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Interview

Diageo takes shot at China growth with Scotch and baijiu

Spirits maker uses 'academy' to educate drinkers in Asia's biggest market

Sam Fischer, head of Diageo's greater China and the Asia-Pacific operations, has "great confidence" in travel retail in markets such as Hainan Island in China. (Photo courtesy of Diageo) 

TOKYO -- Diageo, the world's largest spirits producer, is on a mission to satisfy China's thirst for Scotch whisky and baijiu white spirits.

"China is obviously an enormous consumer market," Sam Fischer, head of Diageo's greater China and Asia-Pacific business, stressed in a recent interview with Nikkei Asia. The British company describes the market as having an "enormous emerging middle class with an appetite for consumption."

Baijiu and Scotch are two key products for Diageo in China. While Chinese white sprits are the country's national liquor, Scotch still has few regular drinkers. "Scotch whisky is the opposite of baijiu, it's quite nascent in China, but growing really fast. ... People are getting interested in the category," Fischer said.

Diageo is working hard to "educate Chinese consumers" through its online "whiskey academy." Said Fischer: "We know that China loves to learn, and loves to experiment and experience, so you know we can see green shoots appearing in the development of Scotch whisky." The maker of Johnnie Walker Scotch and Smirnoff vodka also holds "whisky summits," in China -- dinners where influencers learn the finer points of the spirit from Scottish experts.

In Japan, he said, "The business is predominantly focused on Scotch whisky." The British company this spring expanded its Diageo Japan subsidiary, hiring more employees and rolling out new brands as it tries to grab a bigger slice of the premium market. The distiller is focusing on growing premium brands in Japan such as Baileys, Captain Morgan and Crown Royal.

With the Japanese government previously asking bars and restaurants not to serve alcohol as a way to curb the spread of COVID-19, Fischer said: "We're working with governments [and] particularly with venues to try and ensure that if venues are opening, they've got appropriate protection in place."

Japan is not alone. Other governments in Asia are imposing regulations that have cast a shadow over makers of alcoholic beverages. In January last year, Vietnam introduced "Decree 100," ratcheting up fines and prison terms for drunken drivers to reduce car accidents, which the government says cost the equivalent of 1% of the country's gross domestic product.

Fischer said he understands the issues. "We very proactively work with governments to shape responsible alcohol policy, to educate communities where there is irresponsible consumption and/or underage drinking." The distiller will begin offering online learning programs in Australia, Indonesia and the Philippines by the end of the year.

Amid changing regulations and growing consumer awareness of health, Diageo plans to expand the no-alcohol and low-alcohol category in Asia, which now makes up less than 10% of its portfolio. "It's very small. It's nascent, but it's growing, so we can see that it's going to be a bigger part of the business over the medium to longer term," Fischer said.

Fischer says the world's largest spirits maker will focus on selling Scotch and Baijiu in China. (Photo courtesy of Diageo) 

In 2020, as the pandemic wreaked havoc on the drinks industry, Diageo's Asia-Pacific business, which accounts for about 20% of the group's net sales, racked up an operating loss of 697 million pounds ($974 million). To weather the downturn, the company last year cut its marketing spending in the region by 11% and focused more on at-home consumption. "We made sure that we shifted investment into e-commerce," Fischer said.

In Asia, it teamed up with couriers such as Grab, to deliver cocktails to people's homes. In the Philippines, the distiller collaborated with Grab and asked for its help in making sure alcohol was delivered responsibly and with proper age verification. Diageo also makes sure its products are not left at the door when no one is home.

"We knew that people were experimenting at home with cocktails and having fun, because there was ... a lot of downtime, a lot of boredom," Fischer said. Diageo also offered drinks and cocktail recipes to spur demand during the lockdown.

The tourism segment was another important source of revenue for Diageo that was disrupted by the pandemic. Although the virus hit travel demand hard, Fischer expresses "great confidence in the channel, in global travel." South Korea's Jeju Island and China's southern island province of Hainan, where domestic tourists can buy imported goods duty-free, are two particularly important markets where Diageo is expanding its retail network.

"In my view, we will continue to search for the opportunities, while we know the future is very bright," Fischer said.

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