China's Bling Dynasty blip for Scotch

Decadence, corruption & Scotch whisky sales in China...

The WHISKY industry's faith in emerging markets is based on a simple tenet, writes Tom Bruce-Gardyne for WhiskyInvestDirect – that on reaching the 'middle class', consumers will ditch local spirits for international ones like Scotch to celebrate their newfound status.

On that basis, few countries appear as enticing as China with its vast population and more than 160 cities with over a million inhabitants each.

China's annual GDP growth may have slowed but it's still around 7%, and the country has a proven thirst for spirits, downing 11 billion litres of local baijiu in 2012.

Of course, the idea that 1.3 billion Chinese might raise a collective dram and drain Scotland's warehouses in one gulp is pure fantasy. Only an estimated 150 million can currently afford a bottle of whisky, and its taste is worlds apart from baijiu – the national white spirit with its sweaty, cabbage-like aroma to an untrained, Western nose.

Yet the value of direct Scotch exports to China leapt from £1.8 million in 2001 to £71.5m in 2012. Add indirect shipments via Singapore, and you can see why China got the industry so excited. 

For some time it seemed Pernod Ricard's Chivas Regal had cracked China with a cocktail of Chivas and green tea which accounted for two thirds of its global sales. With Johnnie Walker in hot pursuit, Pernod's marketing made China the Chivas brand's biggest consumer, and for a while Scotch overtook Cognac as the country's leading international spirit.

The two whiskies slugged it out and drove the category evermore up-market, paying hefty listing fees to nightclubs and karaoke bars. In 2011 Diageo opened its first Johnnie Walker House in Shanghai, followed by one in Beijing a year later. Within these temples to the brand, Chinese tycoons can commission their own personal blend for RMB 800,000 (£80,000).

China is still splashed across Western drinks' company reports today, but for very different reasons. On his election in November 2012, President Xi Jinping launched an immediate crackdown on corruption. Four 'forms of decadence' were identified including 'hedonism' and 'extravagance'. Lavish gifts and State banquets became taboo as the world's biggest luxury goods market (with a 29% share in 2013) began to implode.

Instead of top-end expressions of Johnnie Walker, Chivas or Royal Salute, today's politically correct gift is a caddy of vintage Chinese tea. Direct shipments of Scotch to China slumped to £39m in 2014, and the government's anti-extravagance crusade was cited as one of the main reasons overall Scotch exports slipped 7% last year.

Euromonitor analyst Spiros Malandrakis speaks of a "prolonged slowdown" rather than a "short-lived blip" and reckons it will endure longer than Diageo or Pernod are expecting.

If China's bling dynasty is over – or at least on hold – there may be a silver lining. Because Scotch may become less about status and gift-giving, and more of a spirit to drink at home with a meal, like baijiu is at present.

This is exactly what Diageo is hoping for with Haig Club, its new David Beckham-endorsed grain whisky. If Becks can show them the way, all bets are off with China. Margins may never match the early 21st century boom, but the volume potential could be mind-blowing.