Thursday 21 February 2013

What the end of the baijiu binge means in China

By Qu Yunxu and Wang Chen
BEIJING (LinkTextChunk((LinkChunk)chunk)) — Dizzying sales of the popular Chinese hard liquor baijiu in recent years have given way to a hangover that has been painful to producers and a headache for dealers.
Since the Communist Party’s 18th National Congress last year, the central government has campaigned against corruption and lavish spending. The Politburo said in December that local governments shouldn’t arrange banquets for visiting central government officials.
As a chaser, that same month the Central Military Commission said military officials shouldn’t drink alcohol when they visit subordinate units.
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These policies echoed suggestions by Premier Wen Jiabao in March 2012 that the government should spend less on liquor. Speaking at a State Council conference on clean government, the outgoing premier proposed “prohibiting the use of public funds to buy cigarettes, high-end liquor and gifts.”
Several industry insiders say all of this has dealt a blow to the baijiu industry, especially producers of the expensive versions.
“The government agencies and the military can buy 30% to 50% of some high-end baijiu makers’ annual production,” an executive at a distillery in the southwestern province of Guizhou said.
Industry insiders say it is unlikely the military will completely forgo its beloved baijiu, but it will at least refrain from ordering expensive bottles of Moutai and Wuliangye in public.

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Chinese wine bottles at Shanghai Xizha old village
Some of the producers’ problems were their own making. In November, excessive levels of a chemical plasticizer harmful to people were found in Jiugui Liquor Co. Ltd.’s CN:000799 +1.40% product. From then until early February the combined market capitalization of 13 listed manufacturers fell nearly 200 billion yuan on domestic stock markets.
Additionally, two major manufacturers have been caught in a price-fixing scandal that saw them fined heavily.

To the good times

The high tide of sales for baijiu made by state-controlled Kweichow Moutai Co. Ltd. CN:600519 +1.10%  was from July 2011 to March 2012, a dealer in Chongqing who has been in business for several years said.
Times were so good the company had to ration its shipments to dealers.
“In order to prevent dealers and the market from hoarding baijiu, Kweichow Moutai limited our daily supply to one to two boxes,” he said. “There were 12 bottles in each box and all could be sold out.”
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Times were so good that the dealer asked the company to raise his quota several times, but was rejected.
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“The production of Feitian Moutai, a high-end baijiu, requires up to five years of storage, so the company could not expand its production in the short term,” the dealer said. “Everyone wanted to get a higher quota, but it was hard.”
However, Kweichow Moutai’s sales started to slow in the second quarter of last year. “The days of making money easily are over,” the Chongqing dealer said.
Jiugui Liquor said in February that its net profit was just 36 million yuan ($5.77 million) in the fourth quarter of last year, down 81.5% from the previous quarter. Before the chemical scandal was exposed, Jiugui’s net profit in the first nine months of 2012 was 459 million yuan USDCNY +0.0962% , a year-on-year increase of 433%.
As the market weakened, dealers felt a double impact because distilleries stopped delivering goods on time, but dealers still had to pay them monthly. As a result, baijiu makers’ financial reports still looked good despite the sales’ slowdown.
For example, the operating revenue of Shenzhen-listed Wuliangye Yibin Co. Ltd. was 15.6 billion yuan in the third quarter of 2012, up 36.4% compared to the same quarter a year before, the company’s financial report shows. Its net profit was 4.8 billion yuan in the July-September period, up 41.9%.
However, Silver Base Group, Wuliangye’s largest dealer, said it lost $177 million Hong Kong dollars ($22.7 million) in the third quarter of last year, the first time it lost money since it listed in Hong Kong in 2009.
“We paid Wuliangye on a monthly basis,” a Wuliangye dealer in Beijing complained, “but Wuliangye can delay delivery to us for half a year.”

The fix was in

Kweichow Moutai increased the factory price of 106 proof Feitian Moutai from 499 yuan per bottle to 619 yuan in January 2011. The company’s recommended retail price was 1,319 yuan.
Several dealers said that in the third quarter of 2011, Feitian Moutai sold for as much as 2,200 yuan, and even reached 2,800 yuan in Beijing.
In September, Feitian Moutai’s factory price was increased to 819 yuan, but by then the environment had changed. The retail price had fallen to between 1,500 yuan and 1,700 yuan.
Kweichou Moutai’s top priority was to maintain price, company chairman Yuan Renguo said at a dealers’ meeting in December last year, adding that the retail price of Feitian Moutai couldn’t fall below 1,519 yuan.
These remarks would open up a can of worms for Yuan’s company and Wuliangye Yibin. They would get the notice of price monitoring authorities, who began investigating the firms for violations of the country’s anti-monopoly law.
The two firms quickly stopped their price-fixing, but that did not stop the National Development and Reform Commission from slapping Kweichow Moutai and Wuliangye Yibin with large fines in February.
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Even before the firms stopped their price-fixing, retail prices had already started falling. Meanwhile, some dealers were left with large inventories.
Several industry insiders say government agencies and the military have put baijiu makers like Kweichou Moutai, Wuliangye Yibin and Luzhou Laojiao Group Co. Ltd. CN:000568 +1.61%  on lists of items that are banned from purchase.
Many of Kweichou Moutai’s dealers had counted on the connections with the government and military to survive, the Chongqing dealer said, but were now panicking due to a shortage of sales channels. Kweichou Moutai has responded by opening its own retail stores to work off its inventory.
Many dealers agreed the days of celebrating high profits were gone, and the industry was indeed facing leaner times. For his part, the Chongqing dealer seemed resigned to a slower pour. “In the future, most dealers will count on ordinary consumers, the profit will be lower and the speed of making money will also slow down.”
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