Click image for details Baorun's hit product RIO premixed cocktail, after two years of rapid growth, has shrunk like a bubble. Recently, Shanghai Baorun Investment Holding Group Co., Ltd. (hereinafter referred to as "Baorun") released its 2016 performance report, showing a 60% year-on-year drop in revenue and a loss of 142 million yuan. In fact, the premixed cocktail market entered a downturn at the start of 2016, and Baorun, which focuses on this category, was hit hardest. Baorun began incurring losses in the second half of 2015. Although in December 2016, Baorun increased capital in Bacchus Liquor, which produces RIO premixed cocktails, to expand capacity, the RIO premixed cocktail, which once brought huge profits to Baorun, has lost its sales magic as the market bubble burst, becoming the "culprit" dragging down the company's performance.

Major Performance Slump After two years of rapid growth, the premixed cocktail market shrank like a bubble, and Baorun, the leading company, suffered huge losses in 2016. On the evening of February 24, Baorun released its 2016 performance report, showing that revenue dropped 60.22% year-on-year to 935 million yuan, operating profit fell 142.76% to -266 million yuan, and net profit dropped 128.39%, resulting in a loss of 142 million yuan. Baorun explained in the announcement that the main factor affecting performance was the continuous digestion of channel inventory in the premixed cocktail business in 2016, leading to a decrease in shipments of premixed cocktail products and a significant decline in main business revenue compared to the previous year.

With the arrival of the premixed cocktail downturn, Baorun's performance experienced a roller-coaster decline. According to Baorun's financial reports, the company's revenue for the four quarters of 2016 was 216 million yuan, 204 million yuan, 326 million yuan, and 189 million yuan, respectively.

In fact, according to Baorun's financial reports, in the fourth quarter of 2015, Baorun's net profit had already lost over 200 million yuan. In the first three quarters of 2016, Baorun's revenue was 746 million yuan, down 66.07% year-on-year, and net profit continued to lose 104 million yuan, a decline of 114.84%.

While performance declined, inventory also became a stumbling block for Baorun. In fact, Baorun spent 2016 working to reduce inventory. The 2016 interim report showed that Baorun made significant progress in digesting distributor inventory, which was slightly below normal safety stock levels. In the third quarter, revenue was 326 million yuan, an increase from the previous two quarters.

Sealand Securities' analysis of Baorun's third-quarter report showed that due to the broadcast of "The Voice of China" in July 2016 and "Love O2O" in August 2016, RIO sales were stimulated, and compared to the same period last year, Baorun's channel inventory pressure decreased. Currently, RIO channel inventory has returned to normal levels, approximately equivalent to two months of sales for Baorun in 2016. In its third-quarter report, Baorun stated that channel inventory had dropped to a reasonable level in 2016, and the fourth quarter's operating conditions were expected to continue improving. However, in the fourth quarter, Baorun's revenue still showed a decline, only reaching 189 million yuan.

Cai Xuefei, a marketing expert in the liquor industry, analyzed that the fourth quarter is the traditional peak season for liquor sales, which is precisely the off-season for premixed cocktails like RIO, as they cannot become a choice for traditional Chinese holiday gifts or family gatherings. In addition, industry insiders revealed that Baorun's inventory reduction efforts in the fourth quarter were not successful; instead, they pressured distributors to stock up again, causing many distributors to collapse and exit the cooperation system.

Zhu Danpeng, a researcher at the China Brand Research Institute, believes that the current premixed cocktail market share is approximately 3-4 billion yuan, and Baorun alone can meet market demand. However, widespread producer entry led to oversupply, pushing the premixed cocktail market directly into a recession.

RIO Loses Its Magic Before Baorun acquired Bacchus Liquor, Bacchus's performance was already showing good growth. Data shows that in 2012, 2013, and 2014, Bacchus's revenue was 58.807 million yuan, 186 million yuan, and 970 million yuan, respectively, with net profits of 4.996 million yuan, 20.212 million yuan, and 290 million yuan.

In 2015, after being divested by Baorun for six years, Bacchus was bought back by Baorun at a high price of 4.945 billion yuan, and Baorun's main business expanded from solely flavor and fragrance manufacturing to include premixed cocktails.

RIO did not disappoint Baorun. According to Baorun's 2015 interim report, during the reporting period, Baorun's revenue surged 278.43% year-on-year to 1.688 billion yuan, and net profit soared 329.5% to 613 million yuan.

Baorun's 2015 annual report showed that sales in the premixed cocktail segment increased 125.35% year-on-year to 2.213 billion yuan, accounting for 94.14% of the company's revenue. RIO's market share rose significantly, making it the leader in the premixed cocktail industry.

At the same time, due to its positioning toward young consumers, Baorun made significant investments in variety shows and film/TV product placements. Data shows that in 2015, Baorun's advertising expenses reached 330 million yuan; in the first half of 2016, Baorun's investment in advertising and marketing reached 154 million yuan.

Cai Xuefei stated that from the perspective of the entire beverage market, with the generational shift of consumers, the importance of youthfulness, fashion, and low alcohol content is gradually emerging, and premixed cocktails have inherent advantages. At the same time, traditional liquor failed to keep up with changes in pace, missing out on this market, leading to premixed cocktails as a niche product being hyped by capital, resulting in a period of rapid growth.

In fact, Baorun's revenue began to show signs of decline in the second half of 2015. In the third quarter of 2015, revenue was 510 million yuan, and net profit was 88.16 million yuan, less than 100 million yuan; in the fourth quarter, revenue was only 152 million yuan, and net profit lost 201 million yuan.

Cai Xuefei analyzed that premixed cocktails have a very low entry barrier, low technical content, and are easy to replicate. At the same time, the youth-oriented and fashion-oriented marketing that this category relies on has encountered problems. Companies mistakenly interpret marketing as idol drama placements and topic hype, believing that this constitutes brand, and treat visibility as the sole criterion for measuring brand. However, visibility does not equal purchasing power or brand value; brand should be reflected in channel management and consumer word-of-mouth.

Zhu Danpeng pointed out that Baorun invested heavily in advertising and film/TV product placements, hoping to boost profit growth, but in fact, these increased the company's burden, leading to declines in both revenue and profit.

Magic Cannot Be Reproduced Although RIO has largely dragged down Baorun's performance, Baorun has not planned to give up the premixed cocktail business.

In December 2016, Baorun announced that it would increase capital in its wholly-owned subsidiary Shanghai Bacchus Liquor Co., Ltd. by 450 million yuan, and after the capital increase, it would further increase capital in Bacchus Liquor (Chengdu) Co., Ltd. and Bacchus Liquor (Foshan) Co., Ltd. by 350 million yuan and 100 million yuan, respectively. The announcement stated that the capital increase was mainly for capacity expansion projects.

In addition, Baorun successively launched new products, including the "ORIGINAL" series with 5% alcohol and the "STRONG" series with 8% alcohol. However, sales of the new products were not ideal. A search for "RIO" on Tmall shows that the monthly sales volume of the RIO 5-degree original cocktail set was 597 units, while the STRONG series had only 358 units, showing no significant boost to sales.

Cai Xuefei stated that although RIO is currently underperforming, the industry is relatively optimistic about RIO because of its strong brand communication, good visibility, and a certain consumer base. Premixed cocktails will enter a long adjustment period, and RIO has a first-mover advantage. At the same time, with the disguised exit of major liquor companies such as Wuliangye, Gujing Gongjiu, and Shuijingfang, RIO's competitive pressure has decreased. Therefore, if Baorun itself does not have too much ambition, it can still achieve good development in the premixed cocktail market in the future.

Zhu Danpeng believes that premixed cocktails are actually a flash in the pan. Consumers were initially curious about premixed cocktails, but because the entry barrier was too low, a large number of products flooded in, leading to market overexploitation. At the same time, as young consumers increasingly value health, the rich colors of premixed cocktails leave an impression of high pigment and flavor content, which has become a product disadvantage.

It is understood that RIO is currently mainly concentrated in supermarkets and nightlife venues, with a relatively single sales channel. Sealand Securities research report pointed out that cocktails are a non-mainstream alcoholic beverage, and young people have low repeat purchase rates from supermarkets; however, the catering channel is relatively blank, and as an on-premise consumption venue, the catering market has higher repeat purchase rates. Opening up the catering channel could lead to higher growth for the premixed cocktail industry.

Beijing Business Today reporter sent an interview outline to Baorun regarding its 2016 performance and plans for the 2017 premixed cocktail market, but as of press time, the company had not responded.

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