Austerity in China hurts luxury brands
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."
Frequently Asked Questions about this Article…
China's austerity measures, including a clampdown on banquet spending, are reducing consumer demand for premium brands. This has led to decreased sales for luxury goods companies like Pernod Ricard and Treasury Wine Estates.
Pernod Ricard, the world's second-biggest drinks company, reported a 1% fall in first-quarter sales, with a significant 6% drop in the Asia/Rest of World region, largely due to reduced shipments to China.
Pernod Ricard's luxury brands, Martell and Chivas Regal, have been particularly affected, with global sales falling by 12% and 9% respectively, due to decreased spending on premium drinks in China.
Treasury Wine Estates has noticed a slowdown in demand for its brands in China following the leadership change in Beijing and the new austerity measures, as noted by Chairman Paul Rayner.
Before the austerity measures, China was a booming market for luxury brands, helping to offset economic challenges in Europe and the US by driving significant growth for companies like Pernod Ricard.
Australian winemakers, such as Treasury Wine Estates, have directed more of their premium wines, like Penfolds Grange, to wealthy Asian markets, including China, to capitalize on the demand for luxury brands.
Analysts, including Deutsche Bank's Michael Simotas, express concern that China's political changes and austerity measures will continue to weigh on demand for premium wines and luxury goods.
Treasury Wine Estates' strong second-half 2013 results were supported by a large allocation of Penfolds, which helped mask the negative impact of China's austerity measures on demand.
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