Jiugui Retreats As Baijiu Clean-Up Looms
China’s homegrown traditional liquor industry has been plunged into turmoil over the last 18 months, and now the shakeup may have claimed its first victim with word that Jiugui Liquor (Shenzhen: 000799) is retreating from the national market. Of course the big question will be whether other makers of baijiu, the traditional Chinese liquor, will follow Jiugui’s lead, and whether Jiugui itself will survive as an independent company. I suspect the answer is that some limited and much-needed consolidation will finally begin to occur in this crowded and money-losing sector. But the process may be difficult, since regional stakeholders will be reluctant to give up control of liquor brands that are often closely tied with the identities of many smaller cities and towns throughout China.
China’s baijiu makers have been in a state of crisis for more than a year now, dating back to a scandal at the beginning of 2013. That particular scandal saw many of the country’s major producers exposed for having high levels of plasticizer in their liquor, the result of using plastic containers in their distillation process.
But the plasticizer scandal was only the beginning of their problems, and the much bigger issue began later in the year as Beijing strictly enforced an austerity campaign. That campaign saw new president Xi Jinping order a reduction in government waste and lavish spending, which included a reduction in the consumption of baijiu at state-sponsored banquets and the giving of expensive baijiu as gifts.
Most national companies have taken a big hit from the resulting downturn, and shares of premium brands Moutai (Shanghai: 600519) and Wuliangye (Shenzhen: 000858) have both lost about 40 percent of their value since the beginning of last year. But the outlook is even cloudier for mid-tier names like Jiugui, whose shares have lost around 80 percent of their value since the beginning of last year.
According to the latest reports, the situation for Jiugui could be rapidly deteriorating further still, with the company recently making the strategic decision to abandon a national distribution strategy and retreat to its home market in central China’s Hunan province. (Chinese article) The shift would mark a major change for Jiugui, which derives only 4-5 percent of its current 800 million yuan ($130 million) in annual sales from its home province.
An optimistic company official said Jiugui hopes to sharply boost its hometown sales to 3 billion yuan annually over the next 3 years, meaning it would have to see its local sales rise by a factor of 75 times over current levels. Obviously this kind of goal is sheer fantasy, and I would expect that Jiugui’s size will fall sharply following this new retreat and the company will be lucky to post sales of more than 100 million yuan 3 years from now.
In fact, such a reduction may be a good thing and perhaps this kind of downsizing is what’s needed to restore some health to China’s struggling baijiu sector. What’s really needed is true consolidation, much like what has happened to China’s beer industry over the last 20 years. I can remember a similar landscape in China in the 1980s, when ever city and town had its own beer brands, many of dubious quality. Most of those have disappeared now, replaced by 5 or 6 major national brands.
The big obstacle to needed consolidation is regional obstructionism, since many names like Jiugui have long histories and their local government stakeholders will be reluctant to sell the brands to outsiders. What will probably happen is some sales of non-controlling stakes to outsiders. That could pave the way for formation of a new generation of major holding companies that could bring scale to the national sector, while also allowing for the continued independence of some of the larger regional brands like Jiugui.
Bottom line: Jiugui’s retreat to its home province looks like a good strategic move that could be copied by other mid-tier brands, kicking off a wave of limited consolidation for baijiu makers.
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