China Consumer

Punch drunk

Why Wuliangye is losing out to its big rival


No longer the toast of the town

Cognac makers had little to cheer about in the aftermath of the First World War.

For a start, the phylloxera beetle had devastated French vineyards in the late nineteenth century and sales were yet to recover. There was increased competition from Scotch whisky as well as a crippling import tax levied on French brandy in the then critical British market. To make things even worse, in 1919 the Americans went beyond fiscal levies and introduced an outright ‘prohibition’ on the sale of alcohol.

By 1922, the outlook was so bleak that two of the most famous cognac houses made a 25-year pact. The deal saw Hennessy and Martell fix the price of young brandies, take shares in one another and carve up the international market. Martell got exclusive rights to the UK, while Hennessy got Asia (and the US too in the event it repealed prohibition).

Times are tough in China’s liquor market today but a similar spirit of cooperation is less in evidence. In fact, the rivalry between the two biggest baijiu (grain wine) makers, Moutai and Wuliangye, is getting more bitter. With sales of premium liquor suffering because of Beijing’s crackdown on corruption, each firm has been trying to grab a larger share of the shrinking market by luring away the other’s wholesalers.

Moutai scored a major victory last month by snatching a key partner from Wuliangye when Hong Kong-listed Silver Base said it had signed an agreement to sell Moutai’s products in China. That is significant because Silver Base has been Wuliangye’s biggest distributor for years. China Business News reported that another of Wuliangye’s top 10 dealers may also be on the verge of defecting.

A few years back, switching between sides would have been unthinkable – akin to the coach of Real Madrid quitting to join Barcelona. Like the two Spanish teams, the liquor firms’ regional rivalry is intense. For example, local officials in Sichuan (home of Wuliangye) and in Guizhou (home of Moutai) have both sought to name local airports after their respective brands. In this case, Wuliangye is ahead (as passengers flying into Yibin might have noticed). The commercial contest is nothing less than tribal, which makes the switching of loyalties all the more surprising.

Drinkers of baijiu may see it differently. “The battle for distribution resources is good news for consumers as it will lead to declines in retail prices,” the New Express Daily notes. The drinks makers are getting more flexible in negotiating wholesale prices with distributors. The National Business Daily reports that Silver Base has paid Rmb64 million ($10.45 million) for 63,700 bottles of Moutai. That equates to a price of Rmb1,000 per bottle suggesting big discounts on offer versus last year’s retail prices, which reached Rmb2,000.

Ostensibly, Wuliangye’s numbers are holding up. Last month it reported a 15% gain in first-half profit to Rmb5.8 billion. Revenues climbed 3% to Rmb15 billion. But, the internet news site for Phoenix TV, has reported that up to Rmb2 billion of Wuliangye sales were generated by guaranteeing bank loans for its distributors. CBN agrees that this helped the results look rosier than the reality by shifting excess inventory out of the factory and into the distribution chain. Real sales are stagnant, the newspaper said, explaining why retail prices for the brand are down as much as 45% in some parts of China.

A look at the figures from some of the distributors tells a similar story. In Silver Base’s case, 2012 revenues dropped 87% to HK$390 million ($50 million), hinting why it was tempted by Moutai’s deal. “Things could get worse for Silver Base if it doesn’t look for a new revenue sources,” the Entrepreneur Daily warns.

Will the outlook improve? Anecdotally, baijiu sales didn’t seem to pick up during the Mid-Autumn Festival last week, traditionally a bumper period for business. “We couldn’t even sell a bottle a day,” a distributor told the Oriental Morning Post, exaggerating somewhat to make his point. But when the newspaper visited retailers in Beijing, it noted that shelves normally stocked with luxury liquors were filled instead with instant noodles.

It’s the kind of story that will have baijiu bosses reaching for their own bottles to fortify themselves for the struggle ahead.

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