High-end Baijiu to Drive Chinese Alcohol Market Growth

The world’s most popular spirit, baijiu, is drunk almost exclusively in one country—China. While it’s available for as little as 1 per bottle from convenience stores across the nation, it’s the premium end of the market that’s set to drive future growth in Chinese alcohol spending. Bigger Than the Absinthe Fairy Flying Fairy Maotai (飞天茅台), produced by Kweichow Maotai (贵州茅台), costs an eye-watering 1,499 RMB (237) per bottle, but a shortage of supply means consumers are willing to pay much more. During January, the official Maotai store on JD.com received over 380,000 orders for Flying Fairy Maotai at the suggested retail price, and purchases had to be restricted to two bottles per order. Several high-end baijiu brands have already raised their prices this year. Kweichow Maotai saw an 18 percent average price rise, with Flying Fairy’s recommended retail price increasing from 1,299 RMB (206) to 1,499 RMB (237). In stores, prices are as high as 2,000 RMB (316). Flying Fairy’s sensational success is not a unique case in the baijiu market. A recent Chinese language report predicts that baijiu products over 1,000 RMB (158.3) will become the main force driving sales growth in the Chinese alcohol market in 2018. In 2018, the whole luxury baijiu market is projected to reach 1 trillion RMB (158.3 billion). Powered by its high-end baijius, which retail for over 2,000 RMB (316.6), industry leader Kweichow Maotai (贵州茅台) is expected to reach revenues of 221.6 billion RMB (35 billion) in 2018. “China is the only country in the world where drinking gets more prevalent when you get older,” said Derek Sandhaus, the author of Baijiu: The Essential Guide to Chinese Spirits (Penguin), on the increasing demand of high-end baijiu. “The demand for baijiu is the same for high-end products throughout China. It has to do largely with the purchasing power of customers. As the purchasing power of the average consumer has increased, so has the demand for more expensive baijiu.” The Only World-class “Red” Luxury Brand Kweichow Moutai was ranked first among the top 10 Chinese domestic luxury brands in 2017. While baijiu rivals 五粮液 (Wuliangye) and 水井坊 (Shuijingfang) are ranked second and sixth, the historical and cultural value of Maotai secured its reputation as the top Chinese luxury brand both domestically and internationally. The price of Maotai depends on the alcohol content and the year of production, and typically starts from 900 RMB (138.3). The most in-demand product is a 500ml bottle of 53 percent alcohol Kweichow Moutai, and costs 1,899 RMB (292), but the price surges as high as 218,888 RMB (3,3619) for an 80-year-old bottle. Last year, the brand's market cap hit 71.5 billion, making the company the world’s most valuable liquor distillery. The cachet of Maotai makes even its old bottles valuable. In recent decades, the price of vintage Maotai bottles has surged 1,000 percent. Vintage Maotai liquor collector Xiao Qiang told Newsweek that, “Even if you have the money to buy it, you can’t always find it.” In 2012, a bottle of 1980 Maotai was sold for 1.3 million at auction. Maotai has a special reputation as China’s national liquor due to its cultural and political importance. It is considered the drink of diplomacy, used to toast important political figures, including President Richard Nixon on his landmark trip to China in 1972. Former US National Security Advisor Henry Kissinger commented during Deng Xiaoping’s US visit in 1979: “I think if we drink enough Moutai we can solve anything.” It is also a staple at lavish banquets, and for this very reason, its purchase by government officials was discouraged during President Xi Jinping’s anti-corruption campaign in 2012. That has hardly slowed Maotai’s sales as China’s private class of wealthy elites grows in size and spending power. Could Baijiu Go Global? Baijiu accounts for 99 percent of liquor sales in China, but it is barely known in other countries. Even the most famous baijiu brand, Kweichow Moutai, makes 95 percent of its sales in China, with much of the remainder made up by Chinese living or traveling abroad. Literally “white alcohol”, baijiu is a strong flavored clear liquor which is distilled from fermented sorghum. Consuming baijiu was once considered a luxury only accessible to literati and social elites. Nowadays, baijiu is used to lubricate contract negotiations and celebrations, business dealings and weddings. Yet, the market is now shifting in response to the new social and cultural structure. “Now the distilleries have taken a more consumer-oriented approach,” Sandhaus said. “The government has stopped being the major purchaser and consumer of high-end baijiu, following the guidance of president Xi Jinping. There are also a lot more trusted online vendors, which has among a lot of consumers restored confidence that they can buy high-end baijiu and not get fakes.” Baijiu makers are also targeting new markets in Europe and the United States. Maotai spent a reported 11.76 million to establish its Paris store, and more international locations are planned. “That’s a really exciting new development of high-end baijiu—the well-established baijiu distilleries are getting into the international market,” said Sandhaus. “While some foreign trading companies such as Byejoe and HKB made the effort to bring baijiu abroad by repackaging it, the major distilleries have their unique strength in the broader market.” “They have the ability to produce high-quality baijiu in significant volumes, but they also have the brand heritage and reputation, which a new foreign baijiu company does not have,” Sandhaus said. David Putney, a consultant at baijiu bar Capital Spirits, is optimistic about the potential international market for baijiu. “Baijiu is beginning to internationalize, and is used more and more as either an accompaniment to Chinese food, or an ingredient in cocktails. The focus is rapidly shifting from baijiu being a very expensive gift and currency for showing face. It is slowly moving towards becoming something on par with most international spirits,” he said. Tradition Versus Innovation On the other hand, drinking baijiu is increasingly seen as a dated behavior by younger Chinese uninterested in banquets and bravado. The rejection of traditional drinking culture has opened space for new baijiu brands targeting mainly the post-80s and post-90s generations. One of the most innovative baijiu brands is Jiangxiaobai (江小白). Based in Chongqing, the brand was established through a crowdfunding campaign. Its “simple” philosophy is manifested in both a lighter taste and a more minimalistic packaging design. Bottles also feature quotes such as “I am Jiangxiaobai, life is very simple!” and “About things tomorrow, we will figure them out the day after tomorrow!”. Clever online marketing and a vibrant community on social media site Weibo also distinguish Jiangxiaobai from its predecessors. Another area of innovation is new technologies to adjust the brewing process. Guanyun (观云) created a unique flavor that is softer, sweeter and fruitier than traditional flavors. In this way, the pungency of baijiu is reduced and becomes more approachable to younger consumers and the international market.

Sectors

Insights

Company

High-end Baijiu to Drive Chinese Alcohol Market Growth