Recently, the baijiu sector has been frequently reporting good news, with the stock index rising for eight consecutive weeks, and companies like Moutai and Fenjiu continuously hitting new stock price highs... The overwhelming media coverage has led many industry insiders to exclaim that the industry is fully recovering and the situation is excellent! But is that really the case? To truly understand the current market situation of baijiu, a reporter interviewed distributor Mr. Wu to hear his perspective.

-01-

Performance Down to Less Than 60% Year-on-Year, Losses for Four Consecutive Months

1. How Severe Is the Impact of the Epidemic? Mr. Wu primarily deals in brands such as Yanghe and Red Bull. He does not agree with the optimistic views on the baijiu industry: "Market consumption has recovered to at most 50%, that's the ceiling; anyway, it's not that good for me." He also stated, "I feel that the impact of this epidemic on baijiu is greater in the short term than the Eight Regulations in 2013." This is mainly because the epidemic has cut off almost all baijiu drinking occasions, whereas the Eight Regulations only affected government and business consumption. Regarding 2020 performance, Mr. Wu did not disclose specific figures but told the reporter that April sales rose over 60% compared to March, yet still did not reach 60% of the same period last year. The entire first quarter and even through April, the company was in a loss-making state. It is understood that Mr. Wu's province has controlled the epidemic relatively well, with full resumption of work long ago and schools fully reopened by May. Moreover, the local catering industry has resumed operations at an 80% rate, which should theoretically help the baijiu industry recover. So what is the actual situation? 2. Difficult Sell-Through, High Inventory, and the Peak Season Won't Return "The missed peak season won't come back." Mr. Wu lamented, "Catering has reopened, but customer traffic is far from previous levels, only recovering to about 60%. Large banquets are still restricted, so baijiu consumption still can't rise. The so-called revenge spending has not appeared in the baijiu category." Mr. Wu mentioned that the so-called performance recovery is due to downstream customers' payments gradually arriving, but actual consumption has not recovered to a high level, sell-through is far from previous levels, and downstream channel inventory pressure remains. Sell-through is difficult, performance recovery is slow, but employee wages, office expenses, and store rents still need to be paid as usual. This is also because the products he distributes are famous liquor brands, so the situation is relatively better. Many of his distributor friends are borrowing money to get through difficulties, and he himself has closed two of his stores to increase income and reduce expenditure. "I'm still okay; although I'm losing some money, I'm managing. Once the epidemic is completely over, it should be no problem for famous liquor consumption to recover to original levels. If we can survive, there's hope, but for those with weaker brands, it's hard to say..." Mr. Wu said. In the final analysis, the difficulty for distributors during the epidemic is that sell-through basically fails, goods don't move, leading to a sharp increase in capital pressure, with non-strong brands facing even greater pressure. For most small and medium-sized distributors, the goal during the epidemic is to survive and hold on. 3. Leading Companies Don't Represent the Entire Market; Industry Recovery Is Not Strong Looking back at the operating data of listed liquor companies, during the first quarter of the epidemic, except for five companies like Moutai and Wuliangye, the remaining 14 listed liquor companies saw a decline in net profit, with Anhui Golden Seed Wine's net profit plunging 392% in the first quarter. Seeing this, do you still think the baijiu industry has fully recovered? In fact, distributors know best whether liquor is selling. There may be some recovery, but it is far from as strong as the stock market suggests, and it is largely driven by leading companies.

-02-

Survivors Are the Winners: How to Survive?

This epidemic is like a harsh winter; whoever can endure it and survive may welcome the spring. According to Mr. Wu, many employees left during the epidemic. The main reason was that the company implemented a salary strategy of lowering base pay and increasing commissions. Although commissions were higher, goods were barely moving, so some people left. Many distributors with stores also closed them, all to increase income and reduce expenditure and endure this "battle." Mr. Wu and many of his friends believe that if the company can survive, there is hope, and it may rise again in the future. So, what methods has he adopted to "survive"? Mr. Wu's strategy is mainly to seek stability: "In my personal opinion, don't make rash moves during the epidemic. For small and medium-sized distributors, capital is limited. Innovation and such, without much confidence, can easily lead to trouble. Stay stable, hold on, and if others fall but you don't, you win. As for large distributors, that's another matter; I don't know much about that." Of course, seeking stability does not mean staying unchanged. To get through the difficult period, Mr. Wu mainly made the following changes: 1. Lowered employee base salaries and increased commissions to motivate employees; 2. Clearly instructed salespeople to focus more on major key accounts, and appropriately abandon less important resources; 3. In terms of channels, ventured into community group buying and home-delivery e-commerce, which were previously not emphasized, and focused on maintaining a few key restaurants; 4. Introduced some craft beer SKUs to fill the gap in low-alcohol home drinking scenarios, with decent sales; 5. Actively reported difficulties to manufacturers and sought help; 6. Reorganized personal networks to seek help when needed. Under the stability-seeking strategy, Mr. Wu's business has been affected but not to a very difficult extent. Many distributors around him are in similar situations, which may represent the current state of a group of distributors.

-03-

Discussing the Future Trends of Baijiu Based on Distributors' Current Situation

Many factors can influence the future trends of the baijiu industry. Today, we mainly discuss based on the situation of the distributor in the article, and what the future may hold for the baijiu industry. At present, due to the epidemic, baijiu consumption demand is unlikely to recover to pre-epidemic levels in the short term, and the expected revenge spending has not arrived. Additionally, the international epidemic situation is not optimistic, which may affect the domestic economic environment. Therefore, the baijiu industry may be affected by the epidemic throughout 2020, entering a slow recovery phase. Furthermore, from the conversation with Mr. Wu, it is learned that distributors of some regional brands are having an even harder time. On one hand, the industry's scale is declining. Data shows that since 2017, baijiu production has continued to decline, with production dropping to 7.85 million tons in 2019; the number of baijiu enterprises above designated size decreased to 1,176, also declining for three consecutive years; the top 50 baijiu enterprises, accounting for 70% of the industry, saw their growth rate drop from 30% to single digits. On the other hand, under the Matthew effect, the strength of famous liquor brands continues to grow, and they continue to sink down and squeeze the market share of regional famous liquors and small and medium-sized liquor enterprises. The arrival of the epidemic has intensified this change. It can be foreseen that after this epidemic, strong brands at various price points should be able to return to pre-epidemic levels after a period of recovery, or even grow further. However, regional liquor enterprises and small and medium-sized liquor enterprises with weaker brand power will face a continuously worsening survival environment and competitive pressure. How to break through is the biggest challenge, and distributors will also face the same situation. The above trend judgments are only based on the situation of some distributors and are personal opinions. If there are any biases, you are welcome to correct and discuss in the comments. If you are a baijiu distributor, in this war without gunpowder, how is your company doing?