The IWSR Baijiu Report “Innovation and Tradition Clash in the World's

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“Innovation and tradition clash

in the world’s largest spirits category.”

The IWSR Baijiu Report

Tommy Keeling

The IWSR Baijiu Report

Date of Publication:

January 2016

Report Author Tommy Keeling

Tommy hails from an international background, having grown up in Luxembourg with English and Spanish parents. After gaining a master’s degree in biochemistry from Cambridge University, he spent five years studying and working in China in a variety of industries ranging from cinema to pharmaceuticals. He currently covers parts of South America, the Caribbean and north-east Asia.

e: [email protected]

About the IWSR The IWSR is the leading source of analysis on the alcoholic beverage market. The IWSR’s database, essential to the industry, quantifies the global market of wine, spirits, beer and RTDs by volume and value, and provides insight into short- and long-term trends. Our data is used by all of the largest multinational wine and spirits companies, as well as many more local companies. The IWSR’s unique methodology allows us to get closer to what is actually consumed and better understand how markets work. The IWSR conducts face-to-face interviews with 1,500 companies in 118 countries each year, with further input from 350 companies. The IWSR tracks overall consumption and trends at brand, quality and category level.

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Page 2 of 51 Copyright © 2016 – The IWSR Contents List of tables ...... 6 Introduction...... 8 Units ...... 8 Product Definition ...... 8 Executive Summary ...... 9 Baijiu Consumption ...... 11 Global Context ...... 11 Local Context ...... 12 Consumption by Quality ...... 13 Consumption of high-end baijiu by brand ...... 14 Consumption Forecast 2015-2020 ...... 15 Consumption occasion ...... 17 Consumption by Type ...... 17 Gifting ...... 17 Consumer Profile ...... 18 Baijiu Production ...... 18 Production by Region ...... 18 Origins ...... 20 Recent History ...... 21 The New Normal ...... 23 Production versus Consumption ...... 23 Revenues and Profits...... 25 Route-to-market ...... 26 Marketing ...... 27 Tax ...... 28 Key Players ...... 29 Kweichow Moutai (贵州茅台) ...... 29 Wuliangye (五粮液) ...... 31 Luzhou Laojiao (泸州老窖) ...... 33 Other Notable Brands ...... 35 Guilin Sanhua (桂林三花) ...... 35 Guizhou Xijiu (贵州习酒) ...... 35 Jian Nan Chun (剑南春) ...... 35 Red Star (红星) ...... 35 Xifengjiu (西凤酒) ...... 35

Page 3 of 51 Copyright © 2016 – The IWSR Xinghuacun Fenjiu (杏花村汾酒) ...... 35 Yanghe (洋河) ...... 35 Yushuqian (榆树钱) ...... 35 Zhanggong (张弓) ...... 35 Foreign Investment ...... 36 Foreign Tie-ups ...... 36 Diageo – Shui Jing Fang (水井坊) ...... 36 Pernod Ricard – Tianchengxiang (天成祥) ...... 36 LVMH – Wenjun (文君) ...... 37 ThaiBev – Yulinquan (玉林泉) ...... 37 SWOT Analysis ...... 38 Strengths ...... 38 Diversity ...... 38 History ...... 39 Unique Production Methods ...... 39 Huge Consumer Base ...... 39 Large Ultra-Premium Segment ...... 39 Weaknesses ...... 39 Diversity ...... 39 Fragmented Industry ...... 39 Overcapacity ...... 39 Poor Marketing ...... 40 Lack of National Standards ...... 40 Weak Regulatory Environment ...... 40 Lack of Innovation ...... 40 Overreliance on Government and Corporate Consumption ...... 40 Drinking Culture Over-Reliant on Shots ...... 41 Opportunities ...... 41 Innovation ...... 41 Low-ABV baijiu ...... 41 Cocktails ...... 41 RTDs ...... 41 Ageing ...... 41 Craft Baijiu ...... 41 Industry Consolidation ...... 42 Threats ...... 42

Page 4 of 51 Copyright © 2016 – The IWSR Government Intervention ...... 42 Tax Rises ...... 42 Increasing Health Consciousness ...... 42 Counterfeiting ...... 42 Competition from Imported Spirits ...... 42 Appendix: Production and Classification of Baijiu ...... 44 Production Process ...... 44 Raw Materials ...... 44 Fermentation Agents ...... 44 Main Production Steps ...... 45 Fermentation ...... 45 Distillation ...... 45 Ageing ...... 45 Blending ...... 45 Types of Baijiu...... 46 Strong Aroma (浓香) ...... 46 Light Aroma (清香) ...... 47 Sauce Aroma (酱香) ...... 48 Rice Aroma (米香) ...... 48 A Note on Spelling and Pronunciation ...... 50 Sources ...... 51

Figure 1: Baijiu's share of the global spirits market.

Table 1: Consumption volumes in ‘000s of nine-litre cases of the four main categories of alcohol consumed in China.

Table 2: Consumption of baijiu versus other spirits in China over the last five years (‘000s nine-litre cases). ‘

Table 3: Value of the baijiu market versus other spirits in China over the last five years (‘000s dollars).

Table 4: IWSR definition of baijiu quality segments in yuan and dollars per 50cl bottle

Table 5: Estimated consumption of some of selected ultra-premium baijiu brands in nine-litre cases.

Table 6: Comparison of the top ultra-premium baijiu with the top ultra-premium Cognac and whisk(e)y brands (global sales) by volume in nine-litre cases and value in dollars.

Table 7: 2015-2020 forecast for baijiu consumption in ‘000s of nine-litre cases.

Table 8: 2015-2020 forecast for total baijiu consumption compared to the main competing imported spirits, ‘000s of nine-litre cases.

Table 9: 2014 baijiu production by province, share of national production in 2014 and growth rate versus 2013.

Figure 2: China provinces and baijiu production in millions of tonnes.

Table 10: Annual national baijiu production, increase on year prior and per capita production 1990-2014.

Figure 3: Baijiu production and consumption 1990-2014.

Table 11: Baijiu industry revenues, profits and total assets.

Table 12: Proportion of large-scale baijiu producers (defined as those with revenues above ¥20,000,000) operating at a loss.

Table 13: Approximate distribution share per channel for the whole baijiu market.

Table 14: Taxes on baijiu and other alcohol categories.

Table 15: Current Moutai prices for 50cl bottles from online retailers after discounts.

Table 16: Kweichow Moutai key financial figures. Growth refers to the equivalent period the preceding year.

Table 17: Current Wuliangye prices. Bottle sizes are all 50cl.

Table 18: Wuliangye key financial figures. Growth refers to the equivalent period the preceding year.

Table 20: Luzhou Laojiao key financial figures. Growth refers to the equivalent period the preceding year.

Figure 4: Luzhou Laojiao production process

Figure 5: Kweichow Moutai production process