At Wuliangye's 2022 annual shareholders' meeting, Vice General Manager Liu Yang explained the price inversion issue that investors were concerned about: due to multiple factors, the price of 'Pu Wu' has indeed inverted this year, but the company is confident of achieving price recovery this year. In reality, the price inversion of 'Pu Wu' did not start this year; it was already very evident at the end of last year: some liquor distributors, in order to reduce inventory and raise funds, successively cut prices. According to a liquor wholesaler, his purchase price from upstream Wuliangye distributors for 'Pu Wu' had dropped to 930 yuan per bottle, nearly 40 yuan cheaper than the ex-factory price of 969 yuan. In contrast, the ex-factory price of 53-degree Feitian Moutai is similar to that of 'Pu Wu', but its terminal retail price remains at 1499 yuan per bottle, and it has always been in short supply, sometimes even requiring a premium of three to four thousand yuan to buy a bottle. The different situations of the two famous liquors are also evident in their 2022 financial reports: In 2022, Wuliangye achieved revenue of 73.969 billion yuan, a year-on-year increase of 11.72%, while Kweichow Moutai's revenue reached 127.55 billion yuan, a year-on-year increase of 16.5%. Whether in total revenue or growth rate, Wuliangye lags behind Moutai. It is worth noting that while Wuliangye's revenue has crossed a 10-billion-yuan threshold each year for the past three years, its revenue and net profit growth rates have hit a five-year low, with year-on-year growth dropping from over 30% to 10%. 'Price inversion' is like a mirror, reflecting Wuliangye's 'second-place dilemma'. Price Inversion Reappears The 'price inversion' phenomenon, where the actual retail price is lower than the manufacturer's suggested retail price, has always been a focal issue in the baijiu industry. In 2023, the baijiu industry is in a destocking cycle, making price inversion more common. Taking Wuliangye as an example, its inventory in 2022 was 15.98 billion yuan, and the ratio of inventory to total assets rose from 10.33% at the beginning of the year to 10.46% at the end of the year. "Because every year, distilleries have performance requirements for distributors to pay back payments, distributors, in order to complete tasks and recover funds, can only release goods to wholesale channels at low prices. Over time, too much liquor accumulates in the market, leading to price declines," said an industry insider. According to the '2022 Liquor Merchant Status and Development Report', about 39.7% of liquor merchants had inventory for more than 5 months, and 33.6% had inventory for 3-5 months. In addition, from January to June 2022, the average performance of liquor merchants declined by 5.7%, with 63.6% experiencing a year-on-year decline, 27.2% remaining flat, and only about 8% achieving growth. The involution of the circulation channel has further exacerbated the 'price inversion' in the baijiu industry. However, as a leading Chinese liquor company, Wuliangye's 'price inversion' phenomenon has a long history. In 2013, affected by the plasticizer scandal and the ban on official consumption, the high-end baijiu industry entered a downward cycle. Wuliangye distributors, under financial and cost pressure, began to sell at a loss. At that time, the ex-factory price was 729 yuan per bottle, but the first-tier price in the East China region fell below 600 yuan, causing severe price inversion and low-priced goods flowing between regions, leading to chaos in Wuliangye's price system. It was in this year that Wuliangye, which had enjoyed the top position in baijiu for over a decade, was surpassed by Kweichow Moutai in revenue and never regained the lead, leaving it in an awkward position. A former chairman of Wuliangye Group once lamented: "It's not easy to be the leader, nor is it easy to be the second; it's even harder to be the second after being the leader." Ahead is Moutai, whose 100-billion revenue and trillion market value are beyond Wuliangye's reach; behind are pursuers like Fenjiu, Yanghe, and Luzhou, who are catching up fiercely. The 2022 financial reports show that Yanghe, Fenjiu, and Luzhou Laojiao have revenues between 25 billion and 35 billion yuan, still a considerable distance from Wuliangye, but their revenue growth rates are 18.76%, 31.26%, and 21.71%, respectively, all higher than Wuliangye's 11.72%. Image source: Baidu Stock Connect It is worth noting that before both price inversions, Wuliangye made a similar move—raising prices. In February 2013, Wuliangye misjudged the situation and decided to raise prices by 10%, but a month later, reality 'slapped its face', and it had to announce a return of 10-15% of payment amounts to distributors, causing prices to fall instead of rise. At the end of 2021, Wuliangye announced a new contract policy: the planned ex-factory price for the eighth-generation Wuliangye remained at 889 yuan per bottle, while the out-of-plan price was raised from 999 yuan to 1089 yuan per bottle. The contract volume ratio between planned and out-of-plan was 3:2. After comprehensive calculation, the ex-factory price of the eighth-generation Wuliangye would rise from 889 yuan to 969 yuan, an increase of nearly 9%, and basically align with the ex-factory price of 53-degree Feitian Moutai. However, in 2022, some distributors, under inventory pressure, lowered the first-tier price (to 930 yuan). Price inversion has repeatedly dashed Wuliangye's hopes of 'both volume and price increases'. Large Distributor Model "The essence of 'price inversion' is an imbalance in market supply and demand caused by excessive supply from the distillery or reduced market demand, causing the actual transaction price to fall below the purchase price," said a baijiu industry insider. For Wuliangye, the root cause of the supply-demand imbalance lies in its large distributor model. In the 1990s, the baijiu industry was in chaos—marketing by major brands was almost without rules, with the only highlight being aggressive advertising. However, Kongfuyan and Qinchijiu, by competing for CCTV's 'bid king' title, only enjoyed prosperity for two or three years. At that time, Wuliangye introduced its large distributor system and quickly became the big brother of the baijiu industry. The large distributor model means that Wuliangye, with the region as a unit, designates powerful distributors to be fully responsible for Wuliangye sales in that area, with second- and third-level distributors under them, forming a multi-level distribution model. Under this model, Wuliangye does not need to invest heavily in building marketing channels or recruit a large number of sales personnel. Large distributors have pricing power and dominance, and are highly motivated. Before 2003, Wuliangye fully utilized the channel resource advantages of large distributors to quickly promote Wuliangye and its series of liquors nationwide. At the same time, Wuliangye also introduced a buyout and exclusive distribution model and an OEM licensing model, where Wuliangye used other distilleries' products to create sub-brands under its own label. The marketing and sales of these brands were handled by large distributors, with profits shared according to negotiated ratios. This further stimulated the enthusiasm of large distributors. Wuliangchun and Jinliufu were products of this model, with annual sales even reaching billions of yuan. Wuliangye also benefited from this, remaining the leader in the Chinese baijiu industry for over two decades. Image source: Wuliangye official website However, the long-term implementation of this model led to the gradual growth of Wuliangye's large distributors, forming a situation where 'the tail wags the dog': while saving marketing and sales expenses, Wuliangye had weak control over channels, with the most prominent issue being the loss of pricing power for baijiu. When the baijiu market is sluggish, large distributors, under inventory and financial pressure, would dump goods downstream, causing price inversion and greatly damaging the brand and the interests of downstream channels. More seriously, the combination of large distributors and buyout brands had a significant negative impact on Wuliangye's main brand. The buyout brands lacked clear price differentiation, limiting the further growth of Wuliangye's series liquor brands. At the same time, large distributors have strong autonomy and can easily bypass Wuliangye, diluting the brand value of Wuliangye's main brand. Even worse, some original OEM brands like Liuyanghe, after being 'nurtured', would leave Wuliangye to 'fly solo'. During the heyday of the large distributor model from 2005 to 2008, Wuliangye's top five distributors contributed over 70% of total revenue, becoming the backbone of Wuliangye's sales. Deep-Rooted Problems In 2013, after being comprehensively surpassed by Moutai (in revenue and profit), Wuliangye, after painful reflection, began to seek a direct sales model under the large distributor system, i.e., a sales model where 'the manufacturer connects with large distributors, and large distributors connect with small distributors'. It selected over 500 large distributors to be directly managed by the manufacturer, while other distributors purchased goods through large distributors. However, this model merely solidified the original large distributor model and clarified the rights and responsibilities of each party. At the same time, Wuliangye also established a brand management department to be fully responsible for brand promotion and marketing, to some extent reclaiming some power from large distributors. However, Wuliangye's 'power reclamation' was not smooth. There are two reasons: First, due to the long-term existence of the large distributor model, Wuliangye's control over channels is not strong enough, making it difficult to effectively manage the brand and sales. For example, Wuliangye divides the country into 9 regions for management, but due to a lack of effective channel management capabilities and time and energy to strengthen management and guidance, in practice, large distributors do not adhere to regional principles, and price inversion and cross-regional selling occur frequently. Second, some sub-brands, especially buyout brands, developed alongside large distributors, resulting in intricate connections between large distributors and Wuliangye's internal operations. These complex interest links make it difficult for Wuliangye to fully implement its brand and channel 'slimming' strategy. Even by 2019, when Wuliangye introduced the 'control and profit sharing' (fuzzy rebate) model (the so-called 'control' refers to tracking and controlling the supply system and price system, and 'profit sharing' refers to redistributing profits among producers, channel distributors, and terminals), the status of large distributors was severely weakened, but they still contributed the majority of Wuliangye's revenue. According to the 2022 financial report, Wuliangye's total revenue from liquor products was 67.563 billion yuan, of which distribution model revenue was 40.492 billion yuan, accounting for nearly 60%. Among them, the top five distributors had total sales of 9.8 billion yuan, accounting for 13.25% of total sales revenue. Although Wuliangye has also taken measures such as exclusive stores and new retail platforms to gradually improve its control over channels, the role of large distributors remains indispensable. At present, Wuliangye has built a full price-band product system through high-end products like 'Pu Wu', mid-end products like Wuliangchun and Jianzhuang, and multiple regional low-end products, but the main product with brand influence remains 'Pu Wu'. According to Wuliangye's annual report, in 2022, the production of Wuliangye liquor products was 127,161 tons, a year-on-year decrease of 30.04%. However, the production of main Wuliangye products reached 32,768 tons, a year-on-year increase of 12.21%. Image source: Wuliangye official website Compared to the huge pulling effect of new retail channels like live-streaming e-commerce on mid- and low-end baijiu, the mainstream sales channel for high-end baijiu remains distributors. However, the core single product of Wuliangye liquor, the eighth-generation Wuliangye, is deeply troubled by price inversion—although Wuliangye's official guidance price is 1499 yuan (same as 53-degree Feitian Moutai), in actual sales, the transaction price of the eighth-generation Wuliangye remains around 965 yuan. Low channel profits lead to low enthusiasm among distributors. Poor distribution channels have led to product backlog at Wuliangye. In 2022, the overall inventory of Wuliangye liquor products was 23,328 tons, a year-on-year increase of 10.24%; among them, the inventory of Wuliangye products was 2,961 tons, an increase of 52.8% year-on-year. It is worth noting that Wuliangye's contract liabilities are on a downward trend: As of the end of 2022, Wuliangye's contract liabilities (usually, baijiu distributors pay the distillery in advance, and the payment is recorded as contract liabilities before product delivery; this indicator can reflect the popularity of the distillery's products in the market to a certain extent) were 12.379 billion yuan, a decrease of 1.52% compared to the beginning of the year, indicating that distributors' willingness to pay is also declining. To this day, Chinese baijiu has entered a stage of stock competition—from 2016 to 2022, baijiu production was 13.584 million kiloliters, 11.981 million kiloliters, 8.712 million kiloliters, 7.859 million kiloliters, 7.407 million kiloliters, 7.156 million kiloliters, and 6.712 million kiloliters, respectively, showing a 'six consecutive declines' over six years. In this situation, the growth momentum of liquor companies has shifted from sales volume and market share to comprehensive competition across price bands. In the thousand-yuan baijiu price band, Wuliangye's main product 'Pu Wu' faces downward pressure from Moutai 1935 and strong competition from Guojiao 1573 and Yanghe Dream Blue, making it difficult to achieve a 'substitute' for 53-degree Feitian Moutai. If Wuliangye wants to firmly hold the position of 'second in the baijiu industry', or even challenge Moutai's leading position, it still needs to solve the key issues of the large distributor model and price inversion.