China’s distilled white liquor, baijiu, has long proven its strength not just in terms of alcohol content, which can range as high as 70% by volume, but also its ability to weather economic downturns. According to the China Alcoholic Drinks Industry Association, more than US$23.1 billion worth of baijiu was sold in 2008, up from US$18.2 billion the year before, despite belt tightening as the global recession loomed.
Shanghai-listed Kweichow Moutai (600519.SH), based in Guizhou province, recorded about US$1.5 billion in sales in 2008, and likely outperformed China’s spirits segment again in 2009.
With its high-end flagship Moutai brand – in 15-, 30-, 50- and 80-year-old vintages – the purveyor of spicy-strong booze is favored by banquet hosts, government officials and analysts alike.
"Long-term, we are positive on Moutai’s growth, as it holds the enviable position of [being] the number one Chinese spirit brand," said Morgan Stanley analyst Lillian Lou, who has a "buy" call on the company’s stock.
More importantly, baijiu offers some very tasty margins. "High-end baijiu gross profit margins are almost 70%," said Huang Xiaodan, an analyst with food and beverage consultancy Tang Jiu Kuai Xun. "But mid-level baijiu can still book margins of 30-40%."
Pricing power plays a large part in feeding fat revenues. Moutai has historically held a fiercely strong position at the top end of the baijiu league table and has taken advantage of its luxury branding by increasing its prices ahead of big national festivals. It has also maintained output at around 10,000 metric tons a year.
Price hikes
In January, the liquor maker raised product prices across the board in the run up to February’s Lunar New Year holiday: Its popular entry-level "53-degree" Moutai went up 13.5% to US$73 a bottle, while its premium 15-year-old went up 30% to about US$360 a bottle.
Other leading competitors such as Wuliangye Yibin (000858.SZ) and Luzhou Laojiao (000568.SZ) followed suit, initiating price hikes on both mid-range and high-end products.
"Baijiu has, by and large, rather stable sales and maintains about the same total volume," said Kelvin Tam, North Asia vice president of high-end alcohol distributor International Beverage. "The difference is the value of baijiu is increasing and people are buying more expensive brands."
Rapid rebound
Tong Xun, an analyst at Shanghai Shenyin Wanguo Securities, noted that baijiu can also be susceptible to a slowdown in the economy. Prices took a momentary hit between the fourth quarter of 2008 and the first quarter of 2009, when premium brand prices dropped 10-15%. However, they soon stabilized and rose an average of 10% in the second quarter, he said.
According to Huang of Tang Jiu Kuai Xun, even during the downturn the market in general maintained stable development, although there was a shift in sales structure.
"In the first four months of 2009, despite good sales, prices did fall slightly," Huang said. "Sales of high-end baijiu began to shrink and the purchase of high-end brands as gifts slowed. But the period saw a rise in mid-range baijiu."
These changing consumption patterns may play a role in shaping the industry, but the effects may be short lived. Huang Liming, an analyst at Dongguan Securities, believes the strong economic recovery and government support for consumers have improved the sales environment for baijiu in 2010.
Demand will likely remain robust for premium baijiu, still the drink of choice for gifts and for downing at banquets. Luxury foreign sprits such as whisky or cognac remain in a different niche.
"Moutai is ‘face,’ single malt is a show of knowledge, of taste," said International Beverage’s Tam. "You would only give a business partner or an official a bottle of Moutai, but whisky is the sort of thing that is shared between friends."
With liquor from overseas accounting for only about 1% of the total spirits consumed last year, there is a lot of ground to make up if foreign brands hope to compete directly with baijiu in the domestic premium liquor market. Some have tried the direct approach: While still aggressively pushing their own global brands, several of the world’s beverage giants have in recent years also waded into baijiu with eyes on those impressive margins.
In February 2007, Diageo bought 43% of Quanxing Group, owner of Shuijingfang baijiu, and subsequently raised its stake to 49%. Later the same year, LVMH bought a majority shareholding of Wenjun, and Pernod Ricard, through its acquisition of V&S, became a joint venture partner with Jiannanchun.
While the purchases allowed some liquor makers to wet their ankles in baijiu, premium foreign alcohol brands and Chinese liquor are still two very separate markets. However, the influence of foreign branding – sponsored sporting events, mass media advertising and special promotions – has leaked through to the domestic market more so than the drinks themselves.
"Baijiu brands on the whole have deep historical and cultural significance, and this is hard to duplicate," said Dongguan Securities’ Huang. "But foreign competitors in the China market have also inspired domestic distillers to think how to segment the market, raise prices and go on the high-end product path."
The strong cultural ties of baijiu keep analysts optimistic about its prospects even as Huang admits that younger people who go to bars, night clubs and KTV halls go for foreign tipples like whisky and vodka.
"No one will be happy to see whisky or brandy occupy the Chinese drinks market," Huang said.
