When China’s new premier, Xi Jinping,
walked smiling on to the stage with the rest of China’s new central leadership
team back in November, few people would have anticipated the immediate
consequences to the Baijiu industry.
Baijiu, China’s home-grown spirit that,
incredibly, accounts for over 35% of global spirit sales (whisky is just ~10%),
will see an unprecedented collapse in its volumes and profits. The staple drink of China’s
banquet-loving Government officers and State Owned Enterprise management teams
has been hit by a ban on excessive expenditure by public officials which has
included purges on everything from entourages, fresh flowers, entertainment
performances, gifts, and lavish meals.
It is these last two
(gifts and meals) that will deal Baijiu’s pricing and volume a double blow – just
before the Chinese New Year gifting period when Baijiu is traditionally one of
the most favoured presents, with gifting the major seasonal driver of off-trade
(retail) spirit sales.
On-trade (bar,
restaurant, nightclub) sales of Baijiu had already been hit by the reduction in
corporate entertaining in the run up to the Communist Party Congress/Leadership
Change, but rather than recover – as industry observers had anticipated – the
contraction appears to have accelerated since Mr. Xi came to power as he seeks
to make graft/corruption reduction a high profile early win to boost the
flagging popularity of the Chinese government amongst the increasing vocal
people of the People’s Republic.
We at Concise China are
seeing the effects first hand by visiting retailers. Pricing
of Moutai and Wuliangye (another famous Baijiu brand) at major retailers in
Shanghai is down by USD$100/bottle (not a typo)! With the pricing in a downward spiral and no end in sight,
it may not be over for the beleaguered stocks which have seen >USD$30Billion
in value wiped out since the leadership change. And all of this is BEFORE the inevitable poor sales results of the critical CNY period are published
next month!
However, I don’t believe
that Baijiu will be the only casualty of this (permanent?) China sea
change. The astonishing growth of
luxury goods in China (now the world’s number 2 market after Japan) is also
driven by gifting.
Highly visible gifts
can be spotted, as was shown by the blogger who recently published photos on
line of a senior local government official wearing a variety of Swiss watches
at various public meetings! (Despite the watches’ value amounting to many times
his annual income.) The official
is no longer in his job.
So, who else should be
bracing themselves for the fall out?
I believe the following are the most exposed, in no particular order:
·
Luxury bags
·
Swiss
watches
·
5-Star
Hotels
·
Luxury
restaurants
·
Premium
spirits, especially Cognac
·
KTV
(Chinese karaoke where most corporate entertainment and ‘deals’ are done)
·
Golf Clubs
(some of whom have been charging over $200,000 for memberships, often paid for
with company money or ‘gifted’)
·
Luxury
houses (many of which have been illegally registered by government officers to
names of other people to avoid discovery)
Whatever happens,
China’s gift-giving, graft-based commercial and political environment has
changed for good. How deeply these
reforms become ingrained in the slow changing Chinese cultural psyche remains
to be seen. But now would be a
prudent moment for luxury goods companies and related industries to recalibrate
their China expectations.
