Diageo Wants China to Order a Scotch

Diageo (DEO) this month opened a tasting center in Shanghai's fashionable French Concession district to drum up new business in China for its Johnnie Walker brand of whisky. It's not your typical Scottish pub. Visitors to the Johnnie Walker House, a villa converted at a cost of almost £2 million ($3.2 million), are served on the first floor, where lights made from whisky bottles and walls made of peat and barley remind drinkers of the whisky's roots. Select customers—those who are influential or have deep pockets—gain invitations to the second and third floors for lessons about distilling, information about personalized bottle designs and bespoke packaging, and private tastings of pricey bottles like the $2,000 limited-release 1910 Edition whisky. This temple to all things Johnnie Walker is "just the first of many initiatives we have in the pipeline" to drive growth in China, explains Gilbert Ghostine, president of Diageo's Asia-Pacific unit.

The world's largest distiller wants to increase the appreciation of whisky in a market where cognac and the French brandy Armagnac account for 66 percent of the value of all imported spirits, according to the International Wine and Spirits Research Magazine. Whisky has a 29 percent share, says IWSR. "Cognac's been established as the luxury category for 70 or 80 years," says Trevor Stirling, an analyst at Sanford C. Bernstein (AB) in London. "What Diageo has to hope is that a younger generation of Chinese will start to behave like Western consumers and say, 'We want a drink for our generation.' But it's likely to be a slow burn."

Diageo owns a third of LVMH Möet Hennessy Louis Vuitton's alcohol unit in China, giving it a slice of cognac profit from that venture's top-end Hennessy, the No. 1 brand in the country by volume. Still, the joint-venture agreement limits Diageo's share of earnings and its ability to expand further into cognac in the region on its own. So Diageo is turning to whisky to meet emerging Chinese demand for luxe liquor. "Brands like Johnnie Walker, which are premium, aspirational, leading national brands, can offer you the status and face in China," says Ghostine.

It's easier to get consumers started drinking whisky than cognac, which is mostly drunk neat, Ghostine says. In Asia, whisky is often diluted with a mixer, including chilled green tea in China, which may appeal to younger drinkers who often prefer lighter quaffs.

Mainland China is set to be the fastest-growing market for luxury goods in 2011 and the world's third-largest by 2015, according to consultancy Bain. The superpremium segment includes richly priced, highly profitable bottlings that are popular among China's status-conscious wealthy. The company says growth in demand for its so-called superdeluxe whisky in the Asia-Pacific region—including, at $3,000 a bottle, The John Walker—is more than double the 8 percent growth in superdeluxe spirits.

Diageo is counting on emerging markets including China, where the economy is set to expand more than three times faster than the U.S. and Europe this year, to provide the bump it needs to keep pace with rivals Pernod-Ricard and Remy Cointreau. Both are growing faster in part due to the popularity of their cognacs in Asia. Diageo also is trying to catch up to Pernod's best-selling whisky in China; Pernod's Chivas Regal has a 37.5 percent share of the whisky market by volume, while Diageo had 27 percent last year, says researcher Euromonitor International. The market for the drink will grow 14 percent by value during the 10 years through 2015, Euromonitor says. That still trails the 17 percent expected gain for cognac.

The bottom line: Johnnie Walker volume climbed 9 percent in the first half of this fiscal year in China, where the luxury-goods market is growing fast.

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