Blood in the baijiu

Wuliangye Central Command

I was recently asked if I thought China had reached peak ganbei: the point at which China’s baijiu binging reaches its natural climax and recedes into boring restraint. Based solely on my recent experiences traveling around the country, I had to say no.

It’s true that younger people are drinking less and drinking lighter ­– many preferring wine, beer and Western spirits to the traditional firewater – and also that rising health consciousness is turning many more Chinese away from the bottle. To put too much stock in these trends, however, would ignore the larger context. The desire for foreign brands and health consciousness are more symptomatic of rising affluence and, as most of China’s wealth is concentrated in its east coast, unlikely to translate to a national trend in the short term. As per 2012 estimates, foreign liquor still accounts for less than two percent of China’s spirits market.

China is also peculiar in that it is one of the only places where binge drinking increases with age. Heavy “ganbei” drinking is associated with professional success and social status. While little baijiu drinking happens in most Chinese drinkers’ formative years, benders get more and more frequent as one moves through the business ranks. The fact that most young adults don’t drink baijiu is therefore consistent with the national drinking culture.

The growth of the baijiu industry over the past couple of decades suggests that China is years away from capping the bottle. All reliable sales and production statistics indicate that decades of economic growth have been good for baijiu distillers, with continual year-on-year growth since the early nineties. International spirits company Diageo reported that their baijiu sales doubled last year. And their flagship baijiu, Shuijingfang, only entered the crowded premium-baijiu market in the last decade. The price of Kweichow Moutai, China’s most valuable baijiu brand, has jumped from under a dollar per bottle to more than three-hundred dollars in about thirty years, more than doubling in the last two years alone. It’s little surprise that they have plans to double their output by 2020.

But last month may have marked a turning point. In a piece of news that seems to have flown under the radar, it was announced that several high-end baijiu manufacturers are feeling the crunch of a contracting Chinese economy. Falling demand and concerns over stricter rules on government alcohol spending have prompted Wuliangye, which occupies the number-two position at the high-end, to drop their prices by almost 25% in 2012. Luzhou Laojiao has been forced to drop this year’s sales targets by almost one third. Yes, that’s the same Luzhou Laojiao that experienced a 30% jump in profits in 2010 and runs a national marketing blitz so shameless it would make Goebbels blush.

Two Luzhou Laojiao billboards along the Yangtze, next to the Guojiao Bridge in Luzhou.

What this indicates to me is not that the demand for baijiu has peaked, but that the skyrocketing prices may have. During China’s boom years, high-end baijiu has become affordable to an increasingly large customer base. The manufacturers have responded by rapidly escalating their price points, reaping maximal rewards with minimal effort and getting filthy rich in the process.

Don’t think that this has all gone unnoticed. Over the same time period that Maotai and Wuliangye have become top-10 luxury brands, mid- and low-end baijiu brands have been honing their products and business practices. I’ve been pleasantly surprised to discover the abundance of affordable, high-quality traditional Chinese spirits currently available throughout China. Three major international players have also entered the baijiu market in the past five years: Diageo (majority owner of Shuijingfang), Pernod Ricard (JV partner in Tianchengxiang) and LVMH Moët Hennessey (Wenjun).

Then there’s the government factor. Costs are going up while national and municipal budgets are shrinking. Just last week Wenzhou’s government was forced to auction off its fleet of luxury cars. The government’s annual liquor tab is estimated to be at RMB600 billion ($94.5 billion), as much as they claim to spend on national defense. With public outrage at the government’s liquid assets, the baijiu spending is an obvious target for fiscal restraint; a word to this effect by Prime Minister Wen Jiabao earlier this year was enough to deliver a body blow to Moutai’s stock prices. Though the stocks recovered when it became clear that this was only a warning shot, the incident belies the fact that many high-end baijiu’s brand values have been artificially inflated by excessive government spending, spending that can’t continue indefinitely without further attracting the public outrage.

This is all horrible news if you’re making a second-rate, overpriced baijiu, but it’s fantastic news for consumers. If there is a growing reluctance to spend top dollar on spirits, I suspect that baijiu drinkers will start paying a bit more attention to the baijiu itself and to which brand offers the best value. This is not to say that the more expensive baijiu brands are going under. Many of them are well managed and put out exceptional products. But there’s blood in the water, and everyone will need to work harder to survive.

I think we’re witnessing the beginning of very interesting times in the baijiu business.

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5 Responses to Blood in the baijiu

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