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Important Trends in the Chinese Spirits Market

05/11/2018

Looking to enter into the fastest growing spirits market? Here are some current important trends that you need to know before you enter into the Chinese spirits market.

The Chinese spirits market is now one of the fastest-growing spirits markets in the world. Analysts at GlobalData now project the Chinese spirits market to grow at a Compound Annual Growth Rate (CAGR) of 15% over the next five years. That would make the Chinese spirits market a $450 billion market opportunity by the year 2021. So what important trends do Western spirits brands need to know in order to take advantage of this unique opportunity?

The growing demand for international spirits

Currently, Chinese domestic spirits (known locally as baiju) dominate the market, accounting for 90-95% of all spirits sold within China. However, that figure is set to change over the next five years, driven primarily by a greater embrace of international spirits. According to the China Association of Imports and Exports for Wine and Spirits, spirits imports (in terms of volume) increased by 27.69% in 2017. Moreover, the value of the spirits being imported increased by 37.75%, to a record-setting level of $807 million.

The first big international spirit to hit it big within China was Cognac, which now ranks as the top-performing international speciality spirit within the nation. In fact, China is now the No. 3 importer of Cognac in the world, according to the Bureau National Interprofessionnel du Cognac (BNIC), trailing only the United States and Singapore. Brandy (of which Cognac is a subset) now accounts for nearly 75% of the value of all imported spirits. This is proof positive that Cognac is highly resistant to any downward pressure on overall luxury spending.

And now, according to experts and analysts, other Western spirits could benefit from the rising incomes of young middle-class Chinese, many of them now curious to experiment with different spirits from around the world. After cognac, other spirits that are chipping away at the dominance of Chinese baiju include whiskey, vodka, gin, tequila and mescal. A GlobalData report, for example, found that tequila and mescal could be headed for record growth over the period 2016-2021. The current estimate is for 21.6% CAGR during that time period. Already, stories are starting to appear in media sources like the South China Morning Post about tequila and mescal. One story focused on neighbouring Hong Kong, and how underground speakeasies like Mezcalito and Los Sotano that specialize in tequila and mescal are catching on with young millennial drinkers.

The premiumization of the spirits market

Another big trend is the overall premiumization of the Chinese spirits market. This is evidenced in two ways – by the growing number of premium baiju products and by the arrival of pricey foreign imports. The price hike in local spirits is especially interesting to note because the rising prices for domestic spirits create a huge new opportunity for foreign brands. In short, when the perceived price gap between domestic and foreign goods narrows, it makes it much more affordable for young consumers to choose the foreign option. And, it’s not just that domestic spirits prices are increasing – they appear to be doing so in an uncontrolled, speculative manner. Research reports on the Chinese spirits markets are full of stories about “uncontrolled price hikes” that seem designed to maximize total spending by Chinese consumers.

Without a doubt, the premium segment of the market is where foreign imports want to be. At one time, Chinese consumers were switching from pricey international spirits to cheaper local spirits; now, the momentum appears to have shifted. After a brief period of austerity and less ostentatious spending (a policy supported by the government), things appear to be readjusting back to normal.

The return of bar culture

It’s not just that Chinese consumers are purchasing more bottles of expensive spirits when they go to their local hypermarket or supermarket, either. They are now ordering expensive spirits when they hang out with their friends at bars, restaurants and lounges. One notable change has been the much-heralded “return of bar culture,” which means that young Chinese drinkers are once again making bars and nightlife part of their regular consumption pattern.

This marks a steep departure from recent years when “Otaku culture” (a sort of catchall term designed to capture the idea of staying home, watching TV, playing video games and having fun on the Internet) seemed ready to engulf the younger Chinese generation. In many ways, this was also a function of social media and its emphasis on hanging out on mobile devices all day rather than leading a more active lifestyle.

Still, while local media outlets report a flow of Chinese consumers to bars, lounges, themed boutique bars, and public houses, there is still very much a tendency to favour restaurants and KTV (i.e. karaoke) establishments as the preferred place to hang out with one’s friends. Still, the overall sign is a positive one for foreign brands that can tap into these new lifestyle preferences from Chinese consumers.

The great brand shakeout

Finally, mention needs to be made of the great brand shakeout in China. This can also be thought of as a “brand trimming,” as producers and manufacturers try to streamline their offerings. Baiju manufacturers, for example, often rushed to extend their product lines in order to capture a larger and larger share of their target market. That led to an unsustainable situation, however, as too many unknown brands were competing for the attention of consumers. Brand recognition fell, as did consumer willingness to consider yet another speciality baiju brand.

This brand fatigue, though, may be coming to an end. Domestic Chinese spirits brands are doing a much better job of marketing themselves to local consumers. That’s especially true when they attempt to court the favour of young Chinese millennials – they are opening up pop-up concept stores, embracing celebrity online influencers, and working hard to perfect their brand messages to appeal to specific niches in the youth market.

Baiju still dominates the Chinese spirits industry, but a number of notable trends – such as the spike in foreign imports, the overall premiumization of the market, the rise of the millennial consumer, and the consolidation of brands – suggest that the next five years will be a very profitable period for foreign spirits producers willing to take a shot on the Chinese market.

 

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