Diageo Targets Double-Digit Sales Growth In China- Interview


LONDON (Dow Jones)--Diageo PLC (DGE.LN), the world's biggest liquor maker by revenue, said it's targeting double-digit sales growth in China, as the maker of Johnnie Walker scotch whisky focuses on the luxury end of the fast-growing spirits market.

Gilbert Ghostine, president of Asia Pacific operations, also said the group is open to further acquisitions of local makers of baijiu, a white spirit distilled from sorghum, wheat or rice, which is a much larger and lucrative market.

Speaking to Dow Jones Newswires in an interview, Ghostine added China's consumer boom looks set for the long term, even as economists and investors worry the country's economic growth is slowing amid pressures on exports, house prices slumps and rising inflation.

China's gross domestic product grew 9.6% in the first half of 2011, compared with growth of 10.3% in 2010, according to Euromonitor International.

The London, U.K.-based company last week posed a rise in first-half operating profit, driven by volume gains across Africa, Asia Pacific and Latin America.

It expects those regions, with rising adult and middle-class populations, to contribute half of its global sales in the medium term as thirst for premium spirits accelerates. In China alone, the company says 20 million consumers reach legal drinking age each year.

As well as gaining market share in baijiu, Diageo is focused on increasing Chinese purchases of international spirits, which so far make up just 2% of revenue from domestic alcohol consumption.

In the second half of 2011, Diageo's overall sales in Greater China, which includes Taiwan and Hong Kong, jumped 20%. In the same period last year, sales rose only 2%, hit by a spirits price war and trading in spirits from non-official sources.

"I see no reason why we won't be able to grow our business double-digit in China," Ghostine said.

Diageo, which owns 34% of French luxury goods firm LVMH Moet Hennessy Louis Vuitton SA's (LVMUY) drinks unit, is pushing its luxury scotch brands like Windsor and The Singleton to both grab share away from cognac and brandy, which are popular in China, as well as take a bigger slice of the whisky market from rival Pernod Ricard SA's (RI.FR) Chivas Regal and Royal Salute brands.

"We have invested behind super-deluxe [scotch] in China over the last two years and it's yielding very good results," Ghostine said. Sales of the group's super-deluxe scotch increased over 40% over the last six quarters, he said, which is "consistent growth".

Diageo is targeting the super-rich through initiatives like Shanghai's four-floor Johnnie Walker 'embassy', a bar and whisky museum where full access is by invitation only.

But 50% of alcohol consumption revenue is spent on baijiu, Ghostine noted.

Sales of economy baijiu increased by 7% in 2011, while super-premium baijiu saw more dynamic growth of 13%, according to Euromonitor data. Europe's drinks giants are now fighting to break the market for China's national spirit.

"If there are opportunities, we could look at them in an open mind. [For] any potential acquisitions that we might consider in baijiu, we want to do it with our partners through the Shui Jing Fang vehicle that we have."

In June last year, Diageo became the largest single shareholder in premium baijiu producer Shui Jing Fang--listed in Shanghai as Sichuan Swellfun Co. Ltd. (600779.SH)--after it raised its stake in Sichuan Chendu Quanxing Group Company Ltd to 53%.

Ghostine is confident Chinese regulators will approve Diageo's proposed bid for full equity control of Shui Jing Fang. The deal could cost just over 6 billion yuan ($953 million).

"If there is one thing I learned in China [it's] patience," the executive said. "We are in baijiu because it's a very important and strategic category in China. We are committed to grow [Shui Jing Fang] in China and internationally," he said.

International sales of Shui Jing Fang are "growing strongly," boosted by sales points in 40 airports globally and the growing numbers of Chinese tourists, expected to number 150 million by 2015, up from 57 million last year.

Ghostine said the Chinese consumer economy remains robust, with no signs of a slowdown. "Consumer demand [for] our brands is still going very strong," he said.

Ghostine also said while further flexibility of the yuan, seen as key to increasing global trade and investment, would lead to "accelerated growth" in China, the current valuation isn't hampering Diageo's business.

In any event, Ghostine said the growth seen today in China is "good enough". "Any European country will dream of such growth prospects," he said.

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