Some distilled wisdom on China
Message in a bottle: Premium whisky The Macallan tells how it won over Chinese drinkers
28 Mar 2013
Week in China
A single bottle of 60 year-old vintage The Macallan can sell for up to $70,000. That’s an indication of how coveted Scotch whisky has become, creating both opportunities and challenges for The Macallan’s owner, Edrington, in the China market.
The Glasgow-headquartered distiller has spent the past decade growing The Macallan’s Chinese business, nurturing the brand’s image among the country’s new whisky drinkers.
Here, Edrington’s regional managing director for Asia Martin Reimann discusses the firm’s history in China and why his growth strategy is a little different to his UK peers.
What kind of sales do you now have in Greater China?
I’ll have to use Asia to answer that, as we don’t break the numbers out in exactly those terms. What I can say is that Asia constitutes more than half of The Macallan’s global sales. The vast bulk of those are in north Asia, of which the biggest market is Taiwan. It’s about 50% of our Asian sales. The parallel I often draw is that Taiwan is a small island of 23 million people, and yet it sells the same quantity of The Macallan as the USA, which has 300 million people.
That paints a picture of the relative scale of the brand in Taiwan, and how it has been taken to heart by the Taiwanese.
How did The Macallan get started in China?
I started with the company in 2002 and by that time Asia had already been identified as a growth region. A core driver of those new sales was Taiwan, where The Macallan brand had been positioned at a very high price and status, and was being sold by some very passionate people within the business there. It started to gain traction principally through business people advocating it to each other in peer-to-peer conversations. We saw growth that was doubling year-on-year.
That gave us the confidence to try and replicate that success in Hong Kong and mainland China. So we opened a sales office in Shanghai, knowing that a large number of Taiwanese businesspeople were already doing business there and were familiar with The Macallan brand.
So, to a degree, the Taiwanese were a key catalyst for our mainland Chinese business. They have an enormous influence, particularly in the Yangtze River Delta area and in the south too. They brought the brand with them, especially for business entertainment purposes. And they were great advocates for The Macallan because they have an understanding of what makes it different from other whiskies. They can articulate those qualities in the local language with the right imagery and the right attributes. That’s very powerful.
So your China strategy was a bit different?
Yes, for us it wasn’t the typical ‘land grab’ approach. I suspect that when you talk to a lot of other companies about China, a lot of the strategic positioning is to ‘get as big as you can as fast as you can’. In other words, create a large market footprint as quickly as possible. That would be pretty true if you were brewing beer, for example.
But in our case we were faced with two challenges: limited stocks of The Macallan itself and the requirement to position the brand as the iconic single malt Scotch whisky.
So we didn’t try and be everywhere at once. Quite the opposite, in fact: we said we will just do Shanghai and make sure we get that market right. Once we’ve done that, we can determine if there is an opportunity to replicate the model in other parts of China. And gradually, that’s what happened.
So you focused on the more sophisticated first tier cities?
We concentrated on first tier cities and their satellite cities. We have never configured a map in China based on tier one, tier two, tier three and tier four cities. Instead we look at clusters of influence. If you take Shanghai, for instance, it has an impact on nearby cities like Ningbo, Hangzhou and Suzhou. They are all big in their own right, but they are influenced by Shanghai. There’s also a lot of overlap in the business communities. The Shanghainese will tend to introduce our whisky to the elites in those neighbouring places and tell them that it’s the best.
What were the major clusters you targeted?
We would map where the businesspeople from Taiwan, Hong Kong and Japan tend to travel in China, knowing they’d market The Macallan for us through word of mouth.
So Shanghai was the first, then Beijing-Tianjin and Guangzhou. There’s also a cluster around Xiamen, because of the large Taiwanese business presence there. We also looked at clusters around Qingdao in Shandong because of the strong South Korean expat community (like the Taiwanese, the Koreans and Japanese are big fans of the brand). And now we’re starting to explore the northeast, in places like Shenyang and Dalian.
One of the other factors expanding our footprint is that we are such a strong brand among five-star hoteliers. They are, in global terms, our key accounts. It’s rare to go into a bar in a five-star hotel in China and not see The Macallan. If a new five-star hotel opens in a Chinese city, the F&B director will want to supply the best Australian beef, the best French wine and the best Scotch whisky. From there, we can look to expand our sales in that city.
Have you faced distribution challenges?
When I first arrived in this region, Edrington was part of a four-way joint venture that distributed through a company called Maxxium. Our drinks in the region were distributed alongside Remy’s cognac, Absolut Vodka and Jim Beam.
Over the years this began to change as partners exited to manage their own companies or through changes in brand ownership, and we finally bought out the venture about 18 months ago. Today we have four subsidiaries in Asia, and have gone from having a handful of staff in the region to over 300. This means we now have 100% control of our business in China. That’s been very positive and has helped us to distribute The Macallan in a way that gets us the right return for the brand. All our sales and distribution staff are now Edrington employees, rather than joint venture employees, and they focus solely on our brands under Edrington’s own set of values.
By ‘right return’ what do I mean? The Macallan is a fairly scarce resource – it takes a minimum of 12 years to mature before we bottle and we only have a restricted supply each year, below a million cases globally. The volumes vary by age category too. For instance, only 200 cases of 30 year-old are released annually. Meanwhile global demand continues to exceed supply. So our challenge is to allocate stock to the markets that generate the best returns (i.e. profit per bottle) while also delivering against our long-term strategy.
It’s quite easy in a place like China to seek volume sales, if you want to. But this doesn’t necessarily equate to profit, because there are lots of very large accounts in China where the cost to enter is extremely high. When you do the maths, you’ve deployed scarce stock but are not making much return.
So when we had absorbed the old joint venture’s sales and distribution team, we restructured them, completely overhauling the key performance indicators from volume to value, and from quantitative to qualitative.
It’s quite easy in a place like China to seek volume sales, if you want to. But this doesn’t necessarily equate to profit
That meant quite a significant programme of cultural change as volume and market share is very seductive to salespeople in China. Instead, we had to make clear that we were fixated on value, and selling through the channels that generated the best returns.
Those channels – for example, cultivating local business leaders through chambers of commerce and events – involve the building of more personal relationships. It can be slow and tough work and it requires a real passion for the brand. A standard salesperson would find it a lot easier to pitch a chain of karaoke bars and get one big order. But for us that would be a less profitable approach and not strategically sensible for the long-term health of the brand.
To illustrate this with numbers, we have been seeing double-digit sales growth in Greater China. But the growth in our ‘value’ of sales (i.e. profit) is twice that of our volume growth (i.e. the number of bottles sold).
That tells you our sales team now understands how to expand in China without sacrificing our margins.
So does it only make sense for Edrington to increase sales volumes in China if you can do so more profitably than in other geographies?
In the sense of pure returns the answer would be yes, but there are other factors that we have to consider. What are we trying to achieve today, and what are the choices we want to have tomorrow? The world is changing and East and West are becoming quite polarised in terms of growth. A company like Edrington – which wants to be active in strong-growing international markets – has to make a choice. This means we take a balanced and blended approach, and every year we produce long-term plans based on what we are trying to achieve in those markets for the future.
Southern Europe is witnessing some tough times currently, for example. The old heartlands for single malt sales are now mature markets where there isn’t a growing population or growing wealth. You have to be fluid enough in your strategy to plan for the longer term.
That’s the beauty of Edrington’s ownership structure as an independent, private company held by a charitable trust. We can look to a five, 10 and 20-year horizon for our business decisions. We are laying down spirit today that we will be selling even 30 years from now. So we have to be confident that our future projections enable steady and consistent growth, both in value and absolute growth terms. That means there are decisions to be taken in allocating stock for brand building and future growth in China, and not just to maximise today’s bottom line.
How about brand? Is ‘Made in Scotland’ at the heart of your marketing strategy?
If you look at how we market our brand, it’s less about tartan, heather and the glen and more about prestige, status, aspiration and quality.
If you look at how we market our brand, it’s less about tartan, heather and the glen and more about prestige, status, aspiration and quality
Don’t get me wrong: provenance is really important and it underpins our message. But we focus more on sublime luxury, as ‘’the world’s most precious whisky’’.
When we do use Scotland it is to underpin our heritage. For me, the really important part of that is the extent to which Scotch whisky is heavily regulated for quality. The industry has over 100 years of governance, ensuring that production is controlled, regulated and checked at every point. This stringent approach to quality and safety impresses Chinese consumers.
So as the Chinese become keener on whisky will China become the industry’s number one market?
I don’t know – although that probably sounds a weak response. China, like India, has the potential to be very big. There is also a large local liquor industry, which means consumers are used to drinking spirits. But for China to be the biggest market in the world for Scotch whisky – which means the high volume blends as well as the more expensive single malts like The Macallan – some things have to change. There has to be a faster switching out of domestic spirits. Whisky and international spirits also need to be more ubiquitously available in the biggest channel: Chinese restaurants. Because the economics aren’t perfect at the moment, local baijius (Chinese white spirits) have an advantage here over international spirits as a banqueting and toasting product.
There also needs to be some perspective on how dominant the local players are. Total white spirit sales in China are about 1 billion cases annually, while imported international spirits make up around 4 million of these cases.
The encouraging thing for companies like ours is that, as younger Chinese travel the world, enjoy more disposable income and get broader awareness, international brands start to appear more clearly on their radar. Our potential customers also start to see patterns emerging, like The Macallan being offered in every five-star hotel that they stay at. Our brands are at every major airport too. The huge growth in Chinese travelling overseas is really good for all international brands.
As to Edrington, we are very pleased with our business in China and its current growth path. I think we’ll continue to see 10-12% growth in volumes in China, but in keeping with our strategy, an even higher growth in value.
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