Emerging markets equity

Western spirits companies turning to China and India to fuel growth

Western spirits companies turning to China and India to fuel growth
Key takeaways
Growth potential.

In China and India, rising affluence and improved category development may present significant long-term growth potential for western spirits companies.

China’s market.

China’s spirits market is dominated by local beverages, but western companies are investing significantly in order to grow their market share.

India’s market.

We believe India could become the fastest growing spirits market in the world over the next decade.

The guiding principle of the Invesco Developing Markets Fund has always been to seek out idiosyncratic opportunities to invest in globally advantaged companies, regardless of their domicile. We have had long-term success investing in luxury goods and brewing companies that, despite the fact they reside in the Organization for Economic Cooperation and Development (OECD), have growth that is led by the emerging world. Today, we believe the future of the western spirits industry will be driven by the developing world — especially China, which is the world’s largest spirits market, but one where western brands are just a drop in the brandy snifter.

We believe Pernod Ricard is especially well-positioned to benefit from the growing popularity of western spirits in China and India. The company has become a leading investment in the fund, at 5% of AUM1.

The opportunity for western spirits in the developing world

The western spirits industry — i.e. the brands we see regularly in bars, restaurants, and liquor stores in the US — is both relatively mature in developed economies and entirely youthful in the developing world.

In the developed world, this $232 billion market2 has witnessed mid-single digits revenue growth2 over the past decade, driven largely by “premiumization” — the demand for higher quality products that command higher prices. This has also led to consistent expansion in profit margins. Additionally, the industry has consolidated around a handful of leading conglomerates.

While we expect premiumization to continue to grow profitability, the future of western spirits is likely to be centered in the developing world. Notably in China and India, we anticipate rising affluence and improved category development to present significant long-term growth potential for Pernod Ricard and its peers.

China: The world’s largest spirits market

China is the single largest spirits market in the world (at $229 billion in 2021, it is nearly half of the formal global spirits market!3), and in our view it is the single biggest long-term opportunity for the western spirits conglomerates. These companies are in the early stages of investing in the Chinese market and developing their brands, distribution capabilities, and awareness across the hundreds of millions of middle-class consumers that have been minted over the past two decades.

We see considerable analogies to our experience with the vast growth in Chinese consumption of luxury goods and coffee – China is now the dominant bedrock of global hard and soft luxury consumption in the world, and the second home market of Starbucks4.

Much like earlier experiences across Asia (Japan, Korea, Taiwan), China’s spirits market is dominated by traditional local spirits, particularly “baijiu”. Western spirits occupy just 4% of the value of the entire Chinese market5, despite rapid growth over the past five years.

Western companies like Pernod and Diageo6 have historically focused entirely on the top of the pyramid of consumers in China with cognac, and to a lesser extent Scotch whisky (single malts). Now, these companies are investing significantly in order to grow categories throughout their portfolios. They are committed to increase distribution beyond its narrow present confines, while also aggressively investing in marketing and innovation.

Much like the experience of developing a coffee culture in China over the past 20 years (no, the Chinese do not only drink tea!), western spirits producers that invest in category development will, in our view, unearth massive potential opportunity in the world's largest spirits market. 

We believe Pernod Ricard will be among the dominant western spirits players in China over the next decade. Pernod already enjoys more than a 41% share7 in this embryonic market, nearly twice that of its nearest peers (Moët Hennessy8/Diageo). Management has articulated strong aspirations for China with significant investments in areas that we believe are the keys to winning – building route-to-market in both on-trade and off-trade channels (including e-commerce); significant marketing to support category development; a broadening of investments behind key brands (cognac, scotch whiskeys, vodkas); and building cultural awareness of the category. In fact, Pernod just opened China's first malt whisky distillery in Emeishan, in proximity to China's historic baijiu producers.

India: A significantly underpenetrated market

While China is critically important to Pernod Ricard, its India business is nearly as large. And in India, western spirits producers need not build awareness or desire of the category. Like most emerging markets (Africa, Latin America), India’s preferred tipple is whisky, which accounts for three-quarters of all spirits consumption9. And it remains a significantly underpenetrated market – India’s spirits market is less than a tenth the size of China at $20 billion10, despite having a population equivalent to its neighbor.

We expect India to be perhaps the fastest growing spirits market in the world over the next decade, supported by its status as the globe’s fastest growing major economy as well as its growing urbanization and affluence. And we anticipate significant opportunity for growth in the imported scotch whisky market, driven by rising discretionary incomes as well as the elevated possibilities of a trade deal with the UK that would remove onerous tariffs (150% on scotch whisky today!11).

Like in China, Pernod Ricard is in pole position to exploit these structural growth opportunities as it is the most profitable spirits company in India12 and the market is largely a duopoly with Diageo, which owns a majority stake in United Spirits.

Our approach to developing markets investing

Emerging market investing is not, in our minds, about getting exposure to the superior macroeconomic growth attributed to the developing world. Nor is it about playing economic cycles, i.e., “global beta.” While we spend considerable amounts of time thinking through global factors such as currencies, commodities and rates, our real edge lies in unearthing the rare group of companies that possess the potential for durable and structural growth; sustainable competitive advantages; and a host of real options embedded in their franchises/balance sheets. While these extraordinary businesses exist across the developing world, it is our experience that they can sometimes also be found, as with Pernod, outside of emerging markets. Over the past decade we have become among the largest global investors in a clutch of these globally advantaged multinationals.

As active investors, we see little value in conventional demarcations. For example, why would an investor be inclined to pay a market capitalization of $310 billion for a state-owned behemoth like Kweichow Moutai13, which occupies low single-digit volume share of a single (albeit important) market, rather than $60 billion for Pernod Ricard or $100 billion for Diageo14, which have dominant global footprints and the considerable upside of possibly unlocking China and watching India's potential growth unfold?


  • 1

    Pernod represented 5% of the Invesco Developing Markets Fund as of 3/31/2023

  • 2

    Source: IWSR as of December 2021

  • 3

    Source: IWSR as of December 2021

  • 4

    Source: Starbucks 10K, 10/2/2022. Data as of fiscal year 2022 (October 2022 end). In China, Starbucks has 5,358 stores out of a total of 17,133 stores globally.

  • 5

    Source: IWSR as of December 2021

  • 6

    Diageo represented 0% of the Invesco Developing Markets Fund as of 3/31/2023

  • 7

    Source: IWSR as of December 2021

  • 8

    Moet Hennesy represented 0% of the Invesco Developing Markets Fund as of 3/31/2023

  • 9

    Source: IWSR as of December 2021

  • 10

    Source: ISWR as of December 2021

  • 11

    Source: gov.uk, “'Golden opportunity' for Scotch whisky as UK launches India talks,” 1/13/2022

  • 12

    Source: Redburn as of 12/31/2022

  • 13

    Kweichow Moutai represented 0% of the Invesco Developing Markets Fund as of 3/31/2023

  • 14

    Source: Bloomberg as of 5/15/2023