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IVAN MENEZES CONFIDENT DIAGEO CAN REBUILD AN 'ATTRACTIVE BUSINESS'

‘Shui Jing Fang appears to be broken, from the outside’: Analyst tells Diageo boss

By Ben Bouckley+

01-Aug-2014
Last updated on 01-Aug-2014 at 14:13 GMT

‘Shui Jing Fang seems broken, from the outside’: Analyst tells Diageo

Sales of Diageo’s super premium baijiu brand Shui Jing Fang fell 79% in 2014, but CEO Ivan Menezes insists the firm can rebuild an ‘attractive business’ by slashing prices and improving route to market.

After suggesting that sorghum-based spirit brand Shui Jing Fang seemed “broken” from an outside perspective, Anthony Bucalo from Santandar wondered if this was fair, or whether the brand was just going through a rebase, “and we expect things to get better as we go forward?”

(Bucalo was talking on earnings call as Diageo released its Q4 and full year 2014 results for the year to June 30 this morning - you can check out a slideshow synopsis here ).

Menezes said that he and Diageo CFO Deirdre Mahlan reviewed the business yesterday with its Chinese management, and insisted that the baijiu category (almost 1.2bn casks of the nation's favorite spirit were sold in 2013, according to IWSR) remains healthy and profitable.

“What has been hit has been one fifth of the super-premium consumption that was oriented towards gifting and government entertaining, which is a small segment of the total market,” Menezes added.

Taking the price down to rebuild an ‘attractive business’

With Shui Jing Fang, Menezes said Diageo had a “very contemporary modern brand” that it was focused on building demand back up for in off-premise channels.

Diageo was taking the price range for its baijiu brand down from RMB 400-500 (£40-50 or $67-85 for a 500ml bottle), he said, and was innovating across its six fixed regions in China.

“And I’m confident, off this base, you will see us build an attractive business again,” Menezes said.

When Diageo took over Shui Jing Fang for £250m in 2012 it predicted 10% growth year-on-year until 2015.

Baijiu suffers a cyclical slump in China?

But Diageo admits it has been hit by tough competition in baijiu, not least from rival brand Kweichow Moutai, the eponymous owner of which announced 2013 pre-tax profits up 13.4% at the end of March, well down on 52% growth in 2012. The brand’s price cuts have clearly hurt Diageo.

Participation in this market was “strategically very important” for Diageo, he explained, since it gave the company access to the Chinese ‘with meal’ occasion that is the predominant consumption occasion for alcohol.

Diageo plans to launch single-grain whisky Haig Club in China, Diageo’s chief said, and this launch (also pitched at an ‘with meal’ setting, coupled with a stronger route to market for Shui Jing Fang and the company’s other China brands in Southern China, should bring benefits.

“So overall, I expect recovery in Shui Jing Fang,” he said. “And I’d say it’s still, strategically, a very important piece of our overall China strategy.”

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