China Kweichow Moutai Distillery Co., maker of the 106-proof liquor that Mao Zedong’s Red Army used to disinfect wounds, bid more than $13,500 for each second of airtime to advertise on China’s state broadcaster.
The company that controls the world’s second-biggest distiller by market value bid the most among alcoholic beverage makers to advertise on China Central Television. The industry group increased its share of spending, eclipsing banks and consumer goods makers such as Procter & Gamble Co. (PG)
The spending trend illustrates the financial strength of the producer of traditional Chinese baijiu liquor as it competes against rivals including Johnnie Walker maker Diageo Plc in a market Euromonitor International estimates will grow about 5 percent to 4.4 billion liters in 2011. With a profit margin higher than any distiller tracked by Bloomberg, listed unit Kweichow Moutai Co. has amassed a cash pile of almost $3 billion, more than Diageo or Pernod Ricard SA.
“If you are a national liquor company, you want to go to pretty much all the markets in China,” said Andrew Carter, president for investment management at GroupM Trading, the media investment management arm of Dublin-based WPP Plc. (WPP) “If they see a product on CCTV, they think it’s really, really good.”
The slogan “State liquor Moutai reports the time for you” will appear alongside the company’s logo in a five-second countdown before the 7 p.m. news broadcast of CCTV for 10 months next year. The company says the liquor was used to clean wounds of Communist Party soldiers during the two-year Long March that began in 1934, when Chairman Mao’s Red Army fled Chiang Kai- shek’s forces across mountains, jungles and deserts.
The Chinese liquor company is ramping up investment in television commercials to increase its reach in the smaller cities of the world’s most populous nation.
“The smaller the cities where consumers are, the better effect CCTV advertisements would have, because people think it’s a symbol of a company’s financial ability,” said Zang Huixin, a Beijing-based senior research executive at TNS Research International China.
China’s economy expanded 9.1 percent in the third quarter from a year earlier and was forecast to grow 9.5 percent in 2011, six times the pace of the U.S. and euro area, according to International Monetary Fund estimates released in September.
While Bank of China bought the most expensive slot, paying 76 million yuan ($12 million) for 10 seconds after the nightly 7 p.m. news broadcast for January and February, Moutai was the biggest spender at 498 million yuan.
That’s 15 percent of the total 3.3 billion bid by distillers, brewers and winemakers at the annual auction of CCTV, which runs the only nationwide TV network. The industry’s expenditure on CCTV ad slots was more than 10 times that of 2007, according to data from Charm Communications, a Chinese advertising company whose clients include the SABMiller Plc (SAB) and China Resources Enterprise Ltd. (291) venture that makes Snow beer, the country’s biggest by volume.
Procter & Gamble’s China unit, the top bidder for six years through 2008, spent 103 million yuan while P&G Guangzhou Ltd., a joint venture by the maker of Gillette razors and SK-II cosmetics, spent another 60 million yuan, according to Charm Communications. Coca-Cola Co. (KO) bid 35 million yuan and Anheuser- Busch InBev NV’s Budweiser bid 32 million yuan.
“CCTV is a very dominant channel and it’s got a fantastic national footprint,” said Carter.
Advertising spending by alcoholic beverage makers at the auction represents 27 percent of the total, compared with 24 percent last year. Wuliangye Yibin Co., China’s biggest distiller by sales, bid 80 million yuan.
“Alcohol has become a luxury product and demand is growing because of rising purchasing power,” said Zhou Wei, chief financial officer of Charm Communications.
Moutai, a sorghum-based liquor, has been used to toast dignitaries including former U.K. Prime Minister Margaret Thatcher. It sometimes sells for twice the maximum retail price set by the company.
Moutai is expanding capacity to meet rising demand. Ji Keliang, chairman of the parent company, in July forecast a 15 percent increase in output this year because demand remained strong even as the company raised prices.
Sales for listed unit Kweichow Moutai may hit 16.8 billion yuan this year, according to the average forecast of 14 analysts, quadrupling from 2006. Twenty-six of 27 analysts covering the company recommend buying its shares, according to data compiled by Bloomberg.
‘A Face Thing’
Kweichow Moutai has gained 23 percent this year, giving it a market value of 213 billion yuan, or more than $33.5 billion. The benchmark Shanghai Composite Index has lost 12 percent in the same period.
Moutai’s spending on TV advertising increased fivefold from 2006 to 1.8 billion yuan last year, lagging behind the 3.4 billion yuan spent by Wuliangye, according to CTR Market Research Co.
Closely held white-spirit maker Beijing Red Star Co. had the biggest market share by volume of liquor makers in China last year, with 2.5 percent, according to Euromonitor. Kweichow Moutai ranked ninth with 0.7 percent, Seagram’s gin distiller Pernod was at 17th, with Smirnoff vodka maker Diageo at No. 22.
Moutai’s advertising spending is “a face thing,” said Shi Jiangang, an analyst at Orient Securities Co. “It’s for the company to show its power -- that it can get on CCTV.”