Yesterday’s announcement by Kweichou Moutai that it would raise average product prices by 13% from January 1 saw the liquor maker’s stock close 3.31% higher in Shanghai as the price hike is largely expected to boost earnings by up to 24%. Citing a Shenyin and Wanguo Securities report, state media said the factory price of the most commonly purchased 53-degree Moutai will go up by 13.7% to RMB499 (US$73) a bottle while a bottle of 15-year old will rise by 30% to RMB2,500 (US$365). The exotically named booze with its Wade-Giles lettering over a white ceramic bottle is still considered top-notch stuff, and it is common to see a presentation gift box on a company director’s bookshelf or a bottle being passed around at wedding and business banquet tables.
To the uninitiated, Moutai, or Maotai, is a clear liquor known as baijiu, and those with a delicate palate should be warned that the sorghum-based booze is very much akin to Poteen in strength, taste, and after-effect.
Despite losing a battle over recent years to the big beer breweries, baijiu sales have proven robust throughout the economic downturn and Kweichou Moutai has been capitalizing on this, with now near-annual price hikes and expansion of production lines.The company in September said it was to invest almost US$3 million to double output over the next five to 10 years in order to keep up with anticipated demand.This pent-up demand is seen on the books – Kweichou Moutai posted a 25% rise in first-half net profit to US$408 million, with sales up 20% to US$800 million.
In its statement to the Shanghai Stock Exchange, the Guizhou-based company said its latest price hike was due to rising raw material costs, growing demand and "a business strategy to tap the peak festive season" in the run up to Spring Festival, or Chinese New Year.
Other baijiu makers, including Wuliangye and Luzhoulaojiao, are similarly likely to lift prices as the country’s high-end distillers harry to lock in gains in this growing market. Foreign drinks giants such as Diageo, LVMH, Pernod Ricard, have for many years been trying to crack into the domestic booze sector through stake purchases of local distillers, attracted by impressive margins and sales figures.
Kweichou Moutai’s display in confidence by introducing another price hike shows that there is still room for growth at the top of China’s high-end market. You still won’t see Maotai on the table of a Karaoke joint or in the middle of a group of Beijing or Shanghai’s nouveau riche in Baby Face nightclubs, as their weapon of choice is no longer Chivas but bottles of Hennessey XO mixed with (don’t cry) green tea. But investors may want to take another look at luxury branding at the high end of the market, even if it may involve a wee hangover the following day.
Kweichow Moutai was down 0.89% at the midday close.