Emerging markets’ taste for luxury boosts British heritage brands

7th June 2012

The drinks giant announced plans yesterday to slake the thirst of wealthy professionals across Asia, Africa and Latin America by boosting whisky production by up to 40% over the next five years.

Diageo already derives about a third of its profits from Scotch whisky brands including Johnnie Walker and J&B, driven by demand not just in China, India and Russia, but also countries from Indonesia to Columbia, Vietnam to Angola. Sales of Scotch brands have grown 50% over the last five years to reach £3 billion a year, making Diageo the world's biggest Scotch whisky producer.

Similarly, Pernod Ricard, the other significant Scotch whisky business, announced a £40m investment programme last week, designed to expand its whisky production by 25% over the next five years. Pernod Ricard owns distiller Chivas Brothers, purveyor of brands including Chivas Regal, Royal Salute, The Glenivet and Ballantine's.

These investments indicate prospects beyond the struggling euro zone, with the growth of a global middle class keen to spend their newly-earned purchasing power on Western brands.

Nicholas Midgley, UK Equity analyst at Schroders  said: "By buying local spirits players in China, Turkey and Brazil over the last year, Diageo has boosted its distribution clout in some of the world's fastest-growing spirits markets.

"With its step-up in investment in Scotch whisky production the company now aims to capitalise on the growing popularity of Scotch among the increasingly affluent and aspirational emerging middle classes.

"For these consumers, the brand equity of Scotch, based on its protected provenance and the limited supply of aged Scotch in particular, makes it an appealing badge of success and discernment."

Last month Jaguar Land Rover, the Indian-owned car manufacturer based in Britain reported record sales up 30% and profits surging by more than a third, driven by strong demand in China and other emerging markets. Earlier today, Credit Suisse upgraded the equity rating for Burberry, the luxury British fashion house, from outperform to neutral. The change was partly based on a brand image perceived as above most global fashion peers, particularly in Asia Pacific.

Catering to the consumer classes in emerging markets represents a "great opportunity" according to Edmund Harriss, Asian investment specialist at Guinness Asset Management.

Harriss said: "New wealth in countries like China provides opportunities for all premium producers, from whisky to wine, and luxury goods like Bentley, BMW and Aston Martin.

"Look at Asian shopping malls with the presence of premium brands like Burberry, while men's outfitter Hackett is opening stores across the region.

"The market is not just for pure luxury goods, but also for service-type industries. Consumers are spending more on travel and gambling in addition to food and clothing."

Harriss also highlighted the opportunity represented by more mass market, mid-tier consumer brands produced by Asian manufacturers for their own markets, whether car makers like Hyundai or consumer technology companies.

Investors should note that while emerging economies have been doing a lot better over the last 10 years, and are looking a lot brighter than some of the developed world, Harriss emphasised that there are still huge gaps between the very richest and the very poorest.

Harriss warned: "Countries like Vietnam and Indonesia still don't have the mass bulk sales that can be achieved in China, where there are enough people with high levels of disposable income."


More on Mindful Money:

The frontier markets fallacy

China is the problem, not Greece

Singapore – The business capital of the world?

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