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China continues to dominate the luxury alcoholic drinks segment in value terms, with 79% of global value sales thanks to its high end baijiu products. Baijiu domination of Chinese spirits consumption makes it less appealing to many international players. The briefing will look at the what opportunities in China, but also the potential in many smaller markets led by the US.
Thanks to the enormous size of the market and relative wealth, China dominates premium and above spirits in both volume and value terms. This is primarily due one category: baijiu. However, over 2012-2015 volumes declined steeply at the top end of the category. Historically, growth was driven by gift-giving and corporate hospitality. This was impacted by a government crackdown on such practises, which led to a slowdown in volume growth, but more importantly heavy discounting by producers of the top-end brands, which led to value sales declines. However, with greater emphasis on personal consumption, sales began to pick up in 2016.
It is not just the number of households with high disposable income that is a factor in the size of high-end categories, but also the gap between the wealthiest and poorest in that country as measured by the Gini Coefficient. The higher the number, the greater the income disparity. South Africa has 524,000 households with incomes of USD55,000 and above, or only 3% of the total. However, those few have incomes that are vastly higher than the poorest, and this gives them the capacity to afford more high-end products. This small tranche of the population gives international distillers considerable potential to sell their premium and above brands to sizeable niches of the population, especially in emerging markets. This is despite the fact that the vast majority of brands being sold are cheap local brands, or lower-value international products.
The US may not be the largest market for high-end spirits, that privilege belongs to China, however it offers the greatest opportunity for international distillers, both in terms of number of households with disposable incomes above USD55,000 and eclectic taste of consumers, providing opportunities in many categories. The other spirits category accounts for the majority of off-trade value sales. The core of its strength is vodka, which has larger sales than whiskies combined. However, it is ably supported by tequila. The whiskies category accounts for a sizeable chunk, thanks to the various Scotch variants. Other blended Scotch dominates category sales, although it is supported by single malts too. Luxury bourbon/other US whiskies remain relatively small. Brandy and cognac has a relatively small share, partly due to the strong VS focus in the category, but also because around 50% of cognac volumes are sold in on-trade establishments.