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Sales in China not growing as rapidly as expected
The global drinks companies are all reporting that sales in China are not growing anywhere nearly as rapidly as previously predicted.
While they express cautious (but unquantified) optimism about the longer term, the coveted post-covid surge has not provided the profits boost they were seeking from the relentless drive to premiumise and to draw customers upmarket to more expensive and more profitable lines.
Hard facts and figures are hard to come by, however. Exactly what is happening?
Baijiu
Imported premium spirits account for only about 4% of the market which is dominated by baijiu. And the latest market figures about the iconic Kweichow Moutai make unencouraging reading.
If the iconic must-have brand is suffering, importers’ hopes cannot be buoyant.
The market price of China’s most prestigious white spirit has nosedived, reflecting growing concern about demand for luxury goods, including premium alcohol.
According to Jing Daily, the going price of a bottle of Moutai, which once hovered around 3,000 RMB ($413) has fallen to approximately 2,100 RMB ($289 in June), a 30% drop so far this year, although it climbed again to 2,300 RMB last week.
The Shanghai-listed company has reported sales for the first six months of 81.93 billion RMB ($11.43 billion), up by 17.8%, on the year, while its net profit rose by 15.9% to 41.69 billion yuan.
It attributed the top-line growth to a “sales increase and adjustment of sales prices of major products.”
Support
Analysts believe the earnings reflected the company’s recent efforts to stabilise its first-tier wholesale [average selling price], indicated in faster growth in the distributors’ channel over direct retail sales.
One said that enhanced support to distributors “prevented panic liquidation of channel inventories by speculators.”
Nevertheless, the market has been thrown upside down by a disastrous slump in property values combined with growing youth unemployment.
In the face of inflation and domestic stagnation, the Chinese middle classes so prized by Western distillers have zipped their wallets.
Moutai has been a symbol of wealth and prosperity. Trading in it has been lucrative for primary distributors.
Markup
They capitalised on the large markup between wholesale and retail prices and spawned a network of secondary and tertiary dealers who buy in bulk and resell at higher prices.
They have all been hit hard by the price slump and many are sitting on effectively unsaleable stocks. Many are making big losses or simply quitting the market.
Kweichow Moutai’s development of its own e-commerce sales to the public (now 25% of its business) plus demand flowing to rival (cheaper) platforms such as Taobao and Pinduoduo have had a big effect on demand, but the clear message is that the Chinese consumer is resisting high prices.
This downturn, which also saw Moutai’s stock value nosedive by 250 billion RMB ($34.3 billion), has prompted a re-evaluation of the resilience of other luxury goods.
For instance, LVMH noted recently that they were circumventing its pricing strategy in China and travelling to Japan in search of deals.
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