Austerity in China hurts luxury brands

Pernod Ricard, the world's second-biggest drinks company and owner of the Jacob's Creek label, is the latest beverages group to warn that consumer demand for premium brands in China is being punctured by the government's clampdown on banquet spending and other austerity measures.

Paris-based Pernod Ricard, owner of Mumm, Absolut Vodka, Martell Cognac and Chivas Regal, posted a 1 per cent fall in first-quarter sales. Its sales in Asia/Rest of World - which account for 40 per cent of turnover - fell 6 per cent, driven by double-digit falls in shipments to China.

Last week Treasury Wine Estates said demand for wine in China was softening in the wake of March's leadership change in Beijing and a fresh austerity drive.

Chairman Paul Rayner told shareholders at Treasury's annual meeting the company was detecting signs of a slowdown in demand for its brands in China.

Pernod Ricard underlined the pressure on premium brands in China. Global sales for its two leading luxury brands, Martell and Chivas Regal, fell by 12 and 9 per cent respectively. It is believed that spending on premium drinks at karaoke bars and restaurants have been hit particularly hard.

The fall in sales was against 10 per cent-plus growth for Martell, Jacob's Creek and Absolut in the year to June, with analysts estimating underlying growth in China was now in the low single digits. Rival drinks maker Remy Cointreau also recently reported weak half-year sales.

China had been a boom market for upmarket brand owners and helped repair holes in budgets caused by poor economic conditions in Europe and the US.

Australian winemakers have also sought to gain from Chinese demand for luxury brands. Last year Treasury sliced the size of the allocation of Penfolds Grange for local drinkers to direct more of the wine to wealthy Asian markets.

"Following commentary from other premium beverages and luxury goods businesses, we have been concerned for some time that the change in political leadership in China and the associated austerity measures would weigh on demand for Treasury's premium wines," Deutsche Bank analyst Michael Simotas said.

"In our view, Treasury's strong second-half 2013 results were underpinned by a very large Penfolds allocation which masked the austerity impact."