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Why China? 5 Reasons Why Western Spirits Brands Should be Considering China

05/11/2018

While the alcohol producers of China dominate the nation's spirits market, why a Western spirits brand should enter into it?

China is already one of the largest spirits markets in the world, but until now, domestic producers have primarily driven that growth. Baiju, the traditional grain-based alcohol, is nearly ubiquitous across China. But that doesn’t mean that there is not a unique market opportunity for Western spirits brands. In fact, there are 5 key reasons why Western spirits brands should be considering China.

Reason #1: The Chinese spirits market continues to expand at a double-digit growth rate

It’s impossible to ignore the type of growth that is occurring within the Chinese spirits market. Sales of baiju (both by volume and by value) are continuing to grow at a 15% annual rate, showing absolutely no signs of weakness. And, if anything, premium Western spirits are growing at an even faster pace. During the first 9 months of 2017, for example, total imports of Western spirits were up 27.69% on a year-over-year basis, according to the China Association of Imports and Exports for Wine and Spirits. Moreover, if you look at the total value of those imports, the figure was even more impressive: a growth rate of 37.75%.

The research firm GlobalData took a broad, top-down view of the Chinese spirits industry and found that it was growing at an aggregate 15% compound annual growth rate (CAGR). That makes sense, given the dominant role of baiju within the spirits market. If baiju is growing at a 15% annual rate, and if premium spirits are starting to take off as well, then a 15% CAGR may not be as aggressive as it might sound at first. That growth rate would transform the current spirits market from a $205 billion opportunity to a $450 billion opportunity by the year 2021. For any Western spirits brand, the math is impossible to ignore: if you can grab just 1% of the overall Chinese spirits market, that’s still a multi-billion-dollar opportunity.

Reason #2: The young millennial drinker in China wants to experiment with Western brands

Without a doubt, there is a strong demand for Western spirits, especially among younger drinkers. According to the most recent Nielsen report on the Chinese spirits market (“Nielsen 2016-2017 Report on China Liquor Market”), the consumer sweet spot is the consumer who is between the ages of 26 and 35. These consumers are young enough to want to try spirits that their parents don’t drink and also advanced enough in their professional careers, where they have the disposable income to try pricier Western brands.

Moreover, just as we’ve seen with Chinese wine consumption habits, premium Western brands are very much correlated with notions of social status, prestige, and lifestyle. If you are buying expensive Western bottles of liquor, the thinking goes, it is a real mark of social prestige. Even better is if you can give that same bottle of liquor as a gift for a special occasion.

As might be expected, we are finally starting to see signs of new breakout categories in the Chinese spirits market. Cognac has always been a favourite of young consumers, but we are now seeing evidence of whisky taking off as a favourite spirit. Through the first six months of 2017, imports of whisky were up 11.2% overall. Industry analysts are also taking a closer look at vodka and tequila as potential new product categories on the cusp of taking off.

According to that Nielsen report on the Chinese liquor market, one-third of Chinese consumers are now open to trying new products, rather than just blindly reaching for a bottle of top-selling Maotai baijiu. In fact, says Nielsen, 65% of the overall growth they are seeing in the market is coming from consumers trying out new products.

Reason #3: Per capita consumption of spirits is nearly doubling

It’s not just that Chinese consumers are buying new types of spirits, it’s that they are consuming more when they do. In 2016, the average per capita consumption was 7.3 litres of liquor. By 2012, that figure is expected to nearly double, to 14.4 litres. Assuming an average size of 750 ml per bottle, that works out to nearly 10 bottles per year in 2016 and 20 bottles per year in 2021.

The good news is that this seems to be a broad-based trend across all of society. For example, Nielsen found that 51% of Chinese consumers who drank any alcohol (beer, wine, spirits) in the past 12 months had consumed liquor. So it is increasingly the case that a casual beer or wine drinker is now branching out into premium Western spirits.

Reason #4: Women are starting to influence overall spirit consumption patterns

Baiju is a strong grain alcohol (usually 50-60% ABV), and for that reason, has traditionally been perceived as “a man’s drink.” But now more women drinkers than ever before are entering the market, and they are looking for an alternative to baiju. It is still not socially acceptable for women to drink baiju the way men do, and that has led to the search for other spirits or alcohol beverages that would make good substitutes for festive occasions and special events.

Until recently, the alcohol beverage of choice for women has been wine (especially red wine), which is associated with good health and good luck. However, Western brands are now starting to see momentum behind pre-mixed cocktail drinks, fruit-based alcohols (including wine coolers), hard cider, and low- or no-alcohol beer. This shift away from baiju represents a unique market opportunity to appeal to China’s women drinkers. Working with local mixologists, for example, to develop fruit-based, lower-alcohol cocktails, might be an effective marketing strategy for Western spirits brands.

Reason #5: Social media and digital marketing are making it easier to reach core customers

Finally, mention needs to be made of the important role that social media platforms like WeChat and Weibo are having on Western brands. Much as these spirit brands in Western markets use Facebook, Twitter and Instagram to showcase the lifestyle of certain spirits, as well as to develop viral buzz for new product launches, the same phenomenon is happening in China. This is dramatically lowering the cost of market entry for Western brands, and ensuring that they will find a willing fan base when their products do start appearing on retail shelves (or on e-commerce platforms such as Tmall or Taobao).

The good news is that the primary factor behind the spectacular rise of the Chinese spirits market – the broad-based economic growth that has created middle-class consumers with plenty of discretionary income – shows little to no signs of slowing. And, as we’ve already seen with the example of Cognac, even a slight dip in economic performance has had little or no impact on the premium end of the marketplace. For Western spirits brands considering where to expand next, the answer is clear: China.

 

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