Baijiu: Acquiring the taste

The most consumed white spirit on Earth isn’t vodka – it’s baijiu. And China’s vast industry is now a major draw for Western companies, as Charlie Benson discovers.

As a child, they say you’ll need to try coffee five or six times to acquire its taste. With beer, it might be nine or 10 occasions for the novice drinker. China’s indigenous spirit, baijiu, however, raises the bar somewhat. Try 300.

Although not a wholly scientific guideline, it illustrates the point that baijiu is not renowned for being immediately palatable. Yet, despite its reputation, the statistics for baijiu are staggering. Not only is it China’s most consumed spirit, but a greater quantity of baijiu is imbibed than any other spirit world-wide. In an industry now worth an estimated £25 billion annually, baijiu continues to prosper, yielding huge profits for the large premium brands.

It follows that in recent years China’s baijiu industry has attracted increasing attention from the world’s drinks giants. Most notably, the two largest – Diageo and Pernod Ricard – have both made considerable investments in the sector.

What is baijiu?

Baijiu (or báiji) directly translates as “white spirit”. It is a clear distilled spirit, typically 40-60% abv, although it has been frequently known to breach the upper end. It is normally distilled from sorghum or glutinous rice and nearly all baijiu has a highly distinctive aroma. The resulting flavour is highly valued in Chinese culinary culture, but is considered to be an acquired taste to most foreign palates.

Types of baijiu are normally classified by their aroma group. At the highly aromatic end of the scale, “sauce fragrance” includes very pungent baijius such as Maotai (China’s best-known brand), down to the “lightly fragranced” group that includes more neutrally flavoured brands such as Fen Jiu.

History and provenance

Baijiu’s production and consumption dates back thousands of years, according to some historical evidence. Its provincial home is Sichuan, in China’s south-west, where around 25% of all China’s baijiu is produced, and the location of top-tier brands including: Wu Liang Ye, Shui Jing Fang, Jian Nan Chun, Lang Jiu and Lu Zhou Lao Jiao.

All claim hundreds of years of history and often promote this as a key component in their marketing campaigns. Lu Zhou Lao Jiao’s premium product 1573, for example, takes its name from the year they say the distillery was founded – making it the oldest operating distillery in China.

There are many other centres of baijiu in China; Shandong province in the north-east is the second biggest producer with around 10% of the country’s output. Despite being the best-known brand, Maotai is a geographic anomaly, being positioned in Guizhou province, adjoining Sichuan.

Baijiu occasions

There is a strong culture of gift-giving in China, making the gifting of premium baijiu a sure-fire way of delivering and receiving all-important “face”.

People are well aware of the price of a bottle of Maotai or Wu Liang Ye, and so giving such a bottle is a reliable way to conspicuously convey a level of appreciation towards the intended recipient.

Premium baijiu is commonly consumed with food at banquets. For fear of counterfeited products in restaurants, baijiu will normally be brought by one of the guests and a corkage fee paid to the establishment. It is then decanted from the (typically 500ml) bottle into small glass jugs and subsequently into tiny thimble-sized glasses.

Over the course of the dinner, toasts are arbitrarily raised by individuals to others, to multiple participants, or to the entire group. All those involved are expected to finish the contents of their glass or ganbei (empty the cup) and, on completion, display their vacated glass to the other guests. Glasses are then replenished and the process repeats throughout the evening.

Baijiu is rarely consumed in bars, nightclubs or “KTV” karaoke lounges, where beer, wine and foreign spirits have evolved as people’s go-to drinks. That being the case, the night trade is one area that companies have earmarked as a potential growth area, and some are making steps to modernise their drinks for a younger audience.

Distribution and retail

It is estimated that 30% of premium baijiu is purchased directly by the government for distribution among its Communist Party members. Within these circles, baijiu is lavishly consumed at dinner meetings and regularly gifted among other officials and associates.

In the off-trade, baijiu is sold through China’s vast and ever-expanding retail network. Most commonplace are speciality liquor shops where the customer faces a plethora of choice among the seas of red and gold packaging.

Supermarkets and small convenience stores almost always stock baijiu too, but in more limited supply – a small convenience store normally carrying up to 10 brands. Airports, train stations and hotels are also very popular locations for retailing baijiu, often purchased by travellers for drinking at business dinners or gifting to hosts on arrival.

The black market

Counterfeited product is the largest single problem that faces baijiu producers in China today. The margins obtainable from producing premium baijiu are considerable – hence duplication is very tempting for bootleggers.

For the bona fide producers, it’s a double-edged sword. While they strive to drive growth, brand equity, price-points and margins, they are simultaneously enhancing the desirability of copycats forging their products and reaping huge rewards without any of the effort.

There are numerous anti-counterfeiting measures implemented by brands, although none of them comprehensively addresses the problem. At best, the measures act as a deterrent, giving counterfeiters a temporary complication until they have engineered – or indeed paid – to circumvent the obstacle.

A good example of this is the coding system used by Wu Liang Ye and many other top brands. A “unique” identity number beneath a destructible seal is revealed to a customer upon opening. The customer is then advised to relay this number via telephone to a Wu Liang Ye-based operator so that it can be authenticated. Fine in principle, although counterfeiters have been known to obtain lists of authentic numbers by illicit means, and simply turn out products with matching codes.

The Chinese government is fully aware of baijiu’s black market and claims to be doing all it can to stamp out what has grown into a problem of epidemic proportions.

That said, the motivation for the producers to take action is far greater than for any third party and, as such, most national brands have dedicated teams tasked with identifying, reporting and, in some cases – without any involvement from the authorities – closing down counterfeit factories.

Although rogue producers go to great lengths to ensure that aroma and flavour are comparable to the real thing, they have little concern as to what goes into their drinks. This can leave consumers at risk of drinking baijius that contain hazardous substances, and there have been cases in which their consumption has led to loss of life.

Price

There is a baijiu to suit every budget. Chinese supermarkets tend to stock everything from the lower-end, bottom-shelf baijiu – you can pick up a 4-litre plastic drum for around CNY25 (around £2.50) – up to the well-known premium brands. A standard 500ml bottle of Maotai will set you back about CNY900-1,000 (£90-100), and Diageo’s Shui Jing Fang around CNY650-750 (£65-75).

When it comes to special editions, the sky’s the limit. The price of baijiu is normally a function of brand and age, and a bottle of 50-year-old Maotai will set you back somewhere in the region of CNY30,000 (around £3,000) at retail, while very rare examples of treasured bottles dating back to the early 20th century have been known to sell in the millions of Yuan (hundreds of thousands of pounds).

Supply and demand

Baijiu is produced in batches. Each batch production generates a set of quantities of baijiu, each of a different grade of quality. Only a tiny fraction of each batch is of premium quality “A”. A greater volume of quality “B” is available, “C” a greater volume still, and so on. In each production, there is also a large quantity of product of such poor quality that it has to be discarded.

Premium baijiu producers generally skim the premium quality for their own brands and then resell the B, C and D quality baijiu to third parties or other producers.

Because of this, most premium baijiu companies already produce as much premium baijiu as they conceivably can – it is not cost-effective to make the investment required to increase production that then yields only a tiny usable volume of A-grade spirit.

As such, companies such as Maotai are unable to keep up with consumer demand for their product, but capitalise on the opportunity this presents by raising their prices – not only in an effort to balance supply and demand, but also to maximise their profits.

Partly because of this, Maotai is at the head of every ranking table for profitability. Though it is not the largest – a mantle taken by Wu Liang Ye – it certainly has the strongest branding and consumer appreciation – a standing the company cleverly converts into the best bottom line in the business.

Marketing

Traditionally, baijiu’s marketing is centred on heritage and provenance. Most ancillary packaging is finished in red and gold, while the higher-value products are graced with oversized external packaging that envelops the small bottle. Wood and metal are often used in secondary packaging in a further effort to give products a distinguished and high-value appearance.

Companies rarely go out on a limb with their packaging. One company that has done so, however – and with considerable success – is Jiangsu Yang He, which uses taller bottles and blue-coloured packaging, along with revealingly dressed ladies in its marketing material. It appears to have worked well: Yang He more than doubled its sales figures from 2007 to 2010 and entered the national top 10 of premium baijiu names.

Leaving aside Maotai and Wu Liang Ye (names already ingrained in the minds of most Chinese people), brands’ successes depend heavily on advertising budgets and spend. Huge quantities of cash are spent on national television advertising, billboards, and other multi-media marketing.

Highly aggressive brands looking to make a name for themselves fast will plough money into these media and invariably reap rewards in a short space of time. It is a highly cash-intensive exercise, but also a very effective one.

International involvement

There are two fundamental reasons why international drinks companies are keen to be involved in baijiu. First and foremost, premium-end baijiu can be hugely profitable. And, secondly, having a fully integrated and trustworthy business partner in China is invaluable, especially for a drinks company where the success of your brands is largely dependent on your distribution capacity.

Diageo began its due diligence in 2005 with a detailed study of possible baijiu companies to partner. With the help of China-based consulting groups they finally fixed on Sichuan Chengdu Quanxing Group – the largest shareholder of Sichuan Shui Jing Fang – mainly owing to its brand position, size, management and fairly aggressive commercial style.

Diageo acquired a 43% stake in the company, upping it to 49% shortly after, and then patiently negotiating for the following 18 months to acquire the additional 4% to give it the controlling majority. It is still early days since Diageo gained control, but the relationship looks strong.

Pernod Ricard came by its baijiu involvement more circumstantially, as a result of its purchase of the former Swedish government-owned Vin & Sprit. The French concern now owns a 51% share in a joint venture with Jian Nan Chun – a top five baijiu national brand.

The venture, known as TCX Liquor, has in the last three years launched two products with a very modern twist. Purfeel 21 is a toned-down 21% abv baijiu product aimed at the female market, and TCX is a full-strength product, but in a contemporary packaging format. Neither product appears to be enjoying much market acceptance, although arguably these modern baijiu product concepts are at a very early stage in the traditional baijiu arena.

A less public relationship is shared between Maotai and Cognac producer Camus, which in 2004 became Maotai’s exclusive international partner in the duty free/travel retail sector. Camus, as the world’s fourth-largest duty free spirits retailer, with a highly esteemed product portfolio in its own right, was considered the ideal partner by Maotai to help take its product to international markets. Seven years in, the comparatively long standing of the relationship is a testament to its success.

Finally, in 2007 Moët Hennessy acquired a 55% stake in Wen Jun Distillery for US$141 million, immediately revamping the brand’s packaging and re-launching it as a premium product at CNY598 (around £60). It is yet to see any real success, however, regardless of its high visibility in many retail outlets. Despite Wen Jun having a 450-year history, it has never been recognised as a serious baijiu brand in China and, even with its overhaul, potential consumers still shy away from it, opting for the better-known brands in this price category.

The foreign alternative

Despite its fast-growing popularity, the foreign spirits sector still only makes up a tiny proportion of China’s spirits consumption. Baijiu currently has about 92% market share, compared to Cognac at around 2.5% and whisky at around 1.2%.

It is hard to see where foreign spirits are going to take bites from the baijiu market, given that their drinking occasions tend to be quite different. Whereas baijiu accompanies banquets and dinners, foreign spirits are normally consumed in bars, nightclubs and KTVs. As such, the emergence of foreign spirits brands is not really impacting sales of baijiu in the modern on-trade.

But the gift-giving sector is a different story. Where traditionally a gift of baijiu would have been deemed the height of sophistication, many people now would prefer to give or receive an expensive bottle of Cognac to achieve the maximum kudos.

There are also many geographical consumption patterns. Large modern cities – where foreign influences are generally more prevalent and there are many more bars, nightclubs and KTVs – naturally have a higher than national average rate of consumption of foreign spirits.

By comparison, people based in more provincial locations may have little or no awareness of the existence of foreign spirits, and always revert to China’s indigenous drinks in times of celebration. Meanwhile, Cognac has become hugely popular in the south of China, while whisky – especially Johnnie Walker and Chivas Regal – remains very popular in more northern cities, including Shanghai and Beijing.

Baijiu’s future

Baijiu’s popularity, coupled with the scale of China’s consumerism, gives the industry colossal momentum, which could take decades to slow. However, when you consider that most baijiu consumers are male and aged 30-plus, and the fact that the culture of baijiu is not being readily adopted by the new 18- to 25-year-old generation of drinkers, it appears that baijiu might yet face a significant decline in the years to come.

Long-term, traditional brands are going to have to do something quite drastic to maintain their market dominance. The sector now faces more threats than ever before, combining to produce real problems for baijiu’s outlook: a sophisticated wave of new drinkers uninterested in baijiu; fierce foreign competition; government health warnings advising against its consumption; and a clampdown on drink-driving.

For now, however, with the continuing expansion of China’s affluent middle classes and the consumerist culture still exploding, sales of premium baijiu – along with most other premium consumables in China – continue to thrive.