Diageo to make whisky in China to woo premium drinkers

[BEIJING] Diageo is investing US$75 million into building its first whisky distillery in China, aiming to turn more local drinkers into whisky lovers in a spirits market long dominated by baijiu makers like Kweichow Moutai Co.

The British alcohol giant will next year start construction on a facility in Yunnan province, aiming for completion in 2023, it said in a statement on Tuesday.

The distillery will produce Diageo's first Chinese-origin, single malt whisky targetting the country's so-called "premium" drinkers, the statement said. Premium alcohol - including Moutai's prized baijiu and Budweiser Brewing Co APAC Ltd's premium and super premium brews - has significantly outperformed China's overall liquor sales in the last few years, even as the pandemic kept consumers away from restaurants and bars.

"China continues to be an attractive market for us with the increased consumption occasions, the fast-growing middle class and the rising appreciation for whisky," Sam Fischer, president of Diageo Asia Pacific and Global Travel, told Bloomberg in an interview.

International retailers are upgrading their offerings to meet the demands of a growing Chinese middle class eager for more expensive products from luxury handbags and cosmetics to higher-end beer and imported steak.

Global firms operating in China are increasingly looking toward future growth in the world's largest consumer market, as the pandemic - now fuelled by the Delta variant - drags down sentiment in other areas of the world.

Fischer said some details of Diageo's new whisky - including pricing and launch information - hadn't been decided as the liquor will need to mature for at least three years following the Yunnan distillery's completion, according to Diageo.

Still, it will be priced "well above" a whisky jointly produced by Diageo and Chinese baijiu distiller Jiangsu Yanghe Brewery Joint-Stock Co in 2019, which sells at about US$50 for a half-litre bottle.

Diageo's China ambitions are based on whisky's solid sales growth in the mainland over the last five years. The country's US$1.7 billion whisky market - though far smaller than the US$150-billion local spirits category mostly composed of baijiu - posted high-single digit growth annually from 2016 to 2019, with just a slight drop last year amid the pandemic, according to Euromonitor International.

But the owner of Johnnie Walker and Singleton faces a key challenge in China: making whisky a desirable option for group gatherings and gift-giving holidays where baijiu has long played a key role.

"Specifically, there are cultural occasions in China such as Chinese New Year and Mid-Autumn festival," Fischer said. "Now our goal will be to make whisky more relevant to those occasions as well."

The distillery will be carbon neutral and recycle the water it uses, the company said, and will have a visitor centre for whisky fans.

Earlier this year, Diageo opened a new logistics centre in Shenzhen, and announced the construction of a Shanghai-based research and development centre it said would strengthen the ability to develop premium products catering to Chinese tastes.

"Our performance has been super on the back of that belief over the last three, four years in China," Fischer said. "We'll continue to invest to develop our brands so that we can play into that long-term growth potential." BLOOMBERG