Baijiu slowdown offers international promise

3rd December, 2014 by Amy Hopkins

Far from an international spirits crisis, the steep decline of the baijiu market has knocked producers out of their complacency, finds Amy Hopkins.

Baijiu

Sales of high-end baijiu have been hit by the Chinese government’s crackdown on lavish spending

Only two years ago, high-end baijiu – the fiery staple spirit of China – was one of the most coveted categories in the spirits world. Accounting for greater volumes than most other segments combined, no-one could have predicted the extent of its decline after the Chinese government announced its ongoing crackdown on hedonistic banqueting and gifting among politicians and the military in 2012.

The white liquor, made from sorghum, wheat or rice, has long enjoyed the financial affections of Chinese officialdom as well as its ceremonial position at most weddings, birthdays and business meetings in the country. Selling billions of litres each year, baijiu’s authority in the spirits world has been left near enough unchallenged for many decades.

It was into this bright and promising arena that Diageo marched in 2011 with the acquisition of SJF Holdco and its luxury baijiu brand Shui Jing Fang. The group was excited not only by the prospect of having greater access to the lucrative Chinese marketplace, but also by making the brand a star on the international stage.

However, China’s austerity measures punctured the UK drinks giant’s optimism, forcing it to write down the value of Shui Jing Fang by £264 million in its full-year 2013/14 financial results. The massive decline impacted Diageo’s overall net sales for the fiscal year, which fell by £1.1bn to £10.2bn. The problem was echoed throughout the business, with both Moutai and Wuliangye Yibin also forced to report sliding profits.

Without the government’s guaranteed block purchases of luxury baijiu, producers have resorted to deep discounting. The effect of this is exemplified by figures released by the IWSR. In 2013, volumes of baijiu continued to grow to 1.17 billion nine-litre cases, from 1.16bn in 2012, however the value of the spirit fell from over US$92bn in 2012 to US$83bn in 2013, indicating a growing trend of heavy price reductions.

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