Trial by firewater: Baijiu market gives west a lesson in Chinese brand positioning

By Tom Miller and Will Freeman

Beijingers call the hot and sticky months of July and August the “sauna” season. On muggy summer evenings, sensible locals sweat it out in the capital’s old lanes with sticks of fatty lamb kebabs and cold bottles of Yanjing beer.

But real men roll up their T-shirts under their armpits, ditch the pansy lager, and instead glug down the local firewater known as baijiu – a potent mash of sorghum, rice, unhusked barley and other grains.

For foreign businessmen forced to drink the stuff at countless banquets, baijiu provides an infamous challenge for the unconditioned palate. But this white spirit – generally 40-60 per cent alcohol by volume, but sometimes 70 per cent plus – is a mainstay of Chinese culture, first popularised during the Xia dynasty 4,000 years ago.

Baijiu, the world’s largest spirits category by volume, traditionally dominated the domestic booze market. But in recent years, sales volumes of China’s national liquor declined as beer, a foreign upstart, gulped up market share.

Now baijiu makers are fighting back with a proliferation of new luxury varieties designed to appeal to the country’s growing band of big spenders. Revenues are shooting up at major distilleries and baijiu is giving beer a run for its money.

For the first 15 years of the economic reform period started by Deng Xiaoping, sales volumes of baijiu rose along with personal incomes. But after peaking in the mid-1990s, sales went into reverse as rural residents switched to beer and increasingly health-conscious urban consumers cut down on the hard stuff.

This trend solidified in 2001 when Beijing slapped two new consumption taxes on baijiu, driving many small, low-margin producers to the wall. Analysts reckon that anywhere between 50 per cent and 90 per cent of the estimated 37,000 distilleries operating in the late 1990s went out of business. The brutal consolidation process allowed 50-60 major players to grab 70 per cent of the market.

Battered by the breweries and government-driven consolidation, the baijiu industry reached its lowest ebb in 2002. But in 2003 distilleries began to fight back, raising prices and reinventing baijiu as a luxury product.

Following the model blazed by famous and expensive brands such as Guizhou’s Moutai – the official tipple at government banquets – the proliferation of new premium brands pushed up prices and boosted revenues across the industry.

Sales revenues for premium baijiu (Rmb100 to Rmb300 per 500ml bottle) and super-premium baijiu (over Rmb300 per bottle) grew roughly 16 per cent and more than 30 per cent per year respectively from 2003 to 2007. The explosion in luxury sales and prices kept baijiu’s share of domestic alcohol revenues steady, even as its volume share dropped.

With margins for premium baijiu around 60-70 per cent and super-premium at more than 80 per cent, the premium business is now a huge money-spinner. The priciest baijiu available in supermarkets costs around Rmb2,000 for a 500ml bottle. By comparison, a bottle of ordinary baijiu – the stuff enjoyed on Beijing’s streets – can cost as little as Rmb4.

Luxury baijiu has spawned a luxury baijiu culture. Super-premium baijiu is de rigueur at elite business dinners, where hosts spend hundreds of dollars on top brands to demonstrate respect for their guests.

Unsurprisingly, western spirits companies had been drooling over margins in premium baijiu for years when Beijing finally scrapped restrictions on foreign investment in the industry in 2006.

UK-based Diageo led the charge, grabbing a 43 per cent stake in the parent company of premium brand Shuijinfang; French conglomerate LVMH followed with a majority stake in Sichuan distillery Wenjun. Their eye is firmly on the domestic market: attempts to popularise pricey Chinese moonshine abroad have failed.

If the experience of foreign breweries holds, international investors will learn that it pays to compete on quality rather than quantity. Many of the foreign players who came to China’s beer party 10 years ago left with formaldehyde-induced hangovers, bludgeoned by competition from low-end domestic breweries with razor-thin margins.

In contrast, US brewer Anheuser-Busch (now owned by Inbev) bucked the trend by buying into China’s largest premium brewer, Tsingtao, and marketing Budweiser as a “super-premium” brand.

Salt-of-the-earth Beijingers will continue to favour “Two Pot Head” baijiu, a dirt-cheap local brew. But the money is increasingly where the premium brands are.

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