China Consumer

Time for a stiff drink at Diageo

Why the beverage giant may regret its China purchase

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Headaches over Shui Jing Fang

In 2012 drinks giant Diageo became one of the first foreign firms to acquire a household name in the Chinese beverage sector. The deal was a major step because Beijing had been notoriously resistant to local brands falling into foreign hands. But Diageo pressed ahead, acquiring a controlling stake in Shui Jing Fang, a premium baijiu label, for about $400 million.

At the time, Diageo expected the Chinese white spirits industry to grow 10% a year until 2015. It also had high hopes that it could sell premium baijiu to more consumers outside China. “There are 4,500 authentic Chinese restaurants in the UK and we would like to educate the Western palate as well as sell to the consumers that already know the brand,” said Diageo’s UK director Andrew Cowan at the time.

Two years on, the investment in Shui Jing Fang looks ill-advised. In the first half of the year, it saw sales drop 65% (to Rmb140 million), reporting a net loss of Rmb120 million. The company chairman has resigned and Shui Jing Fang has warned investors that it faces the risk of being delisted from the Shanghai Stock Exchange if it continues to bleed cash.

Diageo, which owns the majority of Shui Jing Fang’s stock, has tried to sound more cheerful, maintaining that the worst is over and that Shui Jing Fang is on the path towards turning around its business.

Nonetheless, bosses admit they will have to write down the value of their investment in the troubled spirits maker. They will also be cursing their luck that they bought into Shui Jing Fang before the impact of Xi Jinping’s campaigns against public sector excess became apparent.

“It was the right thing to do strategically but the timing turned out to be awful,” an analyst told the Financial Times.

Xi’s campaign continues to bite deep into the baijiu market, with this year’s Mid-Autumn celebration (on Monday) “the thriftiest moon festival” in history, according to the Global Times. Traditionally one of the most popular seasons for gift-giving (after the Lunar New Year), the holiday would normally teem with life, with gifts of mooncake and toasts of baijiu at business dinners. This year it was eerily quiet, as Xi continues to throttle down on bribes and celebrations involving state sector employees.

Last week the China Daily reported that the campaign against extravagance in the public sector will continue for at least five years, while Wang Qishan, secretary of the CPC Central Commission for Discipline Inspection, reiterated in late August that the fight against corruption is a war that “the nation cannot afford to lose”.

Other analysts say that some of Shui Jing Fang’s problems are more of its own making and that its competitor Kweichow Moutai has been more proactive in trying to limit the damage of the drop-off in demand. By cutting prices on some of its products and offering new sales deals online, Kweichow Moutai has been winning over a wider range of consumers and reducing some of its reliance on liquor served at government banquets. But Shui Jing Fang is still positioning itself as a premium baijiu label. Yet in a climate in which careers can come a cropper through any association with the luxury lifestyle, that image is more of a hindrance than a help. It’s also why Shui Jing Fang is being hit harder than the other baijiu brands, says Finance and Investment, a Sichuan-based newspaper.

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