Whether or not young people like baijiu, the entire baijiu industry is experiencing polarization. In the first half of this year, the revenue and profit growth rates of listed baijiu companies slowed significantly year-on-year. Moreover, the semi-annual reports of 10 liquor distribution companies also show that most of them did not achieve good revenue in the first half of this year, to be precise, "generally negative growth." On the other hand, the leading liquor companies are getting stronger. According to relevant media, the top five companies—Moutai, Wuliangye, Yanghe, Fenjiu, and Luzhou Laojiao—achieved total revenue of 144.745 billion yuan and net profit of 62.331 billion yuan, accounting for approximately 80% and 89% of the 19 listed companies, respectively. Being among the "top five" already indicates a high market position, and the impressive "battle reports" further demonstrate their strength. Taking Luzhou Laojiao as an example, in the first half of 2022, it achieved revenue of approximately 11.664 billion yuan, a year-on-year increase of 25.19%, and net profit attributable to the parent company of approximately 5.532 billion yuan, a year-on-year increase of 30.89%. This is a gratifying report card by any measure. However, the problem is that in market competition, if you do not advance, you retreat. Especially for Luzhou Laojiao, which was once ranked third in the industry, the desire to restore its former glory is strong. Why would it be willing to stay in fifth place? Yet, the "cruel story" of the industry is that Luzhou Laojiao has been striving to "return to the top three" for seven years, but the distance is getting farther and farther, as if it were an unattainable illusion. 01 Failed to Break into Top Three, Retreating from High-End Market As early as 2015, Luzhou Laojiao's new general manager, Liu Miao, shouted the slogan "Return to the Top Three." In the following year's annual report, Luzhou Laojiao clearly stated its strategic goal of returning to the top three in the industry by the end of the "13th Five-Year Plan." To achieve this goal, management also put forward "higher requirements for the company's innovation capability, brand building, management efficiency, and other competitiveness." With goals and requirements gradually clarified, the next step is to focus on implementation and results. One notable achievement is that during the "13th Five-Year Plan" period, Luzhou Laojiao narrowed the gap with Yanghe. In 2016, Luzhou Laojiao's revenue was 8.627 billion yuan, while Yanghe's was 17.183 billion yuan, a gap of 8.556 billion yuan. By 2020, Luzhou Laojiao's revenue had grown to 16.653 billion yuan, while Yanghe's revenue was 21.101 billion yuan, with the gap only 4.448 billion yuan. Perhaps to keep morale high, Liu Miao frequently mentioned "returning to the top three" during the "13th Five-Year Plan" period, while trying to lead Luzhou Laojiao to break through, but the final result was not satisfactory. At the end of the "13th Five-Year Plan" in 2020, Luzhou Laojiao's revenue and net profit could only rank fourth in the industry, and the dream did not come true. Even so, "returning to the top three" remains Luzhou Laojiao's persistent goal: the 2021 annual report once again stated its determination to return to the top three in China's baijiu industry. That year, Luzhou Laojiao ranked fourth among A-share listed baijiu companies with revenue of 20.6 billion yuan, and surpassed Yanghe by a narrow margin of 400 million yuan in net profit, which could be considered a "curved line to save the country." However, after three attempts, the momentum waned, and the battle for the "top three" became more intense in 2022. Luzhou Laojiao was caught between Yanghe and Fenjiu, and unfortunately retreated. In the first half of the year, Luzhou Laojiao's revenue ranking dropped to fifth, while net profit maintained fourth place, but with only a 523 million yuan advantage over Fenjiu. This means that not to mention "returning to the top three," even maintaining the fourth position is quite difficult for Luzhou Laojiao. A key reason for the regression is that in recent years, baijiu companies with high-end products as their main offerings have developed more strongly, with Moutai and Wuliangye firmly occupying the top two positions in China's baijiu industry. However, Luzhou Laojiao can only rely on Guojiao 1753 as its single high-end product, and it is suppressed by Moutai and Wuliangye, making it difficult to open up more market space. In a situation that is hard to be optimistic about, Luzhou Laojiao chose a strategy of imitation—raising prices. In 2019, the market guidance price of Guojiao 1573 was 869 yuan per bottle, and by early 2021 it had risen to 1399 yuan per bottle. However, the price increase was not fully recognized by the market—in 2020, Guojiao 1573 experienced a price inversion at the terminal; in July this year, media research reported that the retail guidance price of 1499 yuan for Guojiao 1573 could be purchased for only 1050 yuan. Luzhou Laojiao's series of actions not only increased inventory but also "hurt" distributors. According to media reports, in the first half of 2022, Luzhou Laojiao's inventory of mid-to-high-end liquor increased by as much as 56% year-on-year, while the number of domestic distributors at the end of the period decreased by 20% year-on-year. To sell more liquor, especially mid-to-high-end products, Luzhou Laojiao accelerated spending, with advertising and promotional expenses increasing by 70% year-on-year to 700 million yuan in the first half of the year. Even so, in the view of industry insiders, due to the aforementioned suppression by Moutai and Wuliangye, high inventory, and a sharp decline in distributors, Luzhou Laojiao's terminal sales of mid-to-high-end products this year "may not be ideal," and there is "certain pressure" to maintain the fourth position in annual baijiu revenue. 02
Low-End Market Lost, Betting on "Black Cap" Hopeless
While high-end liquor encounters setbacks, Luzhou Laojiao's low-end liquor is also underperforming. Before Guojiao 1573 followed the industry trend of premiumization and continued to raise prices and increase volume, Luzhou Laojiao relied more on low-end liquor for volume, with "other liquor categories" priced below 150 yuan accounting for nearly 60% of the company's total sales. However, last year, the "other liquor categories" segment was severely impacted, with sales volume declining by 52%, and media directly called Luzhou Laojiao's "low-end liquor line completely lost" and "almost collapsed." This is not a problem unique to Luzhou Laojiao. In fact, mid-to-high-end baijiu with stronger social and gift attributes has become the main revenue driver for the entire baijiu industry, while low-end liquor has been relatively sluggish both last year and in the first half of this year. The reason is obvious: the impact of the pandemic. A liquor distribution insider told Caijing reporters that due to the pandemic, consumer demand for weddings and other events shrank in the first half of this year, affecting low-end baijiu consumption. However, Luzhou Laojiao's loss in the low-end market cannot be entirely blamed on the pandemic; its own problems have a significant impact. In 2022, the new national standard for baijiu was fully implemented, defining flavored baijiu, including those blended with edible alcohol, as blended liquor, excluding them from the baijiu category. Under this requirement, Luzhou Laojiao's low-end liquor "Erqu" was exactly excluded, and it had to be discontinued last year. In 2021, Luzhou Laojiao's "other liquor categories," including Touqu and Erqu, generated total revenue of about 2 billion yuan, 200 million yuan less than the previous year. Low-end baijiu is a red ocean where liquor companies compete fiercely, with a market CR3 concentration of only 12%. Even famous brands find it difficult to compete in this field. The loss of 200 million yuan in market share is not insignificant. Facing the low-end liquor dilemma, in 2021 Luzhou Laojiao reorganized and launched "Luzhou Laojiao 1952" positioned as sub-premium and "Black Cap" positioned as mid-to-low-end bare bottle liquor (referring to liquor without a packaging box, where the bottle is directly visible). Luzhou Laojiao has high hopes for both products, hoping the former will "lead the revival of the Luzhou Laojiao series brand with its price and image height," and the latter will become a "cash cow," claiming to achieve cumulative sales of 10 billion yuan in three years for "Black Cap." However, analyzing from the industry and its own situation, it is easy to see that these "high hopes" are difficult to realize. For "Luzhou Laojiao 1952," the development resistance is significant first because the pandemic has impacted consumer demand for sub-premium baijiu; second, the sub-premium baijiu track is mainly regional, such as Langjiu in Sichuan, Jiugui Liquor in Hunan, and Xijiu in Guizhou, which mostly rely on radiating outward from their "main positions." For Luzhou Laojiao to get a share, it needs long-term cultivation and cannot quickly increase volume. For "Black Cap," Luzhou Laojiao set a price of 98 yuan from the start, almost reaching the current ceiling for bare bottle liquor prices, which is quite off-putting. This is because mid-to-low-end baijiu prices are mostly below 50 yuan per 500ml, and low-end liquor prices are even below 20 yuan. In this price range, low- and middle-income groups and urban migrant workers constitute the main consumer base. Moreover, in the current economic situation, the difficulty of making money and price sensitivity have greatly increased. How many people will buy a 98-yuan bare bottle liquor to achieve sales of 10 billion yuan in three years? At the "Black Cap" launch event, Zhang Biao, general manager of Luzhou Laojiao Sales Company, said: "The sustainable development and growth of Luzhou Laojiao requires not only maintaining leadership in the head and waist but also continuously consolidating the base and deeply cultivating the mass consumer market." For the mass consumer market, "deep cultivation" is indeed necessary, but before that, what is more important is deep insight. 03 Brand Aging, Need to Emancipate the Mind Both mid-to-high-end and low-end liquor face severe challenges. In the 2022 semi-annual board of directors' business review, Luzhou Laojiao stated that it would "firmly follow the development path of 'returning to the value of Chinese famous liquor.'" As the only strong-flavor baijiu in the industry to have won the "China Famous Liquor" title five consecutive times, Luzhou Laojiao indeed has its confidence. However, things often have two sides. In the view of liquor industry analyst Cai Xuefei, Luzhou Laojiao, as an old famous brand, is already facing the problem of brand aging. "Brand aging" does not mean the brand has been established for too long, but rather that its ability to influence consumer groups, especially young consumers, is not as strong as before. This is also one of the reasons why Luzhou Laojiao cannot firmly sit in the third position, or even struggles to maintain the fourth. Of course, to update its brand image and enhance its ability to influence consumer decisions, Luzhou Laojiao, like other leading liquor companies, has made relevant efforts. Moutai vigorously promotes its ice cream business, Fenjiu creates liquor-filled chocolates, and Yanghe sells blind box ice cream. Essentially, they all hope to attract young consumers and enhance their influence and consumption stickiness among young people. Luzhou Laojiao's strategy is to "cast a wide net," first promoting iced baijiu. As early as 2009, Guojiao 1573 tried to attract consumers with the selling point of "drinking baijiu on ice," but it was immediately questioned as a marketing gimmick, and this strategy was "shelved"; in recent years, the concept of "iced baijiu" has regained attention, and it has been linked with marketing activities such as pop-up stores and micro-films, but it remains to be seen how attractive it is to young consumers. Secondly, Luzhou Laojiao has made moves in all directions, appearing in categories that young people like, such as facial masks, ice cream, custom perfume, liquor-filled chocolates, and milk tea. In terms of liquor products, it has also launched fruit wine, pre-mixed wine, and cocktails, also hoping to win the favor of young people. There have been many actions, but none have made a splash. Luzhou Laojiao hopes that "innovative products will continuously explore new models and achieve new breakthroughs," but at least so far, this has not been achieved. Perhaps in the face of the increasingly fierce battle for the "top three," Luzhou Laojiao needs to be more pragmatic. While continuing to compete in the high-end liquor market, it should strive to cultivate sub-premium and mid-to-low-end products, improving both quantity and quality, rather than being led by the obsession with the "top three" or "returning to the value of Chinese famous liquor." Recognize reality, abandon illusions. The glory of the past is both capital and a shackle. For an old brand to win a new market, it should not only focus on what it has had in the past, but also understand what the market lacks now. Source: Xin Shang (ID: baoliaohui) Author: Xu Yunliu