Scan the QR code in the image to register High-proof liquor is the common destination for seasoned drinkers worldwide. But not every country can produce it. In China, the ancient fermentation process could only produce low-alcohol beverages like yellow wine (huangjiu). To achieve higher alcohol content, a technique called distillation is required. The basic principle of distillation is to fully ferment grains or substitutes, then heat the mash in a still and pass cold water through the condenser to collect the alcohol vapor, resulting in the final spirit. The principle is simple, but there's a prerequisite: raw materials. Either grains like wheat, sorghum, or corn, or substitutes like potatoes, sweet potatoes, or sugarcane. Without these sugar-rich materials, even the most skilled brewer cannot make liquor. For example, the classic solid-state fermentation process with Daqu (a type of starter) has always had the saying "three jin of grain for one jin of liquor." In the 1950s, the yield for 65-proof baijiu was only about 30%. So, looking at the world's major spirits-producing regions, they are either agricultural countries or have large granaries, or at least have agricultural production areas. Without Ukraine's wheat fields, Russians couldn't have vodka. This is the basic requirement of the brewing industry for its supply chain. In the new China of the 1950s, grain was a major issue. Brewing consumed large amounts of grain, making it a challenge for the industry. In 1951, Beijing produced 6 million jin of baijiu, consuming 20 million jin of grain. With food shortages already pressing, ensuring the supply of baijiu raw materials became a major topic in macroeconomic management. To save grain and increase output, the new government even convened 13 provinces and over 100 technical workers in Yantai for a technical攻关 (research project) with a single goal: learning how to make baijiu from sweet potatoes. So in that era, "eight dishes with one sip of liquor" might not indicate poor drinking capacity but rather reluctance to waste. In this context of overall material shortage, consumption was actually determined by supply capacity. Since 1951, when baijiu became a monopoly product, it was strictly included in planned management. Therefore, in an absolute seller's market, which baijiu sold more depended not on brand, taste, or craftsmanship, but on how much grain quota the distillery could obtain from the plan and how much production capacity it could build. Even Premier Zhou Enlai personally cared about whether Moutai could get sufficient high-quality sorghum—as a foreign exchange earner, famous liquors must not become "sweet potato liquor." The state had unified purchase and marketing, and enterprises produced according to plan, so even famous liquors could not truly compete in a commercial sense in terms of price, influence, or output. From 1949 to 1978, national baijiu output grew from 108,000 tons to 1.437 million tons, with a compound annual growth rate of only 9.3%. Whether it was Fenjiu, Moutai, or Wuliangye, they all held the title of famous liquor but were limited to specific usage scenarios. However, during these three decades, there was indeed a leader in China's baijiu industry: Luzhou Laojiao was an exception. Compared with other famous liquors, Luzhou Laojiao was not particularly distinguished in reputation. But it did something special: systematic technology. At that time, the brewing industry was a handicraft industry heavily dependent on veteran technicians, with skills passed down mainly through "oral instruction and years of practice." In 1959, Luzhou Laojiao published the first brewing textbook in new China, "Luzhou Laojiao Daqu Liquor," which standardized the production process for strong-aroma baijiu nationwide. From today's perspective, this is a typical case of "an enterprise influencing the industry." Luzhou Laojiao's process became the model and standard for strong-aroma baijiu, and its influence naturally grew. Further boosting its status, starting in 1979, commissioned by the Ministry of Commerce, the Ministry of Light Industry, and the Ministry of Agriculture, Forestry and Fisheries, Luzhou Laojiao successively ran 27 training classes on brewing techniques and finished product blending, training over 8,000 brewing technicians. It was truly the "Whampoa Military Academy" of Chinese baijiu. By exporting strong-aroma technology nationwide, Laojiao's influence penetrated high levels. In various diplomatic and social activities, Luzhou Laojiao was favored by leaders and became the exclusive allocated liquor for high-end occasions. This was Luzhou Laojiao's glory. With technological advantages and state support, Luzhou Laojiao became the first leading dragon in the baijiu industry, also holding the largest share and lasting the longest. In 1978, Luzhou Laojiao achieved an annual output of 16,000 tons, while Moutai and Wuliangye each produced less than 1,000 tons that year. Among the "Six Golden Flowers" of Sichuan liquor, Luzhou Laojiao's production and sales exceeded the total of the other five. During Luzhou Laojiao's reign, its factory directors never imagined that its position would be challenged. But things move and change. Soon, the era of a new baijiu king was about to arrive. After that, each round of industry leadership change had intriguing causes. Planned Economy: Fenjiu's Reign The reason that pushed Luzhou Laojiao off the throne was simple: reform and opening up, and economic transition. In 1978, with the implementation of the household contract responsibility system, domestic grain supply increased rapidly, even leading to grain surplus. This made brewing a major outlet for consuming surplus grain. By 1984, under the background of the "dual-track system" in many industries, the government began reforming the brewing industry. A key change was that the state no longer allocated grain to distilleries. To compensate for rising procurement costs under the market price system, the government reduced the baijiu tax rate from 60% to 30% and lifted production quota management. This became the origin of the expansion wave of famous liquor production capacity. Clearly, the implementation of the commodity economy increased the disposable income of both urban and rural populations. The demand for drinking and gifting good liquor had emerged, and the usage scenarios for famous liquors were no longer limited to government and diplomatic activities. Against this backdrop, a group of famous liquor enterprises began capacity expansion. From 1985 to 1987, Moutai completed an expansion project of 800 tons/year. In 1986, Wuliangye carried out its second expansion, with output exceeding 10,000 tons. Known as the "Second Moutai," Xijiu began its "double three thousand" capacity expansion in 1987. Famous liquors expanded production, and every county built factories, driving the prosperity of the baijiu industry. Supply expansion gradually kept pace with consumer demand. From 1978 to 1988, national baijiu output increased from 1.437 million tons to 4.685 million tons, with a compound annual growth rate of 12.5% over the decade. In this wave of every village brewing and every county starting production, the market still had seller's market characteristics. Whoever expanded capacity faster meant having sufficient products to supply the market. This gave light-aroma baijiu a characteristic that made it possible to surpass strong-aroma. The light-aroma process has a feature: no pit constraints, short production cycle, low cost, and high yield. Therefore, in capacity expansion, it had an advantage that strong-aroma could not match. It was this advantage that created a golden age for light-aroma baijiu and also created the new leader: Fenjiu. In the rapid expansion competition, neither Luzhou Laojiao, Wuliangye, nor Moutai could compare with Fenjiu. In 1985, after institutional reform, Shanxi Fenjiu successfully doubled its capacity to over 11,500 tons, with annual output exceeding 8,000 tons, accounting for half of the output of the 13 famous liquors nationwide. In contrast, Wuliangye's total capacity exceeded 10,000 tons in 1986, and Moutai only achieved this in 2000. In 1986, Fenjiu became the first distillery in the country to exceed 10,000 tons of output. In 1987, it achieved the highest revenue, surpassing the combined revenue of the 2nd to 9th places in the top ten of the baijiu industry, and its annual profits and taxes exceeded 100 million yuan for the first time. From 1988 onward, Fenjiu's sales revenue and economic benefits ranked first among national food and beverage enterprises for six consecutive years. Fenjiu became the famous "Fen Boss," and the most critical reason behind this was the capacity expansion advantage conferred by the aroma type in a supply-driven market. Entering the 1990s, the landscape changed again. In July 1988, the state unified the price liberalization of 13 famous liquors, implementing market regulation. Baijiu enterprises began to operate independently and bear their own profits and losses. Prices of famous liquors rose accordingly, with an average increase of 10-20%. Moutai, Wuliangye, Jiannanchun, Laojiao, Fenjiu, and Gujing rose to 140 yuan, 80 yuan, 36 yuan, 75 yuan, 35 yuan, and 40 yuan, respectively. In this round of price increases, Wuliangye for the first time surpassed the ancient leader Luzhou Laojiao and left "Fen Boss" behind. It initially established the consumer perception of "famous liquor, good liquor." In the following year, some strategic differences fundamentally changed the landscape. In 1988, the price index rose by 34.8%. To curb inflation, in 1989, the central government tightened monetary policy and restricted government consumption. "Famous liquor not on the table" was the popular slogan that year, even made into posters and pasted on the walls of restaurants and guesthouses. This caused baijiu output to decline to 3.987 million tons, a year-on-year decrease of 15%, and distilleries successively lowered product prices to adapt to the market. In this wave of price cuts, Moutai's price dropped by up to 50%, Wuliangye fell to 50 yuan, and brands like Fenjiu chose the "from famous liquor to civilian liquor" route in one step. To be fair, in the uncertain macro environment at the time, this was a quick response to the market. But unexpectedly, inflation was quickly brought under control, and the consumption capacity brought by the rapid development of the commodity economy became the best source of demand for the baijiu industry. During this adjustment period, Gujing Gong's performance was also commendable. By promptly adopting strategies such as "reducing alcohol content and price," "debt management," and "value-preserving sales," while developing 55 and 38 degree Gujing Gong liquors, as well as a new product Gujing Tequ priced at only 6 yuan, the market proved that Gujing Gong's strategy of reducing degree and price was effective, and it became the only enterprise among the nationally known distilleries in 1989 that did not see a decline in revenue. Thus, after three years of adjustment, the baijiu industry entered a period of prosperity. National baijiu output increased from 4.761 million tons in 1991 to 7.087 million tons in 1997, with a compound annual growth rate of 6.9%. During this process, the old leaders Laojiao and Fenjiu chose price reduction strategies, which objectively weakened their high-end brand images and missed the best development opportunities. In contrast, Moutai, Wuliangye, and Jiannanchun insisted on price increases and became the biggest beneficiaries of this industry change. The first-tier landscape was basically formed during this period. Market Transition: Strong-Aroma Leader There is a saying that choice determines destiny, which is most apt at some key points in the baijiu industry. In 1989, amid the industry reform, Wuliangye's management chose the high-end route of price increases. It was undoubtedly a correct choice. It is said that whether to cut prices or raise prices was controversial within Wuliangye, but the factory director at the time made the final decision: This is the best quality baijiu in China; it cannot be discounted. While raising prices, Wuliangye chose to continue expanding production. Throughout the 1990s, Wuliangye achieved three expansions, increasing capacity to 90,000 tons while raising prices to over 100 yuan, surpassing Shanxi Fenjiu in both aspects. From then on, the throne of industry leader was formally handed over from Fenjiu to Wuliangye. The high-end route was only the first step for Wuliangye toward becoming the industry leader. What truly solidified its position was its OEM licensing and the large dealer model in distribution. In 1990, Wuliangye had only three brands: the high-end "Wuliangye," and the low-end "Jianzhuang" and "Yidixiang." To absorb excess capacity, improve capacity utilization, and expand revenue, in 1994 it launched OEM and buyout operation models, putting Wuliangye on a fast track. OEM means Wuliangye is responsible for production, with customized branding. Buyout operation means Wuliangye handles product development, while dealers are fully responsible for marketing. During the rapid expansion phase, Wuliangye adopted a large dealer management model, where these agents held pricing power, fully managed sales in their regions, and assisted the manufacturer in managing smaller dealers and exclusive stores. "Dealer general agent buyout operation" + brand OEM became Wuliangye's magic weapon for rapid expansion. For example, in 1994, Wuliangye cooperated with Fujian Shaowu Sugar and Wine Company to launch the OEM brand "Wuliangchun," and the company bought out the national distribution rights for the "Wuliangchun" brand. In the second year after the buyout, sales reached 1,670 tons, and later set a record of 8,580 tons. Meanwhile, another OEM brand "Wuliangchun" saw revenue grow from 9.39 million yuan in 1995 to 67.12 million yuan in 1997, an increase of 615%. The licensed brands "Jinliufu" and "Liuyanghe" also performed well. Within just five years, they became major products in the mid-range baijiu market, with annual total sales accounting for about one-fifth of Wuliangye's total annual sales. Clearly, OEM brands became a new revenue growth point for Wuliangye, which also ranked first in national market product competitiveness for three consecutive years. In 1995, Wuliangye invested 150 million yuan in supporting projects; in 1997, it built China's first blending center with an annual packaging capacity of 80,000 tons; in 1999, it built a modern large plastic packaging workshop covering 15,000 square meters; in 2000, it invested heavily to build a 40,000-ton brewing workshop. By then, Wuliangye Group had become a "ten-mile liquor city" covering 7 square kilometers. During rapid expansion, Wuliangye's capacity grew from 90,000 tons in 1994 to 200,000 tons in 2002, with the number of brands under it reaching over a thousand at its peak. Its revenue scale ranked first in the industry from 1995 to 2002, and its market share rose to a peak of 45% in 2002, with sales more than four times that of the second-place company. Light-aroma enterprises in the northwest and sauce-aroma enterprises in the southwest also began to switch to strong-aroma production. The expansion of capacity and the characteristics of the strong-aroma process allowed Wuliangye to significantly increase both high-end and low-end liquor volumes, laying a solid foundation for its rapid development and its claim to the "king of liquor" title. But every coin has two sides. The empire built quickly on the large dealer system and OEM would gradually expose many problems in the subsequent competition, and also became the opportunity for another change of leadership in the baijiu industry. Capital Era: The Duel of Two Giants Driven by marketing model reforms, Wuliangye took the industry's top spot. One reflection of this leadership was its market capitalization performance. Moutai listed on the A-share market in 2001, with revenue of 1.618 billion yuan, net profit of 328 million yuan, and a market cap of only 9.25 billion yuan. In the same year, Wuliangye had revenue of 4.742 billion yuan and net profit of 811 million yuan, but its market cap had already reached 19.364 billion yuan, twice that of Kweichow Moutai. This contrasts with today's situation. Currently, the high-end baijiu competitive landscape has formed, and the term "Mao Wu Lu" not only refers to the three high-end enterprises but also indicates their industry ranking. As of the close on June 30, 2020, Moutai's market cap was 2.58 trillion yuan, Wuliangye's was 1.16 trillion yuan, with Moutai's market cap being 2.23 times that of Wuliangye. The change of leadership is clearly directly related to some historical factors. In the eyes of later researchers, one of Wuliangye's major mistakes was its failure to recognize the hidden problems in the large dealer system and OEM licensing that had driven its rapid growth. Among these, the main problem with the large dealer system was the manufacturer's weak control over dealers. The pricing power for products was mainly in the hands of large dealers, including not only many OEM products but also Wuliangye's flagship high-end products. The role of large dealers was undoubtedly significant during Wuliangye's rapid development, but when the entire baijiu market shifted from a blue ocean to a red ocean, capacity gradually saturated, competition intensified, and the market entered a clearing phase. Many licensed brands not only failed to contribute profits but also greatly increased Wuliangye's operating costs, impacted its high-end market, and dragged down its overall brand value. Due to weak control over large dealers, regional dumping and low-price selling were common, and price inversions frequently occurred. From Moutai's development, the "manufacturer-led small dealer system + core large single product" strategy shows Moutai's stronger control over dealers and more persuasive pricing power. Wuliangye truly realized the drawbacks of the large dealer system around 2008. From 2005 to 2008, the top five dealers accounted for over 70% of Wuliangye's revenue, while Moutai's was around 10% during the same period. It wasn't until 2009 that the large dealer system began to improve, dropping below 20% by 2010. Realizing the problem, Wuliangye began marketing reforms. From 2010, it established seven marketing centers; in 2014, it reformed the large dealer system, implementing a core large dealer direct distribution model; in 2017, it entered the Li Shuguang era, launching a "second startup," splitting the original seven marketing centers into 21 provincial war zones and 60 marketing bases, and adopting the "hundred cities, thousand counties, ten thousand stores" project to strengthen terminal control. At the same time, it adopted digital channel management, introduced control and profit sharing for the eighth-generation Wuliangye, and accelerated channel flattening and consumer terminal management. It can be said that Wuliangye's reforms to its channel and product operation model have not stopped to this day, but it was already late to realize the problem and start addressing it. Moutai's overtaking of Wuliangye first showed in revenue and net profit. Net profit is an important indicator for measuring corporate profitability, especially in vertical comparisons within the same industry. Before 2005, Wuliangye's net profit was always higher than Moutai's, but in 2005 it was surpassed by Moutai and never caught up again. That year, Wuliangye's net profit was 791 million yuan, while Moutai's was 1.119 billion yuan. In terms of revenue scale, Wuliangye was first overtaken by Moutai in 2008, when Wuliangye achieved revenue of 7.933 billion yuan and Moutai 8.242 billion yuan. However, in 2009, Wuliangye's revenue exceeded Moutai's again. It wasn't until 2013, due to the national anti-corruption policy and the plasticizer incident, that the industry entered a deep adjustment period. In the industry's difficulties, Moutai truly demonstrated brand resilience, and its position as the industry leader was officially taken over. In pricing, before 2008, Wuliangye always held the initiative in price increases and its prices were higher than Moutai's. Wuliangye raised prices frequently, while Moutai had its own pace, with a price difference of about 80 yuan between them. Starting in 2006, Moutai accelerated price increases, while Wuliangye's price increase room was limited. It wasn't until after 2008 that Moutai's price first caught up with Wuliangye and gradually took the initiative in pricing. After that, Wuliangye had to adopt a gradual follow-the-leader pricing strategy. It can be seen that Wuliangye was truly surpassed by Moutai after its net profit was overtaken in 2005, when the disadvantages of Wuliangye's channel and product operations began to show. Although Moutai's price was not as high as Wuliangye's, Wuliangye's brand strength was diluted by numerous licensed brands, and under the large dealer system, Wuliangye had weak pricing power, with frequent low-price dumping in channels. In contrast, after market-oriented reforms, Moutai truly achieved both volume and price increases through the small dealer channel model, telling its brand story well, and continuously expanding capacity. At the Foot of the Mountain, Wolves Surround The upper limit of the affluent class's consumption capacity is the main reason for Moutai's unlimited price increases, a well-known fact. But the question is: why can Moutai do it, but Wuliangye cannot? Looking at the top "Mao Wu" pair, Wuliangye's terminal price has never been effectively raised, with a price of around 1,100-1,200 yuan, far behind Feitian Moutai's around 3,000 yuan. The price gap is only the surface of the problem. The reason Moutai's terminal price can remain firm and rise is essentially three points: telling the "Moutai story" well, high category focus, and channel reform. Before 2000, compared with other "big factories" like Wuliangye, Fenjiu, and Luzhou Laojiao, Moutai was not prominent. Moutai's market-oriented reform path was relatively late. Before 1998, it mainly produced under "plan plus approval slips." In the first seven months of 1998, Moutai Distillery sold only 700 tons of liquor, which is unimaginable today. In fact, Moutai's "low profile" was related to the macro environment at the time. Due to grain shortages, Moutai's production cycle was long and consumed a large amount of grain, with a consumption of over 4.5 tons per ton of liquor, compared with 2-2.5 tons for light-aroma and 3-3.5 tons for strong-aroma. Thus, grain shortage and capacity constraints were important reasons for Moutai's slower development since the opening of baijiu pricing rights. By 1991, Moutai's capacity was still only 2,000 tons, and sales had just exceeded 100 million yuan. Before starting market-oriented reforms, Moutai sold 70% of its products through sugar and wine companies, with little investment in terminals. Since Moutai's market-oriented reform began in 1998, by 2004 it had formed a "small dealer" channel model of "exclusive stores + regional general dealers + special dealers." Unlike Wuliangye's large dealer system, Moutai had stronger control over dealers, and marketing and pricing policies were well executed. In product strategy and marketing, Moutai focused on the high-end large single product Feitian Moutai, while using vintage liquors and other non-standard products to further enhance brand value. Its brand marketing focus was very clear. In contrast, Wuliangye's ability to "tell stories" was much weaker, relying more on existing brand recognition; "industry second" seemed to have become an inherent perception. In terms of origin culture, although Yibin also has its characteristics, the saying "You can't make Moutai outside Moutai Town" is well known and hard to surpass. From the perspective of marketing reform and category focus, Wuliangye's reforms were clearly "half a beat slow," failing to complete the transformation in time. By the time it realized the problem in 2008, its brand strength had already been surpassed by Moutai. Beyond Moutai, what may put more pressure on Wuliangye are other baijiu brands entering the thousand-yuan price band. In recent years, amid the consumption upgrade wave, major liquor companies have launched thousand-yuan high-end strategies, carving up the high-end market. Examples include Qinghua Lang (Langjiu), Jinsha Zhaiyao, Jiugui Neican, Yanghe Dream Blue M9, Shede Zhihui Shede Collection, and Guotai Longyao vintage liquor. In addition to national large distilleries, regional distilleries have also begun high-end paths. A typical example is Laobaigan. Hengshui Laobaigan, as a regional famous liquor in Hebei, derives over 60% of its revenue from Hebei, with core products mainly in the mid-to-low-end range under 500 yuan. In 2018, to enhance brand value and push high-end, it launched Laobaigan 1915, priced at 1,688 yuan. Similarly, Niulanshan, the leader in the low-end liquor segment, also released its high-end new product, Jukui Shenghao, priced at 1,598 yuan at the end of May. The king of the low-end segment entering the high-end price band is also a way to enhance its brand value. For regional distilleries, the purpose of launching high-end products is not to immediately drive sales but to use price increases to enhance product brand value and price positioning. For Moutai, this kind of market fragmentation has limited impact, but for Wuliangye, which lacks sufficient brand strength, it may be hard to completely ignore. In the 1990s, Wuliangye became the industry leader due to its high-end strategy, aggressive capacity expansion, and channel marketing. Later, it was surpassed by Moutai for two reasons: first, in the transition from "channel competition" to "brand competition," it failed to tell its brand story well, and its brand characteristics were not as prominent as Moutai's; second, its channel and brand strategy reforms were too late, failing to adjust in time and losing the initiative in price increases. The question arises: can Wuliangye return to the top position? The answer is that Wuliangye missed the best opportunity. It is now very difficult for Wuliangye to catch up. From the competitive landscape, the high-end baijiu competition pattern has formed and is tending to solidify. Moutai's position as the industry leader and its brand image are well known to the Chinese public. In other industries, competitive patterns are often distinguished by market share, but product price differences are not obvious, such as in dairy products, condiments, and manufacturing. But in the baijiu industry, the competitive pattern is not only about market share but also product price and brand strength, a winner-take-all pattern. From terminal prices, Moutai is around 3,000 yuan, while Wuliangye is in the 1,100-1,200 yuan range. The huge price difference already indicates Moutai's industry position and brand strength. Moutai's huge gap between guidance and terminal prices, and the supply shortage of its products, create spillover demand for high-end products, which also presents opportunities for other high-end products like Wuliangye, Guojiao, and Qinghua Lang. Achieving brand leapfrogging in the baijiu industry is very difficult. Continuous price increases are sometimes just a corporate strategy. After price increases, price inversions and low-price dumping still occur frequently. The core of price leapfrogging is still the enhancement of brand strength and public recognition. Clearly, Wuliangye has lagged behind Moutai in brand strength and public recognition, and the chance of returning to the top is very slim. Currently, the only possibilities are if Moutai faces major operational problems or if Wuliangye achieves a catch-up through category innovation in a major industry change. But waiting for Moutai to have operational problems is like chasing a mirage. Even if problems arise, Moutai's strong brand power and recognition give it a high fault tolerance. Category innovation in the baijiu industry needs time to be verified, and whether it can become a significant growth pole for the company or even the industry remains unknown. For Wuliangye's own reforms, if it had discovered the problems in the large dealer system and OEM licensing earlier (e.g., in 2003) and taken the high-end route in time, the gap with Moutai might have been much smaller, providing more room for imagination in catching up. Source: Alpha Factory Research Institute (ID: alpworks) -END-