Diageo targets Asia market rival with bid for China spirits firm

Published on Saturday 6 March 2010 13:13

SPIRITS giant Diageo aims to make inroads into the Asian market share of arch-rival Pernod Ricard following its £610 million bid for a Chinese white spirits maker unveiled last week.

Pernod, Scotland's second biggest Scotch whisky maker behind Diageo, has traditionally held the upper hand in the increasingly important Chinese spirits market.

City analysts say that is because cognac is a much more popular drink in China than whisky and Pernod has a strong flagship in that sector in Martell brandy, while Diageo has no in-house cognac brand.

But the deal announced by Diageo, the world's biggest spirits company with brands ranging from Johnnie Walker Black Label to J&B, should help challenge some of French-owned Pernod's Chinese dominance, the analysts say.

Carl Short, drinks analyst at Standard & Poor's equity research, said: "It is not an absolute game-changer for Diageo in China. They are still quite a distance behind Pernod there.

"But the deal is definitely positive for Diageo in that it should help them to catch up. It is an interesting development."

Diageo said last week that it aims to tap into the continued march of the Chinese consumer by splashing out 624m to take over China's fourth-biggest spirits group Sichuan Shui Jing Fang.

This would add Chinese white spirits to Diageo's portfolio of top brands, which also include Smirnoff and Baileys, in a country where white spirits accounts for half of overall alcohol consumption, with sales of 13 billion last year.

Diageo already owns 39.7 per cent of Shui Jing Fang through a holding company, Quanxing. The British company said it had agreed to increase its stake in Quanxing by 4 per cent to 53 per cent at a cost of 14m.

By doing so Diageo will become the indirect controlling shareholder in Shui Jing Fang and under China takeover rules must make an offer to buy out other Shui Jing shareholders.

While not commenting directly on the group's Chinese rivalry with Pernod, whose whisky brands include Ballantine's and Chivas Regal, a Diageo spokesman said: "We need to scale up in China and this is a step in the right direction. It is a country still growing GDP at 7 to 8 per cent per annum."

Analysts said Diageo could gain several benefits from the proposed deal, which needs Chinese regulatory approval.

One said: "Diageo has been hampered in China by not having an in-house cognac, which is much more popular in China than whisky is.

"But this deal would take the group into the even more popular white spirits market in the country.

"It would obviously sharply increase Diageo's distribution capability there, which currently is overwhelmingly done through its joint venture with LVMH.

"That would help gain ground on Pernod in terms of market share. And there is also the potential down the line for Diageo to take Chinese white spirits to other parts of the world."

Chinese white spirit, or baijiu, is different to vodka or gin as it is made from sorghum or rice.

One industry executive said the proposed Diageo deal with Shui Jing Fang was "interesting rather than dramatic. Pernod will still have the edge should this deal happen in terms of volumes."

The latest available figures from a 2007 report by the International Wine & Spirits Record showed that Pernod's Chivas Regal and Ballantine's, for instance, together represented about 895,000 nine-litre cases in China. Diageo's Johnnie Walker Black and Red Label represented about 532,000 cases. Both companies also have a range of other Scotch brands being exported to the market.

Diageo said China currently accounted for 2 per cent of the group's net sales. Pernod said it did not publicly divulge this figure.

According to HM Revenue & Customs figures, direct Scotch whisky exports to China have grown in value from just 900,000 in 1998 to 44.3m in 2008.

There are also significant indirect shipments to China through regional hubs, such as Singapore, not captured in the HMRC figure.

Industry estimates are that total Scotch whisky exports to China were between 70m and 80m in 2008.