SHANGHAI | 3-4 Nov, 2019
Beyond Baijiu: China’s Embrace of Western Spirits
Baijiu represents 95% of the entire spirits sales volume in China. However, a significant proportion of Chinese consumers has been seen switching to premium foreign spirits.
There’s no denying that baijiu remains the national drink of China. According to some industry analysts, baijiu represents close to 95% of all spirits sold by volume in China and continues to post double-digit sales growth rates on an annual basis. However, there are a number of fundamental trends at work that are leading to what research firm Nielsen refers to as a “consumption upgrade.” In short, Chinese consumers are shifting out of traditional baijiu and into premium foreign spirits.
A new preference for premium Western spirits
The No. 1 factor at work, of course, is the continued dynamic growth of the Chinese economy. While China may no longer be growing at a 10% growth rate, as was the case in the 2000’s, there is still plenty of growth ahead – and that is leading to plenty of disposable and discretionary income for Chinese consumers. If, before the period of peak economic growth began, consumers preferred to consume cheaper domestic spirits, they now have the financial resources to buy more expensive foreign spirits.
And, indeed, even the domestic baijiu market has witnessed a “premiumization effect,” as domestic producers rush to price up their spirits competitively. In fact, some industry analysts have noted that prices are skyrocketing so fast, so quickly, that it appears almost like a speculative bubble.
Brandy and Cognac
So if Chinese consumers are now willing to try premium Western spirits, which ones are they embracing most closely? For now, the clear winner appears to be brandy (and especially Cognac). According to data from the China Association of Imports and Exports for Wines and Spirits, brandy accounts for nearly three-quarters of all foreign spirit imports. In 2017, brandy posted a growth rate of 44.4%, making it the best performing Western spirits category.
The Chinese preference for brandy is best explained by three factors. One factor, of course, is that brandy is a prestigious French import, and as we have already seen by the Chinese love for red Bordeaux wines, France is generally considered to offer the most prestigious and expensive imported goods. Another factor is that Cognac is considered to be the perfect gift for special occasions or for business partners. In the Chinese market, giving luxury gifts to one another is still a very important tradition, especially among business partners. And, finally, one could plausibly argue that Cognac is a “consumption upgrade” from baijiu, in that it is a relatively high-alcohol spirit that is suitable for drinking as toasts at festive occasions, business meetings and important events.
In 2017, the Financial Times reported that this was the biggest year ever for whisky consumption in China. If there is one Western spirit capable of overtaking brandy within the next five years, it is whisky. The reason is quite simple: whisky, just like brandy, is perceived to be a high-end, prestigious and elite product.
Moreover, the Chinese have shown a strong preference for high-alcohol drinks, and whisky appears to fit nicely within this concept of what an alcohol should be. The typical ABV of baijiu is 50-60%, and the perception even today is that baijiu is “a man’s drink.” It is perhaps no surprise, then, that Scotch whisky has emerged as a clear favourite with Chinese consumers, especially among young men.
Through the first six months of 2017, imports of whisky were up 11.2%, a clear sign that foreign imports of whisky could be locked into the near-term cycle of double-digit growth. Currently, 85% of all whisky imports come from the UK (i.e. Scotland and Ireland), with the remaining 15% split among the United States, Japan, Taiwan and South Korea.
Moreover, Western whisky producers have been very adept at adapting their product to local customers. For example, French alcohol beverage giant Pernod Ricard has been working hard to adapt its marketing and messaging within China specifically for the Chinese consumer, especially when it comes to Chivas Regal Scotch Whisky. Pernod Ricard noticed the popularity of using green tea as a mixer for strong baijiu drinks and has decided to embrace canned green tea as a potential mixer for Scotch. While Western consumers prefer to enjoy their Scotch neat, straight up, or on the rocks, Chinese consumers would rather mix it with green tea.
Somewhat surprisingly, vodka has not caught on yet with the Chinese consumer. This, despite the fact that vodka is perhaps the most likely replacement for baijiu – it is relatively high-proof, perfect for toasting at events, and made with a variety of grains (including wheat), just like baijiu. What can explain this fact? One big factor might be that vodka just has not acquired the “elite” image of whisky or brandy. The biggest vodka exporter to China, for example, in Sweden, and it’s hard to imagine Absolut ever becoming as prestigious a brand as a famous French cognac.
Another potential factor might have to do with the unique taste preferences of Chinese consumers. In analyzing the domestic baijiu market, for example, Western analysts typically break down baijiu into one of four different aroma profiles: Strong, Light, Rice and Sauce. This sauce aroma is extremely popular in China, and can best be described as a strong, intense umami aroma that smells a lot like soy sauce. A strong aroma, on the other hand, is sweeter and fruitier. Thus, it could be the case that vodka is generally perceived as an inferior replacement to baijiu, simply because it is not capable of such powerful flavour expressions.
If there’s one Western spirit category that analysts are excited about, it’s tequila and mescal. Right now, tequila is still a very tiny slice of the overall Chinese spirits market. That’s because, traditionally, it has been viewed as a relatively cheap, bad-tasting alcohol that is not suitable for festive occasions such as banquets or weddings. But that has changed considerably with the introduction of new super-premium tequila brands, specifically those that are described in the West as “sipping tequilas.” In 2017, for example, the South China Morning Post began posting stories about tequila moving upmarket in neighbouring Hong Kong, as well as the launch of new Los Angeles-style lounge bars specializing in tequila and mescal.
While there is clearly considerable momentum around Western premium spirits, one big caveat to keep in mind is the potential for a trade war involving China and the United States. Already, China is rushing to slap 25% tariffs on U.S. spirits (especially whiskey), and if the trade war escalates, could also impact European spirits producers as well. So keep an eye on China’s trade relationships, and how they impact overall imports and exports.
With that being said, however, China is clearly poised for a remarkable new phase of strong economic growth, rising incomes, and the creation of a new consumer class with a strong preference for premium Western spirits. Across every category, imports are on pace for double-digit growth, with no signs of slowing anywhere on the horizon.