The Star in the East is beginning to rise.And if the markets of China,India and Russia perform anywhere near to their potential,they could change the world of whisky forever.Richard Jones reports
It’s hardly front page news that the economy in China is doing pretty well at the moment.Well actually it is. On the 19th April 2006 The Independent reported the visit of Chinese President Hu Jintao to Washington with the headline ‘America meets the new superpower’. Inside the same newspaper commentator Rupert Cornwell observed that ‘it is a question of when, not if, America will be eclipsed’ economically.Even if long range forecasting is a notoriously unreliable business, it is hard to argue with figures such as these: the world’s fastest growing economy; total GDP (Gross Domestic Product) at $1.9 trillion and poised to overtake Britain and France in becoming the world’s fourth largest economy (some analysts believe this has already happened); producer of more than half of all the industrial goods on the planet; and the biggest consumer of coal, steel, grain and meat.Of course economic success is not the sole preserve of China. India boasts the world’s second largest population and has also experienced phenomenal growth.The country’s GDP has increased by an average of 6.8 per cent per annum since 1994 placing it 10th on a global scale.Although predictions are less bullish than for China, some forecasters believe that the Indian economy will overtake the combined output of Western Europe by 2035.Since its financial crisis in 1998, the Russian GDP has grown by an average of 6.4 per cent annually. Underpinned by its strong reserves of oil and gas, Russia currently has the most dynamic economy of all the G8 countries with an increasingly affluent middle class as well as a growing group of superrich oligarchs.So what does this have to do with whisky?Well, if you are a producer of whisky, particularly Scotch whisky where exports account for 90 per cent of total sales, this economic data should have you purring with excitement.I suspect some executives may keep a few key facts by their bedside table to help them sleep soundly at night, safe in the future success of the whisky industry.For the potential whisky markets of China, India and Russia are simply enormous. 1.3 billion people in China, 1 billion in India, burgeoning wealth in the Russian Federation – as Paul Ross, the Edrington Group’s zone director Asia, North East Europe and Emerging Markets, observes: “the numbers are so big that even a small percentage is an interesting number.” As a whisky drinker, however, ‘concern’ might be a more appropriate reaction. The laws of economics and common sense dictate that what is good for sellers is rarely good news for buyers. Whisky, particularly malt whisky, is a relatively finite product.There is only so much Macallan, Ardbeg, Springbank, Laphroaig et al available for the world, especially the older, more desirable expressions.“The example I would give is Cardhu,” explains Dr Nicholas Morgan, global marketing director for premium malts at Diageo.“Because of the now well-known inventory constraints on that product we have, in effect, constrained it to a small number of European markets. We simply had no choice. And I think all malt whisky producers will ultimately be forced to make similar sorts of decisions in the future.” So, will your favourite dram be ‘reassigned’ to other global marketplaces in the next few years or will you be priced out of the market for rarer malts by drinkers in the East prepared to pay ever more inflated sums? In these uncertain global times only one thing is for sure – it pays to know your ‘enemy’.“There’s a lot of excitement in China from all the whisky companies,” observes David Williamson, public affairs manager at the Scotch Whisky Association. “2005 was a recording breaking year for Scotch whisky exports to China growing by 86 per cent to £46 million.” The market for whisky in China has been bolstered by the country’s accession into the World Trade Organisation in 2001. As a result the import tariff has fallen from 65 per cent in 2000 to 10 per cent in 2005, making imported whiskies far more affordable.“A growing economy, in tandem with a reduction in the spirits tariff, has benefited overseas companies,” David Williamson continues. “A gradual liberalisation of distribution arrangements, which now allows full import and distribution rights, is also important.” The Chinese market for Scotch whisky is currently dominated by blends. Chivas Regal is the market leader by a significant margin followed by the likes of Johnnie Walker, Ballantine’s and The Famous Grouse.However, as Paul Ross at the Edrington Group notes, there is little point in distinguishing between blends and malts.“There’s no such thing as a category in the Chinese market. Consumers are simply aware of branded international spirits and that happens to be blends at the moment.” Simon Erlanger, sales and marketing director at Moet Hennessy Louis Vuitton, owner of Glenmorangie, concurs.“Whilst blended and malt whisky are both in strong growth in China, there is a major education job to be done and that is our primary focus.For example, there is a need to explain the difference between blends and malts.” Martin Riley, international marketing director at Chivas Brothers takes up the theme: “People are buying into the international success and aspirational image of a brand like Chivas Regal in China. Scotch whisky is consumed by young adults almost entirely in the on trade in bars and clubs, and is often mixed with green tea over ice as a long drink.” This younger generation is generally based in a city (Beijing, Shanghai as well as more provincial ones) and rarely pay for their whisky themselves.“Corporate entertaining accounts for the bulk of branded spirit sales in China whether it’s gifting (Chinese New Year) or nightclubs (hostess bars),” explains Paul Ross. “And corporate money is looking for big brands that are a safe choice.” Given the lack of sophistication in the Chinese whisky market, it’s no surprise that malt whiskies are thin on the ground.“We’re certainly not doing anything on malts in China at the moment,” notes Nick Morgan at Diageo. “You need to build a platform and that platform is always built through the presence of blended Scotch.” Other companies have already launched malts into China but are understandably taking a long term view.“The Macallan is about word of mouth, education and tasting rather than television advertising. These things don’t happen overnight, so I wouldn’t pretend that China is going to become one of our major markets in the next five years,” argues Paul Ross.A similar strategy is being deployed by Simon Erlanger at Glenmorangie.“We have many people in the country doing tastings to consumers in the top outlets and bars. The taste profile of Glenmorangie with its delicate, light and soft flavour is going down really well. It’s very exciting but I’m not expecting China to become one of our top 10 markets overnight.” If China is a relatively embryonic in whisky terms, its neighbour to the west is considerably more developed.“India is not a potentially vast whisky market, it is a vast whisky market,” states Nick Morgan.The country boasts the largest whisky sales in the world at 55 million cases, although definitions of the word ‘whisky’ are open to debate as domestic produce can be made from molasses. However there is little doubt that the appeal of whisky in India is huge.“When I was trying to obtain 19th and early 20th century Scotch whisky-related artefacts, most of the stuff was sourced out of India.And that’s a reflection of how big the business for whisky was there in the past. This is not a new market, it’s a very old market,” continues Nick Morgan.As Martin Riley at Chivas Brothers explains: “The potential in India is very large because the Indian consumer has a taste for whisky that has been developed over the years.” So why hasn’t the market for Scotch and other imported whiskies taken off already?“India remains a small market in global terms as a result of the discriminatory fiscal regime on imports on spirits and wine that is contrary to international trade rules,” explains David Williamson of the Scotch Whisky Association.“Scotch whisky faces an overall duty burden of between 225 per cent and 550 per cent which is why the industry currently has such a tiny share of the overall market.” The potential of imported whisky is clear when you consider the huge grey market in India. According to John McDermott, the Edrington Group’s regional director, emerging markets, a one litre bottle of Famous Grouse can be bought at around £7.80 duty free at an Indian airport as opposed to between £22 and £23 for a 75cl bottle in the domestic market. This disparity encourages Indians to stock up when they travel for business or pleasure to sell the bottles at a profit on their return.“Despite all the difficulties, brands like Johnnie Walker, Buchanan’s and Ballantine’s have a huge awareness in the Indian market that goes back to the 19th century,” comments Nick Morgan.Few in the whisky industry doubt the potential in India should customs duties be abolished or significantly reduced.“Amongst the affluent middle and upper classes who drink alcohol, malt whisky is already established and has a huge cachet in that market,” states Nick Morgan.John McDermott at the Edrington Group agrees: “The market could have a rapid development. When the consumer gets access to international brands that have been exorbitantly priced, there’s usually a tremendous uplift in consumption.” While its whisky heritage may not be so ingrained, Russia is another country with obvious promise.“Although the volumes are relatively small, culturally and in terms of awareness it’s quite an established market for Scotch,” remarks Nick Morgan.The country is currently the second fastest growing whisky market in the world and already has its own dedicated whisky magazine, whisky retailers of the highest quality and an increasing affinity with malts.At the moment much of the demand emanates from the higher end, superrich category of consumer. Stewart MacRae, the Edrington Group’s area director for Nordic and Eastern Europe explains.“On The Macallan we cannot supply the demand we have in the country for older ages.We launched The Macallan Lalique 50 year old at a recommended retail of US $6000 in Russia just before Christmas and our entire allocation of 20 bottles sold out within a week.” However Stewart MacRae also observes a growing middle class developing during his visits to the country.“In Moscow there are now more regular cars appearing on the road and you’re starting to see more people going out for a meal and a couple of drinks. Consumers are starting to trade up and the challenge is to get them to trade up from vodka to whisky. That’s where the real explosion of growth has the potential to come from.” The markets of China, India and Russia are undoubtedly full of promise, then, but will the East rise up and dominate the world of whisky in the years to come? And, if so, will thirsty whisky drinkers in these enormous emerging markets lead to shortages and price increases in established regions in Western Europe and the United States?“If these markets expanded very, very fast, the way Taiwan has come from absolutely nothing to become a 200,000-300,000 case malt whisky market, there would clearly be a potential issue,” Simon Erlanger predicts.Nick Morgan, however, expresses a note of caution.“Everyone is becoming a little obsessed by Asia as this vacuum cleaner that’s going to sweep up all the malt whisky in the world based on what’s happening in Taiwan. But Taiwan in terms of malt whisky is absolutely aberrant compared to the rest of Asia where volumes are still very small, though of course the longer term potential is impressive.” Talking about China, Paul Ross is more optimistic.“The great thing for the future is that we are seeing whisky becoming fashionable amongst the up-and-coming middle management and children of wealthy businessmen. You only have to walk around Shanghai or Beijing to get the sense that something big is about to happen. It’s very exciting but it’s still early stages and a lot of things can go wrong.” In India the obstacles to success are as much political as economic.“All logic says they will liberalise custom tariffs but there are still major obstacles within the country,” Simon Erlanger remarks. “We’ve been fighting for 15 years now and we are making slow progress. But we’re continuing to invest because if it does happen the market would take off very quickly.” So is it time to start stockpiling cases of your favourite dram in anticipation of a whisky drought? Well it makes for an interesting argument when trying to justify your latest credit card statement to your partner.The answer, of course, is impossible to predict but before you take out that second mortgage, one unnamed source in the industry reminds us that whisky lovers everywhere are a fairly intrepid bunch.“Fortunately for consumers the trading world and the commercial realities of malt whisky is such that, no matter how you might try to confine supply of a product to a particular market or region, bottles will always turn up somewhere else.” Long many it continue.
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