultural integration and bottom-up adapted campaigns will be the wisest ways for the industry to tame the rising Far Eastern dragon. db

• Spiros Malandrakis is alcoholic drinks analyst at Euromonitor International