People outside of China have mostly never heard of ‘baijiu’ – literally ‘white liquor.’ Not only is it China’s national beverage, it is also one of the most widely consumed distilled drinks on earth. Made from sorghum, baijiu typically has more than 45 percent ABV and a distinctive sharp taste.
Moutai is a brand of Baijiu, made in the town of Maotai in China’s Guizhou province. It is produced by the state-owned Kweichow – the name is an old romanization of ‘Guizhou’ – Moutai Company (600519: SHEX). But there is more. Unlike any other baijiu brands – such as Erguotou Red Star (二锅头), which you can buy for as cheap as USD 2 – the cheapest Moutai bottle will cost you more than USD 250.
Although few outside China buy the liquor or the brand, in the past five years Moutai’s listed shares have soared by almost 500 percent, outpacing the likes of Amazon. At USD 200 billion, its market value is only USD 50 billion less than that of Coca-Cola – the world’s biggest beverage company. It cranks out EBITDA margins of 68 percent, twice that of global rivals such as the British brand Diageo – the owner of Johnnie Walker.
Moutai owes this success to elitism and nationalism, an increasing elderly population and traditional production techniques – which, perhaps excepting other examples of nationalism in populous countries, is something scarcely any other company could hope to replicate.
► The company’s nationalism comes from its history. The area where Moutai is produced is also famous for being where Mao Zedong’s Red Army took refuge during the historic Long March. They used the spirit from the town for its medicinal effects, such as disinfecting wounds. Moutai is also supposedly where Mao Zedong and his comrades toasted the founding of the People’s Republic in 1949. Moreover, it was Premier Zhou Enlai’s favorite spirit; he duly shared it with Richard Nixon in 1972.
Next, the company chose to serve China’s super-rich and elite rather than its middle class. Although China’s middle-class market is huge, the premium market is also very lucrative – the size of the upper-class market is more than 70 million, bigger than most of European counties’ populations. One of the biggest advantages of this market is that it is less crowded with prestige brands. Therefore, Moutai is filling a gap in the market by providing the Chinese answer to premium scotch.
In addition, Moutai’s products address the elderly and middle-aged population. Currently, its biggest market is drinkers in their mid-30s. This age group consists largely of businesspeople. Moutai is often a guest of honor in their business meetings or in weddings and banquets.
Finally, its centuries-old craftsmanship based on traditional methods. The grain and water used to make Moutai baijiu must come from Maotai town and the brew must be buried in urns for at least four years before it’s sold. The factory floor remains deliberately labor-intensive. For example, the ribbon on each Moutai bottle is still tied by hand.
► However, there are various challenges with this growth model. Millennials are the biggest problem for the future of Moutai. They seem to be not into drinking as much as their parents’ generation – especially strong alcohol. According to a survey conducted by Daxue Consulting, recent years exhibited a growing trend for healthy consumption in China, impacting the alcohol industry. Consumption of alcohol is changing, and Chinese millennials want low alcohol and healthier drinks.
Additionally, Chinese millennials are more interested in international spirits. They often prefer drinking beer (91 percent), followed by wine (57 percent) and Baijiu (31 percent), whiskey is also very appreciated, according to the same study. Young Chinese believe that Baijiu is not for young people. Therefore, they are less likely to drink Baijiu mainly because of its bad taste, limited appropriate occasions for drinking, and its old fashion image.
Indeed, Baijiu has an old and positive image – but it also has another, unpleasant image related to corruption, which creates the second biggest challenge for the company. There is a saying among Chinese people: “The one who drinks Moutai never pays for it, and the one who pays for never drinks it,” which means if you are buying Moutai, well, then you are probably will give it to someone as a ‘gift’ in return of a political/economic favor.
Until President Xi Jinping started his anti-corruption campaign, Moutai was the Communist Party’s drink and gift of choice. According to the Economist, about two-thirds of the company’s bottles ended up as tokens for the banquets of government and military officials, and their bank accounts when they sold the pricey gifts back to shops. People began to refer to the price of a bottle of Moutai as China’s ‘barometer of corruption.’ Although temporary, even the firm’s share price was negatively affected by the corruption campaign.
More recently, another anti-corruption push has shaken the firm. Yuan Renguo, the company’s chairman from 2011 to 2018, was arrested on May 22, 2019 for taking massive bribes. A few days after Yuan’s arrest, the head of the company’s e-commerce division, Nie Yong, was also arrested on similar charges. Moutai products are sold through designated distributors, who need licenses granted by the company to be able to sell it. The profitable Moutai business has become a way for many top Moutai executives to establish relationships with local government officials. According to industry insiders, it has become an open secret that government officials would call on senior figures – in this case, such as Yuan and Nie – in the company, develop favorable relationships, often through bribes, in a bid to secure a distribution license.
Apart from the bad image and corruption within its distribution system, Moutai also faces problems such as fake products, a long-time headache to the company. According to Xinhua News, last year in January, six people were detained in Guizhou for making and selling fake Moutai. The suspects allegedly bought cheaper liquor at CNY 50 to 300 per bottle and sold it for CNY 300 to 4,000, after repackaging it with fake logos, to markets in Beijing and South China’s Guangdong Province.
Lastly, think of a state-owned company in a developing socialist country selling alcohol for USD 300 per bottle. All these elements do not really fit well together – even under socialism with Chinese characteristics – and the government also noticed this. The government is the largest shareholder, and it wants Moutai to have a stable price.
The above mentioned special labor-intensive manufacturing process puts limits on the company’s production. When faced with production limits, the easiest way to keep revenue growing is to raise prices. In 2018, the company increased its prices by more than 18 percent and drove its shares up more than 8 percent. However, the government still puts restrictions on the prices of high-end liquor. As a state-owned enterprise, Moutai is expected to display a certain public attitude. Which means relying on price increases for future revenue growth will be a challenge. Besides, as Moutai struggles with these challenges, smaller rivals like Wuliangye Yibin Co. are already starting to win more business.
Although there are various challenges, Moutai is not worried about the company’s future. Last year, during the annual shareholders’ meeting, the new chairman Li Baofang managed to strike an optimistic tone about the company’s future development, eyeing a growth target of 14 percent.
In 2019, the baijiu giant posted stronger than expected preliminary profits. The company’s net income rose almost 16 percent, while its sales revenues reached CNY 80 million.
► In short, Moutai will likely add new chapters to its success story in the near term; however, unless the challenges are met, the tale might end up with something like a long-overdue hangover.