Foreign investment has brought valuable marketing nous to China's rice wine-based spirits category but, Mark Godfrey writes from Beijing, there has so far been little change in the balance of power in the market.
A collapse in demand for premium baijiu, China's fiery clear rice wine-based spirit, may suggest investments already made by multinational drinks firms were ill-timed. However, marketers and analysts believe there is still growth potential in the baijiu market, with the drink remaining enduringly popular with consumers.
Nevertheless, a battering for China's export-driven economy has badly dented sales at premium producers like Wuliangye and Maotai.
Enrico Perlo, China-based manager for Guala Closures, which makes seals for bottlers including several baijiu makers, says sales during the peak New Year holiday period fell dramatically this year because companies were reluctant to hand over the expensive bottles of baijiu traditionally given at that time of year. But lower-priced brands are still selling well, he says.
Foreign investors who have entered the premium baijiu sector include LVMH which acquired a majority stake in Wen Jun in 2007 and has since repackaged it using an international design agency. In 2006, Diageo bought a 43% stake in Quanxing, another leading baijiu brand in Sichuan province, raising its stake to 49% last year. In 2007, Vin & Sprit formed a joint venture with JianNanChun (JNC) for a piece of what it claims is a baijiu market worth US$19bn a year.
However, foreign companies are unlikely yet to become serious players, says Huang Li Ming, alcoholic drinks analyst at Donguan Securities, "since most of the best brands are all state owned". Beer and soft drinks firms, he explains, "are much more open to outside investment".
This is supported by comments from Zhang Shidi, professor of finance at China's Academy of Social Sciences. According to Shidi, while investment in baijiu makes sense - the best baijiu brands are very profitable - acquisition opportunities are thin on the ground. "Local governments are just not willing to let go," he says. "Baijiu brands are like a status symbol to a local governor."
Shidi, who worked for spirits maker Brown Forman before taking up his professorship, says he travelled China seeking distilleries for foreign buyers. "We didn't do any deals; it was so complicated to buy any of those distilleries."
The foreign investment that has been seen in the baijiu market has been portrayed as an opportunity to bring some new 'cool' to an age-old drink. But Perlo believes the impact of foreign investors such as Diageo will be restricted to improving efficiency and cost control. Diageo's investment has not yet changed the look of the Shuijinfang label, a Guala Closures customer.
Already a top-five player in volume terms (according to Euromonitor), Wuliangye earlier this year announced it was discontinuing some of its lower-priced products to better compete with other premium-end brands like Maotai. The move has been interpreted as a response to the influx of foreign brands, but that is denied by Wuliangye executives.
At a recent trade fair in Kunming, capital of southerly Yunnan province, the best booths were those sponsored by baijiu brands. Maotai offered tastings while Wuliangye offered gold paper-packaged special editions to visiting officials and foreign executives.
Head of Yunnan sales for Wuliangye, Wang Lijun, was reported in local media as saying that the demise of traditional local spirits is "really exaggerated". Baijiu brands had a bumper year in 2008, he said, adding that thriving sales and price hikes on Wuliangye premium products were behind an 8.2% increase in revenue and a 23.3% rise in profits at Wuliangye parent company Sichuan Yibin Wuliangye Yibin.
Euromonitor data shows the total volume in China's spirits market climbed from 3.61bn litres in 2006 to 3.84bn litres in 2008. Revenue rose from US$29bn to $37bn in the same period.
Meanwhile, the popularity of baijiu has strengthened Chinese market resistance to foreign spirits such as whisky, while absorbing cash and marketing techniques from multinational investors.
Baijiu sales rose 20% in 2007 and though the growth slowed to 10% last year there's more room for sales to climb, says Huang. He says the only clouds on the horizon are high taxes - baijiu is taxed at 20% compared to 5% for beer - and the possibility of falling sales in a more health-conscious China.
In Beijing supermarkets, which regularly devote a prominent shelf to baijiu, distinguishable for its red-gold boxes, there is little sign of the new brews produced by LVMH. An assistant at the Sanlitun branch of the Jingkelong supermarket chain (north China's largest by number of branches), directed just-drinks to 400ml bottles of Maotai and Wuliangye at RMB700 and RMB451($102 and $65) respectively for "very special occasions". The top seller was said to be the 400 ml bottle of Beijing Bai Nian brand (40% abv), retailing for RMB148 ($22).
However, the packaging design of local newcomer Mongolian King - a luxurious dark green box with a minimalist grey label - does suggest Chinese brands have been taking a hint from the foreigners' packaging. The 550ml bottle reportedly sells well at RMB43.70 ($6), on a shelf that includes a 475 ml bottle of baijiu by Sichuan Shanxi Xinghuacun Funjiu Group for RMB39.80 ($5.80).
Shidi believes reports of the demise of baijiu are overstated and that sales of foreign spirits will remain "small" compared to baijiu.
A local foreign drinks executive also warns about optimism around sales of foreign spirits: while sales may be rising by 30% or 40%, the percentage of overall spirits sales held by foreign brands is barely 2% and will grow very slowly. "It won't go to 5% anytime soon," he says. "If it grows, it will maybe hit 2.1% next year."
Hospitality executives serving spirits agree. George Van Oosten, general manager of the Sheraton hotel in Shenyang, says baijiu remains the preferred drink for private and government banquets at the hotel. "We have seen minor increases in consumption of red wine and whiskey, but these are not significant compared to consumption of baijiu."
Wilfred Kwok, proprietor of Glen, Beijing's first dedicated whisky bar, says traditional baijiu brands are unlikely to be displaced by imported spirits because "they've become so good at blending to suit Chinese food far better than other spirits". However, he is hopeful that the sour, grain-based taste of whisky will appeal to baijiu drinkers.