Where Did the 20 Billion Yuan Pre-mixed Wine Market Go?

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When it comes to pre-mixed cocktails, everyone should be familiar with them.

In 2013, the popularity of pre-mixed cocktails was even more explosive than today's internet-famous beverage, Genki Forest. How optimistic was the market at that time? It was widely believed that the explosion of pre-mixed cocktails signaled sustained rapid growth for the pre-mixed wine market. At that time, some brokerage research reports even made bold predictions: by 2020, the pre-mixed wine market would conservatively reach 20 billion yuan.

Consumers flocked to it, and investors went crazy for it.

At that time, Baorun Co., Ltd., which launched RIO, saw its stock price surge more than 9 times within less than a year; and Black Cow Food, which followed the trend by launching the pre-mixed cocktail brand TAKI, also gained nearly double.

But clearly, the market's judgment was wrong.

By 2019, RIO's sales were only 1.279 billion yuan. Considering that RIO accounts for as much as 84% of the entire pre-mixed wine market, in other words, the domestic pre-mixed wine market size in 2019 was approximately 1.5 billion yuan.

In the first half of 2020, RIO's sales were 702 million yuan, roughly the same as the same period last year. So, where did the 20 billion yuan pre-mixed wine market go?

-01- High Opening, Low Walking Pre-mixed Wine

It is appropriate to describe the domestic pre-mixed cocktail market as "high opening, low walking."

In 2013, RIO gained widespread attention from young consumers through overwhelming marketing, such as product placement in popular TV dramas, program sponsorships, and celebrity endorsements, leading to an explosive performance.

From 2013 to 2015, RIO's sales grew from 186 million yuan to 982 million yuan in 2014, and then reached 2.213 billion yuan in 2015. Such performance can only be described as astonishing.

Of course, RIO's sales growth was largely driven by marketing. In 2015, Baorun's selling expenses reached 922 million yuan, nearly half of its revenue. But even so, Baorun still achieved a net profit margin of 21.27%.

At that time, the domestic pre-mixed wine market was just starting, and Baorun was the absolute leader. Once the logic held, Baorun would undoubtedly become a new money-making machine. In the capital market, this story was extremely "sexy."

In less than a year, Baorun's stock price surged more than 9 times; and Black Cow Food, which followed the trend by launching the pre-mixed cocktail brand TAKI, also gained nearly double.

Unfortunately, the pre-mixed wine market did not develop as investors expected. In fact, in the second half of 2015, RIO began to see sluggish sales.

In the third quarter of 2015, Baorun's revenue began to decline. In the fourth quarter, revenue was only 153 million yuan, and it even recorded a loss of 200 million yuan.

In 2016, Baorun attempted to use marketing to re-stimulate market growth. Baorun's annual selling expenses reached 741 million yuan, but with little effect. Under huge channel inventory pressure, RIO's annual sales were only 813 million yuan.

After experiencing market collapse and inventory consumption, the real market demand for pre-mixed wine emerged. In 2017 and 2018, RIO's pre-mixed wine sales were 1.029 billion yuan and 1.045 billion yuan respectively, with the market demand for RIO stabilizing at around 12 million cases.

In 2019, benefiting from the growth of the cultivated big single product "Weixun" series, RIO cocktail sales revenue increased by 22.2% year-on-year, but still only reached 1.279 billion yuan.

RIO's situation basically reflects the predicament of the domestic pre-mixed wine market. By sales volume, RIO's market share in 2019 was as high as 84%. That is, the domestic pre-mixed wine market sales volume was about 15 million cases, with a market size of about 1.5 billion yuan.

This is far from the previous brokerage predictions of a market size of over ten billion yuan, and even less than one-tenth of the previous forecast. The trend of the domestic pre-mixed wine market has clearly surprised most people.

-02- Behind the Underperformance: Differences in National Conditions

The underperformance of the domestic pre-mixed wine market can be described as "unexpected but reasonable."

The high expectations of domestic investors for the pre-mixed wine market were mainly influenced by neighboring Japan. Japan's eating habits are relatively similar to China's, and it took the lead in becoming a developed country, making it a good reference sample.

In 2014, Japan's per capita consumption of pre-mixed wine was 7 liters per year, while China's was only 0.11 liters per year. The huge gap implied an attractive room for improvement in the domestic pre-mixed wine market.

But simple comparison is too simplistic. To some extent, Japan's pre-mixed wine development logic does not fully apply to China. The large scale of Japan's pre-mixed wine market is essentially due to its "cost-performance advantage," which replaced part of the beer market.

Pre-mixed wine is a substitute product introduced by Japanese beer manufacturers in response to beer tax pressure. The Japanese government stipulates that beverages with a malt ratio of 67% or more are beer, and one liter of beer requires a tax of 222 yen.

In 1994, to reduce tax pressure, Japanese beer manufacturer Suntory launched sparkling liquor with a malt ratio below 67%, with a tax of only 152.7 yen per liter and a lower price.

However, the Japanese government subsequently revised the liquor tax in 1996, making sparkling liquor with a malt ratio between 50% and 67% subject to the same tax as beer. Reluctantly, breweries launched sparkling liquor with a malt ratio below 25% to cope with the policy change.

In 2003, the government raised taxes on sparkling liquor with a malt concentration below 25%, and Suntory again created the third-category beer (with a malt ratio of 0%), which had an even lower tax rate, only 69 yen per liter, and a lower price, with a unit price generally only half that of regular beer. Major beer manufacturers followed suit.

To this day, third-category beer has become a force to be reckoned with in the Japanese liquor industry. In 2018, in Japan's beer beverage industry, beer accounted for 49.2%, sparkling liquor 12.7%, and third-category beer 38%.

Pre-mixed wine belongs to the third category of beer. In 2018, Japan's pre-mixed wine market sales exceeded 200 million cases (single case 250ml*24), with per capita consumption of 1.6 cases. It is clear that Japan's demand for pre-mixed wine is extremely strong.

But under the special tax system, the development of Japan's pre-mixed wine market is an exception and has little reference significance for China's pre-mixed cocktail industry.

On the one hand, domestic beer tax rates are lower, with taxes and surcharges not exceeding 10% of revenue. Although the beer market has entered an era of stock, with production declining year after year, beer manufacturers still stick to their main business and have no motivation to launch pre-mixed wine and cultivate the market.

On the other hand, on the consumer side, domestic pre-mixed cocktails are generally priced higher than beer, making it difficult to encroach on the beer market. Taking RIO as an example, the Weixun series products are 330ml and generally priced between 6-8 yuan, while domestic beer brands of the same capacity are generally 3-4 yuan.

Due to the above reasons, it is difficult for pre-mixed wine to grow by encroaching on the beer market in China as it did in Japan. In the past few years and in the future, the pre-mixed wine market can only be driven by consumers' diversified choices.

Therefore, pre-mixed cocktails in China will still find it difficult to shake off the label of niche liquor. It will also be difficult for them to grow and thrive like in neighboring Japan.

-03- Insights from RIO

"Its rise is swift, and its fall is sudden."

The food and beverage industry is prone to producing big bull stocks, and marketing can often turn the ordinary into the magical, creating sales hits in a short time. But after the marketing hype fades, the true demand for the product becomes apparent.

For consumer goods, once the market heat passes and consumers have not yet developed purchasing habits, the huge channel pressure may directly crush the company.

Therefore, for investment in such consumer goods, tracking "heat" is important. So, how to track the "heat" of such consumer goods?

Operating cash flow is a good indicator. Compared to revenue data, which is easy to adjust and lags, cash flow indicators better reflect real-time product demand. This was fully demonstrated in Baorun's pre-mixed wine story.

In the first half of 2015, Baorun's cash received from selling goods and providing services was 2.355 billion yuan, while the company's revenue for the period was only 1.688 billion yuan. This meant that product sales were booming and distributors were actively paying.

But in the third quarter of 2015, Baorun's cash flow picture changed abruptly. During the same period, sales cash increased by 519 million yuan, while operating revenue also increased by only 510 million yuan. The increase in sales cash was basically equal to the increase in operating revenue, indicating that channel merchants' enthusiasm for stocking up had declined, reflecting poor terminal sales.

In addition to cash flow, the production date of products on sale can also reflect the terminal sales situation to a certain extent.

For fast-moving consumer goods such as beverages and beer, channel inventory within two months is considered normal sell-through. In early 2015, RIO had good sell-through, and out-of-stock situations often occurred in major supermarkets.

By August 2015, the production dates of RIO products in first-tier cities were generally May-June, and in second- and third-tier cities March-May, which meant that a large amount of distributor inventory in the second quarter was transferred to terminals in July and August, putting pressure on terminal sell-through.

In January 2016, terminal sales stagnated. The production dates of RIO products in first-tier cities were mostly May-July 2015, and in second-tier cities March-May 2015, indicating that terminal product digestion was not ideal. This already foreshadowed the "halving" of Baorun's revenue that year.

The nature of consumer goods determines that "overnight fame" does not only happen to RIO. In recent years, hit products such as "Jiangxiaobai" and "Genki Forest" have emerged one after another.

But rapid growth now does not mean large future space; even if future space is large, it does not mean that current high growth can be sustained, and the market may still need a long cultivation process.

In general, daily consumer goods are not far from our actual lives. While chasing the trend of hit consumer goods, we must undoubtedly constantly observe market sales changes. This may help us avoid repeating the mistakes of "RIO."

Source: Understanding Finance (ID: dudongcj), Author: Dong Wuying