A Postcard from China

First there were prolonged Covid restrictions, now there are economic headaches. What has happened to the golden promise of China for Scotch whisky? The industry is hanging tough and playing a long game, reports Richard Woodard for WhiskyInvestDirect…

In late January, Presidents Xi Jinping and Emmanuel Macron hailed 60 years of diplomatic relations between China and France, with plenty of welcoming smiles, warm words and pledges to cooperate on a number of global issues. A month later, China Foreign Minister Wang Yi met President Macron while on a whirlwind tour of EU nations, amid rumours that President Xi might visit Paris this spring.

In the background, however, trade tensions lurk. The Macron administration has championed an EU probe into China's support of its EV (electric vehicle) sector, prompting fears of a tit-for-tat trade war between Beijing and Brussels.

What does any of this have to with Scotch whisky? Directly, nothing. However, on 5^th January, China's Ministry of Commerce announced the launch of an anti-dumping investigation into EU brandy imports, acting on a complaint from the China Alcoholic Beverages Association.

A similar probe into Australian wine imports resulted in the 2021 imposition of tariffs so cripplingly high that they effectively closed the Chinese market to the entire industry. The implications for Cognac – Scotch's chief rival among the country's imported spirits – could not be clearer. And the same could be said for the potential opportunities for Scotch, should punitive tariffs be imposed.

That hypothetical analysis contains a lot of ifs, and the Scotch whisky industry might be uncomfortable about profiting from the misfortunes of others, but anything that boosts its presence in China might be very welcome news right now.

Direct Scotch whisky shipments to China fell 4% by volume to 2.58 million cases in 2023, edging up by 1% in value terms to £235.3m, according to HMRC figures. Shipments to Singapore – a major re-export hub to China – dropped slightly to 2.56m cases, with value rising by 19% to £377.8m. 

Not bad, not great – and reflective of a market that has endured a series of challenges over the past four years. China was the first country to enter the pandemic, and it was one of the last to emerge from it, with restrictions only being lifted in December 2022.

However, if hopes were high of lucrative Chinese New Year trading 12 months ago, it wasn't to be. The late lifting of restrictions gave already wary Chinese consumers little time to plan travel arrangements – and a fresh wave of Covid infections hardly helped.

If the medical crisis is past, the economic after-effects are continuing. In late 2023, global beverage alcohol data and insights specialist IWSR Drinks Market Analysis reported that, for all that trade in China had been boosted by the reopening on-trade, recovery was being hampered by economic concerns, and especially the poorly performing stock market and real estate sector.

'People are still visiting high-end restaurants, but not as often,' reported Shirley Zhu, IWSR research director, Greater China. 'And, when they do, they are not spending as much. The footfall may be back and restaurants may be quite busy, but the average spend is down.'

This downbeat assessment continued in the latest half-year results from Scotch's two leading players, Diageo and Pernod Ricard. Diageo's China revenues for the last six months of 2023 rose 18% in organic terms, but strip away the 32% surge in sales of baijiu and the picture is less rosy.

Pernod, meanwhile, reported a 9% revenue decline in the country, with CEO Alex Ricard blaming 'soft' consumer demand and 'a challenging macro environment'.

And yet optimism persists. We won't know the full results from Chinese New Year for a few weeks yet – and the industry is mildly pessimistic, based on the macroeconomic trends – but it can hardly be worse than last year's damp squib.

It's also true that, when you've invested as much in the country as the major Scotch whisky makers have done over the past couple of decades, you have to stick with it. 'The reality is our consumer pool in China is middle-class Chinese households, which are expanding,' Alex Ricard told analysts following the results announcement. 'And bear in mind our penetration rate is still extremely low at 2%.'

He conceded there are 'macroeconomic headwinds' at present, and that the consumer 'is basically putting money in a bank, rather than spending it. But, over time, we remain very confident on China … The fundamentals are absolutely unchanged.'

Such statements are designed to reassure shareholders, but there's an element of self-fulfilling prophecy about companies of the scale of Pernod and Diageo continuing to back China, which is precisely one of the reasons why IWSR remain bullish about the country in the long term. As Zhu puts it: 'Companies are quite determined to wait this difficult period out. They still want to develop this market, and brands are continuing to invest in the future.'

The intricacies of geopolitics and global trade in 2024 are more labyrinthine than ever. China's imposition of tariffs on Australian wine had more to do with poisonous political relations between Canberra and Beijing than any real dumping of wine.

In that context – with China looking to improve relations with Europe in anticipation of continued tensions with the US pending the possible re-election of Donald Trump – Cognac may have little to fear.

But, by the same token, Scotch whisky's long-term success in this hugely lucrative destination for its wares shouldn't be contingent on disaster befalling one of its rival spirits categories either. The pie, in this case, is plenty large enough for everyone to take a slice.