Diageo taps into China with 43% stake in 600-year-old distiller

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Diageo, the world's largest alcoholic drinks maker, is to tap into China's expanding spirits market with a stake in the nation's oldest distiller of the traditional white spirit "baijiu".

The maker of Smirnoff vodka, Guinness and Johnnie Walker whisky has signed an agreement with Sichuan Chengdu Quanxing for a 43 per cent stake in the business.

Although Diageo is not releasing financial details of the deal, Quanxing is estimated to have a market value of £416m.

Drinks makers, keen to take advantage of the booming economy and rising incomes, have been making acquisitions in China. The country is set to surpass Japan as the world's second-largest spirits maker by value with sales estimated to reach $11.4bn (£5.8bn) this year.

Thirty-five billion litres of beer, wine and spirits were downed in China last year, according to Euromonitor Data. Total sales of alcoholic drinks reached $416bn in 2005 - an 8 per cent jump on the previous year.

Meanwhile, international wine companies spent $140m on advertising products in China last year, an increase of 156 per cent on the previous year, according to CTR Market Research.

Analysts said the agreement was a strong strategic move for Diageo as premium liquor is expected to deliver strong growth over the next five years due to the increasing disposable income of the world's most populous nation.

Under the terms of the deal, Diageo will form a joint venture with Quanxing "as a basis for future co-operation in the Chinese and international markets". The agreement is subject to Chinese authority approval.

"We believe that we have the best possible partner in Sichuan Quanxing through which to deepen our commitment to the Chinese market." Diageo said.

Diageo will use the joint venture for developing cheaper sources of packaging and other materials in China.

It will also promote overseas sales of the Swellfun brand, or Shui Jing Fang, which is a premium baijiu brewed by the Chinese firm.

Swellfun is for China's wealthy. A bottle of Swellfun is sold for about 600 yuan (£38) compared with the average of 3 yuan (19p) for beer, 5 yuan (32p) for spirits or 25 yuan (£1.62) for wine.

The company has been producing baijiu for 600 years, since the end of the Yuan Dynasty and Mongol reign in China. Its main competitor is Kweichow Moutai, which plans to boost capacity of its spirit brand by 2,000 tonnes a year by 2008.

Sichuan Quanxing, which is listed in Shanghai and based in Chengdu, capital of Sichuan province, posted profits of £5.1m last year.

Diageo entered the Chinese market in 1995, selling Johnnie Walker and J&B and has had double-digit growth on the mainland in recent years.

Other international drinks makers have also been keen to expand into the rapidly growing market. SAB Miller bought a stake in China Resources Snow Breweries in 2001 and the venture has become Asia's biggest brewer by sales volume. In June, InBev, which makes Beck's and Stella Artois, acquired Fujian Sedrin Brewery in southeastern China.