Good morning and afternoon. Welcome to the Diageo Greater China President's Call, hosted by Sam Fischer, President of Diageo Greater China and Asia Pacific. This is a live Q&A session for 30 minutes following the pre-recorded presentation that was made available on diageo.com earlier today. This call is being recorded. To ask a question, please press star one on your telephone keypad. Please limit yourself to two questions at a time and rejoin the queue for any additional questions. Please make sure your mute function is turned off to allow your signal to reach our equipment. Again, press star one to ask a question. We are now ready to start the Q&A. Our first question comes from Mitch Collett with Deutsche Bank, with Credit Suisse. I apologize. We'll take our first question from Sanjeet Aujla with Credit Suisse.
Hey, Sam. Thanks a lot for the presentation today. Just a couple of questions from me, please. Firstly, you highlighted the exceptional growth of the Greater China business around 15% CAGR going recent years. I guess with Scotch now starting to accelerate, do you think there could be upside to that over the next few years? My second question is just around e-commerce. For Scotch, how significant is that now as a part of your Scotch business? I think a couple of years ago, it was around mid-teens. I'd just like to get a feel for how that's progressed since then. Thank you very much.
Hi, Sanjeet, and hi everybody else on the call. Welcome to our Greater China Q&A. Just in relation to our performance in Scotch generally, I think through the presentation, we talked into our confidence around the progression of Scotch. It's still relatively small at only 3% penetration rates. But with the work we've done over the last three years, really trying to build the category from a credentials perspective. I do think we've got confidence in the green shoots that we've seen. We've been working on whiskey summits, whiskey boutiques, a Diageo Whisky Academy, which is all about educating people around this category, the credentials of the category, the craftsmanship, the heritage that goes into it. We talked about enhanced penetration in some provinces that have given us confidence. We've seen interest in online options.
I think the runway is really long, and we've got lots of confidence in our future. In relation to e-commerce, we would be investing in e-commerce also for a long period of time. We're number one with Scotch on the e-commerce platform, and we've got about 20 people now working specifically on e-commerce. I think it represents just over 15% of our business today. No reason to think that that won't continue to increase as e-commerce as a channel continues to be more prevalent in China.
Thank you.
Casey, can you hear me? I seem to have lost connection. Harriet, can you hear me? Can anybody hear me?
Yeah, we can hear you, Sam. We'll take our next question from Richard Withagen with Kepler.
Good evening, Sam. Thanks for the presentation earlier. I have two questions. Are you using tools like Catalyst and EDGE in China, how useful or effective are these in the country? Secondly, do you see an opportunity for other whiskeys like Bulleit or Crown Royal given also strong growth rates for other whiskeys than Scotch?
Thanks for the question, Richard. We do use Catalyst and EDGE and many more of the Diageo tools to drive effectiveness and also efficiency in our business in China. We talked a little bit about our Salesforce automation, where we've got through the sales force an ability to see into some of our core stores real-time what's going on with our execution, sales performance, et cetera. Again, these are all technologies that we've learned from Diageo, we've implemented in China, and are making a big difference to our execution. When it comes to whiskey generally, Scotch is the bulk of the whiskey category, and at only 3% penetration. We've got a lot of work to do to continue to drive that penetration in our core provinces, but also more broadly across the country.
Number one for us is to continue to build the power brands we have in Scotch, behind Johnnie Walker, Blue Label, Singleton, Talisker and Mortlach. The runway we've got with Scotch is huge. We are seeing other brands in the format, and I talked a little bit about Baileys and Guinness and our Reserve portfolio and Bulleit would sit within that. The core focus for us remains developing our Scotch business and our Scotch power brands, and of course, our Baijiu business.
Yeah, thanks. Thanks, Sam.
Thank you. We'll take our next question from Simon Hales with Citi.
Thank you. Hi, Sam. A couple from me as well, please. Could I just ask you about the need for investment over the next few years to really realize the opportunity you talk about, both from a marketing, from an SG&A and a route to market standpoint? You talked about how you're building penetration beyond the South and the Southeast markets. Maybe linked into that, can you just remind us, outside of the Shui Jing Fang business, how your route to market operates, given your JV with Moët Hennessy? Which brands are still going through that, and which brands and which parts of the portfolio now do you have full control over? Secondly, can I just go back to your comments around e-commerce. Can you talk a little bit about the opportunity, perhaps to go more directly to the consumer with your e-commerce business?
Do you have much of a presence in that D2C opportunity at the moment? I'm wondering whether that is really particularly an opportunity around things like single malts, where you've clearly got a good story to tell, a broad brand portfolio that you could perhaps take directly yourself to the consumer without going through a third-party platform.
Terrific. Thanks, Simon. Let me just start with the route to market piece and investment. I do think that we're investing ahead in China to support the growth ambition that we have for the market. That will include brand investment, that will include investment in technology and platforms, and of course, investment in our route to market. We are looking at expanding the route to market, and we talked into that a little bit. We're strong in the South and the bulk of the business remains in the South, in Guangzhou and Zhejiang. We are seeing pockets of growth in Shanghai, in Jiangsu, in Beijing and surrounds, and also in the West in Chengdu and Chongqing. We're building out our route to market there as well.
A relatively small penetration at the moment, but we are seeing those green shoots we talked into around some of the whisky bars, the super deluxe end of the market where we're getting specific consumers continuing to ask about our Scotch portfolio. We do see big opportunities to continue to build out that route to market to give us more of a national coverage. We've got a great relationship with MH, as you know, in many parts of Asia and France. We've got a strong relationship and partnership in China. They've done a good job for us on Red and Black Label , and we're pleased with that performance and that relationship. In relation to e-commerce, the bulk of our e-commerce is still focused on this O2O, using some of the key platforms of Jingdong and Tmall through Alibaba.
We're a bit nascent in the direct-to-consumer space at the moment, but we do see opportunities, particularly with the prestige part of the business, where we can build up with some high-net-worth individuals in China, the potential of a direct-to-consumer. Right now, there's still a massive opportunity to drive performance of our business across some of those core platforms, and that's where the bulk of our investment is going at the moment.
Got it. Thank you.
Thank you. We'll take our next question from Edward Mundy with Jefferies.
Hi, Sam. Evening. Two questions, please. The first is, I think you mentioned in your opening remarks that China is now 5% of the business from 2% five years ago, but you think it can get to 10% of group sales. I was wondering, were you able to share a timeframe on when you think that might take place? Second of all, I think in your presentation you talked about there are five cities that penetration rate of Scotch is higher than cognac. Can you talk about what's perhaps different in those cities? How's the route to market? How's the consumption? Who are the consumers? What is giving Scotch a higher penetration rate versus cognac in those cities?
Yeah. Okay. Let me just start with the ambition of 10%. That's really on the back of all that work we've done on category development for Scotch, on overlaying all the investment around establishment of our brands. I talked into Blue Label, Singleton, the fastest growing malt business in China, and also our other supporting malts in Talisker and Mortlach. That 3% penetration and the momentum that we're seeing at a category level, that gives us some real confidence that there's an enormous runway here for Scotch whisky in China. Our brands are perfectly placed to capitalize on that. When you project that out into what could happen if penetration continues to improve and frequency continues to improve, which is what we would expect, again, that gives us confidence that 10% is attainable.
We look at Baijiu, this massive category that exists in China. We're in a very exciting part of it in the super and ultra-premium segment, a segment that is going to benefit from this premiumization trend that we've been seeing for a long period of time. When we look at the massive volume that sits underneath that super and ultra-premium segment and the premiumization trend, again, we think there's a massive runway for our Baijiu business. Again, Shui Jing Fang is really one of the very few Baijiu brands in China that is national.
When you start to look at the potential of both of those core pillars, then you look at that in the context of what 10% represents for Diageo, I think we've got great confidence. Of course, we can't predict what's going to go on, and we've seen all sorts of volatility in the world at the moment. All I can say in relation to the timeframe is that we will continue to make appropriate investments that build the brands, build out our footprint, and set us up for the longer term. When that 10% arrives, I'm not going to give the date because I don't know.
Sam, just on that point before we move on to the second question. Just some crude maths. If you grow at, I don't know, 15% per annum, you get there in 10 years. If you grow at 20% per annum, you get there in five years. It sounds like the baijiu category is going to grow at least 10%, and you're going to grow ahead of that. Equally, you're quite excited about Scotch. Is it fair to think it's somewhere in between the two? Very crude maths. I'd love to get your view on that.
I think that our goal, again, Edward, is to continue to grow share in the marketplace on the back of very considered, careful investment that we've proven over the last three years. I think when you take those into consideration, some of the assumptions you've used for your math can be correct. Again, I'm not going to put a timeframe on it.
Got it. Thanks. On Scotch and those markets that where Scotch has got greater penetration than cognac?
Well, I think when you look at Hong Kong and Taiwan right next door, you've got some very influential markets that sit right next to the bulk of the international spirits business in China in the form of Taiwan, which is right next to Fujian and, of course, Hong Kong. In both of those markets, Scotch is significantly bigger than cognac, and that wasn't always the case. We saw cognac many years ago in those markets was really large, but as people got involved with Scotch, started to explore and understand that craft and heritage and provenance, that interest grew and Scotch became the largest category by a long shot. Again, those are even indicators that give us confidence around what we're doing in China.
Great. Thanks.
We'll take our next question from Chris Pitcher with Redburn.
Hi, Sam. Thank you for taking the questions. Again, quick, one on Shui Jing Fang. You mentioned that you are making it into a national brand. Could you give us updates on the percentage of sales that's still in Chengdu? Also the challenges to taking it national. Is it route to market? Is it brand awareness? Just to kind of get a sense of that distribution upside. Secondly, have you considered using the Shui Jing Fang distribution network to perhaps recruit people earlier into Scotch? I'm trying to think how you might get cheaper Scotches into the market to capture people, or are you really just focused on the premium opportunity?
Thanks, Chris. Let me just start with the Shui Jing Fang piece. We are based in Sichuan in Chengdu and our factory is in Chengdu. Actually, we've got quite an even split of business across basically our top 15 provinces, little bit stronger in our top eight, and we're present in 28 provinces. There's no real one province that makes up a significantly larger portion of our business than anyone else. The national coverage I think is there. We're in 30,000 outlets, as I mentioned in the presentation. I think what drives that share further, and again, we're very precise in relation to how we do this. We target provinces. We look at our media investment. We support that with investment in our route to market, in our execution, in our core store programs. We build out those banqueting relationships, those corporate gifting relationships.
There's a whole suite, if you like, of codified growth drivers that we deploy when we look to drive share disproportionately in target provinces. I think, again, that's been working in some instances. We've seen strong share growth on the back of that investment. That's been quite successful for us. The second part of your question, could you just remind me?
Yeah, sure. In many other markets globally, you're actively trying to recruit Scotch consumers early-
Yes
With primary Scotch.
Yeah.
Do you have the route to market to do that in China? Can I add an addendum to that? What lessons did you learn with the 12-year-old Scotch category when you tried to seed that in the early 2000s?
Yeah.
What have you learned?
Yeah. Thanks, Chris. Yeah, look, I think, we are looking at recruitment into Scotch. We've been very targeted in relation to focusing on super deluxe Scotch, really building the category from the top. Blue Label has done exceptionally well over the last 3 years, growing at a CAGR of 51%. This is really helping us position our brands and the category in that very aspirational, super deluxe segment. Then we work down from that, as we've looked at our 15-year-old Johnnie Walker Sherry, which again, is more accessible in its price point, still super premium and super deluxe. That's again, helping us to recruit a slightly different consumer into Johnnie Walker and into the category. We've got very targeted investment to ensure that we position the brands and the category where we want, and that's super premium.
Then how we add to that through innovation and the rest of the portfolio to recruit drinkers into it. The same goes with what we're doing on single malt. I've just given you an example with Johnnie Walker. In relation to the synergies and what we've learned from Shui Jing Fang, you might remember some years ago, we did look at province testing, whether we could put the routes to markets together, unlock some synergies and learn from each other. I think what we found was that there were quite distinctive partners and customers that we had in each one of the chains, and different jobs that we needed for them to do in relation to the development of the various businesses.
It's been quite successful for us to be very focused in relation to our route to market and our customers, really trying to educate them and help us to develop the categories that we operate in. In the future, maybe there's an opportunity to unlock more synergies, right now, that focus is what's key to the success that we've had so far. Thanks.
Thank you. We'll take our next question from Olivier Nicolai with Goldman Sachs.
Hi. Good evening, Sam. Thank you for the presentation. I've got two questions for you. First of all, regarding the Hainan province, could you tell us how big it is today as a % of your sales for China? Since you said it was likely to become much bigger going forward, can you give us an idea of the profitability? Is it more profitable than the rest of your business, for instance? Second question, I was wondering if you could give us a bit of an update on Zhong Shi Ji, and if you are thinking about launching new local collaboration.
Okay. Hainan is a duty-free island today. It's not really part of our domestic business, it's part of our GT business. Again, we're very excited about what that's going to provide in relation to a runway for luxury spirits growth. It is benefiting from the change in government policies, which is increasing the quotas for the purchase of liquor, and liquor has been included now very recently. It's still very small in relation to the overall, if you like, volume that Hainan is generating. We're very excited about its future. We've got boutiques going up in Sanya and Haikou. We're investing through the GT business to make sure we access what we see as a huge opportunity for duty-free.
Also a huge opportunity for brand building, because there's lots of customers who are going to Hainan who are engaging online before, they're learning about products, they're absorbing content. In some instances, they're pre-ordering. Again, it's a matter of the domestic business working with the GT business, the global travel business, to ensure we've got the content online. We're working with the customers in Hainan, so that we've got that online and offline opportunity. There's even an opportunity for the customers who've gone to Hainan to purchase when they're, I think it's within 180 days when they return. This repatriation of the travel dollar that's going on in Hainan, I think is huge, and I think it's going to be terrific for luxury spirits, and we're right in the middle of it. I've spent too long answering that question, and I've forgotten the second question.
I think it's Zhong Shi Ji.
Yeah.
Zhong Shi Ji was an experiment to sort of marry a liquid with Scotch and baijiu to try and bridge, if you like, that taste barrier, to try to tap into international and local culture, and take master distillers from the baijiu business and the Scotch whisky business. I think the performance has been only okay so far. I think we've had trouble inserting that into the meal occasion, which is a big opportunity in China. We'll continue to experiment and to learn, to see if that opens up any more innovation opportunities. I would say the performance of that business, it was always very small. It's only okay at the moment.
Just to follow up on that, perhaps. First on Hainan, if I understand correctly, it's very similar to a normal duty-free business in term of margin structure. Then just on the second part on the other question, are you thinking about launching more local whiskey, for instance? Not necessarily mixed with baijiu, but more local collaboration and local whiskey, or is it just going to be essentially Scotch? Thanks for the comments.
In relation to the Hainan margins, I think they remain attractive. We will continue to invest because there's so much infrastructure being built there. Content online is being built, this will be an investment market for us as well. Certainly, our margins are attractive. We'll continue to look at insights from markets. We'll feed those into our innovation machines, we'll see whether or not there's opportunities for us to localize liquids, or to infuse culture into our innovation, which is what we've been doing for many, many years and what we continue to do. Right now, we really are focused on Scotch whisky, if there are opportunities to localize whisky, we will consider them, they're not on the table at the moment.
Thank you very much.
Thank you. We'll take our next question from Mitch Collett with Deutsche Bank.
Hello. Thanks for the presentation, Sam. A couple of questions, please. You give a slide where you talk about territory expansion, channel expansion, and customer network development. Is there any way to quantify how much each of those three components contributed to your growth over the last five years, and how much of a contribution you'd expect each of them to make going forward? Just a very general question on e-commerce. You said that most of your business, the majority of your business in e-commerce is not direct to consumer. Can you perhaps give us a comment on the economics of selling through e-commerce through third parties, and whether it's comparable to the rest of your business in China? Perhaps more or less profitable?
Yeah. Mitch, thanks for the question. In relation to the contribution of that route to market expansion, I think very difficult for me to quantify that. We are seeing momentum building as we extend our route to market into new territories, as we drive distribution, and as we bring the whole suite of assets to play. Where we start to invest in brand building, in A&P, in our commercial drivers. We start to educate those customers because the customers play a very important role in helping us to educate their customers and their consumers. There's, again, this whole suite, the boutiques, the Diageo Whisky Academy. We do bring summits now out to some of these regions again.
Those summits we bring in some of the influencers, we bring in media, customers and consumers to provide, if you like, a very intensive education of Diageo Scotch whisky business and Scotch whisky as a category. What we've seen so far, particularly in the East, has been extremely positive. We're seeing interest again, I mentioned the North and the surrounding provinces in the North and that Sichuan province in the West. All of those are showing very positive signs off a relatively small base. I think we'll continue to invest and learn and educate like we've been doing for the last three years. My expectation is that business will continue to grow on the back of the momentum that we've already seen.
In relation to e-commerce and the economics in e-commerce, we're very careful actually to ensure that the e-commerce channel is an investment channel, but one that is invested in brand building, in content creation, in recruitment. We put innovation down there and those channels are about the same margins as we have in the rest of our business. They're not eroding our margins at all. They're about the same.
Understood. Maybe just one related follow-up. I think you said that Shui Jing Fang reaches 30,000 outlets. Are you able to comment on the number of outlets reached by Moët Hennessy Diageo and also Diageo China?
I won't comment on the MH number because I don't have it to hand. Certainly the number of outlets that we reach within the international spirits business is smaller than 30,000 by virtue of the fact that the bulk of that business is, at the moment, still concentrated in Guangzhou, Fujian, Shenzhen, that southern area. We continue to expand into provinces, bringing in more wholesalers and sub-wholesalers, direct coverage by our consumers. I don't have the number to hand, Mitch, but from a coverage perspective, I think we're well covered in those southern provinces and we're expanding our coverages in the provinces that I mentioned previously.
Understood. Thank you.
Thank you. We'll take our next question from Laurence Whyatt with Barclays.
Hi, Sam. Thanks very much for the questions. A couple from me. Firstly, with China having emerged from COVID now for a number of months, I was wondering if there are any learnings that you perhaps weren't expecting or not seeing anywhere else in the world that are happening in China with regard to change in consumer behavior. Secondly, a number of years ago, counterfeiting of these sorts of luxury drinks products was fairly widespread in China. How much of an issue is that now, and is it something you need to keep a handle on? Thank you.
Yeah. Thanks. In relation to COVID, I think like everywhere, there has been some shifts in consumer behavior, and China is no exception. We should remember that in China, they really did get hold of COVID very quickly. Whilst there was two, three, four, five, six months of impact, the rebound was very strong, particularly in the on-trade, where we've seen almost total recovery. What we haven't seen recover quite so quickly has been the banqueting, large gatherings. They seem to have gone into slightly smaller gatherings, those different occasions through key periods of the year. Again, even banqueting, we're starting to see come back now, which is very encouraging. The at-home occasion became more prevalent through COVID, we did see online and convenience support that at-home occasion.
We saw indulgence actually pop up where people stuck at home were looking for a treat to have, whether that be a discerning Scotch or using Baileys, for example, to cook up nice treats for themselves. We very quickly responded to that when we saw it and started to put recipes out with Baileys in it and serves out for Baileys, and again, had wonderful online discussions with consumers around how they were using that. I think the intelligence that we got allowed us to move quickly into some of the opportunities, particularly the off-trade, particularly convenience channels, the national key accounts, and of course, e-commerce.
When you looked at the consumer behavior and some of those trends with people at home, smaller groups and how we were able to tweak what we were doing with our product portfolio and activation to tap into it, I think helped us as we navigated through it. I would say the thing to remember is that it recovered faster than anywhere else in the world. We've seen a strong rebound, which has been very encouraging.
Just to follow up on that specifically, where you saw premiumization among Chinese consumers and then the return to the on-trade happened, did the premiumization in the off-trade be retained, or did people trade down as they returned to the on-trade?
I think the dynamic of premiumization has been prevalent all the way through, whether people were at home looking for a discerning moment with a single malt or still trying to ensure that they were able to gift or enjoy something a little bit more special than what they would normally have. This is something that we've seen in the market for a long period of time. This premiumization trend, I think has been very encouraging and continued all the way through. My expectation is that that will only accelerate now as markets go back to normal. The on-trade premiumization, particularly the modern on-trade, which has really been driven by urbanization, where people want to go into the on-trade and celebrate and show what they can buy their friends, I think has been something that's been in the market for a long period of time.
That has returned, we're seeing that in the on-trade. An interesting dynamic between the two is the fact that many people go to the off-trade to buy products for the on-trade, particularly restaurants and so forth. It's difficult to separate those trends because they're kind of interlinked. The modern on-trade we're seeing, my expectation is that as traditional on-trade opens up, the off-trade will support that and the continuation of the trends that we saw at home. I didn't answer the counterfeit question. I think counterfeit is something that we need to be aware of in China. We've been working with the authorities across many provinces for a long period of time. We've been helping educate them in relation to understanding where they see a counterfeit problem.
Right now, I would say that in all of the sampling that we do, the prevalence of counterfeit on our products is relatively low.
Thank you very much, Sam.
Thank you. We'll take our final question from Trevor Stirling with Bernstein.
Hello, Sam. A couple questions on my side, please. Sam, in the highlight that Shui Jing Fang is a disruptor in Baijiu, can you maybe just give a little more color about how you think the brand is disrupting the baijiu category? Perhaps also comment on the relative weight of Baijiu and Western Spirits inside the portfolio at the moment.
I think, Trevor, in relation to how we're disrupting, when we started to think about the core store program, for example, which was all about execution and how we identified core stores and specific trading terms and incentives around execution and engagement with consumers. We had QR codes that allowed us to track their sales, gave us real-time information that we were then able to respond to, whether that be with innovation or tweaked execution standards or activation. I think a lot of other Baijiu players looked at that and said, "Oh, wow, that's interesting." It was extremely successful for us. I think we're up to now core store version 4.0.
In relation to how we thought about the five plus five plus five focused expansion strategy on our route to market and the core store program, I think was quite different to the rest of the baijiu category. Many of them have followed us into that space now and have really started to lift their execution standards. If you look at our packaging as well, Trevor, we've got some wonderful packaging on Shui Jing Fang. We've got beautiful designs on the bottle, carvings on the bottle. The outer package is quite stunning. When I think about what we're doing on a packaging front, even with our museum series, compared to the rest of the category, I think it's quite disruptive and much different from everyone else. Is there more that we can do to disrupt?
Yes, that's just two examples of how we've gone in there with some of the things we do elsewhere in relation to innovation and execution that have been quite different to what has been in Baijiu for some period of time.
Can you comment, Sam, just on relative weight of Baijiu and Western Spirits inside the portfolio at the moment?
It's not a number we would disclose, Trevor. I guess the way I would comment about that is I'm equally excited about both. I think that the runway we've got on Shui Jing Fang is truly exciting. We've seen some wonderful growth, industry-leading growth over the last four years. We've still got so much more to do in relation to the opportunities that exist in Baijiu with Shui Jing Fang and that premiumization trend, which we think is going to drive growth for many, many years. The same with Scotch. We've worked hard over three years to build a Scotch category that's genuinely aspirational for Chinese consumers. I talk about the summits and the boutiques and super deluxe and auctions and 600 whisky bars. Last time I spoke to you all, it was 300. It's doubled. They're spread all over the country.
Just those two pillars, I think give us massive confidence and opportunity. I won't talk about the relative weighting. I'll just talk to you about how excited I am about both.
Very good. Thank you very much, Sam.
That will conclude our question and answer session. I'd like to turn the call back over to Mr. Fischer for any additional or closing remarks.
Well, thank you very much for, as usual, very probing questions. Nice to speak to names that I recognize from the past, and I hope we've given you an insight into how excited and confident we are about our position in China and the runway we've got for growth along into the future. I look forward to coming back with a progress update at some point in the future. Thank you very much for attending. Bye.
That concludes today's call. We appreciate your participation.