Investing in China? Brands should look beyond premium spirits

Despite a slowing Chinese economy, most imported categories are continuing the recovery that began in China in 2016. Premium drinks continue to do well, but Chinese consumer habits mean some spirits naturally do better than others.

Brown spirits are a status symbol

Drinking choices tend to be status-led in many Asian markets, and China is no different. Tommy Keeling, IWSR’s Research Director for Asia-Pacific, notes: “Brown spirits tend to be favoured here, as their colour makes them immediately and visibly different from local spirits such as baiju, and thus easier to charge a premium for.” This is a trend that goes beyond China and can be seen across countries in Asia, where a tradition of white national spirits – such as Japanese shochu or Korean soju – influence the perceived status of brown spirits.

With spirits such as whisky and Cognac, it is easy to judge the quality of the product from its age statement. As a result, these categories have been seeing continued growth momentum in the Chinese market: whisky consumption increased 10.6% the past year, with a forecast CAGR of 8% from 2018 to 2023. The fact that whisky and Cognac are global categories makes them attractive to more internationally minded Chinese as well.

Opportunities for white spirits

Although white spirits aren’t the first choice as a status symbol, some, such as tequila, could potentially integrate easily into Chinese drinking habits; the national spirit baijiu is drunk from small shot glasses as part of a toast.

International spirits such as gin, vodka, tequila and rum are benefiting from the expansion of Western-style bars, cocktail bars, gastro lounges and international hotels in first-tier cities. Development is spreading consumption to smaller cities as well, helped by ecommerce and the rise in home consumption. These spirit categories also sell well online and are popular at house parties, which are becoming more common.

The growing Chinese middle class is driving a more relaxed attitude to extravagant spending than previous generations.

The challenge for white spirits, specifically those marketed as premium, is resistance from consumers who would rather spend their money on a brown spirit and the immediate status attribution it brings.

Keeling adds: “Brand owners who want to explore the potential of white spirits in China would do well to look at the opportunities of standard-priced spirits. The growing Chinese middle class is driving a more relaxed attitude to extravagant spending than previous generations. Coupled with growth in the retail and ecommerce channels, standard products are showing potential.”

Case study: tequila

Instead of being pushed as a premium drink in the Chinese market, tequila’s penetration is driven by trading-up from very cheap tequilas to more mainstream brands. Premium tequila is likely to grow in China, but will still be considered niche in comparison to other spirits.

Tequila is drunk mostly as a bar shot by younger consumers, who are attracted to the lemon-and-salt ritual, and in cocktails – mainly margaritas. Jose Cuervo is the dominant brand, though Pernod Ricard’s Olmeca is now also a force to be reckoned with. However, tequila is also held back by regulatory issues: China does not recognise caramel as a permitted ingredient for tequila, which keeps many gold tequilas (marketed as a brown spirit) out of the market, while restrictions on methanol content make things difficult for 100% agave tequilas.

“Succeeding in China is very dependent on logistics and distribution channels. Brand owners such as Pernod Ricard have set up their own distribution for Olmeca. Jose Cuervo uses a local distributor instead. Technological change, in the form of online sales, will change the way that much alcohol is sold as well,” advises Keeling.