China’s dominant baijiu category is coming under pressure from other spirits, with whisky, vodka and Cognac set to challenge its position, reports Sandra Newman.
Baijiu remains by far the largest spirits category in China, but other spirits — particularly whisky, vodka and Cognac — are gaining ground. Recent market growth has been fuelled by the rise in the number of Chinese middle-class consumers and an increasing interest in imported spirits, especially among younger LDA consumers living in large cities.
In 2021, China’s spirits market recovered strongly, following the initial few months of the COVID-19 pandemic, but has been affected this year by extended lockdowns in major cities, such as Shanghai and Beijing, as China maintains a zero-COVID policy to limit outbreaks of the virus.
According to Jiangxiaobai Group’s director of international business department, Zoe Fu Peng, conditions have been “enormously challenging” for the spirits market this year. “The zero-tolerance policy has led to the permanent closing of many restaurants, cafés and bars,” he says. “It’s safe to say that the economy of the whole country has been impacted seriously, and both people’s consumption power and confidence are much lower than they were in the pre-pandemic period.”
Lockdowns also hit online spirits sales as well as the on-premise. “E-commerce sales of global spirits brands were also badly impacted due to the lockdown of Shanghai this year,” says Fu Peng. “Since most imported spirits enter China through Shanghai port, and most of the warehouses are in Shanghai too, many companies were simply unable to deliver the bottles to consumers and their distributors from the warehouses. For imported spirits, challenges from the global supply chain and logistics have combined to make the situation even worse.”
Yuchen Zhong is a co-founder of Yuan Kun Education Technology, the leading education and technical consultancy in the baijiu industry. He says that while there hasn’t been a significant decline in baijiu sales yet this year, smaller producers have been adversely affected by difficult market conditions. “Major baijiu brands were performing well in the first half of the year, but we did see smaller baijiu companies struggling with their sales,” says Zhong. “The second half is key since many experts are predicting that baijiu distributors will have a rough second half. Therefore, this will impact the overall baijiu market.”
Fu Peng agrees that while well-established baijiu brands enjoyed good growth last year, things are now tougher for the smaller players. “Most of the small and medium baijiu brands are experiencing a hard time due to several reasons, including brand awareness, a shrunken promotion budget and a limited distribution network,” he says.
Zhong suggests that “perhaps the main factor is not the pandemic itself, but the overall economic downturn — but this factor affects everybody in every way, not just baijiu consumption”. He also notes that in China, “foreign spirits like whisky are coming in strong” and this can be seen from recent trends in spirits imports, although growth figures for 2021 appear abnormally high due to 2020’s COVID-induced downturn. China is the world’s second-largest export market for Cognac after the US, for example, with 34m bottles shipped to the country last year, according to France’s Bureau National Interprofessionel du Cognac. This marked a 55.8% increase on 2020.
According to the Scotch Whisky Association, China was the fifth-largest export market by value for Scotch whisky last year, with exports increasing by 85% to GBP198m (US$236m). The country doesn’t feature among the top ten export markets in volume terms, however, which clearly shows the importance of higher-end whiskies. Demand for single malt, for example, is rising boosted by specialist whisky bars in cities such as Beijing, Shanghai, Guangzhou and Shenzhen.
International influence
As well as brands from overseas, demand for local malt whisky is forecast to boom. Pernod Ricard and Diageo, which are among the biggest international players in the Chinese market, have both recently announced moves into the domestic malt whisky sector.
In November 2021, Pernod Ricard, which has been present in China for more than 30 years and claims to be the leading international wine and spirits group in the country, announced the opening of a distillery in Emeishan in Sichuan province. The facility, which commenced in August 2021, will allow the company to enter the growing local whisky segment. It’s no surprise, then, that Pernod Ricard reported a 12% increase in sales in China for the nine months to the end of March this year.
Diageo, which owns Chinese baijiu company Shui Jing Fang, plays across a number of key categories, with baijiu and Scotch generating more than 80% of the group’s sales in China. A year ago, the company broke ground on the site of its Eryuan Malt Whisky Distillery in Yunnan province, which will produce Diageo’s first China-origin single malt whisky. In the six months to the end of December 2021, the group reported 18% sales growth in greater China, with its Chinese white spirits sales leaping 26%.
Diageo Asia-Pacific & Global Travel president Sam Fischer says the baijiu category still holds considerable potential for the group. “We’ve still got so much more to do in relation to the opportunity that exists in baijiu with Shui Jing Fang, and the premiumisation trend, which we think is going to drive growth for many, many years,” he reveals.
Premiumisation has also been a factor in the strong growth for Diageo’s Johnnie Walker Blue Label over the past few years, which has been boosted by limited editions, such as last year’s Forbidden City Edition. Greater China now accounts for about 5% of total sales for the group and Fischer expects the country to become an even more important market in the future. “It’s a very attractive and profitable growth engine for Diageo, and I see this business growing to be 10% of Diageo’s sales over time,” he says.
Rémy Cointreau, another leading international group and a key player in the Cognac category, reported “very strong double-digit sales growth” in greater China for the 12 months to the end of March. This was led by higher-end lines such as Rémy Martin Club, Louis XIII and XO. In the first three months of 2022, however, there was a double-digit fall in sales in mainland China for the company, in part due to the impact of strict lockdowns in March.
Outside categories such as whisky, vodka and Cognac, other spirits are also gaining ground. In June, Mast-Jägermeister stepped up its expansion in China with the launch of the Jägermeister Cold Brew Coffee extension in the duty-free sector, in partnership with China Duty Free Group (CDFG). The coffee liqueur was initially available in CDFG’s stores ahead of being rolled out to the Chinese domestic market in September.
Baijiu responds to global trends
Jiangxiaobai Group’s Fu Peng says baijiu is being influenced by trends in other spirits categories. “In the global market, vodka, whisky and many other kinds of spirits have had flavoured products added to their portfolio for some time,” he says. “In China, fruit-flavoured baijiu is also becoming more popular. A consumption era of multi-flavour, multi-spirit-category and easy-drinking liquor has arrived.”
Fu Peng also highlights some trends in different price segments: “The demand for alcohol at social banquets makes the high-end baijiu market perform strongly, but this doesn’t mean all baijiu will be high-end. The daily drinking of ordinary Chinese people is also increasing, and most baijiu makers have quite a broad portfolio ranging from entry-level to high-end products”, he says.
There is a trend towards premiumisation in the sector, says Yuan Kun Education Technology’s Zhong, but he predicts the growing popularity of imported spirits will continue to erode baijiu’s market share. “Average baijiu prices are rising every year and the low-priced baijius are being pushed out of the market by other liquors and spirits,” he says. “Baijiu production volumes are going down year by year in recent times, but profit and sales remain high. It shows that baijiu still holds a strong position in the banquets and gifting market.”
With baijiu long established as a true national drink, Zhong says market saturation has already been reached. “Everybody drinks it, no matter if they like it or not,” he says. “Young consumers still have to drink it to please their supervisors. There is no more empty market space for baijiu companies — unless they look overseas, which is highly unlikely. So, right now, every competitor is competing for the existing market and this will be brutal. Whisky and other spirits are eating away baijiu’s share in some high-end consumption scenarios.”
Given this situation, Zhong warns, “only the super-brands will survive and the rest of the baijiu brands will have to find another way”.
This article was initially published in September’s issue of Global Drinks Intel magazine. For details on how to subscribe, click here.
