Western spirits producers struggle in China

Western spirits producers are facing a tough time in China, a key market they are targeting for future growth and profitability.

Not only are Cognac distillers facing the prospect of penalty tariffs to be imposed by Beijing as part of its trade war with the European Union but further evidence has emerged of how the sluggish economy is hitting consumer confidence in high-end spirits.

Baijiu continues to dominate the market for alcohol and for years China’s consumers have speculated in Kweichow Moutai’s flagship offering, Feitian Moutai, the Flying Fairy.

Owning 500cl bottles of the 53-degree spirit has been regarded as almost as good as holding a hard currency, such was the strength of demand for corporate gifting and family festivities.

This year, however, the price has been falling and middlemen are refusing to buy stocks until the present bout of panic selling disappears.

Small investors are flooding the market with bottles to try to raise cash and combat the disastrous falls in house prices which are leaving millions with negative equity and soaring youth unemployment as the economy falters in the post-pandemic era.

Flying Fairy

The secondary market price of a bottle of Flying Fairy has fallen from about CY2,700 (£292) at the beginning of the year to CY2,200 ($238) and is heading further south.

In one day this week it fell by almost £20.

Kweichow Moutai itself says that people are focussing on that price but that it continues to sell at its list prices (about CY2,400 or £260) for bulk orders.

But reports from inside China suggest that those prices are also slipping as demand weakens.

Over the past couple of years Kweichow has targeted direct to consumer sales, which now comprise almost half of its revenues.

The annual Dragon Boat festival would normally trigger an upsurge in demand with prices rising accordingly.

But this year the price of Flying Fairy fell over the recent festival to approach the cost of stockpiling by middlemen, who are now refusing to buy as consumers tighten their wallets.

That bodes ill for companies such as Remy Cointreau, Pernod Ricard and Diageo who all see premiumisation in China as a key source of future growth for their global brands.

Close attention

Both Diageo and Pernod Ricard close their annual accounts in a few days’ time and investors and analysts will pay close attention to what the figures reveal in a few weeks’ time, especially as the US market remains in the doldrums.

Meanwhile, the share price of Kweichow Moutai has fallen sharply to an 18-month low.

Last June it stood at CY1900. Today it has slumped by 20% to CY1500.

This month alone has seen it decline on most trading days, and its total market value has evaporated by more than CY110 billion (£12 billion).

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