Baijiu Makers Benefit from Rising Middle Class, Reform in Sector

(Beijing) — Chinese liquor makers are seeing sales rebound after three years of declines amid a government crackdown on graft, thanks to a rising middle class and reform within the sector.

Before reporting revenue for 2016, the front-runner in terms of market value in the baijiu sector, Kweichow Moutai Co., forecast a 17% year-on-year gain for the first quarter of 2017.

Other distillers have shown a better-than-expected performance, with Wuliangye Yibin Co. Ltd. recording sales of over 70 billion yuan ($10.2 billion) in 2016, up 8% year-on-year. Sichuan Tuopai Shede Wine Co. Ltd. expects its 2016 net profit to grow tenfold from a year earlier, and Sichuan Swellfun Co. Ltd. said it expected to see its net profit grow 160%.

Great market expectations have helped boost average share prices of listed baijiu makers, which surged by almost 4% last week, the steepest gain of all food and beverage firms.

The high-end liquor industry, which soured after the central government began a nationwide anti-graft campaign in 2012, appears to be rebounding as consumption shifts from official to individual use.

“After three years of government anti-extravagance measures, baijiu consumption has largely shifted from party and government office consumption to individual consumption,” said Euromonitor research analyst Fay Zeng.

“With growing health concerns, increasing income levels and changes in attitudes to consumption, Chinese consumers are starting to drink better-quality products, which has resulted in a higher volume growth in premium baijiu, and consequently has inflated average unit prices,” Zeng said.

Several companies have increased retail prices, following several years of price cuts — a shift that indicates recovering demand.

By Friday, prices of some popular brands, such as Moutai, Wuliangye and Swellfun, had increased by 8.8% on average within one week on online stores on JD.com, according to a report by financial services firm Northeast Securities.

Increasing costs of raw materials, packaging, labor and transportation have largely affected the profit margins of liquor manufacturers, which has compelled them to increase prices, Zeng said.

Meanwhile, reforms allowing employees of distillers and their distributors to own shares in the companies have contributed to higher productivity and profitability.

Wuliangye in December last year secured regulatory approval to issue additional shares worth 1.8 billion yuan to employees and distributors. Earlier, Hebei Hengshui Laobaigan Liquor Co. Ltd. rolled out similar plans, and the government of southwestern China’s Sichuan province handed the majority of shares of Tuopai Shede to a private group, SkyOcean Group Holdings Co. Ltd.

Moutai and Luzhou Laojiao Co. Ltd. are working on similar reforms.

Xiao Zhuqing, general manager of baijiu company Shandong Wenhe Alcohol Co., Ltd., told Caixin that ownership reform is a future trend within the sector that will allow distillers as well as distributors to share profits and losses, which will improve cooperation.

Share ownership reform is also likely to shift focus from short-term performance to long-term development, Xiao said.

Baijiu is expected to see retail value growth of 6% in 2017, but overall consumption volume is likely to remain stable due to a gradual shift among young consumers away from the existing traditional drinking culture, Euromonitor’s Zeng said.

Contact reporter Coco Feng (renkefeng@caixin.copm)