April 15, 2021

Imported Spirits in China - 1Q21 Trends

DEO, DGE LN, RI FP
By Brandon Zhu
Imported spirits sales in China increased significantly yy during 1Q21 but have been slower to recover to pre-pandemic levels in the on-premise channel because of limited international travel and continued caution about drinking in clubs and restaurants.

Imported Spirits Sales Struggle to Recover in On-Premise Channel
Sales: Imported spirits sales in China during 1Q21 were up 52% and 19% yy, respectively, for two distributors because of easy comparisons to the beginning of the pandemic last year, with sales recovering much faster in the retail channel than in the on-premise (especially nightlife) channel. The distributor with clients consisting of mostly international hotels said 1Q21 imported spirits sales decreased 45% compared with 1Q19, while the distributor with exposure mainly to the retail channel said sales increased 6% compared with 1Q19. The distributor who was down compared with 2019 said, “The pandemic has impacted consumers’ spending and preferences and varies by region. In south China, spirits are selling well in restaurants, while in east China, consumers seldom order spirits for lunch or dinner. And because the pandemic is still ongoing outside China, there are few foreign tourists staying in premium hotels, which has hurt spirits sales.”

Purchases: Despite the slow sales recovery in the on-premise channel, both distributors’ purchases of imported spirits during 1Q21 were up yy and compared with 1Q19, helped by the gradual increase in consumer spending coming out of the pandemic, as well as distributors stocking up ahead of price hikes and because of low inventories (as noted in OTR Global’s January note). “We purchased more, especially in March, because of the price hikes. All major whiskey brands raised prices before April. International transportation and inflation during the pandemic are the main reasons for the price hikes,” one distributor said. “Inventory is the main problem with imported spirits right now, although prices are increasing. Most distributors are holding inventory because of unsteady and short supply. We only sell at prices with enough margin.”

Both distributors said the resurgence of COVID-19 in north China during December-January had a limited impact on imported spirits trends. “The resurgence affected inventory but did not impact sales much. We -- and our clients -- were cautious about inventory in January, so we did not purchase a lot. Since February, when the pandemic was contained, we began to receive bigger orders from international hotels and then we increased purchases,” one said. The other said, “Purchases were slightly affected by the resurgence of COVID-19..”

While ecommerce sales have spiked during the pandemic -- including for spirits -- both distributors said the nightlife channel is still the most important for imported spirits sales in China. “Overall, imported spirits only account for about 3% of the total alcohol market in China. Ninety percent of total imported spirits consumption is in the nightlife channel. Spirits sales through the ecommerce channel are increasing quickly, but such fast growth is due to its low base. And in fact, ecommerce has very limited share.” The other distributor said, “The foodservice channel -- including restaurants and nightlife -- is the most important part of imported spirits sales. But the nightlife channel is much stronger than restaurants because of different regional consumers’ preference and habits. Off-trade retail contributes a very small portion of the total spirits marketplace. The ecommerce channel is growing fast and changing. Before the pandemic, there were very few online sellers without brands’ authorizations, but now brands are focusing on their direct online flagship stores and do not forbid unauthorized online sellers.”

Best Sellers: One distributor cited whiskey and cognac as best-selling categories according to Chinese consumers’ customs. “Whiskey and cognac are best-selling categories. Unlike Western people, Chinese consumers like to buy spirits by the bottle instead of by the glass in restaurants and clubs. Whiskey and cognac are more closely aligned with that habit. Tequila, vodka and rum are used more for making cocktails in pubs, so they have a much lower ticket average in China,” he said. The other distributor said, “Most Chinese consumers do not have profound knowledge or an understanding of imported spirits. Any midlevel spirit around 500 yuan a bottle are my best sellers.”

Other Spirits Categories Raise Prices Following Whiskey Hikes
In line with OTR Global’s January note, whiskey brands raised prices during 1Q21 because of cost pressures and a slowdown in the supply chain. Subsequently, both distributors said major brands in other spirits categories also increased prices during the quarter. “All major whiskey brands raised prices before April. Many cognac brands raised prices by 5%. Pernod Ricard S.A.’s Martell increased 5%; other [Pernod Ricard] brands increased 3.5% on average. Other spirits brands also had price increases, with less expensive items increasing by 3%-5% and premium ones by 8%-10%,” one said.

Outlook
Both distributors expect 2Q21 and 2021 imported spirits sales in China to increase yy mainly because of easy comparisons to the pandemic last year and the coronavirus being contained. “Imported spirits sales are expected to increase [yy] with the pandemic being contained. It will be difficult to recover to the normal level versus 2Q19 because international travel has not recovered yet,” one said. The other said, “I believe 2021 sales will have at least a double-digit increase compared with 2020, but less than a 10% increase versus 2019.”

Additional Quotes
“We have been raising prices of imported spirits by 3%-5% every year. Imported spirits brands have different management and price control in different regions and are quite different from domestic baijiu brands. Baijiu brands raise or lower prices every quarter or even every month.”

“Consumers’ spending power somewhat decreased during the pandemic. Less expensive spirits are more popular now, so we provided a stronger promotional level [yy].”

“Promotional levels stayed the same [yy] but increased compared with 1Q19. We had some promotions since last year, including free wine as a bonus for spirits over 1,000 yuan. But now we stopped all kinds of promotions.”