Diageo's Chinese white spirits unit, Sichuan Swellfun, targeting wealthy Chinese businessmen to increase sales as austerity drive driven by nation's president dries up government orders

Nevin Barich

SHANGHAI , February 19, 2014 (Bloomberg LP) – Diageo Plc, the world’s biggest distiller, is targeting wealthy Chinese businessmen to boost sales at its local white-liquor unit as an austerity drive by President Xi Jinping dries up government orders.

Sichuan Swellfun Co., the Diageo unit making the white spirit called baijiu, will focus on selling more to walk-in customers and online buyers, James Rice, Swellfun’s managing director, said in an interview. He said the distiller also plans to expand its product line to attract retail consumers.

Xi’s crackdown on extravagant spending by government officials has hurt sales by domestic and foreign liquor makers including Kweichow Moutai Co. and Paris-based Pernod Ricard SA. Six of the 14 white-liquor makers listed in China are set to report losses or lower profit for 2013, according to company forecasts compiled by Bloomberg News. Swellfun may report a loss of at least 124 million yuan ($20 million) in 2013, the company said in a Jan. 20 statement.

“Before Xi Jinping, anybody could sell baijiu because the consumption demand was huge,” Rice said in a phone interview from Chengdu on Feb. 14. “Now, you have to be at the right price, you have to sell the right way and you have to go find your consumer.”

Before the crackdown, about half of industrywide sales of white spirit priced above 500 yuan went to the government, state-related enterprises and companies, Rice forecast. Overall baijiu prices have dropped 50 percent in the last year, he said.

SOCIAL MEDIA

Diageo, the maker of Smirnoff vodka and Johnnie Walker Scotch whisky, plans to sell a 68,000-yuan limited-edition white liquor and offer more products priced above 2,000 yuan this year as it caters to affluent customers, Rice said. Diageo rose 0.1 percent to 1,868 pence as of 9:47 a.m. in London.

Swellfun is advertising on Weibo, China’s version of Twitter, and other social media as it targets successful male entrepreneurs between the ages of 35 to 55.

“Mercedes, Louis Vuitton and Land Rover, they still sell,” Rice said. “There is still a consumer there for high quality products in China, and we want to be right there.”
To target more mass-market buyers, the company also introduced cheaper products such as a 98 yuan white spirit under a different brand, he said.

REASSIGNED SALES

An escalation in Xi’s frugality drive crimped high-end spending over the Chinese New Year holiday, analysts at Bank of America Merrill Lynch wrote in a Feb. 7 report.

High-end gift buying took a hit in the first four days of the period, with sales of expensive alcoholic drinks falling about 70 percent in some supermarkets in Fuzhou, eastern China, according to the report, which cited the Ministry of Commerce. Revenue at upscale restaurants in northern Heilongjiang province dropped 20 percent, it said.

Swellfun reassigned a sales team formerly catering mostly to state and state-related entities to focus on online purchases and selling to retail outlets such as Wal-Mart Stores Inc.’s hypermarkets, Rice said.

Liquor companies from Kweichow Moutai, the world’s largest baijiu maker, to Pernod have also adjusted. Moutai will start a new marketing company to serve retail buyers instead of relying on government sales, China Daily reported Feb. 6, citing Chairman Yuan Renguo.

CHEAPER LIQUOR SALES

Pernod, Europe’s second-biggest distiller, cut its forecast for full-year global profit growth last week, citing declines in China. The French liquor maker said Feb. 13 sales in China fell 18 percent in the first half of its fiscal year.

More Chinese drinkers were choosing less expensive non- Chinese-made spirits, like Absolut vodka or Ballantine’s Finest whisky, Pernod’s Chief Executive Officer Pierre Pringuet said.

Remy Cointreau SA, which sells Cointreau and Mount Gay rum, said Jan. 21 it expected the Chinese New Year period to offer no relief amid declining sales in Asia.

An estimated 98 percent of China’s sales of spirits, which include vodka and whiskey, were made up of baijiu in 2012, according to industry researcher Euromonitor International.

--Liza Lin, with assistance from Jacob Gu in Shanghai and Clementine Fletcher in London. Editors: Terje Langeland, Suresh Seshadri, Kim McLaughlin

To contact Bloomberg News staff for this story: Liza Lin in Shanghai at llin15@bloomberg.net

To contact the editor responsible for this story: Stephanie Wong at swong139@bloomberg.net

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