Chinese distributors of baijiu were caught flat-footed this past lunar new year holiday by a surge in demand for quality product. They do not believe this was a one-off — despite widespread concern about the health of Chinese consumption, demand for higher-quality variants of the fiery grain alcohol is expected to continue rising, even as the overall market falls.
Distributors across China said they had stocked for last month’s holiday expecting relatively weak demand. Falling sales of cars and smartphones have fed into the idea that China’s consumer is in retreat in the face of a slowing national economy; distributors were understandably braced for a tough holiday season.
But demand for good baijiu — which tends to start at Rmb200 ($30) per bottle — far out-stripped supply. In Wuhan, one distributor selling Yanghe-branded baijiu from Jiangsu province said news of a slowing economy convinced him to cut inventories by a third before the holiday, only for an influx of orders to quickly empty his warehouse and force him to turn down valued, wealthy customers.
“I underestimated the high-end market,” he said.
Distributors estimated that sales of baijiu priced between Rmb200 and Rmb1,000 as much as doubled over the holiday period compared with last year. Growth was particularly strong in smaller, poorer cities such as Enshi, a town of 800,000 in central Hubei province, where distributor Xia Qin said sales of mid-range baijiu increased fivefold over last year’s holiday.
“Local drinkers are beginning to cross the income threshold to be able to afford higher-quality products,” said Mr Xia, who sold 35,000 bottles of mid-range baijiu this year.
This demand contradicts widespread reporting about slowing Chinese consumption and is partial tonic to the agonising over China’s “consumption downgrade”, the buzz phrase at the heart of a debate over whether households are willing to keep paying a premium for high-end goods and services.
While incomes are being squeezed and spending on discretionary items has clearly slowed — the 8.5 per cent growth of overall retail sales over the holiday was the slowest in years — companies and sectors have not been hit uniformly. For every China-focused profit warning from a company such as Apple, quarterly reports from the likes of LVMH and Tiffany have assured readers they are doing fine in the world’s second-biggest economy.
The growing popularity of better-quality baijiu reflects rising household incomes, while falling overall sales of the spirit show how consumer tastes are changing as living standards improve. Euromonitor expects annual sales of lower-end baijiu to halve between last year and 2022 to just over 1bn litres, while those of premium brands will increase by more than 50 per cent in that time to 1.4bn litres.
In Jiangsu, one of China’s most developed provinces, distributors said the most popular baijiu brand served during wedding ceremonies now costs about Rmb500 per bottle, up from Rmb300 three years ago and just Rmb60 a decade ago. In Anhui, a less developed province also on the east coast, the average price of baijiu served at weddings has risen to Rmb300 from Rmb100 five years ago, distributors estimated.
“Mid-range baijiu is changing from being a semi-luxury product to a daily item that everyone can access,” said China International Capital Corporation (CICC), a domestic investment bank, in a note.
At the higher end of the market, the provenance of drinkers has also shifted in the wake of President Xi Jinping’s anti-corruption campaign, which started in 2012. The profits of market leaders collapsed after Communist Party disciplinarians cracked down, putting an end to much of the banqueting and gift-giving that supported their business. Distributors said the government officials who once dominated consumption had given way to an executive class.
“If the host of a business dinner doesn’t provide Maotai [a leading high-end brand], we suspect they are running into financial difficulties,” said He Yuling, general manager of Huazhi Alcohol, a Beijing-based distributor.
Distributors said industry leaders such as Kweichou Maotai and Wuliangye would need to build new capacity to match demand. The lunar new year holiday run on baijiu underscored how ill-prepared the industry was for the consumption upgrade — the process of making premium baijiu takes years, traditionally including ageing in buried urns.
Supply constraints have been pushing up prices. Despite government pressure to keep prices down, premium baijiu prices hit a record Rmb1,043 per bottle in December, up from Rmb813 two years ago. Kweichou Maotai increased production last year by 16 per cent but that did not stop half-litre bottles of its 53-proof Feitian baijiu from changing hands for more than Rmb1,700, compared with the recommended retail price of Rmb1,499.
“It is not enough to have only three to four high-end brands serving a vast population which is looking to drink better,” said Luo Min, a distributor with Baijiu Trading in Hangzhou.
Listed Chinese liquor makers have been market outperformers this year. Their stocks have benefited from the increased attention of global fund managers after index provider MSCI increased the weighting of A-shares in its indices. Kweichou Maotai’s market cap is now more than 50 per cent bigger than Diageo’s.
Even as baijiu shares are looking pricey, analysts’ buy recommendations are hinged on the idea that more Chinese consumers are willing to pay more to drink better — provided they can get hold of the stuff.
“One of the biggest problems facing the baijiu market is that high-end manufacturers can’t meet growing public demand,” CICC said.
scoutAsia is a corporate data and news service from Nikkei and the FT, providing in-depth information about more than 660,000 companies across more than 20 countries in East Asia, South Asia and Asean. This exclusive scoutAsia Research content has been produced by FT Confidential Research
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