Workers packing Moutai at a workshop belonging to Kweichow Moutai Co in Zunyi city, in Southwest China's Guizhou province. In China, sales revenue from white spirits is expected to grow from 110.9 billion yuan ($18 billion) in 2007 to 926.5 billion yuan in 2016, according to Frost & Sullivan, a US-based market consultancy. Provided to China Daily

Opinions differ on length of time to deal with difficulties brought on by frugality drive

The Chinese liquor industry is expected to have impressive growth potential in the future despite the present downturn caused by the government's crackdown on luxury official banquets, says Frost & Sullivan, a US-based market consultancy.

According to a recent report by the consultancy, white spirit production will reach 17.05 billion liters in 2016 from 4.94 billion liters in 2007 with a compound annual growth rate of 14.8 percent. Sales revenue from white spirits is expected to grow from 110.9 billion yuan ($18 billion; 13.5 billion euros) in 2007 to 926.5 billion yuan in 2016, with compound annual growth rate of 26.6 percent.

The report attributes the robust growth potential to several factors. First, the white spirit industry is closely associated with the macroeconomy and China is still at a stage of rapid economic development as well as rising disposable incomes.

Second, multi-sales-channel marketing strategies have been vigorously used by domestic alcohol makers, such as group purchases and online sales, which have been greatly welcomed by younger customers.

According to the report, Chinese white spirit is one of the seven renowned distilled spirits in the world. Sichuan, Guizhou, Shaanxi, Anhui and Shanxi provinces are the most recognized origins of it in China. Each province has its own special drinking habits and brands. There is Wuliangye in Sichuan, Moutai in Guizhou, Xifeng in Shaanxi, Gujing in Anhui and Fenjiu in Shanxi.

Sichuan is the most high-yielding province in China. In 2011, white spirit output in Sichuan made up about 30 percent of total output in China and has maintained compound annual growth rate of 38 percent for nearly five years. There are numerous famous white spirit brands in Sichuan, including Wuliangye, Luzhoulaojiao and Swellfun (Shuijingfang).

Shandong is anther traditional high-yielding province, says the report. In 2011, the output of baijiu in Shandong accounted for 10 percent of total output in China, with revenue of about 30 billion yuan. For example, sales of Confucian Family Liquor (Kongfujiajiu) have doubled every year since 2007.

But, there are also some restraints on the industry, says Frost & Sullivan, such as local governments' protection of local brands, which jeopardizes fair competition in the market, as well as a lack of product research and innovation capabilities, as the new generation of young customers seek personalized and diversified products.

Other obstacles also exist, the consultancy says.

At the end of last year, the central government unveiled a series of anti-graft rules called "The Limitation of the Three kinds of Government Consumption". They decree that receptions for high-ranking military officials should no longer include liquor or luxurious banquets, which has led to a sharp decrease in the purchase of white spirit by government and business organizations. Sales of some high-end white spirit brands have dropped sharply.

It did not take long for the stock market to feel the effects.

Just two days after the announcement, shares in Chinese distillers such as Wuliangye Yibin Co and Kweichow Moutai Co fell.

Shares in Moutai fell 5.55 percent on the Shanghai Stock Exchange, while shares in Wuliangye slid 3.02 percent on the Shenzhen stock market. Moutai's market value shrank by 12.5 billion yuan on the same day.

"Moutai and two other high-level alcohol brands, which are popular with government officials and military officers, account for 20 percent of the total liquor market," says Jian Aihua, a researcher with CIConsulting, an industry research institution.

Yuan Renguo, Kweichow Moutai's chairman, said recently that the company will slow its growth to reach an 18 percent year-on-year rise by the end of this year.

"There has been a slump in Chinese liquor sales and in the catering industry since late last year, mainly caused by the government's anti-corruption moves," says Su Qiucheng, head of the China Cuisine Association. "Restaurant sales in some big cities even posted negative growth, such as Beijing and cities in Jiangsu and Zhejiang provinces."

Duan Kaiyun, assistant secretary-general of Beijing Cuisine Association, says: "The difficult time will last for a long time because it's a key part of the new government's vow to curb corruption."

But Bian Jiang, assistant director of the China Cuisine Association, says the habit of pleasing business clients with extravagant banquets is deeply rooted in Chinese culture and will not be reversed overnight.

In addition to government's anti-graft calls, food safety scandals have also damaged growth of the industry.

Last year, the Hunan Provincial Administration of Quality and Technological Supervision said liquor samples from Jiugui Liquor Co contained 1.04 milligrams of plasticizer per kilogram, more than three times the 0.3 mg per kg standard set by the Ministry of Health.

Jiugui products were taken off the shelves, and shares in the Shenzhen-listed company were suspended when the scandal broke.

According to a statement issued in March by the Hunan-based liquor maker, its first-quarter profits plummeted 90 percent year-on-year and it expects its first quarter profits to be 8 million to 12 million yuan compared with 119 million yuan during the same quarter last year.

The China Alcoholic Drinks Association said earlier this month that large-scale tests on China's liquor products show that almost all alcohol products contain plasticizers, with an average level of 0.537 mg/kg. They are used to thicken liquids.

"Although some alcohol brands are facing difficulties in the short term, the Chinese liquor industry is expected to have impressive growth potential in the future because the post-1980 generation will gradually become major consumers," Frost & Sullivan forecast.

"The drinking habits of the post-1980 population will determine the future of the Chinese white spirit market. The industry players who strengthen their marketing efforts toward the post-1980 generation, such as their drinking habits and culture, will eventually win more market share," says Bian, of the China Cuisine Association.

According to the association, in 2015, the number of primary white spirit customers who are between the ages of 30 and 49 will be 441 million. The post-1980 generation will make up 22 percent of them. By 2020, primary white spirit drinkers will number 444 million and the post-1980 will make up 48.5 percent of them.

"The growth rate of high-end white spirits such as Moutai and Wuliangye might slide in the short term but, in the long run, the two brands, especially Wuliangye, will rebound quickly. The sales growth of middle or moderate high-level brands such as Yanghe and Langjiu will speed up. And the distiller that is successful in the middle to high-end white spirit market will be the ultimate winner," research and investing firm Rising Securities Co says in a report.

liwoke@chinadaily.com.cn

( China Daily European Weekly 06/21/2013 page23)