China’s national spirit, baijiu, is quite difficult to popularize as few people who have not tasted it can understand its taste. For most Western drinkers, its powerful smells of fish sauce and a thrust to alcohol in the mouth are something they might never learn to appreciate. Nonetheless, foreign investors are displaying a different kind of demand for baijiu – a stake in the share of baijiu companies. Since China recently announced new measures in late September aimed at encouraging domestic consumption, shares of companies producing baijiu have risen. Leading baijiu manufacturer Kweichow Moutai nearly doubled its market capitalization by about $89 billion in just one week. It has recently become worth more than Coca-Cola at $313 billion. With its nearest rivals, the sum total of the top baijiu manufacturers has now crossed half a trillion dollars.
But the market rally extends beyond distillers. The same has been the case with Chinese brewers where companies like Tsingtao, the largest listed Chinese brewer, as well as the producer of bottled water Nongfu Spring, reported a rise of 30 % in their stock prices. However, the remaining CSI 300 index that has all large Chinese companies added about 25 percent in the same period. Unfortunately, for investors, it appears the future of making money in China lies with beverages.
The question remains: Will this bullish streak last or fizzle out as quickly as it began?
The first and probably the most obvious argument here is that China’s beverage industry today is highly profitable. Let’s take into consideration the top three firms in the production of baijiu spirits, bottled water, and beer. Currently, the estimated gross profit margin of Kweichow Moutai, the largest baijiu manufacturer in China, is higher – 92%, compared to such key world players as Diageo, whose proportion is only 60%. For the full year, Nongfu Spring has an operating margin of 33%, higher than Google’s parent company Alphabet or Chinese digital titan Tencent. Moreover, Bud APAC, an operating brewery in Asia and owned by the world’s biggest brewer company AB InBev excels in showing a return on capital. These firms aren’t just riding a temporary high; they are making long-term bets on Chinese consumers’ evolving tastes.
Catering to a More Discerning Consumer
By the time Chinese shoppers first experienced disposable income in the early 2000s, they were willing to try out all sorts of products. Now however they are becoming more selective, this is because of the uncertain financial times linked to slow property sales. Even though market growth decelerated over the last few years, consumer spending remains one of the most promising areas, primarily, in the segment of premium goods. Euan McLeish, an analyst at brownfield house market specialist Bernstein, notes that there is still a differentiated cyclers category of consumers who are willing to pay a premium price for such goods and services. The real opportunity for companies is to find ways how to stand out from every other company in the market by focusing on the quality of the product.
Kweichow Moutai’s Premium Edge
In this case, it doesn’t take much for Kweichow Moutai to stand out. Wuliangye accounts for 94% of the share of sales of vanity baijiu, a category that includes half-liter bottles priced at more than 1,200 yuan ($165). Its leading product is distilled in a specific region of Guizhou province and placed in underground cellars; some of the aging products that are most sought after date back to the Ming Dynasty, which ended in 1644. Most of these factors of historical dominance are very hard for the competitors to emulate, putting Kweichow Moutai in a very strategic position. Having been associated with the country’s leadership for many years, the company does not need to invest in promotion as its rivals do. Rather, it strives to sustain rarity and its Sales distribution network, which has been supplemented by an online portal that quickly responds to retailer demand.
Nongfu Spring’s Premium Water Strategy
On the other hand, Nongfu Spring has never been affiliated with Anting and has had to establish the brand on its own after its establishment in 1996. Its strength is in marketing its bottled as a natural spring water product rather than distilled water sold in the market by its rivals. Due to the focus on quality Nongfu could set higher prices, and expand into other drinks including sugar-free teas and juices which at present take approximately half of the company’s sales. These products cater to health-conscious consumers, a demographic that continues to expand even as China’s overall population declines.
The Quest for Premium Status in Beer
The health benefits of beer may not be as obvious, but premium brands are thriving in China’s beer market nonetheless. Budweiser, along with its upscale sibling brands like Corona and Hoegaarden, has seen consistent demand among Chinese drinkers. In contrast, sales of cheaper beers have been declining. Bud APAC’s biggest competitor, CR Beer, distributes Heineken in China but has found it difficult to elevate most of its brands beyond the budget category. Even Tsingtao, a well-known Chinese beer brand, struggled with its attempt to rebrand as a premium product, using new packaging and celebrity endorsements that failed to resonate with consumers.
Betting on China’s Rising Affluent Consumers
Kweichow Moutai, Nongfu Spring, and Bud APAC are all betting on two major trends. First, they are banking on the continued rise of China’s affluent consumers. Between 2017 and 2022, the number of Chinese households earning an average of $95,000 annually grew by 7% each year, reaching 93 million. By 2027, this group could swell to more than 120 million. Another 200 million consumers are expected to enter the entry-level premium market, earning around $26,000 a year, up from 170 million in recent years. Together, these two groups will rival the entire population of the United States.
Second, the three companies are betting that as Chinese incomes grow, these high-earning consumers will adopt spending habits similar to their Western counterparts. Recent hesitation to spend, which has contributed to China’s deflationary pressures and spooked investors, remains a concern. However, as incomes continue to rise, the demand for premium beverages seems poised to follow suit.
For now, investors who are still cautious may soon find themselves toasting to success, with a glass of baijiu, bottled water, or premium beer in hand. For insights into China’s evolving market, contact Hub of China today and discover how we can help your business navigate this dynamic landscape.