At the Moutai shareholders' meeting a few days ago, when asked about when Moutai would raise prices, Ding Xiongjun, chairman of Kweichow Moutai, said:
"Whether to raise prices, when to raise them, and how to raise them—these indeed require wisdom." Ding Xiongjun's response might sound a bit show-off to other liquor companies. After all, in 2023, it is not easy for other premium liquor brands to raise prices. Recently, multiple media outlets reported that during the 618 mid-year promotion, liquor prices generally experienced price inversion: Qinghua Lang 20, with an ex-factory price exceeding 1,000 yuan, was sold at 948 yuan on an online store. (The author found a minimum price of 894 on JD.com);
Guojiao 1573, with an ex-factory price of about 910 yuan, was offered at 1,738 yuan for two bottles after the 618 "subsidy," equivalent to 869 yuan per bottle;
Xijiu Jiaocang 1988's expected transaction price on an online store fell below 500 yuan per bottle, while its ex-factory price was 568 yuan; Junpin Xijiu fell below 1,000 yuan, with prices starting with 8 on JD.com;
Shuijingfang Jingtai's ex-factory price is 808 yuan, but on JD.com it is commonly sold at over 500 yuan, with some prices starting with 4. The popularity of premium liquor, represented by Moutai, once stimulated a large number of liquor companies to raise prices, adopt a premium route, and gild themselves. But now, the high prices of many brands are beginning to collapse. The tide of industry prosperity is receding. Once, Moutai was still the big brother, but many "premium liquors" can no longer maintain their former glory. Prices Are Rising The overall size of the liquor market has not decreased. The trend of China's liquor market is quite interesting. According to data from the National Bureau of Statistics, from 2016 to 2022, liquor production volumes were 13.584 million kiloliters, 11.981 million, 8.712 million, 7.859 million, 7.407 million, 7.156 million, and 6.712 million respectively, showing a "six consecutive declines" over six years. In addition, according to data from the China Alcoholic Drinks Association, in 2022, the number of liquor enterprises above designated size was 963, lower than the 1,593/1,445/1,176/1,040/965 in 2017-2021. In other words, the number of liquor enterprises above designated size has seen "five consecutive declines." But despite the halving of total production and a significant reduction in the number of players, the overall size of the liquor market has not decreased. Looking at data in recent years, the sales of liquor enterprises above designated size have moved in the opposite direction to the decline in production. For example, in 2022, according to the China Alcoholic Drinks Association, there were 963 liquor enterprises above designated size, with production of 6.712 million kiloliters, a year-on-year decrease of 5.6%, but they completed sales revenue of 662.65 billion yuan, a year-on-year increase of 9.83%. Behind the phenomenon of "more money despite lower production" is the surging premiumization process of liquor companies. It can be seen that this premiumization craze, which started around 2017, originated from the "surge" of Moutai, the big brother: On April 10, 2017, Moutai's market value surpassed that of international spirits giant Diageo, becoming the world's most valuable spirits company with a total market value of 494.9 billion yuan. Two days later, Moutai's market value exceeded 500 billion yuan;
In January 2018, Moutai's market value exceeded one trillion yuan, becoming the first stock in the liquor capital market with a market value exceeding one trillion yuan;
In 2019, Moutai's market value exceeded two trillion yuan, while Guizhou Province's GDP that year was only 1.8 trillion yuan;
In June 2020, Moutai surpassed ICBC to become the "top brother" on the A-share market. Under Moutai's guidance, liquor companies acted in unison, as if they had opened their "Ren and Du meridians." Those with premium products raised prices vigorously; those without quickly created them and then raised prices: In 2016, Guojiao 1573 raised prices 9 times, and by 2017, it had risen to the thousand-yuan range;
Wuliangye's ex-factory price has been raised five times from 679 yuan in 2016 to 969 yuan;
In 2020, Shanxi Fenjiu launched its new strategic product Qinghua Baijiu, priced at 1,099 yuan per bottle;
In September 2021, Shuijingfang launched the new Diancang as its premium large single product, raising the price by 200 yuan to 1,399 yuan.
...... Especially sauce-flavored baijiu, driven by Moutai, has been rising all the way, becoming the most accepted luxury item among Chinese people. Premium liquor is not only a consumer product but also carries more business and financial significance. According to the "2019 Shangzhi Youpin - China Millionaire Brand Preference Report" released by the Hurun Research Institute, among the most favored men's gift types, premium liquor led with an 11.5% selection rate, with Moutai and Dream Blue occupying the sixth and eighth positions respectively. Premiumization has become a potent medicine, but it has side effects. Inventory Is Increasing High inventory has become a common problem for many liquor companies. 2023 is a crucial year for liquor companies committed to premiumization. Whether they are aristocrats or nouveau riche may be revealed this year. In the first quarter of 2023, 19 listed liquor companies on the A-share market released their Q1 performance reports, with total revenue exceeding 126.8 billion yuan, a year-on-year increase of 15.28%. On the surface, the entire industry seems prosperous, but in reality, it is highly differentiated—the top five listed liquor companies, including Moutai, Wuliangye, Yanghe, Fenjiu, and Luzhou Laojiao, account for as much as 82.9% and 89.4% of revenue and profit respectively. The first-tier big brothers continue to advance triumphantly, while some second- and third-tier younger brothers cannot keep up. For example, Jiugui Liquor, Shuijingfang, and Tianyoude Liquor all experienced varying degrees of decline in revenue and net profit: Shuijingfang's revenue and net profit were 853.3 million yuan and 159.5 million yuan, respectively, down 39.69% and 56.02% year-on-year, the largest decline in nearly five years; Jiugui Liquor's revenue was 965.4 million yuan, down 42.87% year-on-year, and net profit was 300 million yuan, down more than 42.38% year-on-year. Laobaigan Liquor's revenue was 1.003 billion yuan, up 10.43% year-on-year, and net profit was 102 million yuan, down 61.51% year-on-year. Among them, high-end liquor revenue and gross profit both declined. It is worth noting that these companies were typical representatives eager to transform to premiumization. Between 2020 and 2021, Shuijingfang continuously launched premium products and raised prices for its various products multiple times. The price range for its four core single products, Jingtai, Diancang, and Jingcui, was mainly 800 to 1,700 yuan. In April 2022, Shuijingfang also raised the suggested retail price of the 52° new-generation Jingtai to 808 yuan and the 38° to 768 yuan, both up 70 yuan. Jiugui Liquor has also been obsessed with premiumization. Neican Liquor, launched in 2004, touted itself as "one of the four independent brands of Chinese premium liquor," directly benchmarking against "Moutai, Wuliangye, and Luzhou Laojiao." More than a decade later, sales of around 1 billion yuan clearly cannot match its ambitions, and its revenue share is only about 30%. Many even question that Jiugui Liquor's high growth in recent years is actually related to the significant increase in dealers and inventory. According to the company's annual report, Jiugui Liquor had 528 dealers in 2019, which surged to 1,586 by 2022, an increase of 200%. According to financial reports, from 2019 to 2022, Jiugui Liquor's inventory soared from 3,460 tons to 7,375 tons, more than doubling. In fact, gradually rising inventory has also become a common problem for many liquor companies. In the first quarter of 2023, among the 19 listed liquor companies, only three saw a year-on-year decrease in inventory, while 17 saw an increase. In the circulation channel, destocking has also become a difficult task for distributors. According to the "2022 Annual Report on the Status of Liquor Merchants," from January to June 2022, 80% of liquor distributors had severe inventory. Among them, about 39.7% had inventory for more than 5 months, and 33.6% had inventory for 3 to 5 months. Why has the premium liquor that many manufacturers are chasing suddenly lost its appeal? Demand Is Shrinking The drinking population is gradually shrinking. With changes in the macroeconomic environment, the room for growth of premium liquor has become limited, which means that even several leading companies will be forced into a slower growth rate. From a market trend perspective, China's liquor production continues to decline, and the decline is widening. According to data from the National Bureau of Statistics, as of April this year, the cumulative production of liquor enterprises above designated size was 1.581 million kiloliters, a cumulative year-on-year decrease of 29.6%. This is the largest decline in many years. From a demographic perspective, starting in 2022, China's population entered a period of negative growth, and also entered a period of rapid growth in the elderly population. According to data from the National Bureau of Statistics, in 2022, the population aged 65 and above reached 210 million, an increase of 9.22 million, far exceeding the 3.12 million new births, with a further increasing trend. At the same time, the population born between 1962 and 1975 is 367 million, and these people will all age in the next decade or so. From a lifestyle perspective, more people are pursuing healthier lifestyles, and young people's dependence on alcohol is rapidly declining, with fewer choosing to build emotional connections through drinking together. All these factors lead to a gradual shrinking of the drinking population. Additionally, the most realistic factor also influences people's purchasing decisions: the purchasing power of China's premium liquor market is weakening. The most important usage scenario for premium liquor is business banquets, and corporate group purchases are one of the important sales channels for premium liquor. But in 2023, corporate clients are facing pressure on profits and budget cuts. Taking industrial enterprises as an example, on April 27, data from the National Bureau of Statistics showed that from January to March, the total profits of industrial enterprises above designated size nationwide were 1,516.74 billion yuan, a year-on-year decrease of 21.4%. Among them, state-controlled enterprises achieved total profits of 589.24 billion yuan, down 16.9% year-on-year; joint-stock enterprises achieved total profits of 1,129.03 billion yuan, down 20.6%; foreign and Hong Kong, Macao, and Taiwan invested enterprises achieved total profits of 331.81 billion yuan, down 24.9%; private enterprises achieved total profits of 389.41 billion yuan, down 23.0%. Profits of all types of enterprises are declining across the board. Another important consumption scenario for premium liquor—wedding banquets—is also pessimistic, as China faces an unprecedented "marriage shortage." In 2021, the number of marriage registrations in China was 7.643 million couples, lower than the level 20 years ago. Overall, the supply of premium liquor is increasing, but the occasions for its use are becoming fewer. At the same time, the general public's demand for low-end liquor shows a certain rigidity. This can be seen from the performance of bottle liquor (guangping jiu). According to a market survey report by the China Alcoholic Drinks Association, the bottle liquor industry entered the fast lane in 2013, with the market size growing from 35.2 billion yuan to 98.8 billion yuan in 2021, with an average annual compound growth rate of 13.8%. It is expected to maintain a 16% annual growth rate from 2022 to 2024, with the market size exceeding 150 billion yuan in 2024. From 2013 to 2021, the compound annual growth rate of bottle liquor was 13.8%, while the compound annual growth rate of the liquor industry's sales revenue during the same period was 4.9%. That is, the growth rate of bottle liquor is nearly three times that of the overall liquor industry. During this period, the market share of bottle liquor increased from 7% to 16%. Bottle liquor is like a mirror for premium liquor, reflecting the other side of the liquor market. Final Thoughts Liquor itself is a high-margin industry. Even low-end liquor has much stronger profit performance than many other industries. If companies raise prices for these low-cost liquors, it becomes easier to make gross margins higher and higher. And a fairly high gross margin means that, under ideal conditions, companies can expand sales and recover cash flow by increasing marketing investment. Under the demonstration effect of Moutai and Wuliangye, more and more capital has entered this industry, and more small and local brands have been discovered and created. For a time, premium liquor brands were everywhere, so much so that there were not enough premium consumers. Capital and entrepreneurs with their own agendas all feel they can hitch a ride on the Moutai, Wuliangye, and Luzhou Laojiao bandwagon, arbitrarily increasing the total supply of premium liquor, without noticing that the macro environment and demand side have quietly changed.