Wahaha Speeds Up Baijiu Liquor Consolidation
I like to write occasionally about the market for traditional Chinese liquor known as baijiu, often more out of personal interest than because I see any big potential in the sector. While many of China’s other food and beverage sectors have consolidated around a few key players over the last 15 years, baijiu has been strangely resistant to such a movement. As a result, the industry remains highly fragmented and not very interesting for investors. But recent signs are pointing to a potential consolidation finally on the way, including the latest word that food and beverage giant Wahaha is entering the field in a bid to develop a new national brand based in southwest China’s Maotai county, an area famous for the traditional liquor.
Before we look at the latest headlines, it’s helpful to take a broader look at the baijiu sector’s development in recent years, and compare it with the related beer industry. The 2 sectors have followed very different tracks, with beer consolidating around a few players like domestic giant Tsingtao (HKEx: 168; Shanghai: 600600) and international players like Anheuser Busch InBev (NYSE: BEV). As one would expect, that consolidation has resulted in the disappearance of many smaller local breweries, which offered inferior products and simply couldn’t compete with the big national companies.
By comparison, baijiu has undergone little or no such consolidation over the same period. I don’t know enough about the industry to comment too authoritatively on why it hasn’t consolidated, but I suspect regional interests are a strong factor. Nearly every place, from the biggest cities to the smallest towns, has its own “famous” local liquor brand, most of which are owned by local governments. Profit is seldom a major concern at such companies, making consolidation difficult since local governments don’t want to see their local brands closed. Complicating the matter, China now bans most foreign ownership of baijiu brands, locking out most big international spirits companies that could become important consolidators.
Against that backdrop, let’s look at the latest news that has Wahaha launching a new baijiu brand in partnership with Jinjiang, a producer in Maotai county. (English article) Most people know Maotai county because it’s home to Moutai (Shanghai: 600519) brand baijiu, arguably China’s most recognized brand in the field and the closest thing to a major industry player.
Wahaha’s colorful and very entrepreneurial chief Zong Qinghou has very big plans for the new venture, which will spend a hefty 5 billion yuan ($820 million) to try and develop a new national brand called Ling Jiang Guo. As part of that plan, the 2 partners aim to consolidate some of the many baijiu breweries in Maotai county, and I could easily see them expanding that buying spree to other nearby areas.
Wahaha’s efforts follow another recent push by Wuliangye (Shenzhen: 000858), China’s other major national baijiu brand, to boost its sales with the introduction of a moderately priced line of liquor called Tongqu. (previous post) British spirits giant Diageo (London: DGE) also has big plans for the market using its Shuijingfang brand, which it purchased 2 years ago after getting a rare exemption from the rule that prohibits foreign companies from buying baijiu brands. (previous post)
The biggest risks to this nascent consolidation is whether local interests will put up any resistance, and whether Beijing will encourage such a move. I suspect that after much delay, local governments may finally be starting to tire of supporting their money-losing local baijiu breweries. Beijing may also decide to go ahead and finally let the industry consolidate to build up a few major national players, in a bid to revive a sector that plays an important part in China’s cultural identity.
Bottom line: The launch of a new spirits joint venture by Wahaha and a local Chinese partner could signal a coming consolidation for China’s fragmented baijiu sector.
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