Baijiu Liquor In Need Of Image Makeover
It’s been nearly a year since makers of the traditional Chinese liquor called baijiu were hit by a double-whammy created by a food safety scandal and a Beijing crackdown on lavish government spending, sending the sector into a prolonged winter. Media are focusing on this one-year anniversary to chart the recent woes of top names like Moutai (Shanghai: 600519) and Wuliangye (Shenzhen: 000858) and talk about what they can do to turn things around. My view is that these companies are in dire need of an image makeover, which should include development of newer, lower alcohol products and major marketing campaigns targeting a generation of younger professionals in major cities.
The sector’s troubles began last November when media first reported that one famous brand, Jiugui, contained excessive amounts of industrial plasticizers. Additional reports showed that other baijius had similarly problems, the result of the widespread use of plastic containers in the distillation process. Around the same time new Chinese President Xi Jinping launched a major crackdown on excessive government spending on lavish banquets, where famous baijius costing thousands of yuan per bottle are often served.
Shares of Moutai and Wuliangye, as well as most other major liquors, have taken a drubbing over the past year as their sales stagnated from the double-blow. Moutai shares have lost about a third of their value, while Wuliangye has tumbled by nearly half. The sharp drop in demand has forced baijiu makers to sharply cut their prices, which in my view were already ridiculously inflated. (English article; Chinese article) The latest data show that profits for 14 of the biggest baijiu makers tumbled 23 percent in the first half of the year, while revenue was down 7.5 percent.
While effects of the plasticizer scandal have mostly faded by now and the government austerity campaign is likely to gradually ease, I still think the baijiu makers should use the current downturn to put themselves on a new track to remain relevant to consumers of the future. As a longtime China resident, I can say with relative confidence that the word baijiu evokes images of party officials, cadres and older men sitting around banquet tables getting drunk and rowdy amid frequent calls to ganbei, or empty the glasses.
While that image may work for another decade or perhaps a bit longer, the new generation of young Chinese professionals that has emerged in the reform era tend to eschew baijiu for lower alcohol beverages, often imported, like red wine and whisky. Such beverages are already seen as more sophisticated and modern since they are often imported, and foreign companies have helped to boost that image with slick marketing campaigns targeting young urban professionals who don’t mind occasionally spending 50-100 yuan for a glass of wine or liquor.
Wuliangye seems to sense the change in the air, with word that it’s rolling out a new line of lower alcohol baijius that will sell for 500-600 yuan per bottle, still a bit pricey but far less than the thousands of yuan that its premium product still can fetch. (Chinese article) The spirits will be marketed under a new brand, Wuliangye Touqu, and if the company is smart it will launch the product line with a marketing campaign targeting younger people.
Another company trying to become more mainstream by targeting younger drinkers is Sichuan-based Shuijingfang, which has been controlled by European spirits Diageo (London: DGE) for the last 2 years. Diageo is even embarking on an aggressive campaign to take the brand global, which could be a hard sell but might work with the right marketing. Efforts like these could well determine who the leaders of the baijiu industry will be in the future, and equally important could be critical to the sector’s very survival.
Bottom line: The baijiu liquor industry is in need of a major image makeover that should target a new generation of affluent, urban professionals.
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