China’s baijiu makers risk hangover from liquor glut despite new year’s binge

As a huge TV audience tuned in to China’s lunar new year gala last month — equivalent to the US Super Bowl for its peak advertising rates — a record eight domestic liquor makers grabbed almost half of the highly coveted commercial slots at the top of the show.

Led by premium brands such as Kweichow Moutai and Wuliangye, drink makers appeared dozens of times, as presenters and actors filled the four-hour event with promotions for baijiu, the strong grain-based liquor that is as popular in China as vodka is in Russia.

The domination of spirit brands on the nation’s most-viewed television show comes as liquor makers look to sustain a post-Covid sales boom that has also boosted their stock prices. The CSI Liquor index, which tracks Chinese alcohol stocks, rose 9 per cent in January, outperforming a 7 per cent rise for the broader CSI 300 index. Kweichow Moutai is China’s most valuable non-tech stock, with a market capitalisation only exceeded by Tencent.

Baijiu has been among the first industries to benefit from the country’s reopening. Multiple liquor distributors told the Financial Times that sales took off during the lunar new year holiday at the end of January, as people snapped up strong alcohol to celebrate with family. Many were reuniting for the first time in three years after China abandoned strict Covid-19 rules.

James Tan, a baijiu distributor in Beijing, said he was caught off guard by the spike in orders following many months of weak demand.

“I am spending 14 hours a day taking calls from clients and they keep coming in,” said Tan, who added his sales tripled and he had to raise prices by 20 per cent in January from a year earlier.

However, the new year’s recovery was not strong enough to clear the large inventory built up by distributors during the pandemic. Consumers’ desire for healthier lifestyles could affect demand, while businesses, especially in the property sector, where baijiu is heavily consumed for celebrations, have yet to stage their own recovery.

“There is going to be a struggle going forward both from consumers wanting to be healthier and from too much inventory from the last couple of years,” said Shaun Rein, founder of China Market Research, a consultancy in Shanghai.

Baijiu resellers say the industry has unopened stock worth at least Rmb300bn ($44bn), or half of total retail sales in 2021, thanks to Covid restrictions that limited alcohol consumption.

The inventory overhang has forced distributors, especially those for smaller brands, to keep prices steady, even though factories are seeking to charge them more to offset output that has fallen for five straight years.

This means many baijiu resellers are in the red, while its manufacturers are reporting double-digit revenue and profit growth. Analysts say this creates a time bomb that could end the baijiu bonanza.

“The growth in excess inventory may end up making highly leveraged distributors offer deep discounts to generate cash flow,” said Cai Xuefei, an alcohol analyst based in the central city of Hefei. “That would in turn drag factories down.”

Solving the problem would require a further jump in baijiu consumption among reluctant consumers.

In the central city of Wuhan, Li Kun, a marketing manager, said he had one cup of Wuliangye before switching to orange juice during a lunar new year dinner with his family last Saturday.

“I would have finished a whole bottle in the past,” said Li, who tested positive for Covid last month, “but I need to put health first since I have just gone through several days of high fever and two weeks of muscle pain.”

It is also not clear that there will be much demand for premium spirits as a lubricant for dealmaking dinners in the property sector. Rein of CMR said weak consumer confidence did not support a housing boom in the near future.

“I don’t think consumers are going to go out and buy homes any time soon. It is going to take six to nine months before they believe the economy is on the right track and start buying big-ticket items,” he said.

While premium brands such as Moutai and Wuliangye are increasing factory capacity, distributors with large quantities of unsold bottles are less optimistic.

“The days of easy money are gone,” said Luo Min, a premium baijiu distributor based in eastern Zhejiang province. “We need to be ready for normal growth in the years to come.”